The Role and Effectiveness of the Auditing Process - Coursework Example

Client’s Name Professor’s Name Course Name 16 September 2013 Role and еffесtivеnеss of the auditing рrосеss Every business, with a slight exclusion of humanitarian organizations, is built up with the sole purpose of making a profit (Guest and Peccei 220; Guest 378). For this profit to be realized, the stakeholders of the business must observe all the required parameters that are designed to assist the business grow and achieve this objective. It is imperative here to come into cohesion with the fact that there are numerous issues that could culminate, in one way or the other to the failure of businesses realizing this objective. Many businesses post positive cash flows in their statement of income but a negative return in their profit and loss accounts. Though there are many factors that could be attributed to this specific scenario, poor management of finances majorly the main factor. Poor financial management is the reason why many businesses that have the capacity and the potential to make huge positive returns end up getting liquidated. This brings us to the question on how businesses that prosper manage to mitigate these unnecessary expenses and manage the cash flow that they have to realize a positive figure in the P&L account. And the concept of auditing comes in at this stage. This paper will engage in a highlight of the auditing as a concept used in finance. The paper will also look at the effectiveness of the process and the challenges that are faced during this process. Auditing-definitions and internalization To be able to understand the role played by auditing and the panel of professionals that call themselves auditors, it is vital to know what the term and concept of auditing means and its implication in the business. To ‘audit’ by a definition offered by Chea in an accounting perspective refers to the objective scrutiny of a firm’s financial records, using the standardized financial tools and instruments in a bid to establish loopholes where money could be seeping through (12). Empirically, though this allusion (Chea 12) holds some premise, the process and concept of auditing is proven to be have more substance than just a mere perusal of financial records (Agboola and Salawu 95). Auditing encompasses the scrutiny of the firm in a three-dimensional approach, the operations of the business, the employees performance and the avenues of expenditure that a company harbors. Inadvertently, the actions of the personnel in a certain organization often dictate whether the figure in their balance sheet at the end of their financial year will be an inclination to the positive or the negative side. If the figure is negative and the expense figure is exceedingly high, this implies that there are some serious lapses in the way those finances are utilized in that specific organization. Sometimes you may find that even with companies making positive returns, they could do better if they found ways to minimize the way they spend their money as well as adopting policies that are meant to ensure that efficiency in the workplace is upheld. This is where the services of the auditors come in. They go through the operations of the company with a comb like search looking for inadequacies, deficiencies, defects and unwarranted expenditure and loot them out ensuring that the firm functions at the basic capacity and in an efficient manner. The following discourse will entail a descriptive highlight of the forms of activities that these auditors engage themselves in and the forms of problems that they help solve in different levels in the organization. The challenges that they face in this attempt will also be discussed in this paper. A major bias will be offered to the auditing of financial reports in an organization. The link between finance and human resource efficiency Human resource in any organization is the cogs that drive the business machinery towards the production of services or goods. Human resource has their expenses, just like any other raw material that the business utilizes in a bid to make the final product. Human resource in an organization should be treated in the same manner that other raw materials are treated (Rynes et al 151; Han et al 392). This unbiased treatment opens the minds of the management team allowing it to be subjective and frugal when it comes to spending money on the personnel. Hong et al argues that if the human resource as a contributor to the business advancement is streamlined and redesigned to allow it to work in a more effective manner with minimal expenses, it becomes easier for the management to track the usage of cash by the personnel and find ways to minimize unnecessary expenses. Auditing the human resource Before the paper embarks into a discussion on the financial auditing process, it’s imperative to discuss how the human resource could be subjected to auditing too. Auditing of the personnel revolves around the scrutiny of a few key parameters. One of the parameters is the compliance to policies and procedures. Every organization and company has laid down rules and regulations that govern how they operate and these are designed to be followed to the letter (Kane et al 494). However, sometimes you may find that some of the employees in the organization do not wish to follow these rules as stipulated. These lapses in following the set procedures could be expensive in the long run and could form the