Academic studies relating to independent audit of financial records such as economic records and information relating to audit contracts and audit processes has not been widely studied. Before 1970s, the practice of auditing was regarded as a purely practical activity controlled by technical principles set by the practice itself. However, auditing can be regarded as a professional activity within the broader economy. Consequently, auditors are controlled by economic incentives and principles within the market and the restrictions in which they operate.
Furthermore, the incentives experienced by auditors are usually complicated. The process of conducting an independent audit of financial statements is important to both current and possible shareholders as well as creditors who are not in direct contact with the auditors. The auditor participates in transacting with the legal entity as well as the entity's management whose recommendations in the financial statements are supposed to be verified by the auditor. Furthermore, auditors experience a number of professional and government regulation and these regulations vary from country to country. In spite of these complexities, auditing is considered to be a thriving business and high qualities of audits are regarded significant in the right functioning of capital markets. Research themes in the field of auditing have changed to include economic issues such as auditing markets, audit pricing, litigation against auditors, management of earnings, and issues relating to international auditing.
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Furthermore, there have been improved studies on economic themes in academic auditing literature. This paper provides an evaluation of the current government auditing in China and the methods that can be used to move it from the control of the executive system to independent control. The data used to determine the outcome of this evaluation process is obtained from interviews with government auditors and congress officials as well as leading academician who assist in determining problems brought by lack of independence of the auditing process. The results of the interviewing process indicate that despite the possibility of increasing the independence of audit by moving the control to the legislature, the move cannot be feasible in the present political conditions. In order to achieve the purpose of an independent auditing system, most of the responsibilities performed by the government should be transferred to the legislature.
However, it allows that the government would be responsible for controlling other areas of auditing such as special purpose funds for auditing, financial service auditing and state-owned enterprise auditing. This approach is expected to be politically acceptable as it would result into enhancement of independence of audit systems at the time of need for independence as well as enabling the government to have a strong control of the audit system.
The main objectives of this research are to determine the current auditing systems used in China and the disadvantages associated with this form of auditing systems. This allows implementation of the right methods of auditing that result into lack of government intervention as well as ensuring the functions of auditors is accomplished. Some of the objectives of this study include the following.
To examine the current auditing systems used by the government of China
To determine the disadvantages related to the current auditing systems in China
To determine the reforms that need to be made in the current auditing systems in China and the approaches that should be used to ensure independency of auditing systems.
Limitations of the study
Despite the contribution of this paper in establishing areas of inefficiency in auditing systems of the government of China and proposing methods of improving those inefficiencies, there are a number of factors that could result into a difference between Chinese auditing systems in comparison with auditing systems in the Western countries. These include ethical standards, rules that regulate the auditing systems in China in comparison with Western countries, ideas of investors, audit reports and the ideas of auditors. Thus the recommendations proposed for improving independency of auditing systems by other Western countries would not be sufficient to improve the independence of auditing systems in China.
In addition, this study will focus on the study of comparison of Chinese auditing systems with auditing systems in other Western countries by conducting primary data collection such as the use of questionnaires. However, the sample used in the study may not have the right accounting knowledge. In addition, the sample does not represent the opinions of the entire population. Consequently, the opinions will bias the results of the research in certain areas. Furthermore, this study focuses on methods of improving the independency of the Chinese auditing systems by introducing auditing systems used in Western countries. This might not be relevant towards solving auditing problems since the research does not incorporate economic conditions in China.
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In addition, there are many auditing gaps that this study does not examine. For instance, this study does not explain whether the mistakes performed by high-level officials should be disclosed during the auditing process. It assumes that the government always performs the right functions. Thus it assumes that if government makes wrong decisions, they will be ignored because it is difficult to supervise one's supervisor. The response from a number of interviewees also show that auditing does not involve financial responsibility and performance of the government, thus there is a high possibility that many big issues are not accounted for, especially those performed by government officials. Given that most problems emerge from inactivity of the government, audit office cannot intervene and there is a high possibility of recurrence of the problems. This form of auditing demonstrates a serious limitation of power centralization.
Overview of Chinese Auditing History
Current Auditing Systems in China and their comparison with Western countries
According to the present requirement for internal audit practice, there are three forms of structures of establishment of internal audit units within a business environment. The first case involves establishing internal audit parallel to the Board of Directors under the direction of the mentoring committee. In the second structure, the establishment of internal audit involves placing it under departments within the company under a Board of Directors. In the third structure, internal auditing process involves placement under the financial unit, since internal audit is regarded as key functions of the financial departments. Within the first structure, there can be independence of internal auditors during the process of auditing as the internal audit unit has the capacity to set up and conduct internal audit process without interference from outside departments.
In the second system, there is a limitation of independence of internal auditors and it is difficult to conduct auditing in other departments at the same level. In the third structure, internal auditors do not have the independence during the process of auditing since finance department performs supervisory activities on its subsidiary and other sections while internal audit is a sector within the finance department.
In China, the structuring of internal auditing units involves classifying them into business enterprises based on the second and third structures explained above. Comparatively, internal audit in Western countries is based on the first structure. As such, internal audit in Western countries have the ability to keep much more independence during audit process in comparison with Chinese auditing firms. Some of the current auditing principles in China and their limitations include the following.
