The Purpose of Auditing - Essay Example

Insert Title: Name: Institution: Institution: Module: 09TH MAY, 2009 Ethical theories in Auditing Outline Introduction Deontology ethics Teleological ethics Virtue ethics Ethical relativism Decisions for Olga on bribes Procedures and practices of competent audit Reasons for BWE not accepting an audit engagement with solace limited Audit strategy that can be employed on small firms Conclusions Introduction Ethical theories are important in auditing to give the auditor a basis for their argument in the financial reports of an organization. Auditors have o apply ethics in particular decisions that forms their opinion. The essay describes three theories that can be used by an auditor to form an opinion regarding issues in the financial reports. The theories can be used but must be used in combination because none gives a satisfactory solution to the best opinion by the auditor. Auditors are found to combine individual principles in order to provide reasonably comprehensive opinion on financial reports. The following are the ethical theories discussed in this essay. Deontology ethics Deontological ethics is a theory that demands some one to focus on the rightness or wrongness of the intention of the action. It is a theory that binds the person to the duties that must be carried out. In deontological ethics, some actions are wrong no matter what consequences follow them. The concepts of values in deontological theory are fundamental and the idea of an action being right or wrong is basic1. The situation of good or bad depends on whether the action that brought it about was right or wrong. In deontological theory, the ends do not justify the means. According to deontology theory, when evaluating the moral worth of an action or the goodness of an action the consequences do not matter. The theory says that what matters is the disinterested will of a person to follow the dictates of reason, principle and duty, whatever the cost or consequences may turn out to be. Teleological ethics It is a theory that requires a person to focus on the consequences of the rightness or wrongness of the action. Teleological theories have the concepts of obligation already defined. Ethical issue in teleological theory explains the rightness of actions in terms of the goodness of the state of affairs that occurs because of that action. If an action genuinely brings about greater good in the world, then it is a right action. The rightness of the action is independent of the nature of the action or the intentions of the person carrying out the action. In teleological theory, the end justifies the means. In this theory what make an action right or wrong are the consequences only and no reason to look at the intent of the person in performing the action2. Virtue ethics The virtue ethics theory takes virtue as the primary character in the action rather than viewing the rightness or wrongness of the action. 3In this theory virtues are derivatives and are appreciated for the consequences with which they bring after the performance of an action. People must be guided by virtue when performing their duties and virtue must be basis of their opinion on an action. However, the opinion made by a person will depend on what the person considers as virtue. The question here is that, does the action lead to human happiness or to the development of distinctively human capacities. People don’t have to do what is morally obligatory or what turns to achieve the optimality utility. People should base their opinions on what really nurtures and nourishes fully actualized human beings. The theory takes people as social beings who finds their individual fulfillment in community and defines virtues as characteristics that contribute to healthy community life. Ethical relativism The theory of ethical relativism holds that there are no objective ethical standards which apply to the human conduct. The theory does not describe what is required for an action to be ethical. It advocates that the rightness or wrongness of an action depends on the practices of a particular culture.4 In addition, people should consider not consider whether the actions are right or wrong but what makes them wrong should be addressed. The theory demands for tolerance with ones society and make moral decisions irrespective of the factors that exist in the society. Decisions for Olga on bribes The decision that Olga should have made regarding whether or not to report on the bribes can be related to the theories discussed in this essay. Basing the decision on Deontology theory, Olga should have made her decision taking to disclose the information on bribes that were given to the local authorities. It is wrong for an organization to give bribe to the local authorities to receive specified treatments. The intention of the subsidiary not disclosing bribes in the financial reports was to conceal the wrong actions that are being undertaken by the company hence it is wrong and should be disclosed by the auditor. Here Olga will not consider the consequences of disclosing such information to the organization. Failure to disclose this information it may cause the auditors big problems in the future when such bribes are discovered by other authorities. Depending on the teleological theory, Olga should consider the consequences that will arise to the organization due to the disclosure of the bribes. On teleological theory, an action is wrong if it leads to bad consequences. Olga should not disclose the bribes that are not shown in the financial reports because it will lead to problems to the organization. Basing the argument on virtues ethics, failure to disclose the bribes is wrong because by virtue the organization is not truthful in its disclosures. Olga is not happy with the practice of the firm not disclosing the bribes in the financial reports. Virtue ethics demands that an action is good if it brings happiness to the community. By disclosing these bribes, Olga will bring happiness to the community since the truth will be known and this leads to self fulfillment by doing the right thing of disclosure. Basing the argument on ethical relativism, it will be wrong for Olga to disclose the bribes since the organization holds the culture of not disclosing the bribes. It is normal for the company to give bribes to some of the local authorities. 