Discuss About The Understanding Auditors Responsibility For Detecting?
The ASA701 Communicating Key Audit Matters in the Independent Auditor’s Report, is the latest standard that was developed by the IAASB. The main aim behind this standard is to improve the overall audit practices and to remove the loopholes that are present in the system. The standard was developed to specify certain key matters on which the auditor needs to gives his opinion. It makes a specification on the important duties of the auditor while conducting the process of audit. This standard is applicable on the audit of all the listed companies and all the auditors’ needs to follow the same and mention it in their audit report (Abbott, et al., 2016). The auditors can follow the directions of the management or comment on the overall key matter on his own will. This standard was issued in December 2016. It is one of the biggest changes in the standards of auditing since 2004, when they were first issued. There were many factors that led to the same. However the most important factor that was behind the issue of these standards was the global crisis that the world faced when the ABC Learning company went into liquidation. As much as the management of the company was responsible for the same, the auditors were also equally responsible. However no actions could be taken against them because they made their point clear that the responsibility of the auditor is to check the accounts till he finds them to be inaccurate. If he finds that there are no errors than he does not need to comment on the validity of the accounts. This raised a big question on the responsibility of the auditors and had in turn led to the issue of the new standards. Every auditor was asked to follow the same and comment on the same in their financial reports. If they do not comply with the provisions of this standard then they will be punished for the same (Brannen, 2016). This was the main reason why the standard was developed. In this reports we will analyze this reason in detail, and also tell some brief facts about the standards. And give some recommendations by which the auditors can improve their overall area of operation and make the reports as accurate as possible.
The ABC Learning institute was founded in 1988, and was one of the biggest educational institutes in Australia. It had many number of day care centers that imparted education and other services to large number of children and adults. The company was earning a lot of revenue and in 2001 the company was listed on the stock exchange. The total after tax profit of the company was A$143.1 million, and the overall revenue was A$1.7 billion. But due to many reasons the company suffered a major setback and went into liquidation. This affected the investors who had invested in the shares of the company and they suffered huge losses. The company had taken huge loans, because of which they earned huge losses. All these affected the health of the company which led to its delisting and finally led to the liquidation of the company. There was a huge fall in the share price of the company from A$8.62 to A$0.54. This reflected how badly the investors were affected and what setbacks they suffered because of all this. There were several factors that were collectively responsible for the downfall of the company such that the overall business model of the company was not effective (Burke & Clark, 2016). The company indulged in taking large amount of loans and also indulged in aggressive takeovers that had affected the overall market value of the company. The company also had incurred huge capital expenditures that were not mentioned in the audit reports. When the investors tried to analyze the main reasons behind the downfall of the company they found that the business model of the company was not up to the mark and the auditors have stated nothing of this in their reports. This raised a question on the authenticity of the audit reports and also made the government aware that there were some major loopholes in the system. If the auditors had audited the accounts properly then these factors would not been hidden and the management would have been made aware about the same. Thus we find that along with the management of the company that indulged in malpractices, the auditors were also equally responsible in covering the shortcomings of the company. They gave a false picture to the investors that the company was earning huge amount of profits and the company was in a very stable position.
The company had appointed Pitcher Partners as their auditors and they held this position for six long years. The auditors worked as per the discretion of the management and their audit report was framed on the same. Their decisions were influenced by the decisions of the management and they stated the same in their audit report. As per their reports the company was a profit earning institution and their going concern assumption was held true. But in reality there were many loopholes in the management. The company had shown huge amount of profit from loss making units , moreover they had a large number of intangible assets in their balance sheet whose valuation was not stated completely (Guragai, et al., 2017). Most of the intangible assets that consists of derivatives, goodwill, and other biological assets were hard to identify and value. Most of the revenues and the payments that the company was showing in their financial statements was from loss making units and the same were merely El Dorado. The auditors supported all these claims of the company and also gave an unmodified audit report that stated that the financial statements were showing the true and fair view. However, when the new audit Ernst and Young took over they had a very different opinion from the previous auditor. So they further probed into the matter and saw that the management of the company had indulged in a lot of malpractices and the same was supported by the previous auditor. They asked the management to make the necessary changes, however the management refused to do so as that might need them to change the entire scenario of the business and these would have cost them large amount of losses (Jones, 2017). When the management refused the new auditor issued a modified report in which it made clear that the management was not supporting them necessary details and also the company was not a going concern. But the previous auditor was not ready to accept the same. This led to a situation of a deadlock between the two auditors, the government finally appointed a third party to comment on the validity of the accounts and the two audit reports.
The third party was not able to reach to any conclusion. Hence both the reports were held to be true and both the auditors were fixed on their decisions. This led to a lot of upheaval and a big question mark was raised on the authenticity of the audit reports. The previous auditor was not led guilty because they made a claim that it was no where mentioned that the auditors had to make assertions on specific matters. The auditors only need to check the account for their own satisfaction (Knechel & Salterio, 2016). This led to the need of a new standard and hence the ASA701 was formed as per which the auditors needed to comment on the specific matters of audit and mention the same briefly in their audit reports. In case the auditor fails then he will be held liable by the court of law. This provided a limitation on the overall actions of the auditors and the necessary steps that they need to take to make sure that the books of accounts of the company are free from errors and the same must be very clearly stated in their audit reports.
