Auditing and Assurance Services

This essay discusses the challenges and opportunities in the Australian auditing profession and whether the Banking Royal Commission should inquire the operations of the Big Four audit firms. It explores the issues of auditor's independence, audit quality, and non-audit services provided by the Big Four audit firms. The essay also highlights recent regulatory reforms and their impact on audit quality. The opportunities in the Australian auditing profession include the increasing demand for assurance services and the application of Artificial Intelligence in auditing. However, there are challenges related to auditor reporting, audit quality, and disclosures. The essay concludes with a discussion on regulatory attempts to improve audit quality.

Running head: AUDITING AND ASSURANCE SERVICES
Auditing and Assurance Services
Name of the Student
Name of the University
Author’s Note

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Synopsis
There are two main aim of this essay; they are to ascertain whether the Banking Royal
Commission should inquire the operations of the Big Four audit firms that are PwC, KPMG,
Deloitte and EY and to discuss about the challenges and opportunities in Australian auditing
profession along with the recent regulatory reforms. The findings of the report indicates that
these Big Four audit firms are involved in financial misconduct by providing huge non-audit
services and by acting like the insiders in the financial system. Thus, their actions need to be
scrutinized by the Banking Royal Commission. The finding also indicates towards the
presence of both the opportunities as well as challenges in the Australian auditing profession
in the 21st century; and the auditors are needed to take into consideration both of these
aspects. The findings also state that there have been certain major regulatory attempt both in
and outside Australia with the aim to enhance the overall audit quality.

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Introduction
Auditing is considered as a process where the auditors undertake the thorough
examination of the financial statements of their clients in order to make sure that they are free
from material misstatements (Knechel & Salterio, 2016). The auditors are needed to comply
with their responsibilities while discharging their duties and should maintain ethics in all
professional conducts (Chui & Pike, 2013). All over the world, the presence of four audit
firms can be seen which are regarded as the “Big Four” audit firms; they are PwC, KPMG,
Deloitte and EY. Large business corporations all over the world approach to them for
auditing their financial books. However, in the recent years, major questions have been raised
on their roles in providing auditing services since many are claiming that their operations
should be scrutinized by the Banking Royal Commission (Mohamed & Habib, 2013). There
are two parts in this essay. The aim of the first part is to shed light on the fact that whether the
auditing operations of these four audit firms should be scrutinized by the Banking Royal
Commission or not. The second part of this essay discusses about the opportunities as well as
challenges faced by the Australian auditors. This part also takes into consideration discussing
about the recent regulatory attempts taken for bringing improvements in the quality of audit
in Australia. This essay ends with a suitable conclusion based on the outcome of the whole
discussion.
Specific Discussion
According to the provided article in ABC News, the Banking Royal Commission
should undertake inquiring the auditing activities of the Big Four audit firms (abc.net.au,
2019). The aim of this section is to examine whether the Banking Royal Commission should
inquire the activities of these Big Four audit firms. In this context, it needs to be mentioned
that the Banking Royal Commission is the highest form of inquiry on the matters of public

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importance which is responsible for inquiring the misconducts in the banking, superannuation
and financial services industry (abc.net.au, 2019). In order to undertake the inquiry of the
audit operations of the Big Four audit firms by the Banking Royal Commission, there must be
certain misconducts by these audit firms.
In order to discuss this, certain factors need to be considered such as auditor’s
indepdence, audit quality and non-audit services. Auditor’s independence can be considered
as the independence of the internal as well as external auditors from the parties that may have
financial or non-financial interest in the audit client. Auditors must maintain integrity and
objectively for maintaining audit independence (Tepalagul & Lin, 2015). Quality audit is the
audit that undertakes the systematic examination of the financial statements of the firms. It
needs to be mentioned that there is a deep connection between auditor’s independence and
audit quality because it is only possible to conduct quality audit when the auditors are
independent from the audit clients (Gul, Wu & Yang, 2013). Non-audit service can be
considered as any professional services that the auditors provide to their clients during the
audit engagement. These services are not related to the audit of the financial statements and
the auditors charge separate fees for providing these services. Non-audit services have major
negative impacts in audit independence and audit quality (Svanström, 2013).
According to the provided article in ABC News, the auditors of these Big Four audit
firms have major conflict of interest due to the selling of major consultancy or non-audit
services to the same companies whose financial accounts they are mean to be independently
auditing (abc.net.au, 2019). Mr Brooks has also mentioned in the same article of ABC News
that the Big Four audit firms which are PwC, Deloitte, EY and KPMG provides advises to the
financial transactions, financial products and derivative products along with auditing services
(abc.net.au, 2019). Most importantly, as per the estimation of Mr Brooks, these Big Four
audit firms generate two-third of their income globally from proving non-audit services when

