Understanding The Distinctions Between Audit And Non-Audit Services In An Essay.

What are Audit Services and Non-Audit Services?

Audit in simple sense represents an impartial inspection of the financial records of a business organisation. So, audit services are the services employed by any independent individual professional or an audit firm for providing an opinion and commenting on the reliability and relevance of the financial statements prepared by the company which is the audit client. This means that the sole purpose of audit services is to provide an impartial opinion on the true and fairness of the financial reports which is prepared by the management thereby providing reasonable assurance to the shareholders or owners of the business (Francis 2011). Therefore, the primary example of audit service is the “Audit assurance service.” On the other hand, non-audit services represent other professional services provided by any accountant who is a qualified public accountant within the duration of the audit engagement. This portrays that such professional services are provided by any professional accountant who within audit engagement duration but not connected to the rendering of the audit services itself. The prominent non audit services examples include bookkeeping, actuarial services, tax consulting, Internal Audit, Appraisal Valuation, management functions and many more (Wu, Hsu and Haslam 2016). So, the non-audit services which gets rendered by the professional accountant is not at all connected to the review of the financial statements in majority cases. The second distinction between the audit and non-audit services is that the audit services attract a larger amount of audit fees as compared to the fees that gets paid for non-audit services because of the fact that the audit entails a complete evaluation of the financial statements that require a larger amount of time and efforts which are not needed under rendering of other non-audit services. Thirdly, there are time constraints for evaluating and reporting the opinion of auditor sin case of audit services which are not there in case of rendering of non-audit services. The scope of audit services is to provide an opinion on the fairness of the financial statements as per the company statute or company’s law which is the “Corporations Act” for Australia while there are no statutes that provide the scope for non-audit services. Lastly, the provision of the opinion is mandatory in case of audit assurance service while tis is not mandatory under the provision of non-audit services.

If an auditor is also engaged by the audit client to perform the non-audit services for it the there are few advantages for the audit client which firstly include saving in cost and time. If the auditor is engaged for providing both audit as well as non-audit services for its client such as bookkeeping, or tax consultancy or other advisory services on behalf of the audit client then the auditor will have lesser time auditing the o reviewing the financial transactions for the audit client as he himself have the first-hand information of the finical transactions or have prepared the financial statements by himself reviewing which will take lesser time and as a result6 may charge lesser cost for audit as well owing to consumption of lesser time period and owing to getting of bulk order from the same client. Secondly, the auditor if employed for providing other non-audit services such as bookkeeping for the same audit client then in such a case, the opinion to be provided by the auditor after the review will be favourable for the audit client in most cases as he himself would be reviewing his own work which he would be certifying as correct (Knechel, Sharma and Sharma 2012).

However, it is to be noted that there are some inherent disadvantages for an audit client for employing a same professional for provision for both audit and non-audit services for the same client which firstly starts with possibility of hampering the audit quality as the same auditor will not try to identify inherent risks and mistakes of his own work (Kowaleski, Mayhew and Tegeler 2018). Secondly, the there would be possibility of biased audit thereby hampering the audit client and possibility of frauds and mistakes that would not be identified thereby hampering the profitability of the audit client.

In respect to the above three statements, I completely agree to those because the audit firms should not be allowed to provide non-audit services to the same audit client because if the auditor or audit firms allows non-audit services along with audit services there arises conflict of interests and threats to auditor’s independence such as familiarity, advocacy and self-review threat which will destroy the quality of audit services rendered (Beardsley, Imdieke and Omer 2021).

Audit firms as well as audit clients must disclose NAS based upon specific categories such as tax related or other types because the stakeholders must know about the same.

Lastly, the audit partners should not be incentivised top sell the “non-audit services” to its clients because this creates conflict of interest and also reduces the independence of the auditors from its clients thereby hampering the quality of audit services rendered. 

References and Bibliography

Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016. Auditing and assurance services. Auditing and Assurance Services.

Beardsley, E.L., Imdieke, A.J. and Omer, T.C., 2021. The distraction effect of non-audit services on audit quality. Journal of Accounting and Economics, 71(2-3), p.101380.

Francis, J.R., 2011. A framework for understanding and researching audit quality. Auditing: A journal of practice & theory, 30(2), pp.125-152.

Knechel, W.R., Krishnan, G.V., Pevzner, M., Shefchik, L.B. and Velury, U.K., 2013. Audit quality: Insights from the academic literature. Auditing: A Journal of Practice & Theory, 32(Supplement 1), pp.385-421.

Knechel, W.R., Sharma, D.S. and Sharma, V.D., 2012. Non?audit services and knowledge spillovers: Evidence from New Zealand. Journal of Business Finance & Accounting, 39(1?2), pp.60-81.

Kowaleski, Z.T., Mayhew, B.W. and Tegeler, A.C., 2018. The impact of consulting services on audit quality: An experimental approach. Journal of Accounting Research, 56(2), pp.673-711.

Meuwissen, R. and Quick, R., 2019. The effects of non-audit services on auditor independence: An experimental investigation of supervisory board members’ perceptions. Journal of International Accounting, Auditing and Taxation, 36, p.100264.

Svanström, T., 2013. Non-audit services and audit quality: evidence from private firms. European Accounting Review, 22(2), pp.337-366.

Tobi, B.A., Osasrere, A.O. and Emmanuel, U., 2016. Auditor’s independence and audit quality: A study of selected deposit money banks in Nigeria. International Journal of Finance and Accounting, 5(1), pp.13-21.

Wu, C.Y.H., Hsu, H.H. and Haslam, J., 2016. Audit committees, non-audit services, and auditor reporting decisions prior to failure. The British Accounting Review, 48(2), pp.240-256.