Reasonable Assurance in Auditing - Coursework Example

Reasonable Assurance in Auditing Student’s Name Unit Title Instructor’s Name Date of Submission Introduction Due to dynamism of the environment, organizations require a constant flow of information. More importantly, the reliability of information is critical as it ensures that the available information is fair and in accordance with the expected standards. Therefore, auditing ensures that the decisions to be made by the management are consistent with the goals and objectives of the goals (Arter, 2003). Auditing is the systematic and scientific examination of financial data from the accounts of a business (Chambers & Rand, 2011). As a result, the verification of results shows the profitability of an organization that greatly influences investment decisions. Due to the importance of auditing in decision making, it should be undertaken by an independent person or body of persons who have met the expected qualification requirements (Chambers & Rand, 2011). Reasonable assurance is applicable in auditing practices as it forms the basis of the firm’s relationship with the auditors (United States, 1999). Since auditors are expected to give a true and fair reflection of an organization’s financial position, auditors are obligated to inspect the books of accounts according to the Generally Accepted Principles of Auditing. It is through this means that the true position of an organization can be determined (Giove, 2012). This paper will, therefore, discuss the importance of reasonable assurance to auditing, the provisions of reasonable assurance to a client and a brief analysis of the Australian Securities and Investment Commission (ASIC) audit inspection program report for 2012-2013. Reasonable Assurance and Its Importance to Auditing Reasonable Assurance refers to a written agreement between an employer and employee. This agreement requires the employee to perform services according to an expected standard. As such, the employee has an obligation of ensuring that the services provided match the standard principles of operations (Rittenberg, Johnstone & Gramling, 2010). An agreement between an organization and an auditing firm should be based on certain universally acceptable terms. As a result, the auditors have to comply with certain ethical standards. In this light, ‘reasonable assurance is a principle that ensures that the results given by the auditors provide a clear position of a firm and as such, are not tampered with or falsely stated. This is done by analyzing all the available information and highlighting misappropriations that may exist in the financial statements and reports (Millichamp, 2002). In Australia, the Auditing and Assurance Standards Board (AUASB) is tasked with providing a structure that governs the auditing principle. This structure is known as the Framework for Assurance Engagements. As a result, it describes the objectives of an assurance engagement and it applies to various parties. These include assurance practitioners and the intended users of an assurance report. The regulatory body therefore, manages the relationship between organizations and auditing firms. Such programs are intended to comply with the International Auditing and Assurance Standards Board (IAASB) and the International Standards on Auditing (ISA) (United States, 1999). In summary, the principle of reasonable assurance is important in auditing because it enables firms to be acquainted with their financial positions. Additionally, it eliminates the risks of malpractices that might occur during the auditing process. Finally, it ensures reliability of information, which is integral in the decision making process. Provision of Reasonable Assurance about a Client by Auditors Organizations face various risks over their operations due to the dynamic nature of the business environment. As a result, the management has the responsibility of devising ways that can be used to avoid the risks (United States, 1999). The auditor however, is primarily concerned with the risks that might affect the client’s financial statements. In order to obtain reasonable assurance about the reliability of the financial statements, the audit has a responsibility of evaluating the available financial data; give a free and fair view of a firm’s financial position (Arter, 2003). Before an auditor provides a reasonable assurance to an organization, they have to assess whether the employees maintained independence in the preparation of the financial statements and that any breach of this principle by the personnel has been reported to the relevant authorities. The factors that can be considered include management over rides. In this instance, the management does not comply with the independence of the auditors as is expected. Moreover, the employees may collude with other parties in order to provide inaccurate information relating to the performance of an organization. When the auditing firm establishes that the independence of the employees was compromised, it can decide not to obtain reasonable assurance to a client (Giove, 2012). Another procedure that an auditor has to consider before deciding whether to obtain a reasonable assurance relates to the competencies and commitment shown by employees in adhering to ethical principles. Employees are therefore expected to perform the assurance engagements that they have been assigned. Additionally, all personnel that are assigned to an undertaking jointly possess the qualifications necessary in completing a task. As such, auditors review the levels of competencies among the employees in an organization before obtaining a reasonable assurance (Millichamp, 2002). The third factor of consideration by an auditor is the determination of potential sources of risks. Auditors are therefore faced with various risks which they need to overcome so as to ensure that their final report reflects the true and fair picture of a client’s financial position (Beasley & Carcello, 2008). Audit risk is a function of three other risks namely inherent risk, control risk and detection risk. Inherent risk occurs whereby a misstatement is likely to be made based on the assumption