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Questions:

1. Are the ethics of business a concern for the auditing function?
2. Discuss the ethical requirements relating to the audit of a financial report as detailed within the current set of auditing standards?
3. Define Audit quality and detail step on how increasing audit quality can address the audit expectation gap?
4. Management has responsibility for preparing the financial statements albeit part of the auditor’s role is to ensure that they comply with generally acceptable accounting principles (GAAP). In light of the following pictures discuss GAAP and how these principles can and are audited.

 

 

Answers:

Introduction:

Ethics has a major role to play when it comes to owing to the scandals that relate to a corporate in the various countries. It causes a huge amount of damage to the society and the economy as the whole.  The scandals put a question mark on the moral behaviour of the businessmen and the accountant who prepare the financial statements and the auditors who cross check the financial statements and are entrusted with the responsibility of giving their true and a fair opinion with regard to the correctness and the fairness of the financial statements.

This report aims at discussing this issue along with the role of an auditor and the importance of GAAP

 

Role of ethics in business in the auditing function:

Audit is designed to gain an insight into the financial statements of the company. Further, it also aims at ensuring the reliability and accuracy in the areas such as the accounting systems, financial reporting and the legal compliances. The business has to be conducted in the most ethical manner since only then, the audit could be done in the most efficient manner.

Making a decision based on the intuition and the feeling is never right and so, ethics has a major role to play in this. It is the ethics that govern the decision making process.

The ethics play a major role when conducting a business and this has gained much more importance with the outburst of the accounting scandals. The major principle of the auditing function is integrity, professional competence, and scepticism, among others.

It is said that the main responsibility is of the accountants that fail to fulfil their ethical standards in the business. The International Federation of Accounts, also referred to as the IFAC in its report titled “Rebuilding the public confidence in the financial reporting-an International perspective” that was issued in the year 2003 stated that the financial scandals that were being taking place was an indication of much more deeper problems and the cry for some changes. The issue indicated at requiring an improvement in the ethical standards, in the financial management and the mechanisms with regard to the reporting frameworks. Further, this also required an improvement in the audit quality and strengthening the regimes of the governance so as to improve the confidence in the financial reporting. The accounting profession has been entrusted with the responsibility of adhering to the above and making sure that all the deficiencies are corrected.

Ethics takes the shape of the personal, societal and the professional values, most of which are difficult to explain. A business has to focus on the interests of the society and the interest of an individual. Ethics means the moral values and the character. When both these terms are taken together, they mean how an individual interact with each other. Ethics signifies as to how the people would act when they are determined to make the things right. The main aim of the business should never be earning profit. Sure, it is one of the mains of the business but it also a responsibility towards the society in which it lives in and the environment and its people in which it survives.

(CMI Global, 2015)

Considering the number of scandals that have taken place in the recent past, it has become a high profile issue to take into account the ethics that are involved in the business. These scandals that the corporates engage in pose a question mark on the morality of the business concerned and of the accountants that prepare the financial statements. It is often said that the accountants have the major role to play when the ethical standards are being declined.

 

Ethical requirements relating to the audit of a financial report:

When an auditor undertakes an engagement of an assignment, it must be independent from all the bias with regard to its client. This has been pronounced in accordance with GAAS. The auditor is required by law to accept the engagement and report on the adequacy and fairness of the financial statements.

(AICPA, 2015)

The following are the code of ethics that an auditor has to comply with:

1. Integrity: an auditor must establish trust and provide some reliance on his judgement

2. Objectivity: an auditor is the person that has the highest level of professional objectivity when it comes to gathering, evaluating and communicating the information with regard to the various activities and the processes. They have the knowledge through which they are able to assess the circumstances and cannot be influenced by their own interest and make wrong judgements and decisions.

3. Confidentiality: the auditors are the ones that respect the values and the ownership of the information that they receive and ensure that the information that they have gathered during the course of their engagement is not disclosed to anyone, other than when has been required by law, client or the appropriate authority.

4. Competence: the auditors apply their skills, experience and knowledge in order to perform the services.

The auditors have to ensure that the following rules of conduct are followed duly and appropriately:

1. They work with honesty, diligence and responsibility

2. Follow the provisions of law and make adequate disclosures as has been expected by law and profession

3. Will not be the part of any illegal activity

4. Will not indulge in any act that will bring disrepute to the profession

5. Will adhere to all the ethical objectives of the organization

6. Will not indulge in any act that would impair the decision making power of the auditor or any act that would have an impact on the decision making of the auditor.

