THE TRENDS AND DEVELOPMENTS IN AUDITING

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Introduction

Today to manage the risks of an organization has become a vital function for the audit department of every organization. The exposure of frauds, increased errors and inefficiencies has increased in regards with every organization. Such errors and inefficiencies may result in loss of profits and increased business risks. The evolution of regulatory environment, increasing competition, globalization of companies, changes in the business environment have increased the chances of the risk and there by require the organizations to implement effective risk management systems. The main responsibility for assessment of risk, implementation of risk management systems and to keep internal control lies with the auditor of the company. All those factors are keeping a continuous pressure over the internal audit department and management of the company in order to manage the risks of the company. As a result of this, a new emphasis on continuous auditing and investigation has been done in order to build the best practices in the organization for testing of internal control systems and monitoring of management.

Auditing Profession

Today the services provided by the auditing professionals have become very vast. The auditing profession involves compliance of a wide range of rules and regulations, identification of risks, implementation of effective risk management systems, governance and maintenance of proper control systems. Therefore, with the increasing in pressures in this globalized environment various kinds of challenges are faced by the persons engaged in this profession. Such challenges include -

Regulatory compliance and controls.

Value of internal audit and independence of auditors.

Detection of fraud and control.

Availability of skilled resources to the auditors.

Determination and implementation of suitable technology management systems.

In order to face all these challenges, a new approach is required to be addressed for the purpose of providing sustainable and cost effective methods.

Trends and Developments in audit profession since Sarbanes Oxley Act

The post era of Sarbanes Oxley act has resulted in a complete revolution in the business environment. The demand for auditing profession is quite high in all the organizations. The regulatory and legislative measures of reforms have also resulted in the increased demand for auditors. Moreover, in UAE as well as in other countries of the world, there is pressure on the organizations to lay greater emphasis on quality assurance.

With the introduction of Sarbanes Oxley act, more than 70% of the organizations have followed all the rules and regulations related to this act. In order to follow this act, the organizations required near about fifty percent more resources for following the rules and regulations. The auditors are responsible for the implementation of the rules and regulations related to the Sarbanes Oxley act in the organization. In more than eighty percent of the companies, the employees have started reporting directly to the audit committees. The charters of the internal audit of the companies have been reviewed again. The meetings of the audit committees are now attended by all the important professionals. The meetings now take place privately with the audit committees of the companies. With the implementation of this act, more and more companies have started to conduct an assessment of enterprise risk in their organizations on yearly basis. An increase has been seen in the development of efforts of the companies in the field of corporate governance. Efforts have been done by the companies in order to improve the corporate governance system of their organization. Now companies lay more emphasis on hiring talented auditing professionals in the organization. Near about fifty six percent of the companies have started to use audit metrics in order to judge the performance of the auditing functions of the organizations. The programs have taken place in regards with the improvement in quality assurance. The quality assurance review has been taken by near about twenty four percent of the companies. Near about thirty four percent of the companies have started to use monitoring techniques in order to judge the risks associated with the organization.

(PWC advisory, Internal Audit, 2005, Reference - 1, Page - all)

The auditing profession is continuously impacted by the requirements of the Sarbanes Oxley act

A new environment of auditing and compliance has been created by the Sarbanes Oxley act. After the introduction of this act, many companies started to comply with the requirements of the section 404 of this act. According to the section 404 of the Sarbanes Oxley act, the companies are required to document, test, evaluate and monitor their internal controls in regards with the financial reporting.

The requirements of the Sarbanes Oxley act have increased the responsibilities for the auditors. The management of the companies now depends heavily on the auditors for the fulfillment of the conditions related to the act. It has been judged by the companies that for the purpose of complying with the requirements of the Sarbanes Oxley act, more than half of the resources of auditing have been used for this act. The general reviews of controls have been conducted by the most of the companies in UAE and other Gulf countries. The process test designs, process walkthroughs and process documentations have been conducted by near about fifty percent of the companies in UAE and other Gulf countries. In The second year of the implementation of the Sarbanes Oxley act the companies focused mainly on the implementation of the requirements of the Sarbanes Oxley act. More than fifty percent of the time and resources of the companies were used in complying with the conditions stated under the Sarbanes Oxley act. It has been realized by the companies that same level of risk is involved if the companies do not comply with the conditions of the Sarbanes Oxley act and if the companies fail to fulfill the needs of the stakeholders of the companies.

