Critical Importance of Materiality in Auditing - Literature review Example

Materiality in Auditing Table of Contents Table of Contents 2 Introduction 3 Critical Importance of Materiality in Auditing 4 Secrecy of the Materiality Levels in Auditing 5 Academic Viewpoints Regarding the Importance and Secrecy of Materiality in Auditing 6 Recent Changes in the Audit Regulation and Audit Practice 8 Determination of Whether the Change in Auditing Practice will Ensure Transparency in Contemporary Era 9 Conclusion 9 References 11 Introduction In contemporary era, the importance of auditing has gained its momentum amid the global organisations in an extensive manner. Auditing is a process, based on which, an organisation can identify the genuineness of the accounting process and also examine the reliability of the same more adequately. Based on the report of The Financial Reporting Council Limited (2013), it is revealed that materiality in auditing is the key foundation of auditing process. Materiality in auditing is a process, through which it can be possible to identify the accuracy and validity of the accounting process. In this regard, it can be claimed that over the preceding few years, media and newspapers have criticised corporate scandals and commented on the same with regards to the issue concerning unethical and biased auditing process. In this regard, it can be claimed that with the increased level of globalisation, the demand for maintaining materiality in auditing has increased significantly amongst the organisations for reducing adverse impacts on the economy by preparing accounting as well as financial statements in a fairly manner (Porter & et. al., 2014; The Financial Reporting Council Limited, 2013). The concept of materiality in auditing is generally formed with the aim of reducing financial discrepancies that often occur in the global business corporations while performing auditing procedures. In this similar context, based on the report published by “The International Federation of Accountants” (IFAC) (2009), it is notified that the concept of materiality in auditing has been introduced for enhancing the quality of the auditing functions and also enhancing the overall auditing procedures that are required for preparing varied financial statements. In this regard, it can be claimed that IFAC has tried to establish a positive standard guidance for financial statements in case of conducting efficient business operations (The International Federation of Accountants, 2009). In relation to the above context, the prime intent of this assignment is to discuss about the critical importance of materiality in the auditing process or in the auditing context. At the same time, the study will also analyze the fact of keeping secret the materiality levels than the formula applied by Coca Cola. Finally, the assignment will also deal with supporting the arguments presented in relation to the above two abstracts by deciphering recent examples. Critical Importance of Materiality in Auditing Based on the report of Canadian Public Accountability Board (2012), materiality in auditing is regarded as highly effective procedure, through which it can be possible to identify the genuineness and reliability of the accounting process and financial statements of the business organisations. According to the report published by The Economist (2002), it can be ascertained that in the early 21st century, materiality in auditing has become one of the core constituents, which has provided guidance to the corporate and business organisations for reducing any chance of failure and error. Thus, it can be claimed that modern organisations have given priority towards maintaining materiality in auditing with the aim of enhancing the effectiveness and ensure the internal control over the business process. In this regard, the aim of introducing materiality in auditing process is to ensure the quality of audit and to maintain the financial reporting process in a transparent manner. Moreover, it can be claimed that the intention of introducing this auditing process is to reduce the biasness or unethical practices persistent during the audit decision making. Furthermore, it is to be affirmed that materiality in auditing can enhance the efficiency of capital market by a certain extent (Canadian Public Accountability Board, 2012; The Economist, 2002). In order to gain an in-depth understanding about the significance of materiality in auditing context, the organisation i.e. Ford Motor Company has been taken as an example. In this regard, it can be found that the company designed an interactive materiality matrix for resolving any sort of finance related issue and developing overall financial performance. Evidently, the importance of this matrix within Ford lays in categorising the issues in accordance with its stakeholders’ concern with the intention of enhancing the profitability level of the company (Ford Motor Company, 2014). Secrecy of the Materiality Levels in Auditing In