Free Accounting Essays - Requirements of a good strategic audit
It is the legal liability of a firm to have independent audit of its accounts because financial statements are only then published in the annual report of the firm. These statements are first examined and audited by a qualified auditor and they are more reliable than un-audited statements. Because stakeholders are well aware of the fact that auditor possesses expertise to look into the accounts and business of the company, they consider him as independent and professional.
A good strategic audit includes operational and financial aspects of a firm and this is what shareholders and stakeholders expect from auditors. Consider this relationship as a principle-agent relation where duty of the external/internal auditor is to provide information to shareholders. In a broader sense, individuals and organizations expect certain outcomes and benefits from the existence and operation of the corporate audit function.
Therefore, in large corporations under agency relationship, external financial reports are viewed as reports to owners (shareholders) and auditors perform their duties for owners and shareholders.
The role of the auditor is challenging as well as rewarding. Suppose if an auditor fails to reach actual conclusions about accounting information at which he worked on, it leads to the legal liability as and penalty because information provided by the audit is taken as a verifiable source and shareholders act on the audit outcome. On the other side if an auditor knows his client company well, has studied external and internal factors of the environment then he is sure to be in an excellent position to advice management about flaws and deficiencies in their accounting system.
Shareholders, Auditor and Management are three parties having relationship as explained as below:
Shareholders
Auditors
Management
Management report to shareholders
Auditors report to shareholders
Elect directors
Close relationship
Shareholders legally appoint Auditors
It is actually the audit report by which auditors communicate with the shareholders. They share their views and facts of the firm’s accounting information. The signing of the audit report by an auditor is taken as completion of audit process. When auditor(s) have found out that financial statements perceive a fair view of firm’s accounts with the company laws, only then they give clean opinion.
We should keep in mind that when an auditor expresses his opinion it should not be considered as a guarantee. It is judgement exercise for an auditor to evaluate critically all accounting aspects of the firm. To give a guarantee that auditor is infallible and will never make errors in judgement is not possible.
However a good audit report contains additional information about uncertain events that may occur in the future accounting period(s). This information is particularly useful for shareholders as well as present or potential creditors. Share holders are mainly interested in financial performance of the company. Uncertain events could have significant importance for them as they often compare value of and risk to their investment in the firm on basis of audit reports.
It is important for the auditors to provide notes in the accounts in order to disclose sufficiently any fundamental uncertainty and to secure fair view of the firm. When auditors believe that either of the director’s estimates about the future outcomes is uncertain or disclosures regarding the financial status of the firm are inadequate, they consider issuing a qualified report.
Because auditors follow Audit standards SAS 600 (a legislative guide to perform audit), they may disagree with the treatment or disclosure of accounting item in the financial statements and that is how they produce qualified audit report. In this way, we can say that the reporting standards and practise of auditors does not vary and it is generally according to the expectations of the shareholders.
Limitations of Audit scope:
Limitations of scope arise if the auditor is not able to obtain all the evidence required to issue an unqualified opinion. This inability could arise because information is not in existence or has not been supplied by management. When considering whether a qualified opinion should be issued because of a limitation of scope in the audit, the auditor considers a number of issues like availability of evidence to enable him to judge the extent of the limitation of the scope. The auditor also considers the materiality of the item for which there is insufficient evidence and in particular the possible effect of any misstatement which would have on the financial statements.
How audit strategy works according to the expectations of Shareholders
The foremost and basic purpose of publishing audit financial reports is to educate its users (shareholders/stakeholders) about the progress and current financial status of the firm. Auditors also assume that solution to eliminate expectation gap of shareholders lies in educating them about the affairs of the company. It is seen that audit reports are more useful when they uncover greater details of findings during the audit period.
The listing rules of the London Stock Exchange require that directors of all UK listed companies must disclose certain information in respect of corporate governance issues in the Annual report. Similarly auditors are also required to review Corporate Governance matters disclosed by the management. The accounting concept of going concern also remains in force which states that the accounting transactions should belong to the accounting period in which they occur. Directors are supposed to review the qualified reports prepared by auditors.
Audit laws have been well placed enforcing the auditors to report most appropriately to shareholders and management. For example in respect of the going concern the auditors reporting responsibilities are set out in SAS 600, likewise in SAS 130 the features of Auditor’s Reports on Financial Statements has been underlined.
The responsibilities of the auditors effectively lie in the following areas:
1) Auditors are required to be appropriately qualified and independent of the company so that they work in fair and consistent manner for stakeholders and management.
2) The financial statements that auditors verify and report to shareholders should give fair view of the firm’s accounts and comply with the companies act. Thus if auditors think they have not received all the information they need, then these facts will have to be reported to shareholders.
3) Auditors conclude that the details required in respect of director’s remuneration and of any transactions they have had with the company has not been disclosed in the annual report.
Where as a result of the audit work, auditors find that any information disclosed is misstated or inconsistent with the audited financial statements then they draw such matters to the shareholder’s attention in their report or refuse permission for their report to be included in the annual report.
Internal audit should be as systematic as External audit work
The internal audit planning process mostly carried out on a timely basis. A good feature is that the plan is discussed with the external auditor to allow co-ordination of the total audit process.
Secondly audit task is broad in scope and is not restricted to accounts only. A further positive aspect is that the plan contains work on the internal audit department’s won initiative- sales statistics and research and development.
Auditors either Internal or External are objective means they express opinions independently to the stakeholders. In today’s world, we can say that auditors are more flexible to perform their duties. Greater social awareness has now led to clear doubts of unreasonable expectations. Technological change has greatly reduced audit costs besides make the work more efficient.
Role of audit committee:
Audit committees enhance independence of auditors by encouraging and supporting
Auditors. They review the plans of work done by the internal and external auditors and determine that auditors are free from managerial restrictions, interference and undue influence. They also monitor the resources allocated to the internal audit function. They review the nature and magnitude of fees paid to the external auditors and the auditors for non-audit services.
Therefore, we expect that Auditors (external /internal) work on the behalf of management for providing quality services to customers (shareholders). The Audit committee perform supportive role for auditors and help them achieve their objective. Corporate laws bind management and auditors to work in honest and fair means to provide reliable information to shareholders. All of these efforts make good audit strategy and resources for auditors which are generally sufficient for shareholders to believe that audit has been done in satisfied manner.
References:
1. Corporate Audit Theory Author: Tom lee
2. The audit process, principles, practise & cases (2nd Edition) Author: Iain Gray & Stuart Manson
