Examining the increased regulation of audit performance


a) External auditors hold the responsibility to the public interest, which is defined as the collective well-being of the community that the auditors serve (PPB, 2006). Therefore, external auditors must have some basic personality, such as objectivity, integrity, competence and professional due care (PPB, 2006). To maintain such external auditors' professionalism and guarantee them perform at an appropriate level of quality, profession bodies publish different auditing standards to standardise the conducts of these accounting professionals. On the other hand, due to the profound influence of their work to the stock market and wider society, the government enacts laws and regulations that construct a regulatory framework for external auditors' activities.

The regulatory framework for ensuring quality services rendered by external auditors includes Audit Standard Setting, Quality Control Standards, Firm Regulation, Self-regulation and Government Regulation.

In New Zealand, the Professional Practice Board (PPB) issues auditing standards. In its working paper "Due Process and Operating Procedures", PPB specifies its purpose of setting ethical and professional standards for accountancy profession in New Zealand is to protect the public interests. To fulfil this target, PPB issues exposure drafts on ethical and professional standards that are subject to public review.

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To maintain the quality of audit work, in section 14 of ISA (NZ) 200, it requires auditors to comply with relevant ethical requirements. In section 18, it requires external auditors to comply with all ISA (NZ) relevant to the audit; and it also requires auditors to understand the entire text of ISA (NZ). ISA (NZ) 220 specifies "the responsibilities of the auditor regarding quality control procedures for an audit of financial statements and addresses the responsibilities of the engagement quality control reviewer". This standard requires engagement teams to take responsibility in implementing quality control procedures in order to comply with professional standards and regulatory and legal requirements, and to guarantee the appropriateness of auditor's report.

A key change in the regulation of the audit profession in recent years has been the move to increased regulation of the performance of auditors. There are mainly two types of auditor regulations. The self-regulation refers to the regulation which is primarily carried out by the profession. When it is carried out by the government, it refers to government regulation. Under self-regulation, professional institutes act under a delegation from their respective governments. Governments recognise the legal status of professional institutes, and at the same time assign responsibilities and reporting requirements on them. Profession responsibilities include admission criteria, continuing education, disciplines, standard setting and the like. Reporting requirements refer to annual reports submitted by the professional body. In general, under self-regulation, profession regulates itself within the regulation framework and reports its activities. As an addition to assign self-regulation responsibilities to the profession, the government also enacts government regulations. For example, the Companies Act 1993 sets the basic principles of auditor appointment as well as the applicable statutory provisions. The government regulation sets the legal liability of auditors towards the clients and other stakeholders. Both self-regulation and government regulation require auditors to follow the code of conduct and compel auditors' report keeping ethical ideals in mind (Brecht, 1991). Disciplinary action is taken against auditors who violate the regulatory standards. Auditors may face legal charges if they are responsible for some degree of audit negligence. All these legal and regulatory requirements are to ensure external auditors perform at an appropriate level of quality.

b) Before audit engagement acceptance, there are some steps that can assist the audit partner in determining if he should accept the appointment or not.

The first step is to consider the integrity of the management of GML and identify special circumstances and unusual risks associated with the gambling industry. The audit partner may need the performance and documentation of an assessment of management and board integrity and reputation. GML has been named in a recent anti-corruption inquiry, which may indicate the problem associated with the management of GML. The personal characteristics, philosophy and operating style of the management have a significant influence on the company as a whole. According to International Standard on Quality Control (ISQC), if the audit partner "has reason to question the integrity of the management", he should not accept the engagement "because the Engagement Risk would be increased beyond an acceptable limit." To assess the integrity of GML's management, the audit partner should also need to develop a procedure to liaise with GML's present auditors to ascertain whether there are circumstances the firm should take into account in deciding whether to accept the engagement. Especially the audit partner should understand the reason of changing audit partner of GML's present audit firm. He should also inquiry of other Firm personnel or third parties such as bankers, legal counsel and industry peers; and conduct background searches on relevant database.

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The second step of client acceptance could be to determine the competence of the firm to perform the engagement. The audit partner needs to ensure the firm has the competence to perform the engagement, including time and resources, industrial knowledge and relevant laws and regulations applied to the industry. GML operates within a specialised industry - gaming industry. The complexity of the entity's structure and transactions is high. Many accounting treatments may be subject to significant professional judgement and interpretations. The competence of the firm and the audit partner determines the quality of the audit work.

The third step of client acceptance is to comply with ethical and legal requirements. Ethical considerations relate to whether the audit firm is able to comply with sets of Code of Ethics. Code of Ethics outlines the key principles, including independence, integrity, objectivity, professional due care, confidentiality and professional behaviour (IESBA Code, 2011). The audit partner should consider whether he can maintain independence during the audit, especially his potential client has the power to influence the politician. Companies Act 1993 also requires no conflicts of interest, which means the audit partner should implement extensive procedures to deal with regulations.

Due to the particularity of the industry that GML operates, the audit partner should consider the need for additional involvement, consultation and approval by others within the audit firm.