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The purpose of the essay is to use the skills and knowledge learned in class to analyze auditors' role through the past decades. This paper mainly addressed on three problems: the relationship between auditors and clients, users and the public; the factors impact on the changes; and the future development of auditing. In the past, auditors served simple tasks in companies and business activities. Along with the development of economy and finance, audit is becoming more and more important. Auditing is a required process for listed companies and auditors carry on more responsibility to supervise the company's financial performance and provide trustworthy investment suggestions.
According to Auditing and Assurance Standard (AAS), auditing is defined as "the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view expressing an opinion." Audit traditionally connected with a company's financial records and financial system. Nowadays, auditing begins to encompass more information related to financial system and performance, such as risk control, assets evaluation, environmental performance and etc. Accordingly with changes in audit, auditing profession has experienced big changes during the past decades. Auditors now need not only perform tradition conformity role but also play a more important role in business and economy. (Dicksee, L. R. 1892)
Changes in Auditors' relationship with clients, users and the public
Auditors' role has been changed during the past decades with the development of auditing. Firstly, auditors performed primarily check of the accounts and number for inventories and stocks. Now, auditors provide sophisticated assurance service to clients and other users for financial and accounting information. Auditing and auditor's roles and responsibilities have changed with reference to the job nature, objective, responsibility and economic evolution. Auditing now deals with a broad variety of services. The relationship among auditors and clients, users and the public has shifted away from traditional perspectives.
Auditors performed a conformance role traditionally. According to A Practical Manual for Auditors (1892), there are three objectives for an auditor:
1: The indication of fraud;
2: The detection of technical mistakes; and
3: The finding of principle errors.
Auditors' role has been greatly changed with the increasing complexity of accounting and the development financial markets. Auditors' relationship between their clients, users, and the public has also changed a lot. The following will discuss the changes among the three groups respectively.
Relationship with clients
Traditionally, auditors' relationship with clients is rather simple. Due to simple working tasks and procedures, auditors usually had limited responsibility. Due to the development of accounting and finance, auditors currently carry more important position in the company and management.
Listed company directors are likely to defraud the public by giving misleading financial data and information. Currently, there is an increasing concern with the disclosure and responsibility on auditors, who can determine if the information is fair and trustworthy. So the relationship between clients and auditors are more complex. Auditors need to not only complete their jobs but also server as supervisors to the company's financial performance. When conducting auditing procedures, auditors need use professional techniques and principles to objectively measure the company's financial performance.
Relationship with users
Traditionally, auditors' relationship with users is not close. In the past, auditing was only limited to simple check of accountants and record keeping. Auditors' report and job were to provide evidence for company's accounting and management. With the development of accounting and increasing responsibility, auditors now have more close relationship with users. Auditors' report is the connection and evidence for the company's financial information disclosure. Auditors served as a third party give accountability to the fairness of the company's financial information.
Relationship with the public
Traditionally, auditor's job was detached from general public. Auditors were only responsible for companies because their jobs only related to certain accounting items. With the development of financial markets and derivatives, auditing is widely used in various industries and companies. Today, auditor's relationship is closely tied to the public. As more and more people engaged in the stock and security market, financial information such as annual report is very important for the public. Auditors play a intermediary role between companies and the public. One of the auditors' responsibilities is to prevent company's fraudulent activity and provide trustworthy financial information to the public.
Factors caused the changes
The changes in audit professionals have been gone through many stages. Here is a table summarizes the key legislations and Acts which influence audit profession.
Table 1: Developments of audit requirements (Source: Leung et al, 2009)
Successive Companies Act regulated the function and role of professional auditors. In 1900, audit first became compulsory for all companies. In 1948, auditors were required to possess professional certificates and qualifications. The words, styles and process of auditing report and the responsibility of auditors have evolved over time.
There are two cases should be noted on the development of auditing, which greatly influenced auditors profession and responsibility. The two major audit cases which happened in late 1800s established the foundation of auditing. These cases are the London and General Bank (1895) and Kingston Cotton Mill Co. (1896). These two cases established professional requirements for auditors who need to conduct business financial performance with reasonable skills and consideration. With regard to the complexity of nowadays business environment and accounting techniques, it is hard for auditors to indicate all the defraud activities in a company. Auditors' responsibility for tracking and detecting fraudulent actions and errors is questioned. Although there is still debates around the responsibility and roles, auditors should put all their efforts to fulfill their duties to produce reliable auditing reports and reduce mistakes and errors.
