Ethics, are Moral beliefs and rules about right and wrong. As defined in Merriam Webster Dictionary,ethics are the principles linked with what is good and bad and with moral duty and obligations principles of conduct governing an individual. Ethics refers to a discipline in which matters of right and wrong, good and evil, virtue and vice, are systematically examine (Brinkmann, 2002). Ethics encourage a sensed of social; responsibility in the professional member (Tucker et al, 1999), while simultaneously providing justification of professional self-interest (Fisher et al, 2001).
3.1.1 Impact on the credibility of auditors' work
The credibility of auditors' work rests on auditors being perceived as independent, competent, and adhering to ethical conduct. Flint (1988) provides an answer when he states:
'Public trust and confidence in auditors are dependent on a continuing belief in their unqualified integrity, objectivity, and, in appropriate circumstances, acceptance of duty to the public interest, with a consequential subordination of self-interest. Creating and retaining trust and confidence, therefore, requires auditors to show certain characteristics which are those commonly associated with employments which are recognized and sanctioned by society as professions"
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Thus, in order to retain the public's confidence in the credibility of their work, auditors must adhere to standards of ethical conduct: standards of conduct that embody and demonstrate integrity, objectivity, and concern for the public (rather than self-) interest.
According to Dobson and Armstrong, 1995; Libby and Thorne, (2007) ethical conduct supports the enhancement of the audit independence and has significant to the auditor's role to play auditors' primary duty to protect the public interest and the necessity to use judgment in fulfilling his duty such that the auditors' work is credible and reliable.
In Mauritius, the Financial Reporting Council ensures that any registered firms establish policies and procedures designed to provide it with reasonable assurance that the firm and its personnel comply with relevant ethical requirements in conducting their work.
3.2 Regulation of auditor independence
The Mauritius Financial Reporting Act 2004 states: "independence" means independence of mind and independence in appearance. An auditor shall carry out his functions in full independence and shall not act in any manner contrary to the Code of Professional Conduct and Ethics; or engage in any activity which is likely to impair his independence as an auditor.
Mauritius establishes a local professional accountancy body which meets IFAC Statements of Membership Obligations, and a local regulatory body for the accounting profession. Mauritius adopts all current IFRS and ISA. The Mauritius framework, however, acknowledge that the auditor cannot fully maintain this independence of mind and in appearance as in one way or the other circumstance emerges whereby such professional behavior is difficult to maintain. Along with this line, the ICAEW Review of Guidance on Auditor Independence (ICAEW, 2000) highlights that: 'As long as audit appointments and fees are determined by the shareholders of the company being audited, the auditor can never be economically independent of the client'.
Mauritius has undertaken a review (ROSC A&A), most recently in June 201, to determine what reforms should be undertaken to further strengthen the accountancy institutional framework that is critical in contributing to the country's economic growth. This review brings out new issues on the strengths and weaknesses in institutional framework that underpin accounting and auditing practices that influence the quality of financial reporting. The weaknesses are studied and implementations are made to improve Mauritius' business environment, thereby enhancing confidence of investors in the work of the auditor. The enactment of the Financial Reporting Act 2004, establishes the Financial Reporting Council to regulate the accounting and auditing profession by ensuring compliance with accounting and auditing standards.
Mauritius regulation ensures that firms and its personnel maintain independence where required by the IFAC Code and national ethical requirements so that it identifies and evaluates circumstances and relationships that create threats to independence, and to take appropriate action to eliminate those threats or reduce them to an acceptable level by applying safeguards, or, if considered appropriate, to withdraw the auditor from the audit assignment. Firms in Mauritius which are approved by the Financial Reporting Council is obliged to provide independence training to all firm personnel on an annual basis, so as to regularly communicates updates to or clarification of independence policies. It sets the regulation for firms to have a well managed internal procedures and controls over the work. It also specified to have rotation as a means of safeguard for auditor independence. Mauritius framework acts as a shield to non-independent by through education, training and experience requirements for entry, professional standards, monitoring and disciplinary processes, external review of quality control system, and having legislation governing independence requirements and sanction for licensing auditor who fails to conform with the required professional and ethical conducts required as an auditor.
