Maintaining Ethical Professional Standards in Auditing

Every auditor has to maintain ethical professional standard and compliance with necessary laws and regulatory framework so as to verifying financial statements accurately.

AUDIT AND ASSURANCE
1

Table of Contents
INTRODUCTION................................................................................................................................3
1.......................................................................................................................................................3
2.......................................................................................................................................................3
3.......................................................................................................................................................4
4.......................................................................................................................................................4
5.......................................................................................................................................................5
6.......................................................................................................................................................5
7.......................................................................................................................................................5
8.......................................................................................................................................................5
9.......................................................................................................................................................6
10.....................................................................................................................................................6
11.....................................................................................................................................................6
12.....................................................................................................................................................6
13.....................................................................................................................................................7
14.....................................................................................................................................................7
15.....................................................................................................................................................7
CONCLUSION....................................................................................................................................7
REFERENCES.....................................................................................................................................8
2

INTRODUCTION
Auditing refers to the process of inspecting, analysing and evaluating company’s financial
reports so as to make sure accurate reporting to represent true and fair picture of profitability and
financial health.
1
Big 4 Accounting firm is one of the most famous or popular accounting firm in the world
which offer audit, taxation consultation, advices, assurance and legal services to number of private
as well as public companies. It’s big four auditors that are Deloitte, PwC, EY and KPMG provides
top-quality auditing services to the companies to verify their annual financial statement to
communicate their operational performance and financial health more accurately and effectively.
Company believes that quality of audit plays a key role in corporate governance by representing a
true and fair position of their profitability and financial status at the end of the period (Jacob, Desai
and Agarwalla, 2015). Its high audit quality can be evident through number of historical cases
investigated by the company such as Enron Scandal by Arthur Andersen, Satyam Fraud by PwC and
others.
2
According to Revised International Standard of Auditing, 700, independent auditor has to
express their opinion after checking financial statement in a specified format will be applicable on
3

or after the end of calendar year 2016. It will enable users to obtain required information in a
prescribed format and enhance communication between both the auditors and investors via
corporate governance (Hay, Knechel and Willekens, 2014). Furthermore, it increase transparency in
the reporting system and attract managerial attention towards the auditor’s report. This in turn, it
helps to build high level of confidence among users and meet their information expectations
accurately.
3
External auditors fails to discover and detect fraudulent activities, omissions, errors and
mistakes (found only 4% fraud) in the financial reporting because of two main reasons that are
inherent risk and ethical dilemma as well. First is regarded as failure of the auditors to identify
material misstatement information reported in the financial statement, more importantly due to
collusion evident through the case study of WorldCom, 2002. In such respect, complexity of
business processes, closure relationship among organizations and cost control mechanism are the
main reasons can be evident with the case of ESM govt. Securities (Akinteye, 2016). Moreover
external auditors believed on internal managers and executives, henceforth, it can give rise to
fraudulent activities. However, on the other hand, ethical or moral dilemma refers to a situation in
which external auditors has to make choice out of two available alternatives impact objectivity of
the auditors and increase threat of fraud.
4
Although the main responsibility of auditors is to provide top-quality audit services, but still,
in recent times, they also provide non-audit services (NAS) mainly categorized into regulatory
return, statutory requirements and contractual requirement i.e. consultation, specialist advices etc. It
can cause serious threats to auditor’s independence mainly because of inexistence of adequate
safeguard policies (Stuart, 2012). Moreover, UK Auditing Standard stated that audit committee who
deliver NAS need to oversee the relationship with the auditors as a shareholders representative
which challenge their objectivity and independence. However, on the other hand, UK Auditing
Practice Board demonstrated that appointment and termination process, self-interest, social
bonding, management and employment and litigation are several possible threats to auditors which
limit their independence in connection with auditing services (Stuart, 2012).
Ways or effective means available to strengthen auditors independence
 Modification in the selection process
 Controlling non-auditory services like advices, tax consultation and so on
 Mandatory rules
4

