Key Changes to Audit Firm Rotation and Alternative Suggestions
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This article discusses the concept of audit firm rotation and its impact on auditor independence. It also explores alternative suggestions to improve auditor independence.
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Running head: AUDITING AND ASSURANCE SERVICES Auditing and Assurance Services Family Name: Student ID: Lecturer Name: Time and Day of the Seminar:
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1AUDITING AND ASSURANCE SERVICES Keychangestoauditfirmrotationandalternativesuggestionstoimproveauditor independence The Public Company Accounting Oversight Board (PCAOB) issued a concept for the increase in the auditor’s independence by the process of audit firm rotation (pcaobus.org 2018). With the help of these issues,PCAOBtried to bring some major changes in the process of audit firm rotation policy in order to increase and enhance audit independence, objectivity and professional skepticism. As per this statement, there would be a limitation in the number of consecutive years for which a registered audit firm can provide professional audit services to a public company (pcaobus.org 2018). According to the chairman ofPCAOB, in order to increase andenhancetheimportantaspectsinauditinglikeauditindependence,objectivityand skepticism, the aspect of audit client paying the auditors needs to be taken into consideration. He also mentioned that the process of the rotation of audit firm will be majorly helpful in the reduction of pressure in order to develop and retain the long-term relationship with the audit clients(pcaobus.org 2018). Apart from this, due to the change in the policy of audit firm rotation, the auditors will get an opportunity to get a fresh look on the financial reporting of the audit clients. It can be seen that PCAOB invited the public opinions on the implementation of this new concept of audit firm rotation. Most importantly, it can be noticed that the committee received both negative and positive feedbacks for the implementation of this concept of audit firm rotation. It needs to be mentioned that there were some major concerns related to the negative effects of this audit firm rotation policy(pcaobus.org 2018). In the concept of audit firm rotation, PCAOBalso mentioned about some of the major alternatives rather than audit firm rotation in order to increase the audit independence. They are mandatory retendering of the audit procedures, the implementation of compulsory joint audit,
2AUDITING AND ASSURANCE SERVICES and the change in the current model of payment(ey.com 2018). However, it can be observed that PCAOB did not put more emphasis on the implementation of the alternative solution for increase in audit independence. PCAOB mentioned that there are certain major drawbacks in the process of mandatory retendering of audit. However, many suggested there process of mandatory retendering of audit can be a positive factor for increasing and enhancing the audit independence. Moreover, it would also be major helpful in increasing the aspect of audit skepticism (ey.com 2018). It needs to be mentioned that PCAOB did not take any attempt to implement these alternative solutions as there was lack of information on the procedures of joint audit and other alternatives. There was a mention about an aspect that after providing the audit services to the audit clients, the auditors use to find their alternatives (ey.com 2018).
3AUDITING AND ASSURANCE SERVICES Explain the reasons/motivation for the changes and critique whether these changes are likely to achieve their aims It needs to be mentioned that the main reason or the main motivation for the change in the aspect of audit firm rotation is to bring improvements in auditor independence. The other reasons behind the audit firm rotation concept are the increase in audit quality along with audit scepticism. At the time of conducting the audit operations, it is required for the auditors to comply with different types of auditing standards and principles. In this process, the committees expected the fact that there would be increase in auditor independence due to the rotation in audit firm ever five years and this is considered as one of the major cost effective ways for the increase of auditor independence between the auditors and the audit client. In case, there is change in lead auditor, the new auditors would have to start from the scratch with their clients. It implies that there would not be any longstanding relationship with between the auditor and the audit client (Casterella and Johnston 2013). However, there have been many questions about the achievement in the aim of audit firm rotation. It needs to be mentioned that the auditors would look more independent due to the mandatory changes in audit firm rotation every five years. However, in actual, this aspect would not ensure the fact that there would be increase in auditor independence. The rotation in audit firm would make the auditors independent by appearance. However, there is a significant doubt that whether this audit firm rotation strategy would result in auditor independence from mind (Cameran, Prencipe and Trombetta 2016).
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4AUDITING AND ASSURANCE SERVICES Outline the likely impact of the audit firm rotation on auditor independence The main aim of the development of audit firm rotation concept is to increase the auditor independence. In actual, there would be a decrease in the auditor independence due to audit firm rotation and the regulatory intactness can be held responsible forSarbanes‐Oxley Act. In the current situation, the auditors do not provide any non-audit services (Jenkins and Vermeer 2013). However, in case, the auditors are forced in firm rotation, the auditors would use many other firms in order to provide non-audit services like tax consultancy, bookkeeping and others. For this reason, the public organizations would be exposed to many more audit organizations. It needs to be mentioned that an auditor would not be considered as independent in case he/she already did the audit operation of the another business entity (Ewelt-Knauer, Gold and Pott 2013). This is one of the manner in which an auditor can establish relationship with many other audit firms. In today’s business world full of fraud activities, it is hard for the companies to put faith on the audit firms. At the same time, it can also be seen hat ethics play an integral part in the audit profession as the auditors are required to comply with all the necessary principles and standards of audit ethics. In this process, if all the auditors conduct their audit procedure by complying with the ethical principles and standards, there will not be any need for the introduction of audit firm rotation concept (Bell, Causholli and Knechel 2015).
5AUDITING AND ASSURANCE SERVICES References Bell, T.B., Causholli, M. and Knechel, W.R., 2015. Audit firm tenure, non‐audit services, and internal assessments of audit quality.Journal of Accounting Research,53(3), pp.461-509. Cameran, M., Prencipe, A. and Trombetta, M., 2016. Mandatory audit firm rotation and audit quality.European accounting review,25(1), pp.35-58. Casterella, J.R. and Johnston, D., 2013. Can the academic literature contribute to the debate over mandatory audit firm rotation?.Research in Accounting Regulation,25(1), pp.108-116. Ewelt-Knauer, C., Gold, A. and Pott, C., 2013. Mandatory audit firm rotation: A review of stakeholder perspectives and prior research.Accounting in Europe,10(1), pp.27-41. Ey.com. (2018).PCAOB Concept Release on AuditorIndependence and Mandatory Firm Rotation.[online]Availableat: http://www.ey.com/Publication/vwLUAssets/Our_views_on_strengthening_auditor- independence/$FILE/EY%20Key%20Messages.pdf [Accessed 9 Apr. 2018]. Jenkins, D.S. and Vermeer, T.E., 2013. Audit firm rotation and audit quality: evidence from academic research.Accounting Research Journal,26(1), pp.75-84. Pcaobus.org. (2018).PCAOB Issues Concept Release on Auditor Independence and Audit Firm Rotation.[online]Availableat: https://pcaobus.org/News/Releases/pages/08162011_openboardmeeting.aspx [Accessed 9 Apr. 2018].