3.3 The extent to which Mauritius framework as well as institutions provides the best possible training to equip people with the required professional and ethical conducts required as an auditor; independence
Always on Time
Marked to Standard
In Mauritius, the Mauritius Institute of Professional Accountants (MIPA) supervises and regulates the accountancy profession and promotes the highest standards of professional and business conduct of, and enhances the quality of services offered by professional accountants. As far as the professional and ethical conduct is concerned, the MIPA monitors its members using the IFAC Code of Ethics For Professional Accountants by establishing, publishing and reviewing the Code of Professional Conduct and Ethics for professional accountants, which is consistent with and contains all the principles of IFAC's Code of Ethics for Professional Accountants. It promotes the highest professional standards among, and improves the quality of professional services offered by its members. The MIPA does not administer any professional education and examinations since there is no local (Mauritius) professional accountancy qualification. In Mauritius, professional accountancy qualifications are provided by ACCA, ICAEW and CIMA. There is close direct collaboration between tertiary institutions and specific professional accountancy body as exemplified by the cooperation between the University of Mauritius and ACCA. Tertiary institutions and professional accountancy bodies include IFRS and ISA in their syllabus and universities offer ethic training modules. Some universities have modules in public sector and ethics training.
Mauritius institutions are attracting, retaining and developing the right people for the accounting profession. The Council develops issues and keeps up-to-date auditing standards, and ensures consistency between the standards issued and the auditing standards and pronouncements of the International Auditing and Assurance Standards Board. The audit profession is in a prime position to drive financial integrity in the interest of the society. The Institute, in turn, continually challenge the different cultures within the profession. Innovate and continue to invest time and effort in preserving capital market confidence through continually improving the quality of external auditing and instilling the required professional and ethical conducts required as an auditor. Thus in Mauritius regulatory framework prevents auditors who are insufficiently independent and competent in this way of education and training to secure the independence of auditors.
In Mauritius not only members of the profession are educated but also regulators, management, boards of directors and audit committees on the expectations of auditors with respect to independence is done through the following:
Implementation guidance, including examples of appropriate and inappropriate safeguards to independence threats.
Guidance with respect to public-interest entities and the ethics concepts that apply to such entities.
Increased clarity regarding the application of the Code with respect to tax services.
Consideration of embracing ethical compliance within a quality control framework.
Mauritius is making its best to strengthen professional education and training and development of practical-oriented guidelines on implementations of standards for the whole market to meet the challenges and demanding objectives set by the adoption of IAS/IFRS and ISA within a short timeframe. So the Mauritius Framework provides the necessary training which encourages integrity and objectivity, so as auditors have sufficient regard for their careers and reputations to be encouraged towards objectivity and use of safeguards and avoid litigation. Seen in this way, Mauritius can be said to provide the best possible training to equip people with the required professional and ethical conducts required as an auditor.
4.0 Audit Risk
4.1 Definition of audit risk
Identifying and assessing audit risk is a key part of the audit process. According to ISA 400 (SAS 300) "Accounting and internal control system and audit risk assessments", audit risk is defined as 'the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of material misstatement and detection risk. According to Dan Swanson(Articles on Internal Control: Business risk vs. Audit risk) , "audit risk relates mainly to the internal and external audit efforts to achieve its objectives; that is, provide effective, timely, and efficient assurance and consulting support to management and the board".
There are four main audit standards which auditors consider when dealing with audit risk:
ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in accordance with International Standards on Auditing
ISA 315, Understanding the Entity and its Surrounding Environment and Assessing the Risks of Material Misstatement
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ISA 330, The Auditor's Procedures in responses to Assessed Risk
ISA 500, Audit Evidence
4.2 Business risk vs. audit risk approach
The effectiveness of the audit risk approach has been questioned. Lemon et al. (2000) identify that some large firms are adopting what is called a business risk approach. Business risk" refers to the risk that "the auditor is exposed to loss or injury to his professional practice from litigation, adverse publicity, or other events arising in connection with financial statements that he has examined and reported on" (AICPA 1983). According to Jeppeson (1998) business risk brings firm more closely aligned to the objectives of the business and of management than those of financial statement audit so as to add value to audit. By using this approach, the auditor acquires a better knowledge and understanding of the business.
