Literature Review Assignment 2022

ASSIGNMENT

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Table of Contents
Introduction......................................................................................................................................3
Literature Review............................................................................................................................4
Findings and Analysis......................................................................................................................6
Recommendations............................................................................................................................9
Conclusion.....................................................................................................................................10
Reference List................................................................................................................................11

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Introduction
There can be misguided regulations upon the accounting system through internal controls. This is
where an organization can merit from assigning the same responsibilities to an external auditor.
It impacts the inner workings as these auditors turn to discuss important elements regarding facts
and figures with the management. Their ethical code dictates external auditors to observe the
internal circles before they start making clarifications. This provides an assessment into the time,
nature, and scope of the evaluation to be undergone. The exact role of external auditors varies
among countries. These involve examination on a test basis the transactions and recording
financial implications. In other countries, external auditors have to establish supervisory
authority. The purpose of this study is to justify that they do not represent any authority.

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Literature Review
According to Kassem & Higson (2016), states how the principles involving auditor
independence are dictated solely through “ISA 200” framework. This reduces the undiluted
verdicts from external auditors leading to corrupt practices in a corporation. This “ISA” does not
undertake the problems identified by the auditors and recognized from a legislative perspective.
This makes the external auditors wary regarding the factual analysis of financial statements. It
increases their capacity to mistrust functions leading in figures about fixed assets after
depreciation. That reflects heavily upon the financial markets as investors less reliant on
distributing its capital to companies, with negligible auditor independence. This is largely due to
the fact of collusion between owners and auditors that reduces fair representation into the same.
According to Wu et al. (2016), Certain enterprises follow principles into supervising financial
decisions after its failure. This is due to “ISA 200” limiting the scope of the audit through the
policy of reasonable assurance. The auditors become circumspect in their approach and this
limits the opportunity for companies to take care of risks. That is especially why the managerial
heads find it beneficial to consult third party options in the form of external auditors. The
recently held “7th annual audit forum” conducted by the “EU audit reform", tried to
reclassify the scope of auditors in the world. This gave flexible authority to the management who
under accounting governance need to perform financial analysis. This could reduce to
repercussions involved to some extent.

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According to Nehme et al. (2016), the behaviors of external auditors can fluctuate if leniency is
not provided in their activities. This is also attributed to the principles as per “ISA 200” that
dictates, that the opinion of auditors do not give them enough leeway. These are related to the
interpretations involved with statements posting comments and overview of organization
performance. These were discussed in the same forum conducted by the “EU audit reform” that
rules inside this framework must be feasible to some extent. That was with the scope that
auditors can define certain facts related to financial upheavals. These can be in the form of
clarifications that allows contingent liabilities into statements. It can be the prerogative of the
auditor to exclaim reasons about the same. This will not be limited to the ideologies followed by
“ISA” issues.

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Findings and Analysis
There are supposedly five threats that impose itself upon auditor independence. The real reason
for these threats can be due to the two crucial elements involved. These can be the relationship
that the auditor holds with the company and the competition of prices. It must be remembered
that the auditor earns his or her keep through business and other board fees. This is the
responsibility of board managers to outline the same as a de facto authority. The common
auditing blunder can be illustrated through the “Enron scandal”. This company misrepresented
earnings through alterations in the balance sheet. This lead to the bankruptcy of the organization.
It should dictate how auditors might feel when their fees are not inclusive enough to encourage
them towards integrating efficient results (Al-Shbiel, 2016). This makes the auditor more
cautious about his economic dependency. It switches the importance of the activity on their
independence.
Five threats can affect the workflow of an auditor. These can be expressed through the following.
● Threat towards self-interest-The moment an auditor is well received by an organization
either through financial benefits, or settlement of liabilities. It becomes the prerogative of
the same auditor to provide judicious results. The owner of a company can be reliant on
the proper refurbishment into financial statements (Endaya, & Hanefah, 2016). It
becomes the responsibility of auditors to make omission and corrections through their
ideologies. This can work in a negative fashion which will be explained through an

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example. An auditor working for the "XYZ" company might feel discouraged to
perform his duties for the financial year 2019. If he has a due related to the same from
back in 2018. This can impact going concern businesses.
● Threat towards self-review- The perspective of self-review can vary between
companies. An auditor might be indulgent in performing his accounting duties. It is the
responsibility of companies to manage auditors with their tasks (Azim, & Azam, 2016).
There can be situations were auditors have to conduct his or her preparation of financial
statements. This will be followed by self-reviewing through audit respectively. That can
result in a situation where the auditor of “XYZ” has to comment on entries in a balance
sheet. Then the auditor must perform the same. This could also lead to the creation of less
unbiased reports as auditors have the luxury of self-review.
● The threat to advocacy- This can be in the form of employees who are engaged as
auditors for the same company. These employees might help the organization generate
unique selling principles. It could include promotional activities or just providing sound
clarifications to marketing strategies. The perspective of tasks can switch from one
thought process to another. This carries the leverage of a different department. In this
case, it is the sales department (HOXHAJ, 2018). There are outside aspects that need to
be met by the same auditors performing activities of distinct departments. There could be
circumstances where the income statement does not reflect the true figures of the
organization.