5According to ethical relativism an act is right if it supports the culture in a particular community. The impact of pacific acceptance case on the existing auditing practice The pacific acceptance case established that auditors have legal liabilities to third parties after the collapse of a company if they do not use reasonable care and skill when performing audits. The financial statements that have been audited and presented to the public must be of true and fair value in the opinion of the auditor. The auditor must exercise the following professional due care. Auditors were encouraged to make sure that they check and see for themselves all the records in the repots and any other material provided by the firm before forming an opinion on such reports. They should ensure that audits are made for all transactions that took place in the whole year. During the audit they must use well documented procedures and supervise and review the audits appropriately. Auditors must rely on the internal controls used by the company and ensure that the firm uses good internal controls that are reliable for the audit. It is the responsibility for auditors to inform the management on the appropriate reporting measures to be adopted. They should also warn the management on any risk that may be faced by the company due to the adoption of bad reporting procedures. Auditors must structure plans and procedures that will help them discover all material errors or fraud in the financial statements of the company. They should take further action where suspicion of fraud is aroused to establish clear grounds of their opinion. Auditors must be aware that, they should always be guided by professional standards when doing their duties and that must be reflected in their opinion of true and fair financial statements. Procedures and practices of competent audit Several procedures and practices were identified in the ruling of the case of pacific acceptance case as being part of competent audit. These procedures and practices demonstrated that a competent audit is one where the auditor uses a certain degree of care and skill to meet the contractual relationship and special relationship between parties which is imposed by law. A competent audit is one where the auditor exercises the reasonable care and skill expected of a professional by adherence to professional standards. A competent audit is one where the auditor has paid attention to the possibility of material fraud. The auditor has closely supervised and reviewed the work of inexperienced staff. The auditor must have followed properly documented audit procedures during the audit and has carried out proper objective auditing procedures6. Reasons for BWE not accepting an audit engagement with solace limited 1. BWE should not accept the engagement because solace limited does not want to disclose some information in its records that is known to the previous auditor. 2. It will take a process by the time BWE reaches an agreement with the other audit firm because they use different audit procedures. 3. Solace would not even allow them to contact the previous auditor. 4. Solace is currently in the media for failure of the management not disclosing that one of its subsidiaries is being investigated by local authority for suspicion of bribery. Audit strategy that can be employed on small firms 7Small firms are found to encounter problems when auditing their records. These firms can employ a strategy that will ensure that its pats are fully audited. BWE can use the strategy of scaling the audit of internal control. The strategy will involve tailoring the audit approach to fit the individual facts and circumstances of the firm. The reason is that small firms are found to have less complex operation and they share many attributes. The small firms share fewer business lines and have less complex business processes and financial functions. They have extensive involvement by the senior management in the day to day activities of the business. They have fewer levels of management each with a wide span of control. The characteristics of the small firms can affect particular risks that may lead to material misstatement of the firm’s financial statements. The characteristics of a small firm have a pervasive effect on the audit of internal control. With the existence of fewer employees which limits the opportunity to segregate incompatible duties, small firms should use alternative approaches to achieve the objectives of segregation of duties. 8The auditor should evaluate whether those alternative controls achieve the control objectives. The auditor should focus on application controls built into the pre-packaged software that management relies on to achieve its control objectives. Testing the IT general controls require the auditor to focus on those controls that are important to the effective operation of the selected application controls. Small firms can use external professional when auditing their accounts and the auditor may take into consideration the views of third parties when assessing the competencies of the firm. The small firm needs to maintain effective internal control over financial reporting. The auditor should take into account when selecting controls to test and planning test controls. Conclusions The purpose of auditing is to provide true and fair view of financial statements of the firm. Auditors are required to use ethical theories when determining the opinion of their decisions for the reports of the firm. The decisions that auditors can make basing their arguments on ethical theories will always vary and there might be no specific true decision to the opinions since each decision has its reasons behind it. However, the general requirement is that, auditors must follow clear documented procedures in the audit. Auditors have a liability towards third parties in the collapse of a firm. They are required to operate with due care and skill to ensure that they present a true and fair opinion on the financial statements of the company. Bibliography 1. Colin, B 1996, ‘Ethics and corporate governance’ the issues raised by the Cadbury report in the United Kingdom, journal of business ethics, Vol. 15, No. 2 pp. 169. 2. Ibid 1. 3. Ibid. 4. Ibid 167. 5. Ibid 169. 6. Ibid 174. 7. Ibid 177. 8. Ibid 179. Read More