The Business Risk Audit Accounting Essay

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

The introduction of audit approaches that place superior importance on the business risks in the organisation whose financial statements are being audited, normally termed the Business Risk Audit (BRA) has been recognized as a major modernization in audit methodology in the second half of the 1990s. The use of a case study approach to examine the audit process and the change in audit approach is steady with calls that have been made for more research confirmation from real audit assignments about the methods that firms in fact use, and more recently for proof on the practical differences between the application of the older methodologies and BRA (Curtis & Turley, 2007).

The study offers a number of findings with respect to the impact of the implementation of a business risk audit approach on the audit process. There is evidence that the new methodology did result in additional risks being identified; that there was an initial impact on the audit work program but that this then was adjusted to a consistent new pattern; and that significant investment costs of implementation were incurred but not recovered. In addition there was little evidence that the new approach had any impact on the firm's success in identifying other "added value" services taken up by the client, one of the suggested motivations behind the new approach. Finally, the paper also identifies three significant controversies that emerged in the process of embedding or realizing the methodology on this audit and in the subsequent evolution of the BRA methodology itself (Curtis & Turley, 2007).

Good Corporate Governance

In the aftermath of key accounting disgraces such as Enron and WorldCom and a disturbing number of earnings restatements, there were calls for key improvements in the tasks and administration of management, outside auditing, and corporate governance, in particular, the audit committee and board of directors. These calls concluded in the passing of the Sarbanes-Oxley Act in 2002 (Charles, Glover & Sharp, 2010). Cohen et al. (2004) portray a structure for understanding the corporate governance mosaic in which they talk about the associations and the relations of the major players involved in financial reporting and they assess how the corporate governance assortment potentially influences the quality of the financial reporting procedures. It is argued that to be of utmost effectiveness the players in the corporate governance assortment such as the auditors and the board of directors must work together towards a universal objective of promoting high quality financial reporting to the capital markets (Cohen, Krishnamoorthy & Wright, 2007).

The idea of corporate governance symbolizes the compilation of actions, regulations, procedures and strategies that make sure that a company is utilizing its resources, strategies and directions in the best possible manner consistent with its mission and acknowledged goals. This is significant because shareholders and stakeholders rely on this maxim to gauge company advancement toward these goals (Guerra, 2004). With no corporate governance, shareholders putting their faith in management to do what's best for their investment may be unsuccessfully provided. Because management by nature is geared to move the company toward additional profit, this may be to the harm of the overall existence of the company and the shareholder's investment stake. On the other hand, choices made just to please shareholders can drive a company into bankruptcy. Corporate governance keeps the equilibrium between what may be two opposite forces (Lutzenberger, 2012).

Among all the debate over corporate governance and the board's supervision of internal control methods, very little attention has been given to the role of internal audit, and particularly to whom it is in the end responsible. While several high level examination by regulators and others have recognized that the internal audit function and the oversight of internal controls has become a significant responsibility of boards, the insinuation of this for internal audit have not always been followed through. Consequently in the US, the Sarbanes-Oxley Act of 2002 makes no mention of internal audit or of any corresponding role other than the board's role generally in the preparation of the accounts and the setting of accounting standards (Internal audit's role in modern corporate governance, n.d.).

Strong governance is linked with enhanced financial reporting quality in terms of a lesser occurrence of fraud, fewer restatements and lower levels of earnings management. Consequently, the nature and force of corporate governance is expected to impact the audit process like risk assessments and extent of audit tests, since professional standards state that the audit be tailored to the risk of misstatements. Additionally, corporate governance actors such as the audit committee are accountable for managing the quality of financial reporting and the audit and, hence are anticipated to affect the audit process and audit quality, including making sure proper resolution of auditor-client dispute (Cohen, Krishnamoorthy & Wright, 2007).

In a study done by Cohen, Krishnamoorthy and Wright (2007) it was discovered that auditors see the board and the control environment as significant actors in the governance configuration of a firm. However, management continues to be seen as a significant part of corporate governance and still the driving force in shaping auditor appointment and termination. Corporate governance plays a bigger role in influencing the audit process across engagements than in prior years with audit committees significantly more active and hard-working. Audit committees are seen as having adequate expertise and power to fulfill their tasks with members playing important roles in managing internal controls, focusing on reporting quality, ensuring audit fees are adequate, recognizing risks, asking difficult questions, and managing the whistleblowing process. Interestingly, though, only about half of the auditors felt the audit committee played a significant role in resolving auditor disputes with management.

In a study Audit regulatory reform with a refined stakeholder model to enhance corporate governance: Hong Kong evidence (2011), existing audit regulatory frameworks were looked at to see if they adequately serve the legitimate interests of stakeholders. This study was the first to collect survey data on audit regulatory issues in the post-Lehman Brothers environment. In total, 190 responses to a mail survey were collected from Big Four auditors and from 166 CEOs. Stakeholder theory is used to analyze these responses. The results indicate that Big Four auditors and CEOs perceive the disclosure of post-audit report event evidence to be important in discharging their ethical obligations. Both groups agreed that issuing timely audit reports is important, and that introducing quarterly audit reporting is a necessary step to enhance corporate governance. A risk-based auditing approach necessitates the introduction of quarterly reporting. The findings support the notion underlying business risk auditing (BRA) models developed in public practice and the literature. CEOs are acutely aware of their corporate responsibilities to the company's stakeholders, and demonstrate that they understand the core insights of stakeholder theory by applying this theory in the corporations they manage. These results support the assertion that stakeholder theory has managerial implications and intrinsic value. CEOs comply with their audit disclosure obligations in several ways. Based on the results, a refined stakeholder model is proposed and immediate regulatory reform is recommended.

The two main models of corporate governance depend fundamentally on how the design of separation between ownership and control. In the outsider system, which is market oriented, the categories of companies are the public companies, characterized by an increased separation of the property, typical of companies listed on regulated on financial markets and a low concentration of ownership. The market itself is the main instrument for regulating the conflicts between shareholders and managers, which are monitored by the market, due to continuous changes of ownership through shares negotiation (Bostan & Grosu, 2010).

In the insider system, the ownership is highly concentrated in a tough base with a strong role in decision-making, consisting of one or few groups with a familiarly or bank character. The pivot of the system is represented by the relationship between the State, industry, and the banking system, the financial market not being developed in a specific effective efficiency, because of the strong presence of the banks in the capital of the company, of the influence of them in decision making and management decision-making guidance for achieving and respecting the interests of owners (Bostan & Grosu, 2010).

BRA has offered an attractive re-conceptualization of the audit craft. Re-inventing audit as a commercial practice has offered an opportunity to recapture the prestige that the declining profitability of audit had eroded. The notion of 'adding value' to the client embedded in the new audit methodology resonated closely with the identification of corporate management as the essential audit client. Accordingly, BRA presented both an external legitimation to the 'client' and an internal justification of audit to the seemingly higher status functions and divisions of the modern large professional service firm. As such, perhaps the business risk audit event marks another stage on the transition of the accountant and auditor from 'professional expert' to 'businessperson (Humphrey, Jones, Khalifa & Robson, n.d.).