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The fundamental to the society's need for auditor independence or external auditors is fairness and justice. [ Windsor C. et,al]. According to Carolyn Windsor, auditors must ensure credible corporate transparency of corporate reporting in the public interest to balance the interest of various stakeholders. External auditors are under the regulation of corporate governance. 'The guidelines on good corporate governance structure'. This internal control are 'a well established blessing', and request more empirical research on four related issues, the issues are (1) the demand for internal control system, (2) the relationship between internal control system and also other control system, for an example external auditing, and board of outside directors or supervisory board. (3) The effect of internal control on firm performance, and the last (4) demand for reporting on internal control. [Holm.C et.al].
External auditors are appointed by, and report to, the shareholders to examine the annual financial statement that have been prepared by the company directors. Their role is to assess the credibility of these statements by examining the underlying accounting record on which the statement are based and by reviewing the key assumption and estimates used in their preparation. Following this, the auditors will provide shareholder with an independent opinion as to whether the financial statement provide a true and fair view of the state of affairs of the company and comply with legal and other regulatory requirement.[ Atrill .P, ACCA]
High ownership concentration is a feature of publicly listed companies in emerging market. [Fan H.P.J, et.al] Joseph P.H. Fan stated that, an entrepreneur may moderate agency problem by voluntarily imposing monitoring or bonding mechanisms. The entrepreneur may consider an agent or auditor for hiring high-quality reputable information. Assurance of the quality of publicly reported accounting information are provided by the external auditors, where that is in turn limits the entrepreneur ability to manipulate accounting information and hence his or her ability to extract wealth from outside shareholders. For an example, an auditor would note that when controlling owner manages earnings downward to justify the low cash dividend paid to the outside shareholders or the controlling owner profit from transaction with the firm him or her control by manipulating accounting number to influence the selling or purchase price. [Fan H.P.J, et.al].
Shortly after the massive corporate collapses that triggered the 1929 Wall Street Crash makes auditors to become crucial to regain confidence in the integrity and credibility of the capital market. In the United States, the Securities and Exchange Act, 1933 and 1934 were signed into law to rebuild public trust in the governance of the capital market because President Franklin D. Roosevelt's administration was so interested about society's financial security and political stability. Securities and Exchange Act, 1933 and 1934 mandates listed companies' financial report to be independency audited in the public interest. 'Present fairly' in the judicial sense' is the ability of professional auditors to maintain an independent mind, when they are economically dependent on the client management. This is regulatory flow predisposes conflicts of interest because auditor have to negotiate compensation and employment condition with the regulated, the client company. [Windsor C. et.al]
Two key condition determining whether the external auditor actually is employed for this role. The first condition is simply whether quality auditor is available and they are effective. The second is whether the marginal benefit, for an example external auditors can reduce agency problem and hence capital raising costs, of employing the governance mechanism exceed the marginal costs (premium paid to hire the reputable auditor and the reduce benefit of otherwise being opaque) of using it. External auditors play a governance role in East Asia. Firm are more likely to hire name-brand auditors when their ownership structures indicate agency conflict. Some argue that a controlling owner may even hire a low-quality auditor to reduce external monitoring and may not desire to hire a high-quality auditor. [Fan H.P.J, et,al]. Some argue that lack expertise or willingness to supply quality by East Asian auditor. Some concern that auditor monitory role may be in conflict with their consulting activities with client firm an issue not unique to Asia. The country level weak legal environment countries demand, in general, lower quality audit than do strong legal environment countries. Auditors choice can even became irrelevant in a very weak legal environment because the weak public enforcement fails to punish violation indentified by auditors. [Fan H.P.J, et.al]
External auditor are responsibility to communicate certain issues that the external auditors discovered during the audit of financial statement with those person charged with governance of the entity. [Colbert L.J,et.al, 2002]. 'communication of audit matters with those charged with governance, stated in International Standard Auditing section 260(ISA 260), provide guidance in communicating matters which may be of interest to the governance body of an entity. This Standard applies to external auditors. External auditors must determine the person or body entrusted with the governance of the entity. The relevant persons, and the body that the external auditor make up, should be those responsible for supervising, controlling, and directing the entity, as well as for achieving its objective. The governance body is also accountable for appropriate financial reporting and for reporting other matter to interested parties. [Colbert L.J, et.al, 2002]. The matter to be communicated by the external auditor to the governance body are those are discovered by external auditors during audit the financial statement, and which the external auditor believe are significant and relevant to the governance body.[Colbert L.J, et.al, 2002].