(PWC advisory, Internal Audit, 2005, Reference - 1, Page - all)

Role of Auditing Profession in the Compliance of the Section 404

The section 404 of the Sarbanes Oxley act requires the companies to comply with the conditions of assessing the design, operating effectiveness and adequate measures of internal controls regarding the financial reporting. The responsibility for the management of the section 404 wholly lies with the management of the company but the fact is that the management of the companies depends wholly on the internal audit department for the fulfillment of such requirements. It has been analyzed that the companies in UAE and other Middle East countries are assuming far more responsibilities regarding the requirements of this act in comparison to as described in this act.

The responsibility of the fulfillment of the requirements of the Sarbanes Oxley act lies with the internal audit department of the company but when the activities related to the administrative work are done then it has been seen that the perceived objectivity of the different auditors varies.

There are four roles which have been described under the Sarbanes Oxley act and include Project oversight, consulting and project support, ongoing monitoring and testing and project audit. These roles have been described under section 302 and 404 of the act. But it is analyzed that outside the preview of these roles compromise can be done in the objectivity of the audit profession. While working as consultants in the audit profession, the level of permissible activity is not decided. The auditors are the recognized professional experts in the organization and the responsibility of serving the employees of the organization lies with him. The objectivity of the internal audit department of the companies can be impaired while taking the decisions regarding the auditing function of the organization.

(PWC advisory, Internal Audit, 2005, Reference - 1, Page - all)

Perceived Benefits of the Compliance of section 404

The management of the companies has strengthened. The committees of the audit have implemented better systems in controlling risks of the organization. Improvements have been seen in the identification, documentation and testing of control processes. A more control environment has been established in the organizations. There is greater structure of closing process at the end of the year and in recording journal entries. There is improvement in the understanding level of the companies in controlling risks related to the computer system. Anti fraud activities, careful analysis of monitoring and implementing control system

Strengthening of relationship with key stakeholders of the companies by the Auditing professionals

After the implementation of the Sarbanes Oxley act, the reporting relationships between the auditing professionals and the senior level management of the company have increased. The audit committees of the companies are now performing greater level of auditing functions. The internal audit departments of the companies are now performing greater level of tasks in order to support the audit committees of the organization. The relationships between the internal and external audit professionals have improved after the implementation of this act but still a lot of improvement is required to be done in regards with the communication level.

(PWC advisory, Internal Audit, 2005, Reference - 1, Page - all)

Elevated reporting relationships

The reporting levels of the auditing professionals have increased. The internal audit functions are now reported directly to the audit committees of the company. The internal audit department of the companies now report directly to the CEO of the companies.

Recommended reporting structures for auditing functions

It has been recommended that the internal audit department of the companies should perform their tasks independently and communicate the results to the higher management. The audit department of the company should report functionally. It has been suggested that complete power should be given to the auditors so as to perform the audit freely and to report the facts to the jurisdiction head. All the activities which are important for the performing of the audit function of the organization should be reported to the management. In nutshell, it can be said that the audit department can function appropriately if the auditors report directly to the audit committee on a functional level and on administrative level to the chief executive officer.

Stronger oversight of audit committee

After the implementation of the Sarbanes Oxley act there is pressure on the audit professionals to take more oversight of the internal audit function. According to a survey -

Sixty percent of the companies have reviewed their audit charters and the functions of the audit committees have been reviewed.

The meetings held by the committees of the audit professionals have been attended by the eighty five percent persons.

Private meetings with audit professionals have been held by the officers of the companies and amount to forty five percent.

Review of all audit report matters have been done by near about forty five percent of the audit professionals.

Reviews of quarterly reports have been done by forty two percent of the audit professionals.

Expanded role of internal audit

After the implementation of the Sarbanes Oxley act, the financial systems and audit reviews done by the audit professionals have increased. Along with the functions related to the compliance with rules and regulations of the companies, the tasks related to the risk management of the company have also increased. The tasks related to the effective governance, management of risk and development of a robust system of management of the audit department of the company have gained greater importance. It has been judged through a survey done by IIA that -

Fifty seven percent of the organizations now undertake the study of their organizational risks.

The compensation expenses are reviewed by the management of the fifty two percent of the companies.

Training is provided to the fifty percent of the audit committee members in relation with the areas related to risk management, internal controls and corporate governance.

A complaint handling process has been handled by the forty seven percent of the companies.

The compliance with the code of ethics of the organization has been done by the forty seven percent of the companies.

Performance evaluation has been done by twenty eight percent of the companies while hiring external auditors.