that there is no internal control in the organization (United States, 1999). Control risk arises whereby a material misstatement is expected to occur but cannot be prevented by entity internal control. Detection risk on the hand arises when the management believes that material misstatements will not be detected even if the auditors carry out substantive tests (Rittenberg, Johnstone & Gramling, 2010). The mathematical formula is illustrated as follows: Audit Risk= Inherent Risk× Control Risk× Detection Risk These risks are likely to affect the operations of a business organization. The auditor also evaluates the client relationships and potential sources of risks in relations to specific assurance engagement (Chambers & Rand, 2011). An auditor also analyzes whether the client has a system of quality control(Beasley & Carcello, 2008). The determination of the above variable assists the auditors in identifying any potential weaknesses likely to affect the effective operations of the system. The auditor is therefore able to consistently monitor the processes of the organizations. Organizations should as a result, implement various systems for quality control before it can be provided with a reasonable assurance. Finally, the auditor should ensure that a firm complies with professional standards and legal requirements (Beasley & Carcello, 2008). In instances where an auditing firm provides a reasonable assurance to an organization that has constant complaints regarding violation of professional standards, it will be held responsible by the regulatory authorities (Rittenberg, Johnstone & Gramling, 2010). Consistency of the ASIC Report to the Reasonable Assurance Process Report 397 is an auditing inspection program report published in June 2014. The research was carried out by the Australian Securities and Investment Commission (ASIC) and it provides a summary of observations and findings made by the commission’s audit inspection program. This paper will assess whether the ASIC report met the procedural conditions that auditors must reflect on before obtaining assurance (ASIC, 2014). The first factor to be considered related to the independence of the auditor. According to the ASIC report, there were numerous instances of non-compliance with both the legislative and professional requirements. Such factors were likely to undermine the independence and objectivity of the auditors. Some of the instances where the independence of auditors was contravened include a case where one of the firms did not address the potential threat that arose from the relationship between the firm and the executive director and one of the audited entities. Additionally, at two firms, the audit engagement teams failed to provide independence confirmations on an annual basis even though this was a requirement that was needed as a means of compliance with the auditing standards (ASIC, 2014). Another factor that needed to be considered when obtaining a reasonable assurance was the competence of personnel. Firms are required to restructure their staff structures to facilitate the completion and presentation of complex audits (ASIC, 2014). This requires the input of auditors with high levels of expertise and experiences. Additionally, with the changing environmental dynamics, auditors now require the input of professionals in other industries such as valuers, geologists, actuaries and IT experts (ASIC, 2014). Auditors required firms to have mechanisms for quality control in order to obtain reasonable assurance. According to the ASIC report, The Largest Four National firms had implemented various policies and procedures that were aimed at improving the audit quality. This step was completed by doing regular reviews of various selected audit engagements. The other National firms could match the larger organizations by applying risk criteria to their files. The smaller firms were found not to have developed periodical reviews of their files (ASIC, 2014). The firms could have benefitted from constant monitoring of their quality control systems. Additionally, they could easily assess the effectiveness of their operations so as to ensure total compliance with the legal requirements (ASIC, 2014). The report also highlighted the importance of international regulators in improving the audit quality. Since most corporations are involved in cross border operations, there is need align the ethical standards and auditing practices with the international standards. Additionally, the Australian economy, like other economies in the world, was affected by economic and regulatory developments. Through partnerships with the International Organization of Securities Commissions (IOSCO), important issues such as the international guide on audit transparency had been implemented. Finally, the role of professional accounting bodies such as ICCA and CPA Australia were acknowledged. One of the major roles these bodies played in the accounting sector in Australia was the maintaining a constant supply of future auditors (ASIC, 2014). ReferencesTop of FormBottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Arter, D. R. (2003). Quality audits for improved performance. Milwaukee, Wisconsin: ASQ Quality Press. ASIC, (2014). Audit Inspection Program Report for 2012-13. Report 397 Beasley, Mark S., & Carcello, Joseph V. (2008). GAAS Guide 2009: A Comprehensive Restatement of Standards for Auditing, Attestation, Compilation, and Review. Chicago, IL: CCH Inc. Chambers, A. D., & Rand, G. K. (2011). The Operational Auditing Handbook: Auditing Business and IT Processes. Hoboken [N.J.: John Wiley & Sons. Giove, F. C. (2012). Auditing Essentials. Newburyport: Research & Education Association. Millichamp, A. H. (2002). Auditing. London [u.a.: Continuum. Rittenberg, L. E., Johnstone, K. M., & Gramling, A. A. (2010). Auditing: A business risk approach. Mason, OH: South-Western Cengage Learning. Rittenberg, L. E., Johnstone, K. M., & Gramling, A. A. (2011). Auditing. Mason, Ohio: South- Western. United States. (1999). WITHOUT REASONABLE ASSURANCE: FINANCIAL AND..., A STAFF REPT... 105-W... COMM. ON COMMERCE... HOUSE OF REPS... 105TH CONGRESS, 2ND SESSION. S.l: s.n. Read More