order to identify the essentiality of maintaining secrecy of the materiality levels in auditing process, it can be claimed that one of the auditors’ responsibility is to avoid the risks involved in various situations that may hamper in attaining the desired objectives of financial accounting. In this regard, it is highly essential to maintain secrecy of the materiality levels in auditing context, as it can ensure unbiased judgment and decision making towards the auditing process. In this regard, Brennan & Gray (2005) claimed that through maintaining the secrecy and accountability while performing auditing actions and opinions, auditors can enhance the overall outcome of the auditing process. At the same time, auditors took into concern the aspects of honesty and impartiality during the auditing process for maintaining code of ethics i.e. public accounting process, which may influence the effectiveness of the business operations in a positive manner (Brennan & Gray, 2005). In this regard, it can be claimed that through maintaining secrecy of materiality levels in the background of auditing process, auditors can ensure the reliability of the financial information. According to Brennan & Gray (2005), in the contemporary era, the reliability of public accounting has enhanced by a considerable extent. In this regard, rationally, it can be claimed that auditors endeavour to preserve secrecy, honesty and fairness during the audit operations for ensuring the development in the quality of auditing procedure. At the same time, fairness and unbiased auditing treatment have certainly reduced the international financial confusions at large (Brennan & Gray, 2005). Similar to the evidences found relating to determine the significance of materiality in auditing context within Ford, it can also be found that this company has endeavoured to keep secret of the materiality issues for varied purposes. These purposes can be apparently traced as maintaining its financial sustainability based strategies and also developing audit accounting procedures among others (Ford Motor Company, 2014). Academic Viewpoints Regarding the Importance and Secrecy of Materiality in Auditing According to the viewpoints of Brennan & Gray (2005), over the previous few years, “The Securities and Exchange Commission” (SEC) has identified several misstated earnings reports that hampered the efficiency of international trade and commerce. In this context, based on the report of Financial Reporting Council (n.d.), it can be recognised that biasness, which occur during the auditing practice, has generated challenges in relation to corporate governance framework, which destroyed the stability of international commercialisation at large. Based on the observation made by Brennan & Gray (2005), the issue concerning lack of materiality in auditing has largely affected the global financial and accounting process at large. At the same time, it is also noted that the issues related to lack of materiality in auditing have threatened the survival of accounting firms throughout the globe (Brennan & Gray, 2005; Financial Reporting Council, n.d.). In relation to this context, Brennan & Gray (2005) claimed that by maintaining the materiality levels in auditing process effectively, auditors can ensure the credibility of the financial reports. Moreover, it can be argued that keeping secrecy of materiality levels in auditing process, the effect of corporate scandals and financial volatility can be reduced, resulting in developing the prospective of the operations of capital market. Moreover, based on the report of Financial Reporting Council (n.d.), it is identified that through enhancing the materiality in auditing process, financial transparency can be witnessed at large (Brennan & Gray, 2005; Financial Reporting Council, n.d.). According to the viewpoints presented by Zuber & et. al. (1983), materiality in auditing signifies the process through which it can be possible to identify the errors occur during the preparation of financial statements. This certainly ensures the transparency of financial accounting procedure during the conduct of internal as well as external auditing. Moreover, Brennan & Gray (2005) argued that materiality in auditing signifies the integrity as well as promotes an objective based approach towards the audit work based on which unethical financial treatment can be prevented. In this regard, Caswell & Allen (2001) claimed that the concept of keeping secret of materiality levels in auditing signifies the responsibility of an auditor to ensure maintaining varied ethical norms (Brennan & Gray, 2005; Zuber & et. al., 1983). Recent Changes in the Audit Regulation and Audit Practice In order to identify the recent changes in the auditing regulation and auditing practices, it can be claimed that materiality in auditing process has influenced certain changes in this similar procedure. In this regard, it can be claimed that auditing is a verification work, which is highly dependent on couple