7. Will not accept anything from the client that could affect his judgement

8. Will disclose all the material facts and the truth that he has obtained during the course of his employment. And in case, he fails to disclose the same, and then he may distort the reporting of the activities under his review.

9. Shall undertake the responsibility of using and protecting all the information that he has acquired during the course of his employment.

10. Will in no case disclose the information that has been gathered during the course of employment for own benefit and for any interest that are detrimental to the interests of the organization?

11. He will undertake the engagement in which he has the necessary skills, knowledge and expertise.

12. Will do his work in accordance with the Internal reporting standards

13. Will continue to update him so as to improve his proficiency and effectiveness and the quality of his services.

(IIA, 2015)

(Chartered Accountants, 2015)

 

Audit quality and detail steps on how increasing audit quality can address the audit expectation gap:

1. The audit quality is defined as the meeting of investor’s needs of conducting an independent and a reliable audit that meets the following:

2. The financial statements that includes all the related disclosures

3. Assurance with regard to the internal controls

4. The warnings with regard to the going concern.

(PCAOBUS, 2015)

According to Sikka in the year 1998, an expectation gap was the result of the internal contradictions in respect of capitalism. He further went on to say that the expectation gap could not be closed down but the same could be narrowed. The professional institutions have been taking a number of necessary steps so that the gap could be narrowed. When it comes to a reasonable gap, the common unreasonable expectations includes the expectation of the public. And this could be reduced by educating the public and the users of the financial statements about the functions and the role of the auditor and the auditing standards that are required to be followed. The role of an independent auditor has been clearly understood by the profession of audit. The FRC did a revision to the ISA 700 that required the auditor to address the risks of a material misstatement, materiality and the summary of the scope of an audit. This revision would go on to make the application of the company specific standards of auditing more transparent and will also offer the public investors for the engagements about that audit. In accordance with the ISA 240, the most active way of addressing the issues is to acknowledge the expectation of the issues that are related with the prevention of fraud. This act is usually undertaken by an auditor in order to narrow the gap between the expectations. An auditor is expected to maintain professional scepticism throughout the term of his audit and to the quality of an audit. But when it comes to some of the deficient standards, the ambiguous wordings in the auditing standards must be avoided. An auditor must obtain sufficient audit evidences regarding the adequacy of the assumption of going concern while preparing the financial statements. In other words, the auditor must give a true and affair idea of the financial statements. This would help him in avoiding his involvement in the business fraud and would also narrow the gap between the performances.

(Academic, 2015)

(Green leaf, 2015)

The following are some of the ways through which the expectation gas could be reduced:

1. Expansion of the audit report: the researchers have found that the accountants and the different users have different perceptions when it comes to the meaning of an audit and therefore, the words that describes the report of an auditor must be changed. 

2. Structured methodologies of an audit: there must be an increased use of the decisions of an auditor that could respond to the audit firms so as to narrow the gap between the legal liabilities and the responsibilities of an auditor.

3. Education: the knowledge that the different people have is used to influence the size of the expectation gap. In accordance with study that was conducted in USA, it was found that the people who were more educated relied lesser on the report of the auditors and the people that were lesser educated relied more. Hence, this could be concluded that the larger amount of gap exists between a user and the auditors.

(Research gate, 2015)

 

Generally Accepted Accounting Principles:

The full form of GAAP is Generally Accepted Accounting Principles. It refers to the specific set of guidelines that were established so as to help the companies in the preparation of the financial statements. The following are the main principles under GAAP:

1. Economic Entity Assumption: this means that the activities that are related with the business shall be kept apart from the records of the personal affairs and they will never be mixed.

2. Monetary Unit Assumption: the transactions that are entered in money only will be taken into account.

3. Time Period Assumption: the financial statements are prepared half yearly, quarterly or annually. This will help the business in assessing its performance and viability.

4. Cost Principle: the accountants must apply the same methods and the procedures while preparing the financial statements.

5. Full Disclosure Principle: full disclosure in respect of all the transaction shall be made.

6. Going Concern Principle: the transactions will be recorded assuming that the business will continue forever.

7. Matching Principle: all the revenues shall be matched up with the expenses of one period.

8. Revenue Recognition Principle: it means that the revenue must be recorded in the accounts when the transaction is complete.

9. Materiality: the transactions that have a material effect on the business transactions will be taken into financial records.

