This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
The role of auditor in the current business environment has been changing due to changes in the accounting and auditing regulatory frame work. Auditors play a major role of reporting to the external stake holder of a business. The expectation of the external stake holder and the responsibility of an auditor are not always match each other. By considering the above aspect this report is intended to elaborate the Audit expectation gap and its changing nature in the contemporary business environment. Furthered it try to elaborate changing nature of the auditors liability and aspect in which audit expectation gap can be reduced by using the ASB ethical standards.
Why do we need auditors?
Performance auditors have different responsibilities in different organizations, such as universities, hospitals and local authorities. Organizations in need of auditors is very important, there are three theories to explain the need for auditors, although the organization for which they work, namely: information theory, agency theory, and the hypothesis of insurance. According to the hypothesis of information, and audit and produce more reliable information and it will be easier for decision makers when it comes to making big decisions on the Financial Action Task Force. Theory of the organization says there is a need for auditors since the people who provide resources can not rely on corporate managers to use their resources appropriately. Agency theory has several ideas, like all of the managers and customers in an attempt to increase personal income, and financial report and there is a need to provide a full review of deals the company and the projects that will benefit both managers and agents, and the external auditors professional are the best people to monitor the financial statements, I have found that the directors and agents trust in the financial reports more if confirmed by an independent party, and groups of individuals with the reasoning they have different information. Insurance hypothesis suggests that there is a need for auditors because they use the information to provide a review of people with insurance because they can correct the mistakes committed by the auditors neglected. In fact, correct the mistakes made by auditors are the same as correct errors made by the insurance company.
Although the auditors have different responsibilities in different organizations, as mentioned before, and the steps that usually followed in any audit assignment are the same.
@The knowledge and get a presentation of the industry, and risk analysis firm, called the initial stages.
@Must become more aware of Auditors with the work system and test transactions
@Preparation for the final results, which includes work by company's plans to commit the accounts several times and the implementation of a working paper balance date.
@ Reviews analytical work and confirm the accounts and liabilities, events, and post-balance sheet, which is produced in the issue of the audit report and note the changes to commit.
Components of expectation gap
The gap is not a simple gap between two sets of views about the role and performance audit. We will make it clear that the gap pulled by a carrier (1993) in New Zealand, which is useful because of the installation use them to distinguish the various elements of the gap. Phase of the installation before, but adapted to give examples of some components thing discriminate.
A reasonable gap that arises because people expect more of audit than it can give
In practical terms, such as detecting all instances of fraud, however small. There is a belief in some quarters that examines the checker package and the balance of very lonely, as auditor of the practice being examined samples of transactions and balances when forming conclusions about the population of those transactions and balances. is clearly unreasonable would be to examine all transactions and balances of a large corporation. A performance gap between what can reasonably expect of auditors and what they are perceived to do. This gap is itself split in to two:
A deficient standards gap, that the gap between what auditors can reasonably expect to be working and that the law profession and asking them to do. Thus, a user might be expected reasonably auditors to report on cases of misappropriation of the assets of a company by senior managers or users to a regulator. If the profession of law and do not require this, a deficient standards gap you find. It is interesting to note that in the UK, auditors have a duty to report on these and other organizations of the things organizations fill in the item of financial services, including banks and housing associations, although it is not currently a requirement in general.
The performance gap is incomplete (which might be described as a gap audit rotting). Therefore, if the auditing profession has issued a standard that says that auditors should observe the procedures taken Shares of the customer, but the auditors fail to do so, and then their minus say they will act in a manner that is consistent with professional auditing standards.
Of the above, we will discuss the expectations gap that has emerged for various reasons. One felt that the gap include different components, from one can seek solutions to close the gap constituents. therefore, if there is evidence that many of the auditors fail to perform adequately, one may provide post-qualification experience, or even, in the end, committed to withdraw their testimony. You may notice that there are those who propose that the risk of endorsing a look to check the work of the border rather than the narrower view of audit risk, may cause expectations to rise, which if not met will cause the gap for expansion.
Audit expectations gap is the main issue facing the review process Profession?