In Mauritius, the National Audit Office (NAO) adopted the Risk-Based Audit Approach in 2010, and the implementation needs to be strengthened. It is generally accepted that for most entities of size, the risk-based audit approach minimises the possibility of audit objectives not being met. Consequently ISA 315, "Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment", compels auditors to adopt a risk-based approach to audits.
4.3 Auditor independence and audit risk relationship
The Sarbane and Oxley Act (SOX) act enhanced auditors independence as it prevents audit firms from providing additional services to public companies they audit. SOX act was invented in the US when there was fraud and no transparency in public companies that investors lost a lot of money and were in a discouraged state for new investments. Therefore, SOX came to re-assure everyone and to start freshly. SOM act contributes a lot to auditors' independence, and results in an automatic positive impact on audit risks. This is because when the independence of auditors is threatened that audit risks arises more. So, here there is no worry for independence, hence audit risk will be significantly decreased. This act has considered all the drawbacks and possible areas and circumstances in which errors and fraud may occur in an organization before implementing their rules and regulations. It definitely enhances independence of auditors and avoids risk factors. So there is a tie relationship between auditor independence and audit risk. As suggested by Fearnley, S. and Beattie, V. and Brandt, R. (2005), "In reconsidering the relationship between independence in fact and audit risk we are able to identify more clearly where the key audit risks and threats to independence really lie."
Therefore both independence framework and audit risk model is required if auditors' independence is to be protected. Vivien Beattie, Stella Fearnley and Richard Brandt (2005) argue that audit is a holistic activity, in which issues of competence, independence in fact and audit risk are inextricably linked. Achieving the goal of a high-quality audit very much depends on auditors exercising appropriate and sound professional judgment throughout the engagement. If the right auditor is place to carry out the engagement, then audit risk can be reduced. As stated by ISA 200: The Objective and General Principle Governing an Audit of Financial Statement', â€•The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. But the latter must show that appropriate steps have been taken to reached an unbiased opinion. Findings documented by Mitra et al (2007), Goddard and Master (2000), O'Sullivan (1999), Collier and Gregory (1999) and Simunic (1984) report that there is as significant positive relationship between audit risk and factors threatening auditor independence (example in terms fees paid to the external auditor). Increasing auditor independence reduces audit risk as better professional conduct improve the quantity and quality of audit evidence upon which audit opinions are formed. Compromise audit independence associated with increase in total fees paid to auditor, eventually increase audit risk.
5.0 Auditor independence and audit risk model acting as the main components of audit work to ensure public confidence
5.1 Audit Process
5.1.1 Definition of the audit process
According to ISA 200 "Objectives of Auditing Financial Statement", auditors should express an opinion on whether their client's financial statement provides a true and fair view of their financial position. In order to form this opinion, auditors must gather and evaluate sufficient appropriate evidence (ISA 500: "Audit Evidence"). This evidence is collected through the audit process. The audit process comprises a series of logical well-defined steps and is performed using appropriate audit procedures to reach by an audit opinion. There are basically ten steps of the audit process which have been summarized in the table below (Brenda Porter, Joe Simon, David Hatherly, 2002, "Principles of External Auditors", second edition):
Appointment of auditor at annual general meeting of shareholders
Letter of engagement sent to client
To document the audit arrangements and to clarify matters that may be misunderstood
Gain understanding of the client, its activities and its circumstances
To understand events, transactions and practices that may have a significant impact on the financial statements
Overall analytical review
To assess audit risk and set materiality level
Gain understanding of the accounting system and evaluate the internal controls
To understand how the accounting system 'works' and to identify strengths and weaknesses of internal controls
Test internal control strengths through compliance testing
To ascertain whether controls on which audit reliance is planned is functioning well
Test transactions an account balances (substantive testing)
To evaluate the completeness, accuracy and validity of data produced by the accounting system
Completion and review
To ensure sufficient appropriate evidence has been collected on which to base an opinion
Report to :
Shareholders and other parties external to the entity
Those charged with governance of the entity
To inform shareholders and other interested parties of the opinion forms about the truth and fairness of the financial statements.
To inform those charged with governance about the nature, scope and findings of the audit. To inform management of weaknesses found in the accounting system and any to offer matters of concern. To offer advice on how the accounting system and its internal controls can be improved.