10. Conservatism: the business will take into account all the probable losses and will not consider the gains derived.

(Education portal, 2015)

(Tech target, 2015)

GAAP is something the serves as the common language amongst the accounting and the finance professionals. This helps them in comparing the financial statements across the corporation and the vast span of times. When an investor wants to invest his hard earned money in the automobile sector, and therefore, wants to compare tow or more companies, then he will require the information with respect to both the companies. But comparing both of them will not be possible when they have been prepared following the different set of rules and regulations. Therefore, when the managers have to compare the performance of their divisions, they have to ensure that the accountants that have prepared the reports possess the same level of skills and knowledge and experience. GAAP minimizes the risk of making the unintentional errors through an implementation of the checks and the safeguards. This further, provides a certain set of confidence to the users of the financial statements.

(Small chron, 2015)

The financial reports consists of a balance sheet, profit and loss account and the financial notes and the disclosures. This is the language through which the company interacts with its investors, the state and the local government. These are the guidelines grammar and the punctuation that determines the way in which the language should be written.

(Accounting foundation, 2015)

Conclusion:

Ethics takes the shape of the personal, societal and the professional values, most of which are difficult to explain. A business has to focus on the interests of the society and the interest of an individual.

An expectation gap occurs when the there is a gap between the perceptions of the different people and in order to close this gap, there is a requirement of an expanded audit report, structured methodologies of an audit and education.

GAAP is the language through which the company interacts with its investors, the state and the local government. These are the guidelines grammar and the punctuation that determines the way in which the language should be written.

 

References:

Accountingfoundation.org, (2015). The Importance of Generally Accepted Accounting Principles (GAAP). Retrieved 28 January 2015, from https://www.accountingfoundation.org/gaap

Charteredaccountants.com.au, (2015). Professional and ethical requirements. Retrieved 28 January 2015, from https://www.charteredaccountants.com.au/Industry-Topics/Reporting/News-and-guidance-on-regulatory-matters/Corporation-Act/FAQs-Professional-and-ethical-requirements

Cimaglobal.com, (2015). The role of ethics in accounting. Retrieved 28 January 2015, from https://www.cimaglobal.com/Thought-leadership/Newsletters/Regional/The-CIMA-Edge-South-Asia-and-Middle-East/20111/July--August-2011/The-role-of-ethics-in-accounting/

Education Portal, (2015). What Is GAAP? - The Generally Accepted Accounting Principles - Video & Lesson Transcript | Education Portal. Retrieved 28 January 2015, from https://education-portal.com/academy/lesson/what-is-gaap-the-generally-accepted-accounting-principles.html

Essay, U. (2015). Essays com-Definition and Implications of Audit Performance Expectation Gap Accounting Essay. Academia.edu. Retrieved 28 January 2015, from https://www.academia.edu/8561370/Ukessays_com-Definition_And_Implications_Of_Audit_Performance_Expectation_Gap_Accounting_Essay

Na.theiia.org, (2015). Pages                                                             - Code of Ethics. Retrieved 28 January 2015, from https://na.theiia.org/standards-guidance/mandatory-guidance/Pages/Code-of-Ethics.aspx

pcaobus.org, (2015). DISCUSSION –AUDIT QUALITY INDICATORS. Retrieved 28 January 2015, from https://pcaobus.org/news/events/documents/05152013_sagmeeting/audit_quality_indicators.pdf

Researchgate.net, (2015). Research Gate - Share and discover research. Retrieved 28 January 2015, from https://www.researchgate.net/...expectation_gap...auditing/.../0deec5269b46868

Small Business - Chron.com, (2015). The Accounting Cycle & the Importance of Using Generally Accepted Practices. Retrieved 28 January 2015, from https://smallbusiness.chron.com/accounting-cycle-importance-using-generally-accepted-practices-21341.html

Whatis.techtarget.com, (2015). What is GAAP (generally accepted accounting standards)? - Definition from WhatIs.com. Retrieved 28 January 2015, from https://whatis.techtarget.com/definition/GAAP-generally-accepted-accounting-standards

www.aicpa.org, (2015). AU-C Section 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards. Retrieved 28 January 2015, from https://www.aicpa.org/research/standards/auditattest/downloadabledocuments/au-c-00200.pdf

www.greenleaf-publishing.com, (2015). Accountability, Completeness, Credibility and the Audit Expectations Gap. Retrieved 28 January 2015, from https://www.greenleaf-publishing.com/content/pdfs/jcc14adam.pdf

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