Yes, because look at the expectations gap audit to be one of the key issues facing the auditing profession, and the company expects users of audit reports and the report to detect fraud and material irregularities, among other issues. In contrast, in the profession say that users misunderstand the duty of auditors, and fraud detection and reporting is not an audit central government. Papadakis (2003) says that ignores the auditing profession in the face of looming danger, the debate about its ability to achieve what it wants in the market, and thus we expect from users all over the world auditors to detect fraud and to search actively for it. If the educated users of financial statements and the general public to believe that the auditor's role embraces detect and prevent fraud, particularly with regard to items of material, and fraud and error detection for the role of an audit can be relatively objective. The can not ensure absolute objectivity since the "physical" and "the importance of article" is a self-concepts that require clarification further practices by the Board of Audit. Also return to the primary role to detect and prevent because there are welcome at the present time, measures are not sufficient to keep the Auditor responsible for the negative consequences of his actions.
Theory of Expectation Gap
US National Commission on the preparation of Financial Reporting fraudster (the Treadway Commission) the source in October 1987 which concluded that it is still crucial for auditor to discover and deter financial reporting fraudulent although the role of the auditor with regard to fraud and other offenses secondary to those of the management the board directors.
In 1988, the Canadian Institute of Chartered Accountants (CICA) adopted a further study on the expectations of the public audit (Report MacDonald).
In the UK, financial features for managing the company (Commission Cadbury) issued another hard to achieve an investigative auditor responsibility for fraud and other irregularities in 1992. The most radical in this report, the proposed legislation to extend legal protection to all auditors who report a reasonable suspicion of fraud investigative authorities
Audit expectation gap in 2010
Audit expectation gap: how it can be eliminated
In an effort to narrow the audit expectation gap, various approaches have been examined and suggested by researchers and professional bodies through out the period which can be summarized as follows.
Expanded audit report
An expanded audit report gives a fuller understanding of the scope, nature and significance of the audit and influences the reader's perceptions concerning the audit and the auditor's role. That is, an expanded audit report has reduced the audit expectation gap in one way or another. Further researchers suggested that wording changes in the audit report that address the specific areas of the expectation gap should be considered in closing the gap.
Structured audit methodologies
Increased use of auditor decision aids is one of the responses made by some audit firms to narrow the expectation gap. By adopting more structured methods of audit operation, firms expect that consistently high-quality audits can be provided.
Expansion of auditor's responsibilities and enhancement of auditor independence
Evaluation of internal control systems; compliance reporting can be identified as major addition to the auditor's responsibilities. However, these proposals will increase the threat of liability unless the liability crisis is dealt with. Any expansion of auditors' responsibilities will not be feasible as long as the liability system operates as a risk transfer mechanism, with auditors as the prime transferees.
Role of audit committees
Cadbury committee, which started as a result of concern about the collapse of some world renowned companies, gave incentives to the start of audit committees in the United Kingdom.
(The Audit Process 4th Edition, Lain Gray & Stuart Manson, p 697)
In audit committees there is the power and duties. That means the authority of the Audit Committee must have clear rights to the will of the information and decision-making and the implementation of the duties prescribed.
In the United Kingdom, the role of audit committees continues to develop, but pointing Smith on audit committees, a step towards greater consistency in their duties and accepted their roles. Direction Smith summarizes a number of roles and responsibilities of the Audit Committee and we put these out below.
Issues and the provisions of the review mission took part in the preparation of annual accounts, interim accounts and preliminary data
Consider the suitability of important accounting policies and any changes that have been made to them. Assess significant estimates and judgments and the suitability of the treatment of important or unusual transactions. They also make sure that disclosures in the financial statement are enough.
Refer to the internal financial control and also, unless labeled by a separate committee, a risk management company. The latter include the receipt of reports from the company's management on the effectiveness of control. The Audit Committee should review and also give their consent to any data included in the financial reports relating to internal control and risk management.
Analysis the company's policy with regard to storm a whistle and guarantee there are proper mechanisms applied to investigate and followers of the whistle that blows things.
Analysis and observe the effectiveness of the company's internal audit function of the accounts. Review the nature of the work that will lead by the internal auditors and monitor their impact. The Audit Committee must also ensure that the functions of internal audit are sufficiently productive again. Where a company, then the function of an internal audit, then they should be on annual basis is the need for such a function
Recommend the appointment, the conditions of correlation and the size of the remuneration of external auditors.