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● The threat to familiarity- This threat will appear when auditors lean closely with
managers and administrators. The auditor might find itself in a good position if he or she
is related to employers in some way. It can be in a familiar capacity as well as being
family members in the same business (Sulaiman, 2017). There can also exist relations
among auditors with the shareholders of the company. This would ensure that
suggestions can be provided as to investments within an organization. This would be
similar to an auditor who knows the shareholder for 10 years and finally manage to assist
them. These would dilute how auditors might perform their duties for the client. This
would take away the objectivity in the approach. It is generally seen among going
concern firms.
● Intimidation threat-This is the opposite of familiarity. The threat of intimidation arises
when the auditor is forced to work for a company he or she does not desire. This can be
due to feelings of intimidation towards directors and managers. It might also include
feelings where auditors are forcefully committed to performing unwanted tasks. This
could impact the objectivity of the auditors similarly as being familiar. These can lead to
situations where the company does not want to lose a client. It encourages the auditors to
perform appeasement duties by manipulating financial statements. This can show the
client in a good light.

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Recommendations
The study suggests the following approaches to establish good auditing capabilities.
● The going concern business might employ the skills of external auditors to regulate their
internal roles.
● There must be feasibility in audit activities like explanation through vouchers and
brochures. This will enable auditors to believe in their roles reducing skepticism.
● The auditors must not become too familiar with the managers of the organization. This
could lead to a loss of objectivity among financial statements.
● It should be the auditor's prerogative for being flexible to both auditing roles and any
other capacities required by the organization.
● These auditors must be provided the independence to choose his or her roles within an
organization as regulated by the scope.
● The lead accountant must always adhere to the principles provided by auditors to impact
a company's statements.

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Conclusion
The study has isolated the pertinent issues related to independent auditing. It even elaborated on
the principles around which external auditors could resolve the inner problems of financial
representation. This study concludes by stating that even if “ISA 200” principles can limit the
scope of audit variability. There are new regulations taking place through reforms that are
making it flexible for auditors to perform their duties. This study also concludes that there might
be threats to audit independence existing within an organization. These can be disintegrated if
the going concern principles are followed through accounting regulations. This would also
prevent the matter of objectivity from dissolving when financial statements are distributed. The
study finally concludes that auditors should remain professionals even at both familiar and
unfamiliar capacities. This would enable the fulfillment of actual auditing objectives which can
get diluted as a result of this process. It would also ensure that accounting information never
loses credibility.

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Reference List
Journals:
Al-Shbiel, S. O. (2016). An examination of the factors influences on unethical behavior among
Jordanian external auditors: Job satisfaction as a mediator. International Journal of
Academic Research in Accounting, Finance and Management Sciences, 6(3), 285-
296.Retrieved from:
http://hrmars.com/hrmars_papers/Article_28_An_Examination_the_Factors_Influence.pd
f[Retrieved on 28.10.2019]
Azim, M., & Azam, S. (2016). Bernard Madoff’s ‘Ponzi Scheme’: Fraudulent Behaviour and the
Role of Auditors. Accountancy Business and the Public interest, 15(122-137).Retrieved
from: http://visar.csustan.edu/aaba/azimazam2016.pdf[Retrieved on 28.10.2019]
Endaya, K. A., & Hanefah, M. M. (2016). Internal auditor characteristics, internal audit
effectiveness, and the moderating effect of senior management. Journal of Economic and
Administrative Sciences, 32(2), 160-176.Retrieved from:
https://www.researchgate.net/profile/Khaled_Endaya2/publication/310590285_Internal_a
uditor_characteristics_internal_audit_effectiveness_and_moderating_effect_of_senior_m
anagement/links/5bd4b55592851c6b27931410/Internal-auditor-characteristics-internal-
audit-effectiveness-and-moderating-effect-of-senior-management.pdf [Retrieved on
28.10.2019]
HOXHAJ, E. (2018). IT AUDIT-INTRODUCTION OF THE IT AUDIT IN AN
ORGANIZATION. World of Accounting Science, 20(1).Retrieved from:
https://dergipark.org.tr/en/download/article-file/453737 [Retrieved on 28.10.2019]

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Kassem, R., & Higson, A. W. (2016). External auditors and corporate corruption: Implications
for external audit regulators. Current Issues in Auditing, 10(1), P1-P10.Retrieved from:
https://www.aaajournals.org/doi/pdf/10.2308/ciia-51391[Retrieved on 28.10.2019]
Nehme, R., Al Mutawa, A., & Jizi, M. (2016). Dysfunctional behavior of external auditors the
collision of time budget and time deadline evidence from a developing country. The
Journal of Developing Areas, 50(1), 373-388.Retrieved from:
https://www.researchgate.net/profile/Rabih_Nehme/publication/294576457_Dysfunction
al_behavior_of_external_auditors_the_collision_of_time_budget_and_time_deadline_evi
dence_from_a_developing_country/links/573b3d3008ae9f741b2d7c96.pdf [Retrieved on
28.10.2019]
Sulaiman, N. A. (2017). Oversight of audit quality in the UK: insights into audit committee
conduct. Meditari Accountancy Research, 25(3), 351-367.Retrieved from:
https://www.researchgate.net/profile/Noor_Adwa_Sulaiman/publication/
318126870_Oversight_of_Audit_Quality_in_the_UK_Insights_into_Audit_Committee_
Conduct/links/5a053d32aca2726b4c757dff/Oversight-of-Audit-Quality-in-the-UK-
Insights-into-Audit-Committee-Conduct.pdf [Retrieved on 28.10.2019]
Wu, C. Y. H., Hsu, H. H., & Haslam, J. (2016). Audit committees, non-audit services, and
auditor reporting decisions before failure. The British Accounting Review, 48(2), 240-
256.Retrieved from: http://dro.dur.ac.uk/22685/1/22685.pdf[Retrieved on 28.10.2019]