 Better and more effective disclosure
 Reliance upon external or market forces
 Implementation of an effective corporate governance mechanism and policies
5
Recently, one of the Britan’s most famous grocery and retail merchandiser Tesco has
reported an accounting scandal by overstating annual accounting profit by 250 GBP million (25%).
Overstatement of revenues and understatement of cost were the two responsible reasons for
reporting misstated profit (Neri, and Russo, 2014). This case is a correct example demonstrating
that auditors are highly focused on assessing too much on data gathering rather than exercising
enough professional scepticism.
6
Examining effectiveness of internal control system to detect fraud, assessment of risk
prevention techniques, proper documentation of records, test of control and so on are several key
elements or factors applied by auditors in auditing process to assess and control risk (Wong and
Millington, 2014). It directly affects subsequent steps in audit process as effective internal control,
accurate and proper recording reduces auditing requirement to conduct an in-depth audit
programme to verify financial reporting.
7
On 17th June 2016, European Union implemented new EU directives in relation with
statutory audit for the auditors. The main objective of these reforms is to improve transparency in
the system, exert professional scepticism, contribute dynamic audit in EU and ensure effective
supervision of statutory auditors. New EU Audit Directives will influence auditors positively by
improving the quality of audit work (Junior, Best and Cotter, 2014). For instance, separate audit
report for both the Public-Interest entities (PIEs) and non PIEs will report on important areas of
material misstatement, which in turn, reduce expectation gaps between what auditors want to
deliver and what they mandatory delivered. Moreover, its internal control system will enable
companies to reduce compliance as well as operational risk. It will help auditors to overcome
barriers or deficiencies in financial statement, improve reliability and credibility and mitigate risk of
conflicted interest (Humphrey, Samsonova and Siddiqui, 2013).
8
Now, UK had voted to apart from EU nations, called Brexit that will directly impact the
auditing responsibilities of auditors. Post-Brexit impact on auditing makes it necessary for UK-
5

based auditors to consider volatility in foreign exchange and its impact on financial statement.
Moreover, they have to assess potential impact on the valuation of corporate assets, pension deficit
and need to disclose potential risk also. Furthermore, they have to update accounting policies and
conventions like going concern principle so as to ensure that whether it helps to in viable and
accurate reporting or not (Simnett, 2012). In addition to this, in the long-term period, Brexit may
lead to change entire regulatory framework for the UK auditing. At the same time, companies which
operate at multinational level can face challenges due to distinguish policies and regulations in EU
and UK.
9
No-doubt, yes, internal audit plays a key role to fight against possible threats. It is an process
of examining and evaluating organizational issues pertaining to their regular business practices and
risk rather than verifying financial reporting. It is of huge importance, refers to a consulting activity
that is designed to add more value and enhance routine business operations and functions. This
process works as a milestone of good corporate governance and helps to maximize accountability
and assurance environment (Gronewold, Gold and Salterio, 2013). Regular monitoring, reviews,
risk mitigation strategies, proper documentation, control mechanism, managerial control and so on
are the factors which assist establishments to prevent and detect fraudulent activities and ensure
effective governance.
10
Coming into existence new regulatory framework, market volatility, auditing legislation,
global transactions, cross-border financial activities and others are the key historical audit changes
taken place in UK (Christensen, Glover and Wood, 2012). However, in the upcoming decades,
impact of post-brexit may lead to bring into existence a new UK auditing and assurance legislations
separately from EU.
11
As per the cited situation, external auditors do not rely upon the audit work performed by
internal auditors and try to carry out in-depth analysis of financial statement to verify accurate and
valid financial reporting (Soh and Martinov-Bennie, 2015). As per ISA, such reliance can be
improved in three ways to obtain related information for assessment of material risk, obtaining audit
evidences and to perform audit procedure effectively, presented below:
6