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one-third comes from auditing services (abc.net.au, 2019). This particular aspect indicates
towards the heavy dependency of these audit firms on the audit clients for generating fees.
The interrelation between auditor’s independence and non-audit services has certain
key negative influence. There are many instances where the auditors issued unqualified audit
opinion just before they went into liquidation. In this process, the key contributor to the threat
of audit independence threat is the non-audit services provided to the audit client (Sharma,
2014). It indicates that these audit firms are capitalist businesses that largely depend on their
audit client for generating high income through providing non-audit services. Due to this, the
majority portion of income of these Big Four audit firms come from providing non-audit
services (Tepalagul & Lin, 2015). One crucial aspect is that the non-audit services contribute
towards the development of an economic relationship between the auditors and audit clients
that can reduce audit objectivity in negative manner (Zhang, Hay & Holm, 2016). The same
aspect is applicable for these Big Four audit firms.
It needs to be mentioned that the high level of non-audit services in relation to the
total audit fees is connected to a tendency of providing partial financial report and incorrect
audit opinion. Due to this, purchase of high level of non-audit services has key association
with threat of audit independence. The lack of audit objectivity in the presence of massive
non-audit services leads to the issue of inappropriate audit report and opinion that is a major
reason for the collapse of many companies (Brody, Haynes & White, 2014). The example of
Lehman Brothers can be presented in this regard as the auditors issued can unqualified audit
report to the company on 28.01.2008 followed by a clean bill of health on the company’s
quarterly accounts on 10.07.2008. However, the company was experiencing many financial
issues while they filed for bankruptcy on 14.09.2008 (Quax, Kandhai & Sloot, 2013).
Another major example is of America’s second largest independent mortgage providers,
Thornburg Mortgage that received unqualified audit opinion on 27.02.2008 from their audit

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partner, KPMG LLP. However, the company receive a letter from their audit partner on
07.03.2008 which stated that the audit opinion should not be relied upon (Boyle & Mahoney,
2015).
It can be seen from the above discussion that the auditors of these respective
companies provided their clients with unqualified audit opinion just before their liquidation
when there were major issues in their financial statements. And, in most of the cases, the
auditors used to provide major non-audit services to the audit clients that ultimately affected
audit indepdence. Due to the pressure of losing large fees from non-audit services, the Big
Four audit firms provided incorrect audit opinion by compromising their professional
independence and objectivity (Dobler, 2014). According to the provided news article in ABC
News, the auditors of these Big Four audit firms consider them as the part in the financial
system. It is needed for the auditors to maintain their outside status from the financial
statements, but they are acting as the insiders of the financial system. The auditors must
maintain distance with the financial system so that they can monitor them in correct manner.
In the current situation, it is not possible for the auditors of Big Four audit firms to monitor
system when they are inside the financial system (Causholli, Chambers & Payne, 2015).
It can be observed from the above discussion that the auditors of these Big Four audit
firms provide major non-audit services that affect audit independence and compromise audit
objectivity. This had major role in the financial crisis and collapse of many companies. All
these aspects indicate towards auditing misconduct related to the financial services. In the
presence of all of these reason, it is needed for the Banking Royal Commission to inquire into
the audit operations of these Big Four audit firms.

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General Discussion
There are certain audit opportunities under the Australian auditing profession in the
21st century. It needs to be mentioned that auditing has a bright future in Australia since then
society’s needs for assurance services are expanding (Fu, Carson & Simnett, 2015). The
occurrence of many corporate collapses in the recent years has increased the demand of
auditing the financial statements of the firms in order to abort financial frauds and
manipulation and this creates major audit opportunities in Australia. After that, loss of public
confidence has a major cost that cannot be managed but they can be avoided with effective
auditing and assurance services (Fu, Carson & Simnett, 2015). The occurrence of large
corporate collapses has affected the public confidence in the recent years which can be
regained with effective auditing and assurance services. The development of new auditing
standards as well as regulatory reforms in Australia has provided major opportunities to the
auditing profession in Australia (ifac.org, 2019). Most importantly, the introduction of
Artificial Intelligence (AI) can be considered as a major opportunity for Australian audit
since it can add value to the audit profession (ey.com, 2019). The application of AI in
auditing can analyse unstructured data which will further transform audit by deep learning.
For example, the application of AI tools in auditing can ensure the accurate extraction of
required information from the lease contracts through pre-selected criteria (ey.com, 2019).
This is majorly helpful for the auditors in analysing large population of data in less time for
the purpose of auditing. All these implies that audit profession has many opportunities in
Australia.
Along with the opportunities, there are certain challenges in the Australian audit
profession in the 21st century; and these challenges can be seen in three major areas that are
auditor reporting, audit quality and disclosures. The auditor report is considered as the only
tangible part of the whole audit operation that the world can see and thus, it is a critical