The main points that was concluded from this downfall was that there was a gap that was present between the demand of the investors and the auditors responsibilities. Just in the case of the ABC Learning we see how the actions of the auditors were responsible for the fail of the investors. The companies need to make sure that the audit report is genuine and the auditors must make sure that they are doing their duties genuinely. This standard will help the auditors in identification of the key matters on which they need to comment. This is an important change that was brought in the overall functioning of the auditors (Lefkowitz, 2017).
This standard helps provides those guidelines that the auditors need for their development and the overall corporate governance. It is applicable on the audit of all the listed companies and every auditor needs to follow the same. The key features of this standard are –
Previously these audit standards were not applicable and hence they worked negatively for the shareholders and the decision markers, but the auditors and the management of the company benefited from the same. If these standards were defined previously it would have helped the auditors in identifying the key matters on which they need to comment. In case if they fail, and worked as per the decisions of the management of the company, then they can be held liable and can be punished. In the case of ABC even if the previous auditors were known to be guilty no action was taken against them as they had made use of the loopholes that was present in the auditing standards. Thus this lead to a dead lock between two auditors who had different opinions (Sonu, et al., 2017). But with the introduction of this standard it was made clear that the auditors need to identify and comment on the key matters. This put a limitation on the overall actions of the management and the auditors and also gave the investors an insight into the financials of the company, which they can use to comment on important matters. The major loophole that was present in the auditing standards was removed and this embarked the biggest change that ahd taken place in the auditing standards since 2004. Thus we see how ABC learning and its downfall was responsible for the formation of these standard and what effect does it have on the overall functioning of the auditors.
Conclusion
From all the analysis it can be said that the auditors of the company must be true and fair in their approach. The investors are relying on their reports to take important decisions with their money, hence it becomes their duty to provide an unbiased report. In the given case we see that the auditors of the company were not true to their work and had malfunctioned in their actions. This had caused huge losses to the investors of the company. Thus the need for clear and transparent audit practices becomes more evident (DeZoort & Harrison, 2016). It makes it more clear on how important it is that the financial statements that are prepared must be clear as so many stakeholders like banks, investors, the general public all are dependent on it in some way or the other. If the auditors had done their work properly the investors would not have suffered such huge losses. Thus it becomes clear that the issuance of the new standard was the need of the hour and all the companies must make it a point to make sure that the auditors are stressing it in their audit reports. As for the auditors it is important to follow the same else if they are held guilty there are no more loopholes in the system that could save them.
It will thus be recommended that all the parties performs their duties with utmost conviction and genuineness there must not be any falsification of records that might give false picture to the investors. It is very important in the long run to make sure that the books of the companies are prepared free of errors else in the long run it won’t be possible for these companies to survive. The companies those who indulge in malpractices will get liquidated one day. Hence it is requested that proper framework that has been defined must be followed and all the decisions must be taken on the basis of the same, so that none of the parties have to bear any losses. It is important that the actions of the auditors must be timely checked so that they are not able to do any mistakes. It is very important that all these auditing standards must be followed very seriously. It is important for the all round global development and health of the companies and the professionals around the world.
References
Abbott, L., Daugherty, B., Parker, S. & Peters, G., 2016. INTERNAL AUDIT QUALITY AND FINANCIAL REPORTING QUALITY: THE JOINT IMPORTANCE OF INDEPENDENCE AND COMPETENCE. Journal of Accounting Research, 54(1), pp. 3-40.
Brannen, J., 2016. Mixing Methods: Qualitative and Quantitative Research. NY: Ashgate Publishing.
Burke, J. & Clark, C., 2016. The business case for integrated reporting: Insights from leading practitioners, regulators, and academics. Business Horizons, 59(3), pp. 273-283.
DeZoort, F. & Harrison, P., 2016. Understanding Auditors sense of Responsibility for detecting fraud within organization. Journal of Business Ethics, pp. 1-18.
Guragai, B., Hunt, N., Neri, M. & Taylor, E., 2017. Accounting Information Systems and Ethics Research: Review, Synthesis, and the Future. Journal of Information Systems: Summer 2017, 31(2), pp. 65-81.
Jones, P., 2017. Statistical Sampling and Risk Analysis in Auditing. NY: Routledge.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.
Lefkowitz, J., 2017. Ethics and Values in Industrial-Organizational Psychology, Second Edition. second ed. NY: Routledge.
Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.
Sonu, C., Ahn, H. & Choi, A., 2017. Audit fee pressure and audit risk: evidence from the financial crisis of 2008. Asia-Pacific Journal of Accounting & Economics , 24(1-2), pp. 127
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