Category: Informative

Introduction to Audit and Assurance

Auditing plays an imperative role in evaluating business enterprise operations, internal control over financial reporting and governance. Auditing involves both internal and external audit, where the internal audit is performed by an internal auditor in an organization. On the other hand, external auditing is performed by external auditors, who may be from accounting firms, consultants and government. External auditing is performed primarily to ensure an independent and unbiased evaluation of an organization financial health, internal control and governance (Codjia 2012). This practice has undergone evolution overtime due to various factors affecting the practice of auditing. In addition, the global business environment has continuously changed overtime, and performance of audit has to incorporate the changes in the business environment.

Perceptions on the Purpose of External Audit Report

Auditors are required to write reports on the performed audits, which is used by various stakeholders in the organization. An external audit report is essential since it is used by investors in evaluating the performance of the organization. Investors use the reports written by the external auditors when making investment decisions (Rittenberg, Johnstone & Gramling 2011). The external audit report is used by investors in the process of verification of the internal procedures in an organization. In addition, the external audit report is also used by investors in evaluating the performance of the senior managers in the organization. This enables the investors understand how the actions of the senior managers affect the reputation, profitability and competitiveness of the organization (Codjia 2012).

The external audit report is also used by industry regulators in evaluating the adherence of an organization to the industry’s standards and principles. For example, firms listed in the stock exchange are required to present audited financial information with the stock exchange regulators. The external audit is also used by government agencies to evaluate adherence of the organization to the various laws within their jurisdiction. An external audit report also forms the basis of an inquiry to an organization. In addition, the external audit facilitates an organization evaluation of the adequacy internal audit, as well as the efficiency and effectiveness of the internal controls. It also facilitates the internal auditors’ execution of the internal audit programs (Rolfe 2006). For example, an external auditor report may highlight certain areas as riskier, and internal auditors commit more resources towards the highlighted areas.

An audit report is written on completion of an audit in a firm. On completion of the audit, an auditor may give two types of audit report in auditing and accounting profession. An audit report is either a qualified audit report or an unqualified audit report. A qualified audit report is an indication that there were significant accounting errors, and the accounting standards were not followed when preparing the financial statements. A non-qualified audit opinion is an indication that various accounting standards were followed and observed in the preparation of organization financial statements. An auditor may issue a disclaimer opinion in the case of a qualified audit report, when the auditor is unable develop an opinion of an organization financial statements. The disclaimer can be an indication of lack of independence by the external auditor, as well as existence of significant uncertainty (Vitez 2012).

A qualified report is a negative reflection of the company, which may limit the ability of an organization to obtain funds from investors and financial institution. A qualified report also gives an indication that there is poor management in the organization by the senior management. On the other hand, an unqualified audit report indicates that the organization has effective management. It indicates that the auditor performed the audit independently without influence of the organization management. It also indicates that the audit report can be used by various stakeholders in the organization in making decisions about the organization (Gupta 2004). A qualified audit report with a disclaimer opinion indicates increased uncertainty of the business preparation of financial statement. In addition, it can also indicate that the auditor was influenced in conducting the audit; hence he did not conduct the audit independently (Basu 2010).

Evolution of Wording of the External Audit Report

The evolution of auditing and auditor’s report can be attributed to the increased delineation of the auditor’s responsibilities. In addition, there have been extensive cultural changes in the practice of external auditing. The business environment has also developed complexity overtime demanding the performance of external audit to change in response to these changes. The number of users of financial statements has also increased; hence, an audit should take into considerations all the needs of the financial information users (Institute of Chartered Accountant in England & Wales 2007). Globalization has also affected the conduct of business extensively. External auditors have to consider the various effects of globalization on auditing of a business governance, internal controls and financial statements. Technology has also led to increased changes in the conduct of business globally. It has led to shift from paper work documentation to the current use of electronic documentation. As a result, the conduct of external audit has to respond to changes in technology, as well as increase efficiency of the external audit (PWC 2012).

The complexity and increased competition resulting from globalization have led to the need to improve corporate results in order to facilitate corporate competitive advantage. This has led to gross frauds involving accounting, which has led to increased failure by organizations. As a result, international regulators have developed numerous accounting standards and regulations in response to the changing business environment and conduct (International Organization of Securities Commissions 2009). Therefore, the conduct of the external audit has evolved to incorporate the changes in the accounting standards and regulations.