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substance in the audit process (Asare, Wright & Zimbelman, 2015). However, it can be seen
in the recent years that the auditor report lacks communicative value since the increasing
complexity of financial reporting is stimulating the users to hear more from the auditors
regarding the audit procedures and the audited financial statements. This has created major
challenge for the Australian auditors related to cater to the ever increasing demand of the
users (Asare, Wright & Zimbelman, 2015). Most of the readers of the audit report do not
know about the audit quality, but it matters to all stakeholders and to the people who have
roles to play in improving audit quality. The major inputs of audit quality are ethics, training,
auditing standards, quality control, professional judgement and scepticism that the auditors
are needed to bear in each audit engagement (Asare, Wright & Zimbelman, 2015). For this
reason, maintaining all these inputs in the audit process has become a key challenge for the
Australian auditors since the audit outcome largely depends on these inputs. The presence of
increased disclosures can be seen within the organizations due to the increased complexity of
financial reporting. It has become the increased responsibility of the auditors to consider the
fact that which disclosures need to be audited and why they need to be auditors (Earley
2015). It has become a major challenge for the Australian auditors.
In recent times, there have been certain key regulatory attempts for improvising the
audit quality. The Australian Securities and Investment Commission (ASIC) is considered as
the key regulator under the Corporations Act (ifac.org, 2019). In the recent years, ASIC has
conducted certain inspection programs that aims in promoting high quality of external audits
of the financial statements of the ASX listed companies (ifac.org, 2019). The main aim of the
audit inspection report of ASIC is the promotion of high quality external auditing. On 30 June
2012, ASIC released the inspection report of 20 Australian audit firms (ifac.org, 2019).
Another major regulatory attempt is the issue of consultation paper of the International
Auditing and Assurance Standards (IAASB) named “A Framework for Audit Quality”. This

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paper includes the description of the key factors involved to ensure the performance of high
quality audits. Four key elements of this framework are inputs, outputs, interactions and
context (ifac.org, 2019). At the same time, the Public Company Accounting Oversight Board
(PCAOB) in United States has produced a discussion paper on the indicators of audit quality.
Moreover, the Centre for Audit Quality (CAQ) in US is also working for the development of
certain definition for audit quality. All these aspects indicate towards the fact that the main
aim behind undertaking all these regulatory reforms is to ensure improvements in the overall
audit quality while providing auditing services by the auditors (ifac.org, 2019).
Conclusion
The first part of the essay indicates towards the crucial fact that the Banking Royal
Commission is needed to consider inquiring the operations of the Big Four audit firms due to
their involvements in certain key professional misconducts. The above discussion shows that
the involvement of these audit firms in providing major non-audit services is leading towards
the development of audit independence threat in the presence of financial interest of the
auditors in the audit clients. In addition, this financial interest is compromising their
professional integrity and objectivity that contributes towards the issues of inappropriate
audit opinion as well as incorrect audit report. These mistakes of the auditors were majorly
responsible for the global financial crisis and the collapse of certain large business
corporations. It can be observed from the second part of the essay that are certain
opportunities and challenges present in the Australian audit profession in this 21st century
which are deriving the increased complexity in financial reporting in Australia. These
increased complexities are providing scope for improved audit engagements for gaining the
public interest. The introduction and implementation of AI is providing major opportunities
to the auditing profession in Australia. At the same time, the Australian auditors are facing
certain major challenges mainly in the areas of auditor reporting, audit quality and disclosure.

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The above discussion also addresses some regulatory attempts taken by certain authorities
like the ASIC, IAASB, PCAOB and CAQ with the aim to bring improvements in the overall
audit quality in the audit engagement operations.

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