Future changes in the work of auditors
Auditors will face increasing demand for more responsibility and accountability. Users and the public will ask for more perceived benefits from auditors. Countries are now developing international accounting standard to improve the consistency and quality of global and international auditing. The expectation on auditing will beyond the traditional assurance service for financial statements. As a professional service, auditing will be used to increase the integrity of financial and accounting information and accelerate the management decision-making process. This paper will discuss auditors' future role in the following aspects.
Enhancing the accountability and credibility of financial information
Auditors' role has been described as one of enhancing the credibility of financial markets and information which can effectively facilitate the capital market. In the future, auditors will continue to serve this traditional role to various audit practices. The detailed aspects will include:
1) Test and review the company's financial and accounting records and procedures;
2) Approval the use of different accounting principles to appropriate situations; and
3) Examine the financial statements to ensure there is no misleading information and data, no material misstatement and errors.
This traditional role will continue to be amplified in the future dynamic financial markets. Auditors' role in testing and examining financial information and performance will be considered to be basic and the most important. (Bell et al, 2002)
Providing reasonable assurance service to users
According to International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants, auditing assurance services will involve 4 elements:
1) A third party relationship, auditors will act as the practitioner, which could be the independent auditor, responsible party such as the external board or director, and the intended users such as stakeholders and shareholders;
2) A subject matter, assurance services will be applied to financial reporting in which company need to demonstrate the accountability to the shareholders and the public;
3) Suitable criteria, such as fairness and loyalty to the international financial reporting standards and national standards;
4) Evidence, auditors should stick to the company's book keeping records and other materials; and
5) An auditing report, auditors should generate a trustworthy report to the company, users and the public.
In order to meet the above requirement for audit practitioners, auditors will nee to engage in the following areas:
1) Indentify the potential risks which could be materially misleading;
2) Auditors need to perform regular procedures to evaluate the company's financial performance and gather enough evidence to reduce the overall risks which could lead to material misstatement or lower the risks to an acceptable level;
3) Auditors need to express positive opinions regard to the general accepted criteria.
Satisfying the increasing information demand of users
Independent auditors have provided assurance services for company's financial statements for a long time. However, the traditional reporting was been criticized for not meeting the increasing user's demands. People are expecting more forward-looking information in financial reporting. The demand for improvement in financial reporting is justified, while this would exposure more risks and litigation to auditors. While professional standard setting bodies like International Accounting Standard Board (IASB) thought there is demand for more complex auditing and assurance services, professional firms like KPMG and PwC continue to hold the difficulty and complexity of changing auditing services regarding to the rapid development and growth of economy and information technology. As the global economy, companies' business and strategies will become more complex. Auditing practices and auditors' roles will evolve to a higher level, which will add values to financial reporting and related business. (Silverman, E. J. 1971)
Toady's complex economic environment and rapid developing technology requires a change and break of early "balance sheet" auditing level, which primarily focused on the micro level. Current auditors should focus more on the connection and communications between clients, users and the public. The interactions between the environments will facilitate auditors' work and increase the validity of financial statement assertions.
The previous sections has clearly illustrate on the developing roles of auditing, which has evolved through several stages. The relevance of auditing has been set by its traditional values in correcting the accountants, finding out fraud and errors, and giving opinions on the fairness and trust of the financial reporting for users and the general public. Currently, consider the difficulty and complexity of the information and financial environments, auditors need not only to increase the credibility of the financial reporting, but also to give value added services. For example, identify business risks, report on irregularities, and give suggestions on management internal risk control and etc. With the changes in accounting industry, auditing is becoming increasingly competitive. Traditional auditing and non-audit services are not clearly defined. The paradigm of independent and external auditing could be shifted, and auditor's roles and relationship has been reddened. There are three main aspects of the changes: (Carmichael, D. R. 1974)
1) Its scope with respect of the detection of fraud and error;
2) The essential characteristics of audit independence; and
3) The sustaining factor of auditors' liability;
Auditing is an important component of modern accounting and will continue to function in finance and economic activities. It is important to understand roles of auditors and factors influence on the auditing development.