12
In every establishment, audit committee is accountable to monitor accounting policies and
principles and make sure proper financial reporting and disclosure procedure. It plays a vital role in
ensuring auditors independence, it is because, it helps to establish effective internal control and
ensure adhering and compliance with the accounting and reporting legislations and regulations
(Stuart, 2012). It also review audit reports and discuss the main issues and problems with the
managers and external auditors so as to overcome the barriers of inaccurate financial reporting.
13
Yes, new EU Audit Directive after 17-June-2016 will improve competition in audit market
by maximizing transparency, strengthening mandatory legislations on auditors, fostering diversity
and effective supervisions as well.
14
Code of ethics represents values and standard which professionals have to comply so as to
conduct their operations in an ethical manner and without harming others i.e. objectivity,
confidentiality, competency, integrity, professionalism etc (Reding and et.al., 2013). Moreover,
International Ethics Standard Board for Accountants (IESBA) designed ethical standard that every
auditor and accountant need to follow while carrying out their assigned duties and responsibilities.
In addition, complying with the Auditing Practices Board, Audit Commission guidelines and CIPFA
Audit panel is also compulsory.
15
As per revised ISA 700 auditor has to form an opinion after performing respected audit work
regards to the annual financial reports of the organization and give report to the management
expressing their opinion. However, revised ISA 720 represents responsibilities of the auditors
7

regards to the information presented in different type of documents encompasses audited annual
reports along with the auditor report.
CONCLUSION
Report concluded that every auditor have to maintain ethical professional standard and
compliance with necessary laws and regulatory framework so as to verifying financial statements
accurately.
8

REFERENCES
Books and Journals
Christensen, B. E., Glover, S. M. and Wood, D. A., 2012. Extreme estimation uncertainty in fair
value estimates: Implications for audit assurance. Auditing: A Journal of Practice & Theory.
31(1). pp. 127-146.
Gronewold, U., Gold, A. and Salterio, S.E., 2013. Reporting self-made errors: The impact of
organizational error-management climate and error type. Journal of business ethics. 117(1).
pp. 189-208.
Hay, D., Knechel, W.R. and Willekens, M., 2014. The Routledge Companion to Auditing.
Routledge.
Humphrey, C., Samsonova, A. and Siddiqui, J., 2013. Auditing, Regulation and the Persistence of
the Expectations Gap. The Routledge Companion to Accounting, Reporting and Regulation.
4(5). pp. 163-172.
Junior, R. M., Best, P. J. and Cotter, J., 2014. Sustainability reporting and assurance: a historical
analysis on a world-wide phenomenon. Journal of Business Ethics. 122(1). pp. 1-11.
Neri, L. and Russo, A., 2014. A framework for audit quality: Critical Analysis. Business and
Management Review. 3(9). pp. 25-30..
Reding, K. R. and et. al., 2013. Internal Auditing: Assurance & Advisory Services.
Simnett, R., 2012. Assurance of sustainability reports: Revision of ISAE 3000 and associated
research opportunities. Sustainability Accounting, Management and Policy Journal. 3(1).
pp. 89-98.
Soh, D.S. and Martinov-Bennie, N., 2015. Internal auditors’ perceptions of their role in
environmental, social and governance assurance and consulting. Managerial Auditing
Journal. 29(1). pp. 80-111.
Stuart, I., 2012. Auditing and assurance services: an applied approach. McGraw-Hill/Irwin.
Stuart, I., 2012. Auditing and assurance services: an applied approach. McGraw-Hill/Irwin.
Wong, R. and Millington, A., 2014. Corporate social disclosures: a user perspective on assurance.
Accounting, Auditing & Accountability Journal. 27(5). pp.863-887.
Online
Akinteye, A. 2016. External Auditors and Financial Statement Fraud. [Online]. Available through:
https://webcache.googleusercontent.com/search?q=cache:x_Lcg-XfXdIJ:https://
www.linkedin.com/pulse/part-2-external-auditors-financial-statement-fraud-amaka-
akinteye+&cd=1&hl=en&ct=clnk&gl=in. [Accessed on 25th November 2016].
Jacob, J., Desai, N and Agarwalla, K., 2015. Why Do Indian Firms Pay Highers Fees to Big Four
9

Auditors. [Online]. Available through:
http://www.livemint.com/Opinion/ZbwSU8YbVD6skm01b7cqhO/Why-do-Indian-firms-
pay-higher-fees-to-Big-Four-auditors.html. [Accessed on 25th November 2016].
10