Assurance Services Are The Services Provided By The Audit Firm Accounting Essay

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Assurance services are the services provided by the audit firm to increase the confidence of users and reduce the risk of users. (ACCA, 2007) External audit also is a type of assurance service which carried out by external auditor. This is because external auditor will check the financial statement provided by director in order to express an opinion whether the financial statement gives true and fair view to shareholders. (Pickett, K.H.S, Pickett, J.M, 2005)

Auditors are needed in every company. (Woon, 1996) However, the internal auditors may not realise their mistake in perform their audit work because they are most likely rely on precedents within the firms when make judgement about what was true and fair. Besides, most of them may under pressure to agree with the director's practice. (Elliott B, Elliott J, 2008) As a result, external auditors are needed in the companies including the public sector and non-profit companies. (Pickett, 2005)

Demands for assurance service also increased due to the example failure of some companies in the world. One of the examples is Enron, which was closed down in 2001 as a result of its financial manipulation and complex trading activities. Another example is WorldCom where make overstated of profit in 2002 due to the mistake of treat corporate expenses as capital investment by the internal auditors. (Pickett, 2005)

To ensure that high quality audits are performed by the external auditors, having an effective regulatory framework is very important. Some mechanisms which ensure the independence of external auditors are carried out by the profession and society.

Main report

2.1 Auditing standards

Auditing standards are one of the regulatory frameworks that are required to ensure that the external auditors provide reasonable assurance. The auditing standards are set by different bodies in different countries such as Auditing Practice Board (APB) in UK, Malaysian Institute of Accountants (MIA) in Malaysia and International Auditing and Assurance Standards Board (IAASB) for international. (Sagar, Mead, Bampton, 2008)

Auditing standards guide the auditors to determine the extent of auditing steps and procedures they should take when perform in the audit. The auditors are required to maintain independent in mental and attitude, and exercise professional care when perform the audit and prepare report. Besides, appropriate technical training is required by the auditor when perform the audit. (Lauwers, et-al. 2008)

Regarding to the audit standards, the external auditors are required to express an opinion on the fairly of financial statement in respect with Generally Accepted Accounting Principles (GAAP). They also required to state in their report if there are unreasonable informative disclosures. The auditors must understanding the internal control, the risk of material misstatement and audit procedures when performing their works. (Louwers, et-al. 2008)

The external auditors are required by the audit standards to communicate quickly to the director if there is any material weakness in making internal control statement by director or in the scope of their works. (ACCA, 2007) Besides, they are required to consider fraud in an audit of financial statement and the risk of material misstatement due to the fraud. (ACCA, 2005) Audit standard also provides guidance to the external auditors in order always aware of laws and regulation when provide assurance service and also perform their responsibility to report non-compliance. (ACCA, 2007)

Based on the professional auditing standards, external auditors can perform their duties with independent, objectivity, professional competence and compliance with code of ethics. (Pickett, K.H.S, Pickett, J.M, 2005) However, in the terms of ensure independence of external auditors, some of the audit standards may have imitations. For example, the auditing standard of ISA's do not override the local regulations in some countries. As a result, the local regulations are encouraged to change in order to comply with it. (ACCA, 2008)

Recently, a new practice alert has released by IAASB and described in the ISA570 that provide guidance for auditors when evaluate management's use of the going concern assumption and aware them about credit risk etc. (Accountants today, 2009)

2.2 Code of ethics

Code of ethics is formed to help the auditors aware to the areas where ethical pressure may exist and be in dependent all the time. Independent auditors are not only responsible to their client but also the public interest. Therefore, they should follow the code of ethics. (Sagar, Mead, Bampton, 2008)

There are some fundamental principles in code of ethics which must followed by them. Firstly, the external auditors must integrity which means they must straightforward and be honest. If they find that any information contains a materially false, they should not be associated with reports. Next principle is objectivity where the external auditors must not allow bias, conflict of interest and should not influence by the others when making decision. (ACCA, 2007)

Besides, external auditors must achieve the principle of professional competence and due care. This means that the auditors should have professional knowledge and skill. In order to do this, they must always maintenance by awareness to the professional development to keep up of date. They must also behave confidentiality by not disclose any information to the third parties unless there is legal right to disclose. However, in deciding to disclose the information, external auditors should consider about the interest of all parties, to whom the information is give, and whether the information is substantiated. At last, the external auditors must have professional behaviour where comply with laws and regulations. (ACCA, 2005)

The code of ethics requires external auditors to identify, evaluate and respond to threats which affect their independence and apply safeguards to reduce the threats. For example, familiarity threat may be created from family and close personal relationship, and therefore, the external auditors should take safeguard such as removed themselves in the team. If possible, they are encouraged not involved themselves in circumstances that may threaten their independence such as financial interest, close business relationship with clients and others. (Sagar, Mead, Bampton, 2008)

On the other hand, the external auditors must independence of mind and also appearance. This means that they must have mind that allow them make conclusion without being influenced by others and acting integrity, exercise objectivity and professional scepticism. Besides, the auditors should avoid the significant facts, having all knowledge related to the relevant information and always seen to be independence. (ACCA, 2007)

Code of ethics are very important to make sure the independence auditors carry out their work with professional competence and due care. Besides, it can make sure they provide independent opinion when provide assurance services because the public depend on their knowledge, skills and expertise. (Sagar, Mead, Bampton, 2008)

However, it also has limitations. It will make the people too reliance on the codes until do not develop their moral sensitivity and this will result in the wrong decision. Besides, when the actual and professed behaviour of a company is different, the codes can be counterproductive. (Deon, 2002)[online]