(Re) at the company's general meeting
5.1.1 The "unobservable" attribute of the audit process
There are a multitude of issues and problems auditors encounter during auditing that must be addressed individually. Some issues emerge unexpectedly and unnoticeable. Common problems that auditors experience solutions are there, but unclear issues which arise cannot be addresses immediately. Although the audit process is very similar in all audits, audit clients differ markedly in size, nature and complexity. According to Richard A. Vincins, a Certified Quality Auditor and regulatory affairs consultant, there are different auditing styles, from Food and Drug Administration (FDA) inspectors to third-party auditors for International Organization for Standardization (ISO) certifications. There are many problems which arise during audit process, and many of which may be unknown. Audit process is considered to be unobservable as no auditor will encounter the same issue. Many auditors struggle with problems they encounter during the audit process without understanding how to deal with them.
The audit process is very complex and hardly observable by third parties and the audit report (the result of an audit) is so standardised in its content and format that it offers a only few possibilities for differentiation. Audit failures are often only known when there are published by press (Wooten, 2003). So, it is difficult to know the number of audit failures not published by the press. The audit process in itself is unobservable because in the first place issues like independent of mind is difficult to prove and can only normally be established by circumstantial evidence. As the audit process is unobservable, the only occasion when evidence of independence in fact (or lack of it) becomes generally known is as a result of a disciplinary inquiry as stated by SEC. The quality of audit is not uniform and especially not directly apparent. Audit quality and professional scepticism are unobservable in the audit process. All these issues themselves make the audit process unclear. In fact, because of the difficulties in observing the audit process, the majority of prescriptive and experimental research focuses on an assessment of audit quality through "the quality of the auditor" as an individual or group of individuals.
Audit process is "unobservable" because unless appropriate legal, regulatory or ethical incentives are present, there may be little reason for any third parties to cooperate in the audit process or to recognise their part in supporting the truth and fairness of financial statements in the process. There is a danger that information which is of importance in assessing the truth and fairness of financial statements may not be available to either the board or the auditors. The work of third-party advisers can have a major influence on financial statements. But there are consequent dangers that the effects of their work are not transparent or may not be fully taken into account in the audit process.
5.1.2 Ingredients necessary to ensure confidence in the audit process
The financial audit is the linchpin for upholding confidence in the capital markets. It is a must to protect investor confidence in the audit process. Auditors have dealings with a wide range of employees and managers and it is important for them to have confidence in the audit process. As the financial markets become increasingly complex and global, a relevant and reliable audit process is increasingly essential to investor confidence and to the ongoing vitality of the capital markets.Â According to Howard Pratt FCA (July 2012, Group audits article) good quality information, effective communications and proper planning are all essential ingredients for achieving a successful audit process where benefits accrue to all parties. As the audit process is unobservable, public confidence in the value of audit depends on both the appearance of audit quality and the fact of audit quality while audit risk also is fundamental to the audit process as auditors cannot and do not attempt to check all transactions. Enhancing confidence in independent audit by improving audit transparency and supporting shareholder involvement in the audit process are ingredient.
Quality auditing is integral to the effective functioning of the capital markets. It is an essential service requiring specialist skills and knowledge. That is the auditors themselves are a vital ingredient in the audit process. Auditors must be seen to be independence of fact and of mind. Auditors must show that the objectives of ethical standards are achieved, providing confidence in the integrity, objectivity and independence of the auditor, and that sufficient audit evidence is not inappropriately constrained by financial pressures. The European Commission believes that promoting independence and ensuring that auditors are acting in accordance with the professional and ethical conduct is a key to restoring trust in the audit process, which plays a pivotal role in business by promoting the causes of transparency, accountability and sound financial management.
Effective communication is fundamental to the audit process and a quality audit. Research data indicates that skills and competencies traditionally regarded as 'soft', such as communication, are really the true drivers of audit quality. Communication is at the very heart of auditing. Communication within audit teams gives rise to shared wisdom and enhances or encourages professional scepticism. That communication is also how audit findings are best assessed and developed to give the right audit outcomes.
The usage of the audit risk model is also a key part in audit process so as to assess audit risk and set the materiality level, and determine the type of testing to be used (substantive or control test). This model enables the auditor to determine the scope of audit testing for error or misstatement in each client company by assessing the risk of error or misstatement arising in that company. By assessing the level of risk associated with the business and its environment, auditors will know about the effectiveness of the internal control system. In this case the audit process will be carried put efficiently as appropriate testing is made and 'good' auditor opinion is reached.