ISA 260 state, some of the matter which might come to the attention of the external auditor and which may be of the interest to the governance body in fulfilling its oversight role. There are ten matters which are: (10 the scope of the audit, (2) management's selection of, or changes in, significant accounting policies, (3) significant risk and exposures with a potential financial statement effect, (4) proposed and booked audit adjustment, (5) material uncertainties which may impact the going concern assumption, (6) disagreement with management, (7) expected modification to the standard audit report,(8) material weakness in internal control,(9) management integrity, and the final (10) fraud.[Colbert L. J, et.al 2002]. Timely fashion communication should be done by the external auditor to communicate any matter to the governance body. So that the governance body enable to take appropriate action.ISA is not regulated the form of the communication for the external auditors to the governance body. The communication by external auditor to the governance body can be either oral or written communication. If the external auditors choose to communicate the matter by orally, the working papers should be included with an appropriate documentation. The documentation might consists of minutes of the governance body's meeting or a confirmation sent to that group by the external auditor. [Colbert. L.J, et.al, 2002].
ISA 260 notes that the confirmation rules of accounting licensing bodies or legal requirement may restrict the external auditors' communication with the governance body. Ethical responsibilities of external auditors to communication with the group may differ from its legal ones. Directly communication recognize by PA's for external auditors with the board regarding certain aspects. The CAE should be prepared for question from the board and have on understanding of those matters which the external professionals or external auditors will discuss. The meeting with the board and with the external auditors will be in advance. Internal group should request information from their external auditors regarding the issues to be presented. [Colbert L.J, et.al, 2002]. External auditor demand drives from the users of financial statement and their representative and advisors. These parties are aided in their decision making regarding financial matters by the added credibility which an in dependent audit provides. Legal and regulatory climate one of the factor which impact on the demand for external audits. It impact on the demand for external audit basically specific law or regulation in various countries may require entities to submit audited financial statement. [ Colbert L.J, et.al, 2002]
The main objective of the external auditor is to gather evidence to support giving an opinion on the financial statement. The second objective is, as a product of the audit composition of the governance body and what matters are to be communicated to it are considered. The governance body may be different across jurisdictions, which have been stated by ISA 260. In some countries, two boards exist, one is mostly a supervisory, nonexecutive body and the other is a management, or executive board. External auditor should plan to report to the body which supervises, control, and directs the entity with regardless of which structure the country and entity utilize. Whether entity's objective are achieved and that financial result and other information are reported to interested parties will be ensure by this group.[Colbert L.J, et.al, 2002]. The external auditor is not required to design procedures specifically to gather information to report to the governance body. The matter to be communicated by external auditor is those which come to the auditor's attention in the course of the engagement and which the auditor deems to be significant and relevant to the governance body. External auditors may elect to include the scope of the work and their responsibilities regarding communication information in an engagement letter. [Colbert L.J,et.al, 2002].
The role of the auditor in Europe is control as subsumed by the American requirement. Auditor's independence is increased as an important corporate governance issue in accordance with the tradition of European audit research. External auditor regulations have become active in explicitly stating obligation for the external auditor in the corporate governance sitting, for an example Sarbanes-Oxley. And the importance of ensuring auditors independence has highly promoted in the interaction between audit service and non-audit services offered by the auditors. The role of the external auditors seem to be having two conflicting perspective, one is the value adding function of the audit with a risk oriented contribution aligning the auditor effort with the strategic wishes for company risk management. The second perspective is 'back to basics'. It means that audit profession has to reposition itself positive effect of forcing the external auditors to efficiency improvement from the back-to-basics scenario. [Holm. C, et.al, 2007]
The audit regulation has forced the auditor away from self-audits and away from delivery of multiples services like assurance or otherwise in the name of independent. The external auditor can be benefit from a higher fee with a margin or from cost-recovery of the extra audit tasks that include documentation which in a broader sense will serve to keep grievances and lawsuits off their back. [Holm. C, et.al, 2007].
The external auditor has played a key role in monitoring within a framework of accountability, self regulation and information for the stakeholders in the traditional way. In the new regulation and the combined pressures will force the auditors to 'sell' the value adding property of the black box. The black box is the audit product. The opinion of the external auditors given is not the product but the service rendered by the external auditors is that called value adding nature is the product. [Holm. C, et.al, 2007]. Claus Holm find and suggest that two dominant determinants are presently in conflict, namely the value adding function of the audit with an alignment of risk oriented efforts by the auditor and the company versus the nation of 'back to basics'.[Holm. C, et.al, 2007].