The increased complexity of the global business environment and changes in the cultural environment surrounding audit has led to a number of improvements of the auditor’s report. This has led to improvement of the wording of the auditor’s report to facilitate the clarification of the audit scope, responsibilities of the auditor and responsibilities of the management. The improvement of the auditor’s report has taken place due to the view that it has not been keeping the pace of change of the global business. In addition, there have been views that it does not incorporate the complex changes in accounts reporting. This has led to the inadequacy of the audit report to communicate and meet the needs of different financial information users. Therefore, the primary purpose of improving the auditor’s report is to ensure that the report meets the various financial information needs of various users (Institute of Chartered Accountant in England & Wales 2007).

The improvements are not due to low value of the auditor’s opinion on financial statements or essentiality of financial statement audit. They are rather meant to meet the needs of various users of an organization’s financial statement. There is also a need to incorporate narratives on the financial condition and operating results, and other non-financial information regarding an organization in the auditor’s report. In addition, there has been an increased need for valid independence and disclosure of non-financial information regarding an organization by various financial information users (IAASB 2011). This would facilitate effective and informed decision making by various users of financial information.

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Research has indicated that financial information user’s perception of the quality of the auditor’s report is highly linked to their perception of scope and audit quality. The inclusion of non-financial information in the auditor’s report has been viewed as a method of facilitating holistic auditor reporting that meets the various needs of different financial statement users. In addition, it would improve the quality of the audit report (Chesterton 2012).

Proposals by IAASB’s Relating to Audit Reporting

The primary role of the auditor’s report is to communicate financial information of an entity to its stakeholders. The audit reports is generally brief, standardized, and describes the financial statement subjected to the audit itself, as well as describing the responsibilities of the auditor and management. The opinion of the auditor is an essential component of the auditor’s report. However, the diversity of users of financial information users, complex business environment and financial reporting has led to demand of more pertinent information in the auditor’s report (IAASB 2012). To embrace the need for change IAASB has made various proposals facilitating the improvement of the auditor’s report. The recent global financial crisis was also another factor that has led to increase in demand of information by financial information users.

IAASB has been engaging different stakeholders globally in an effort to enhance the value of the auditor’s report. It started a research in 2006, in an effort to retrieve the perceptions of different stakeholders in organizations, which were outlined in its consultation paper of 2011. There has been a call for change of the auditor’s report all around the globe. For example, the US Public Company Accounting Oversight Board (PCAOB) and the European Union have all expressed the need to improve the auditor’s report. There has also been an increasing need to broaden and improve the quality of corporate reporting (IAASB 2012).

IAASB has made various proposals and recommendations enhancing the improvement of the auditor’s report. First IAASB proposed the importance of the auditor inclusion of an auditor commentary in the auditor’s report. However, it has been on the process of refining the contents of the auditor’s commentary, to ensure clarification of various issues and recommendations included in the auditor’s commentary (IFAC 2012). In addition, there has been also been a proposal for the auditors to include conclusions on the procedures used by the auditor relating to the issue of going concern and any other information regarding the audited financial statements (Healy & Jules 2012). IAASB also made a proposal to facilitate clarification of responsibilities of an auditor, through description of the risk based audit approach. In addition, there has been a need for clarification of the technical terms used in an auditor’s report to facilitate understanding of the terms by financial information users. IAASB also understands the diversity of the global community accounting and auditing standards (Crump 2012). This led to a proposal requiring flexibility of the auditor’s report to facilitate accommodation of various regimes of audit reports in different countries.

Conclusion and Recommendations

In conclusion, external audit plays an imperative role in ensuring transparency in an organization internal controls, governance and financial reporting. External audit is also essential in providing an independent and unbiased view of an organization financial reporting, internal control and governance. However, there has been a need to improve the report of an auditor due to changing cultural environment and complexity of the global business environment. The changes in global business environment and cultural environment have also led to the development of complexity of the accounting standards and regulations. Therefore, there is a need to incorporate the changes in the auditor’s report, which has led to proposals forwarded by IAASB to improve the auditor’s report.

In regard to the changes in global business environment, increase in the number of users of financial information and changes in accounting standards and regulation, the following recommendations can be considered in the process of improving the auditor’s report:

  • Due to the developed complexity in business environment, there is a need for the auditor to include more non-financial information in the auditor’s report.
  • There is also a need for auditor’s report to reflect the recent developments of the changes in the accounting standards and regulations. This will facilitate the improvement of the auditor’s report quality. This is because the audit report forms a strong base of financial statement and information users’ decision making process.
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