basis as to why some companies register negative returns in their P&L despite having positive cash flows. The auditors follow keenly what the employees do on a day to day basis, sometimes requiring them to be present when employees are conducting their business, like serving the clients, filling of reports and other activities. From this angle, they are able to identify the loopholes where money is lost or spend in a bad way. They are able to know the quantity and quality of the employees that the business requires to operate at optimal capacity. They are also able to identify key areas that form the strength of the company and in the process are capable of offering relevant and crucial advice to the management of the firm. Financial auditing and role and effectiveness of the auditors Financial auditing, as the name suggests involves the scrutiny of the financial records of a firm or an organization from a person, or persons who are completely unbiased and in a position to deliver opinion that is free from any manipulation whatsoever. Auditing of financial records is done in a three stage process; the first process involves the scrutiny of the way the organization makes it money. This is done by looking at the daily operations of the business, the employees and sometimes the clients. From there, the auditors take a look at the expense cost of operating the business. they look at the cost of raw materials, try to establish whether there are other suppliers who could be offering the same service at a cheaper cost, look into the costs involved in the acquisition of the same amongst other expenses and lastly look at the wealth creation capacity and cash retention ability of the firm. Overheads expenses such as utility bills are also looked upon. The auditors’ role is to ensure that the business operates at the optimal level with the lowest amount of expenses possible. They look into all the avenues where cash could be siphoned away from the business and therefore eating into the profit of the business. Challenges in financial auditing There are a number of diverse challenges that auditors face in their work. Some of these challenges are discussed here. One of the major challenges is the reluctance of the personnel to be cooperative to the auditors. This makes the job of the auditors harder and sometimes it sidelines them to the extent that the report they offer eventually is not objective in nature. Some firms do not keep good financial records and this pose as another very serious challenge to the auditors (Power 198). Without proper records, it is almost impossible for the auditors to look at the past financial performance of the business and hence relating it to the present becomes a challenge too. A good business should have all its financial records and records of operation well kept and well preserved at any given point in time (Ghoshal 78). When the auditors look at the past financial records, they are able to tell whether the business had been operating at optimal capacity or not. Another challenge that the face in their work is the overruling and being overshadowed by the management. Some managers in an organization may be overwhelming and imposing, preventing the auditors from offering their unbiased opinion. Conclusion In brief, the discussion in this paper has offered an insight into the valuable activity that auditors carry out in firms and organizations. It is therefore the prerogative of the management concerned to ensure that the best maximum assistance possible is offered to these auditors to ensure that the opinions and the reports they present are not in any way biased and they are willing to work upon the areas of weaknesses to ensure a positive profitability ratio for the company is achieved. Works cited Agboola, Ayodeji and Salawu, Mary. ‘The Determinants of Internet Financial Reporting: Empirical Evidence from Nigeria’. Research Journal of Finance and Accounting.3.11 (2012): 95-105. print Chea, Ashford. ‘Fair Value Accounting: Its Impacts on Financial Reporting and How It Can Be Enhanced to Provide More Clarity and Reliability of Information for Users of Financial Statements”. International Journal of Business and Social Science. 2.20. (2011): 12-19. Print. Guest, D. ``Human resource management and the American dream'', Journal of Management Studies. 27.4. (1990): 377-97. Guest, Peccei .``The nature and causes of effective human resource management''. British Journal of Industrial Relations, 32.2 (1994): 219-42. Print Ghoshal, Sumantra. ‘Bad management theories are destroying good management practices’, Academy of management learning and institution. 4.1 (2005): 75-81. Print. Han et al. “The hr competencies–hr effectiveness link: a study in Taiwanese high-tech companies”. Human Resource Management. 45.3 (2006). 391–406 Hong et al. ‘An Effectiveness of Human Resource Management Practices on Employee Retention in Institute of Higher learning: - A Regression Analysis’. International Journal of Business Research and Management (IJBRM). 3.2. (2012): 60-79. Kane et al. ‘Barriers to effective HRM’. International Journal of Manpower. 20.8 (1999): 494- 515. Rynes et al. “HR professionals’ beliefs about effective human resource practices: correspondence between research and practice”. Human Resource Management. 41.2. (2002): 149–174. Print. Power. “Fair value accounting, financial economics and the transformation of reliability”. Accounting and Business Research. 1.40. (2010):197-211. Print Read More