In 2007, the By-Laws which adopt the Code was introduced by MIA. The By-Laws provide framework of principles to followed by auditors and help them to perform at highest standards of professionalism. (Accountants today, 2007)

2.3 Company law

Companies Act 1965 is administered by Companies Commission of Malaysia (CCM) which was set up to provide regulatory framework for companies. (Rachagan, Pascoe, Joshi, 2002)

To ensure the independence of external auditors, the provisions of the Act dealing with appointment and removal of auditors are designed. In the Companies Act 1965, section 8(1) stated that a person must be an approved company auditor if a person wants to become an auditor. (Woon, 1996)

The qualifications for an approved company auditor are good character and fit to perform duties. Besides, a person must become a member registered with a regulatory body at national level under company law such as MIA in Malaysia. A person must also passed qualifying exam from specific institution or become member of qualifying bodies such as ACCA or CIMA in United Kingdom (UK). The most important qualification is a person must be independent from officer. (Chan, Koh, Ling, 2006)

In order to ensure the external auditors are independence and acting with professional competence, there are some situations under the act where a person is not qualify to be an approved company auditor. (Woon, 1996) These situations are such as employee of an officer of the company, owed the company more than RM2500, partner of an officer of the company, etc. (Chan, Koh, Ling, 2006) Section 172(4) in Companies Act 1965 indicate that auditors can be removed when they become unsuitable to continue their duties. (Woon, 1996)

Rights and duties which stated in law allow the auditors perform their duties by independence. (Arens, et al.) Section 174(2) (a) in Companies Act 1965 stated that the auditors are required to form an opinion and report to the shareholders whether the financial statement provided by director is true and fair. (Chan, Koh, Ling, 2006) They must exercise reasonable care and skill in perform their duties. (Woon, 1996)

When perform duties to give opinion, the external auditors must be state that whether get all information and explanation, whether the company kept proper accounting as required by the Act, and whether proper returns are received from branch offices. This is indicated in the Companies Act 2006, section 498. (ACCA, 2008)

On the other hand, to enable the external auditors perform their duties independently, they have certain rights which included in the law. Section 174 in Companies Act 1965 allows them to access the records and accounting of company, get information or explanation from officer, and attend any general meeting including obtain information which related to the meeting. (Woon, 1996)

The requirements in Act help the independent external auditors perform their job at a high standard performance and professional. (Arens, et al.) In 2008, new requirements for UK auditors were carried out by Companies Act 2006. There were about disclosure requirement, notification requirement about ceasing and etc. (Takwani, 2009)

2.4 Audit committee (corporate governance)

Besides the case of companies like Enron and WorldCom, at the same time, the need of audit committee is also arise due to the collapse of Bumiputra Malaysian Finance Limited (BMF) in Malaysia. (Saudagaran, 2005) Corporate governance required audit committee is carried out by board where the committee is operated by two or three independent non-executive directors. This is to ensure objective and professional relationship within the auditors. (ACCA, 2007)

Based on Cadbury report, audit committee provide a framework which the external auditors can behave independence in their duties. (ACCA, 2006) This is because audit committee is responsible to make recommendation about the appointment, removal, and remuneration of external auditors in order independent auditors is chosen. (Woolf, 1997) Besides, the audit committee will review and monitor the independence and objectivity of external auditors to ensure the qualification of auditors' report. (Saudagaran, 2005)

External auditors are required by corporate governance to provide report on the final accounts prepared by director whether it show true and fair view relating to the company's financial statement, and liquidity position. (Pickett, 2005) In order to ensure the independence of external auditors, audit committee review the nature of non-audit services provided by them in order they are not too familiar with the management and operation of the company. (ACCA, 2007) There are allowed to perform some basic tax work and services like employee training, and assurance work. (Pickett K.H.S, Pickett J.M, 2005)

Besides, audit committee will access the qualification, expertise, resource, and independence of external auditors every year to ensure their quality. It have procedures to ensure the independence of external auditors by consider all relationship between the external auditor and company. In case of former employees of external auditor is employed by the company, audit committee will consider there is no impairment of auditor's independence. (Collier, Agyei-Ampomah, 2006)

The advantages of audit committee are providing independence point of reference to the auditors because the committee is carried out by all independent non-executive directors. (ACCA, 2007) Besides, audit committee help the external auditors to get information they need and overcome the problems which threaten their independence. (Woolf, 1997)

However, due to the official reporting procedure of audit committee, auditors are prevented from raising matters of judgement and reporting only on fact matters. (ACCA, 2008) Audit committee is also being argued that failed to review auditor's work effectively and do not play effective role between clients and auditor. (Abdullah, no dated)[online] Besides, 'two-tier' board of directors are created where the directors involved in the financial statement and directors do not involved. (ACCA, 2007)

In order to improve corporate governance, Malaysia introduced International Financial Reporting Standards (IFRS) in 2006 where can help to increase transparency of financial statement. (Woodward, So, Ng, 2007)

Conclusion

The regulatory frameworks above aim to improve and maintain the independence of external auditors in order to ensure high quality of audits and services are carried out. However, some of them have limitations. According to Joseph Stiglitz, inefficient accounting framework will lead to bad performance of the company. (Willsher, 2009) Therefore, they need to be developed and improved.

In term of code of ethics, the auditors must always maintain independence, transparency and aware on the changes of legislative and regulatory because the regulation and compliance always increase. (Accountants today, 2007) On the other hand, audit committee must make sure the external auditors are performing independently, objectivity and free from influence. (Moxey, 2009)

Besides, good corporate governance should have a fully independent external audit process and overseen by an effective audit committee where lead by members that have appropriate financial literacy and accountancy qualification. (Moxey, 2009)

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