of factors such as independence in appearance and independence of mind. In this regard, it can be claimed that an auditor’s state of mind as well as ability can highly influence the actual auditing procedure. According to the report of American Institute of CPAs (2014), it can be inferred that in the contemporary era, massive changes can be apparently observed while conducting auditing practices. In this context, it can be claimed that attitude as well as mental strength of an auditor usually assists in executing audit program more effectively. Thus, it can be stated that the performance of auditing programs are generally enhanced through the execution of materiality in auditing process. Regarding this aspect, Brennan & Gray (2005) argued that independence of appearance and mind has helped auditors to conduct the auditing process more efficiently. Additionally, the concept of materiality in auditing process has ensured the reliability of financial information. In this regard, rationally, it can be claimed that modern organisations have relied on materiality in auditing process for ensuring public confidence in case of auditing works (American Institute of CPAs, 2014; Brennan & Gray, 2005). Determination of Whether the Change in Auditing Practice will Ensure Transparency in Contemporary Era It will be vital to mention based on the above stated facts that materiality in auditing process has reduced the level of several misstated earnings reports that enhanced the opportunity of accounting firms around the globe to reap significant benefits. Financial scandals in the corporate sector create a negative impact on the ethics and transparency of the auditors and their process of auditing. In this regard, it is revealed that through making changes in the form of concentrating on materiality and keeping secrecy of materiality levels in auditing process, credibility of financial reports can be ensured, aiding the organisations to enhance their efficiency and genuineness. Thus, it can be claimed in this similar context that the changes in the auditing practice through the above stated factors will certainly improve the auditing functions and supporting the auditors to balance their responsibilities along with executing varied auditing programs more adequately (Messier & et. al., 2005; Brennan & Gray, 2005). Conclusion Based on the above analysis and discussion, it can be ascertained that materiality in auditing process has certainly enhanced the credibility and genuineness of the financial reports and also ensured the reliability of the business accounting process. Apart from this, through executing materiality in auditing process, business complexity has been reduced in the contemporary era. In this regard, it is identified that the materiality in auditing process highly relies on the aspects like independence of mind and appearance of the auditors that eventually assists in conducting the audit procedure in a transparent manner. Thus, it can be recommended that with the intention of enhancing the operations of capital market and to ensure the reliability and genuineness of the accounting process and financial statements, it is highly essential for the modern organisations to emphasize maintaining materiality and keeping secrecy of the materiality levels in auditing context. In a conclusive manner, it can be claimed that materiality in auditing process is one of the most effective approaches based on which responsibility and honesty of auditors can be enhanced during the auditing process. At the same time, keeping secrecy of materiality levels also helps in lessening financial discrepancies amid the global organisations in future that can be substantiated with taking the reference of Ford. References American Institute of CPAs, 2014. Audit Risk and Materiality in Conducting an Audit. AU Section 312, pp. 1647-1663. Brennan, N. & Gray, S. J., 2005. The Impact of Materiality: Accountings Best Kept Secret. Asian Academy of Management Journal of Accounting and Finance, Vol. 1, pp. 1-31. Canadian Public Accountability Board, 2012. Enhancing Audit Quality: Canadian Perspectives—Auditor Independence. Enhancing Audit Quality: Independence, pp. 1-29. Financial Reporting Council, No Date. International Standard of Auditing. Audit Materiality, pp. 1-7. Messier, W. & et. al., 2005. A Review and Integration of Empirical Research on Materiality: Two Decades Later. Auditing: A Journal of Practice & Theory. Porter, B. & et. al., (2014) Principles of External Auditing (4th Ed.). John Wiley & Sons. The Economist, 2002. Accounting in Crisis. Business Week, Vol. 28, pp. 44-48. The Financial Reporting Council Limited, 2013. Audit Quality Thematic Review Materiality. Thematic Review, pp. 1-24. The International Federation of Accountants, 2009. Quality Control for Firms That Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements. Quality Control, pp. 36-70. Zuber, G. R. & et. al., 2004. Using Materiality in Audit Punning. Journal of Accountancy, pp. 42-54. Read More