Relationship between Internal Audit and Government
Internal audit units in China are government-owned organizations and have close association with government agencies of regulation. The processes of establishing all business internal audit units are based on the government's administrative requirements. For instance, the No. 29 standards of 'The National Auditing Law' provide regulation for establishment of internal audit units, while internal audit units in government-controlled companies must operate under the guidance of the local authority. The standards clarify the legal connection between internal units of a business and agencies of government of audit and do not provide rules for creation of functions of internal audit allowing for difference between audit units of a business and government audit agencies. Thus, in China a business internal audit system is under dual-supervision. One form of this supervision involves leadership of its own department while the other is from the guidance and supervision provided by the state departments that represent the government.
In comparison with China, there are usually few laws that regulate the establishment of internal audit in Western countries. The process of setting up internal audit units involves self-discipline methods of enterprises, and supervision of internal audit units is not performed by the local government. Generally, the Internal Auditor Associations have been formed to function as a bridge between the government and businesses and professional companies. By enacting audit standards, Internal Audit Association serves the purpose of communicating audit work experience and delivery of audit information, development of related work theories and providing guidance for the practice of internal audit.
The responsibility, accountability and content of Internal Audit
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In China, regulation of functions of Internal Auditors is performed by the National Audit Office. They engage in auditing the economic activities concerning public finance revenue, public finance spending, revenues relating to finance and financial expenditure in businesses and their subsidiaries. They also audit the use and management of capital inside budget and outside budget. They should conduct auditing of the accountability of influential people during their terms in place of work. They also audit project construction, examination and evaluation of soundness and effectiveness of internal audit control system as well as risk assessment process. They ere also required to conduct operational or performance auditing.
Internal auditors are also required to perform additional auditing works such as required and regulated by the laws or regulations. According to the standards listed above, China's Internal Audit systems are more focused on financial audit and compliance audit. This implies the auditing process is more focused on supervision function and checking whether rules and regulations have bee n violated, but does not involve strengthening the capacity of the administration, or enhance effectiveness of service to help business managers make significant decisions.
In Western countries, the main responsibilities of internal auditors include determination of the role of internal control in monitoring system and enhancing the effectiveness of internal audit process. They also ensure evaluation of economic benefits of companies and evaluate whether laws and regulations are complied with. Internal auditors also provide consulting services, provision of guidance to improve operations and helping them resolve difficulties. Internal audit in Western countries such as Germany put more focus on management audit with a number of functions that include supervision and provision of services.
Quality of Internal Auditors
In China, there are usually insufficient numbers of professional quality auditors to satisfy the present practice requirements. Most of the current internal auditors were trained before economic reforms in 1980s despite having no college education thus resulting into lack of the required professional trainings. Despite a high influx of young professionals in this field, most of them have just finished college and coming from accounting major basically.
In contrast, in Western countries all internal auditors have college education and they speak one or two foreign languages and are computer literate thus facilitating their roles as internal auditors. Professionals of internal audits come from diversified fields such as accounting, auditing and have the familiarity with financial management, business management as well as engineers who are familiar with engineering technology. Other professionals include lawyers who have the competence in legal experiences, and IT personnel and experts who have the competence in computer software. Furthermore, Internal Audit Associations in Western countries also publish and distribute monographs on an annual basis to communicate experience among internal auditors.
Methods of Improving independence of Auditing In China
On the basis of the comparative analysis above between internal audit in China and Western countries, there are a number of suggestions that have been made to the internal audit system in China. It is believed that when these suggestions are implemented, the independence of internal audit activities in China will be significantly improved in comparison to the current internal audit systems.
One suggestion is strengthening the independence of internal audit system since this is the key to effective audit. This is based on the fact that an independent unit needs to be set up without interference and interference from other departments. The audit unit should be responsible for provision of independent opinions and make decisions on methods that need to b used to solve problems that arise from audits. Due to the close relationship between the audit units and the government in China, it should be structured in a similar level with other departments and should not be place within the finance department. Due to these forms of auditing, it is not possible to acquire an independent audit from other influences. It is necessary to structure the internal audit in such a way that it is only under the control of the Board of Directors and the people who work in internal audit unit need to be rotated, assigned to various tasks and relocated on regular basis.
It is also recommended that the quality of internal auditors should be increased. This can be achieved by the internal auditors Association in China when they establish a local Internal Auditor Association chapter to distribute professional monographs that assist in communication of experience among internal auditors. In addition, all internal auditors must go through the required examination for qualification. Furthermore, employment of future internal auditors must be enhanced to all related professional areas.
There is also the need to change the mission of the current internal audit from a simple function to a multi-function. The present goal of internal audit in China is to ensure financial auditing and compliance auditing, with more concentration on supervision. Based on the missions of Western countries, there is the need to change internal auditing in China through expansion to include supervision and provision of professional functions with more emphasis on audit of economic benefits that create the key to enlivening companies and improvement of the national economy. This implies that the focus of internal audit in China should be put on methods of improving economic benefits of business enterprises and the whole economy.
The independence of internal auditing in China can also be enhanced by the use of new technologies in internal audit. Due to the need for internal auditors to deal with more and more of financial data, there is the need to develop new procedures of auditing and using the existing technology and evaluation procedures that include sampling audit, feasibility studies and auditing by use of computers.