Discuss about the Importance and Positive Impact of Independent Audit.
The opinion of auditors on the financial statements is often valued, however owing to the prevalence of global financial crisis, many have asked for the auditor’s report to be more informative in nature so that relevant information can be offered to the users (Church et. al, 2012). This is the reason why key changes have been made in the audit report.
Firstly, a new section has been framed to communicate the key audit matters (KAM) so that items possessing immense significance can be provided to the users. Both IAASB and PCAOB standards necessitate KAM to be offered in association with the audit of the present tenure. However, the PCAOB offers illustrations of situations wherein it may be appropriate to disclose KAM/CAM of the past tenure. These illustrations are not offered by the IAASB standards. Further, both standards reflect that at least one KAM must form part of the auditor’s report but if there are no KAM/CAM, then a statement to the same must be reflected in the report. Secondly, it has been decided that the auditors will also disclose the name of the engagement partner in their report for enhanced knowledge. In relation to the audit of listed companies, both PCAOB and IAASB standards require the disclosure of engagement partner’s name but the manner of disclosure is different under both standards. Thirdly, in relation to audit, the opinion section of auditors has become compulsory to be presented first and it must be followed by the basis for opinion section. The ordering of these sections in both standards is similar in nature. Fourthly, in the audit report, it has become necessary for auditors to provide a statement regarding their fulfillment of ethical responsibilities and independence of auditors (Jeanette, 2014). Even though provisions regarding this change in auditing report are same under both IAASB and PCAOB, the IAASB separately requires the auditors to make an affirmative statement regarding the same. Fifthly, it has now become mandatory for auditors to provide a separate section that offers relevant information regarding material uncertainties in the financials of the company (Ruhnke, 2014).
Enhanced reporting by auditors is observed as significant to the perceived value of audit of financial statements and hence, to the continued significance of the auditing profession. The reason behind the emergence of such changes in the auditing report can be attributed to the fact that such changes can assist in laying down the foundation for the future of international auditor reporting and enhanced auditor communications (Johnstone et. al, 2014). Besides, since the auditor’s report is the main deliverable addressing the output of the audit procedure, enhanced requirements had become compulsory in the report so that it becomes more valuable and relevant to the users. The implementation of new changes in the report can assist in presenting a significant variation in practice, with appropriate collaboration required by participants in the supply chain of financial reporting so that the IAASB’s objectives of audit report can be achieved. The IAASB believes that such new audit changes can have a positive impact on the audit process in addition to enhanced informational value and enhanced transparency. Further, such changes will also affect the auditor’s focus on matters that are required to be reported especially the ones that can indirectly result in an enhanced professional skepticism (Riddle, 2015). Overall, the development of audit report through the underlying ideologies in the ISA audit can assist in addressing how a risk-based process of the audit is conducted and what is necessary to be disclosed with those who are charged with governance (Carcello, 2012).
Outline the likely impact of the audit reporting on audit practice.
Auditor plays a vital role in the process of financial reporting because they act as an independent assurance provider. It needs to be noted that having a strong insight into the auditing process, the auditor report is written in a language that does not share information apart from the audit opinion. Even though the changes in the audit report can play a key role in maximizing the overall impact of quality reporting, thereby in turn assist in providing relevant information to the users, yet professional judgement is the main concern because matters that necessitate significant attention from the auditors is directly associated with such judgement (Black, 2010). Furthermore, the number of audit matters that must form part of the audit report may also be influenced by complexity and size of the company, nature of its environment, and circumstances of the engagement of audit. In simple words, the higher the number of matters, the more the auditor may need to evaluate whether such forms part of a key audit matter. This, in turn, enhances the duty of the auditor because when the engagement level is high it leads to more responsibility on the part of the auditor.
Black, W. K 2010, Epidemics of “Control Fraud” lead to Recurrent, Intensifying Bubbles and Crises, Working paper, University of Missouri-Kansas City.
Carcello, J 2012, ‘What do investors want from the standard audit report?’, CPA Journal vol.82, no. 1, pp. 7-12
Church, B, Davis, S & McCracken, S 2008, ‘The auditor’s reporting model: A literature overview and research synthesis’, Accounting Horizons vol. 22, no. 1, pp. 69-90.
Johnstone, K, Gramling, A & Rittenberg, L.E 2014, Auditing: A Risk Based-Approach to Conducting a Quality Audit, 10th Edition, Cengage Learning
Jeanette M. F 2014, The Importance and Positive Impact of Independent Audit Oversight, viewed 26 September 2017 https://pcaobus.org/News/Speech/Pages/11192014_FranzelIARI.aspx
Ruhnke, K 2014, ‘The audit expectation gap: existence, causes, and the impact of changes’, Accounting & Business Research, vol. 44, no. 5, pp. 572-601
Riddle, C 2015, Internal Auditing: Assurance & Advisory Services, 3rd Edition, The Institute of Internal Auditor Research Foundation.