The strategies and tactics of the audit professionals should align strongly in connection with the needs of the audit committees and the stakeholders of the company for the purpose of adding value to the company.

Strengthening of communications between internal and external audit

The relationship between the internal and external audit is of extreme importance. More and more companies in UAE and Middle East have started to communicate frequently with the external audit companies. More than forty five percent of the companies have started to interact with the external audit organizations on monthly basis. The communication between the internal audit functions and external audit functions has improved. But still a lot of improvement is required to be done in this field.

Corporate Governance and Risk Management take center stage

The introduction of the Sarbanes Oxley act has led to the increase in the use of risk assessments in annual planning for internal audit functions of the organization and in planning for the internal audit engagements of the company. There is an increase in the conduction of the enterprise risk assessments done by the eighty two percent of the companies in the UAE as well as in Middle East. More frequent risk assessments should be done by the companies and on the basis of different plans. The risk management area should organize the risk management program and activities of the organization. A top down review of the audit function of the organization related to the reporting function and other auditing tasks should be done. The companies are now comparing their risk management structure and policies in this area with the framework of risk management and its guidelines. For this purpose the companies are now doing a planned risk management which includes the following steps - Effective environment establishment, setting of objectives, identification of events, assessment of risks, response of risks, control of activities, information and communication and monitoring of different processes.

(PWC advisory, Internal Audit, 2005, Reference - 1, Page - all)

Increased role of Audit Profession in Corporate Governance

The new rules and regulations given in the act make this necessary for the organizations to follow more strict rules of corporate governance. With this the organizations have checked the existing system of corporate governance in their organization. There is increase in the efforts of corporate governance maintenance in the organization. More and more recommendations have been given by the audit professionals to improve the corporate governance in an organization. Both the auditing profession and corporate governance are closely linked with each other. The auditing professionals should judge the design, implementation and effectiveness of objectives, programs and activities of the organization. The ethics and values in an organization have improved. The communication of risk related to the organization is done to the audit committees. Therefore, almost all the companies in UAE as well as in Middle East are keeping corporate governance as their high priority area.

In order to undertake the function of management of corporate governance effectively in an organization, the audit departments of the companies are now performing effectively. Now, the internal audit department is responsible for both internal as well as external management of corporate governance in an area. For this purpose, assessments are being done in more and more companies in order to analyze the existing systems of the corporate governance.

Now, the organizations have got the opportunity to issue the reports related to corporate governance to their stakeholders. The audit profession is required to develop strong reporting principles related to corporate governance in order to ensure the adequacy of oversights and controls in the organization.

(PWC advisory, Internal Audit, 2005, Reference - 1, Page - all)

Resources and Processes of Audit Professionals get strained due to increase in demand

In order to comply with the requirements of the Sarbanes Oxley act, the audit departments of the companies need to possess specialized skills and knowledge in order to evaluate and measure the internal control procedures in the organization. A lot of capability is required in order to audit the complex areas of an organization, judge risk in whole organization, and other issues related to corporate governance. It has become difficult for the organizations to retain the talented audit professionals. There is shortening of skills as well as resources in the audit profession. This shortening can result in leverage of capacity multipliers which can range from co- sourcing solutions to increase enhancement and applications of technology. As a result of this many organizations of UAE and Middle East have entered into strategic co - sourcing relationships with third party service providers. Third party sourcing has become an important aspect in audit profession. Therefore, this development is the result of the Sarbanes Oxley act that more and more companies are now entering into third party engagements.

Internal audit processes are strong candidates for streamlining

With the implementation of Sarbanes Oxley act by the organizations, it has been judged that the improvement in the efficiency, quality and reviewing systems of audit can be done by improvement in the technology. Data software analysis, internal audit infrastructure software and best practices knowledge basis are the technologies which can help in improving the audit functions of the organization. Efficiencies can be gained in the audit functions through enhancement in the processes. Assessment of risks, audit planning, design of audit program and development, documentation and review, internal audit reporting and monitoring and follow up are the important processes of audit that can be streamlined.

Participation in quality assurance programs and reviews is surprising low

Improvement is required to be done in the area of quality assurance programs. According to the guidelines of the Sarbanes Oxley act it is mandatory for the organizations to follow quality assurance programs. Although the quality assurance programs are not mandatory as per the requirements of the act but the companies in the Middle East view this as mandatory condition. As per a survey done by the Price water house coopers, a total of twenty three percent of companies are following the program of quality assurance as per the requirements of the company. Benchmarks and measurements can be used for the purpose of improving the quality assurance programs.