Consideration or determination whether an action is necessary or appropriate in the public interest to consider whether the action will promote efficiency, competition, and capital formation is also an ingredient in the audit process. This will increase investor confidence in the integrity of the audit process and in the audited financial information that they use daily to make investment and voting decisions. This increased sense of confidence should promote market efficiency and capital formation.
Despite the strong criticism in the UK of the extraterritorial aspect of the Sarbanes-Oxley Act, the major provisions of the act are widely seen here as being the right and proper measures. Many would consider greater transparency by companies and auditors as the final ingredient necessary to ensure confidence in the audit process (Peter Wyman, April 2004, Is Auditor Independence Really The Solution?). Certain firms like PWC and E&Y suggest that transparency by company increases usefulness and informational value of audit report in the audit process. Ernst & Young (November 2012) believe a better and more meaningful approach would be to strengthen the audit committee oversight process and make it transparent to shareholders, to provide shareholders with a clearer picture of how the audit committee actually carries out its important responsibility to ensure that the auditor is both independent and effective.
A 'robust independent audit process' is, fundamental to the integrity of financial reporting which is, in turn, fundamental to confidence in the capital market (APB, 1994)
5.2 Audit quality
5.2.1 Definition of audit quality
Audit quality is defined as the probability that an auditor will both discover and truthfully report material errors, misrepresentation, or omissions in the client's material financial statement (Deangelo, 1981). Audit quality includes (1) the probability that an auditor will both discover and truthfully report material errors, misrepresentation, or omissions in material financial statement (Deangelo, 1981), (2) probability that an auditor will not issue an unqualified report for statements containing material errors (lee et al., 1999), (3) the accuracy of auditor's information reporting (Davidson and Neu, 1993), and (4) measure of the audit's ability to reduce noise and bias and improve meticulous in accounting data (Wallace, 1980). Quality has been defined as the entirety of features and characteristics of a system, process, and product or service that bear the ability to satisfy given needs (Mills, 1989, p. 1-4). The quality of the firms' disclosed information is enhanced by the audit quality, which in turn lowers the information asymmetry along with the detection and avoidance of accounting errors and misstatements (F. Hakim, Omri & I. Hakim, 2010, p. 152). The audit quality is normally related to the ability of the auditors to identify material misstatements in the financial statements and their willingness to issue an appropriate and unbiased audit report based on the audit results (Turley & Willekens, 2008, p. 3).
5.2.2 The need for quality control in maintaining high quality audit
International Standard on Auditing (ISA) 220, "Quality Control for an Audit of Financial Statements" deals with the specific responsibilities of the auditor regarding quality control procedures for an audit of financial statements to ensure that high quality audits are performed. Quality control is of paramount importance to the independent audit function. ISA 220 explains:
"In order to carry out an audit in a manner that meets the reasonable expectation of users of audited financial statements, it is essential that audit work is carried out with due regard for audit quality. Firm never compromises the demand of audit quality in order to achieve financial success. In developing quality control policy and processes, and in order to preserve audit quality, management structures within firms are designed".
It is essential that auditors perform high quality audits so that they fulfill accurately their function in society. In order to ensure that high quality audits are performed, or if the public is to have confidence in auditors; work, quality controls are needed to ensure that their work is consistently of high quality. Flint (1988) conveys succinctly the importance of quality control for auditing:
"Auditors have both a legal duty and a professional obligation to work to the highest standards which can reasonably be expected to discharge the responsibility that is placed on them . . . . in a profession whose authority is dependent among other things on public confidence . . . a demonstrable concern, individually and collectively on the part of the members of the profession, to control and maintain the highest quality in its work, is a matter of basic principle. The basis of continuing public confidence and trust in professional competence is a belief that that the standards of the members of the profession will be maintained and can be relied on. (pp. 159, 161)"
Okolie (2007) maintains that high quality audits enhance the reliability of the financial reporting process and facilitate optimal allocation of capital by investors and other users of the financial statements.
Compliance with the ISA 220, "Quality Control for an Audit of Financial Statements" helps minimizing the prospect of audit failure.