Ensure independence and objectivity of external auditors. When evaluating the independence of external auditors by the Audit Committee must take into account the non-audit service provided by them. The Audit Committee must also ensure that the audit company to comply with the legal and professional requirement regarding the independence Checker. For example, the Audit Committee should want reassurance that there is no family or financial relationship between the auditors and the company.
Be involved in developing the company's policy with regard to item non-audit services provided to a company audit. The main concern of the Audit Committee will ensure that the item non-audit services will not compromise the independence of the audit company. Thus, the Audit Committee would be interested in the case, such as the nature of the service is not equipped with a check and wages for the work of non-audit compared to the wage for the work of scrutiny.
(The Audit Process 4th Edition, Lain Gray & Stuart Manson, p699-700)
Money-laundering process large amounts of money obtained by the changing of crimes, such as drug trafficking, to Innovation from a legitimate source. It is a crime in many jurisdictions to change the definitions.
Typical Money Laundering Scheme
Into the legitimate financial institutions. What is this person performing the transfer of funds to the account of an ally that issued him or her invoice for products or services that they delivered.
Next, conspirator adds a deceptive layer of complexity to the process the wire transfer of those funds, in relative anonymity, to a bank account in a systems of judicial authority" is far from the beach "soft. The account holder and then" lend "money to the person who paid the bill counterfeit.
In the final step, the first criminal integrates his or her money into the economy by purchasing actual land and other legitimate assets with big amounts of difficult-to-trace-but illicitly earned-cash.
Overall, business is very useful to traders to money-laundering conduits for tainted funds. So, since the dealers in money laundering usually do not confiscate the assets, rarely leaving the guide activities on the financial statements, making it difficult to detect their activities illegal during a traditional audit.
Despite this, independent auditors they have a responsibility under SAS no. 54, illegal acts by clients, in order to be aware of the possibility that illegal acts may have occurred, the quantities influential indirectly recorded in the statements of the financial entity. In addition, if specific information comes to the attention of the auditor, which refers to the illegal acts of the potential can have a material indirect effect (for example, the entity's contingent liability resulting from illegal acts committed as part of the money laundering process) on the entity's financial statements, the auditor should apply audit procedures specifically designed to investigate whether such activity has occurred .
Include references to potential money laundering activity in the following:
* Transactions that appear to be inconsistent with a customer known forensic work or activities or means of personal; unusual deviations from the account natural patterns of the deal.
* Cases in which difficult to confirm the identity of a person.
*Unauthorized or improperly recorded transactions; inadequate audit trails.
* Large currency transactions unusual, especially as an alternative to bonds, negotiable instruments or to buy direct services to transfer money.
* Businesses that want to invest administrative services when the source of funds is difficult to determine the accuracy or the emergence of contradictory means the customer or the expected behavior.
* Payment of immature characteristically non-investment vehicles, especially requests to re-revenue to third parties unrelated to appear.
*The purchase of big cash rate investments, soon followed by serious borrowing next to them.
* Large net amounts from abroad.
* Insurance policies and values that seem contradictory to the needs of the buyer or the means to secure the phenomenon.
* Purchases of goods and currency prices significantly below or above the market.
*Use many different companies for auditors and advisers to entities associated with the business.
*Forming companies or trusts that appear to have no business purpose.
Auditors are needed in any institution and their need can be explained by three theories: the information hypothesis, the agency theory, the insurance hypothesis. Since auditors are needed and they play a very important role in any organization, we have to find ways to reduce the audit expectations gap. Some of these ways include introducing an expended audit report, widening the role and responsibility of auditors in areas like fraud, illegal acts, strengthening the perceived independence of auditors and the audit education. Although, the audit education has proved to be efficient in some situations, it cannot be guaranteed that it will work all the time.
And the auditing profession is very important for the success or failure of the company. It is also believed that the increase in litigation against and criticism of auditors can be traced to the audit expectation gap. The audit expectation gap is detrimental to the auditing profession as it has negative influences on the value of auditing and the reputation of auditors in the modern society. It is found that the existence of an audit expectation gap is due to complicated nature of an audit function; conflicting role of auditors; retrospective evaluation of auditors' performance; time lag in responding to changing expectation; and self-regulation process of the auditing profession. Such occasions and problematic factors that contribute to the existence of the expectation gap, it is neither the auditors nor users who should be blamed for the "audit expectation gap" crisis.