The formal opinions of chief audit professionals regarding internal control are taken increasingly.

According to the requirements of the Sarbanes Oxley act, the companies are required to get done a formal assessment of the internal controls in the financial reporting matters. In some companies are audit functions are performed very deeply and in some companies there is restriction over the functioning of the audit reporting. The percentage of companies issuing formal assessment of internal controls is quite high and is near about forty percent. A huge amount of resources of the companies are diverted towards the testing of Sarbanes Oxley act, higher level management, and audit professionals. It should be judged by the companies that whether the audit professionals engaged with the companies are having the capability of implementing control system over the operations, financial reporting and compliance. It has been seen that the conflicts are arising between the senior management, external audit department and internal audit department regarding the different perspectives of the financial controls implemented. It has been seen that the process employed by the internal audit department of the company will not be as robust and strong and provide deeper insights into the internal controls of the company as the external audit department will provide. Such insights provide a negative overview regarding the internal controls of the company rather then a positive outlook.

Continuous auditing and monitoring techniques gain momentum

There has been improvement in the continuous auditing techniques used by the auditing professionals. As a result of the implementation of the Sarbanes Oxley act, this is an important development which took place. The control and assessment of risks is now done automatically. For this purpose the companies need to maintain and develop technical competencies which are necessary to access, manipulate and analyze the data in different systems of business. This has helped the companies in the Middle East to analyze the data more frequently and implement the risk controlling measures in the organization. The management and control functions of the organizations have improved.

All the material transactions and relationships with unconsolidated entities are required to be disclosed in the annual reports of the companies.

Reduction of Financial statement fraud

There has been reduction in the number of frauds taking place in the companies. Many scandals have been uncovered. Most of the audit companies like Deloitte have shown a decrease in the frauds done by the companies.

(Journal of Business and economic research, October 2009, Reference - 3, Page - 6)

Improvement in liquidity

There has been improvement in the market liquidity of the companies. All this has happened as a result of the increased disclosure requirements. The level of liquidity in the companies has improved as there is reduction in the trading costs of the companies. The companies in UAE and Middle East have improved level of liquidity after the enactment of SOX. The companies which are more engaged in the following of compliances are having more amount of liquidity.

(Journal of Business and economic research, October 2009, Reference - 3, Page - 6)

Key Trends for the year 2009

The auditing profession is strapped for resources but there is presence of new challenges in the business environment.

The risk profiles of the companies have changed.

New strategies are required to be planned and implemented in the internal audit department of the organizations.

The ERP system and other techniques of data analysis should be used in preparation of reports related to audit.

Performance measurements and customer centric feedback are the activities which are newly associated with the audit profession.

(Price water house coopers, 2009, Reference - 2, Page - all)

Criticism

The implementation of Sarbanes and Oxley act is a costly affair.

There is skill gap in the implementation of ERP system in the audit departments of the companies.

(Sarbanes Oxley act, Reference - 4, Page - 15)

Conclusion

In today's complex business environment, the need for audit professionals has become vital. Today audit professionals cover a wide area of business. The audit profession has undergone a wide variety of changes and new trends and developments are taking place after the introduction of the Sarbanes Oxley act. The audit professionals are responsible for the management of risks, detection of fraud and errors and to keep a check over all the activities of the organization. With the introduction of Sarbanes Oxley act, a lot of changes have taken place in the auditing profession. The companies are required to comply with more and more conditions given under the Sarbanes and Oxley act. This has helped the companies in improving the internal controls and other methods of auditing in the organization. The important developments and trends which took place after the implementation of Sox include compliance of section 404, strengthening of relationships between key stakeholders and auditors, increasing in reporting levels of companies by audit professionals, strengthened position of audit committees, increase in responsibilities of audit professionals, strengthening of relationships and communication between external and internal audit professionals, increase in activities related to corporate governance and risk management. The role of audit professionals in corporate governance has increased. Resources and processes of audit professionals have become strained due to increase in demand. The internal audit departments of the companies are not sufficient enough to hold all the activities of risk management. There is skill gap in the audit profession. Companies are required to make improvements in the technology system in order to build better system of internal control. After the implementation of Sarbanes and Oxley act a lot of developments have taken place in the auditing profession but still a lot of improvements are required to be done in the various areas of auditing. Improvements are required to be done in the area of technology implementation, skilled employees, corporate governance, better systems of fraud detection and errors, communication between external and internal audit, enterprise risk management etc. Therefore, with the improvement in these areas the companies can make their audit systems and procedures better.

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