Auditing

This document discusses various aspects of auditing such as Industry 4.0, EU General data protection regulation, the VUCA world, NOCLAR, cultivation of scepticism by auditors, and the impact of different concepts on the decision-making capacity of auditors. It also answers questions related to the situations in which auditors highlight risk by issuing a going concern in their report and the statement 'Beware of the auditors, they only tick boxes'.

Running head: AUDITING
Auditing
Name of the Student
Name of the University
Author’s note

1AUDITING
Table of Contents
Response to question 1...............................................................................................................2
Industry 4.0................................................................................................................................2
EU General data protection regulation.......................................................................................3
The VUCA world – the new level playing field........................................................................3
NOCLAR...................................................................................................................................4
Response to question 2...............................................................................................................4
Time when auditors highlight risk by issuing a going concern in their report..........................4
Cultivation of the appropriate level of scepticism by the auditors.............................................6
Response to question 3...............................................................................................................7
Discussion of the statement “Beware of the auditors, they only tick boxes”............................7
Response to question 4...............................................................................................................8
Effect of the following concepts on the decision making capacity of the auditors....................8
Four organisational constraints that would impact auditors decision making.........................11
References................................................................................................................................12

2AUDITING
Response to question 1
Industry 4.0
Industry 4.0 is a concept that is primarily used for describing the revolution of
industries. Specifically the term relates to the fourth industrial revolution. This revolution is
said to bring about new technologies in different machines (Schuh et al. 2015). Under this
technology, the machines have wireless connection and sensors. The machines are attached to
a system of production which can foresee the entire production line and make decisions
accordingly. According to Industry 4.0 revolution, the machine systems are slowly moving
towards automation and are most used in the manufacturing industries (Schuh et al. 2015).
The different components of this system include smart manufacturing, smart factory, cloud
computing, artificial intelligence, industrial internet of things and many others.
The concept of smart factory emerged through this revolution. The smart factory
system is incorporated with several sub-components (Schuh et al. 2015). One of these
components is cyber-physical system whose function is to monitor the physical processes
going on in the industrial system. Based on the results found, a virtual copy of the physical
world is created and futuristic decisions are made accordingly.
EU General data protection regulation
The EU General data protection regulation is acronymed as GDPR. It has replaced the
previously implemented regulation which was referred to as Data Protection Directive
95/46/EC (Tankard 2016). One of the primary objectives of this regulation include
harmonizing data privacy laws that are mainly based on Europe. Another objective is to
protect and empower the privacy of the data of citizens belonging to European Union. The
regulation also aims at reforming the data privacy approach of the different organisations
across the European region.

3AUDITING
The EU General Data Protection Regulation also performs many other key functions.
The management of data by the different industrial sectors of the European economy is
guided by this regulation (Tankard 2016). The roles of the higher management of the
businesses are redefined through this regulation. According to this regulation, it becomes the
responsibility of the management to ensure a watertight consent management process as well
as an data rights management systems. This is required for retaining the valuable data of the
business.
The VUCA world – the new level playing field
The VUCA is an acronym for Volatility, Uncertainty, Complexity and Ambiguity.
Volatility represents the nature, volume, magnitude as well as the dynamics through which
any change has occurred in the organisation (Bennett and Lemoine 2014). Uncertainty
relates to the situation in which the managers are unable to predict the issues and events that
are going to occur in future. Complexity talks about the complex nature of the chaos as well
as issues that surround the entire organisation. Ambiguity explains the lack of clarity of the
situations and mixed meanings of the different conditions.
The concept of VUCA has first been introduced by the Army War College of U.S.
The terms incorporate into VUCA are used for describing the outer world of the business that
is termed as volatile, uncertain, ambiguous and complex (Bennett and Lemoine 2014). The
concept has recently taken its root in the ideas of strategic leadership that is used in a wide
range of organisations.
NOCLAR
NOCLAR is the term that has been first coined by the International Ethics Standards
Board for Accountants (IESBA). The board updated the principles that governs the way by
which the accountants are required to respond to the non-compliance of the clients with the

4AUDITING
laws and regulations (Wymeersch 2017). NOCLAR can therefore be termed as the action
that violates the law of compliance. This law of compliance has a direct impact on the
financial statements of the company. In recent days NOCLAR has gained attention as the
framework by which an accountant can make decisions about gaining information from any
outside body.
On a broader sense, NOCLAR can be regarded as the new standard which relates to
the working of the client that is contradictory to the prevailing laws and regulations
(Wymeersch 2017). This non-compliance is said to be concerned with the laws and
regulations that possess a direct effect on the materiality of the financial statements.
Response to question 2
Time when auditors highlight risk by issuing a going concern in their report
The situations in which the auditors highlight risk by issuing a “going concern” in their
report can be elaborated below.
1) The assumptions that have been used by the management of the company with
regards to going concern are inappropriate (Krishnan and Wang 2014). These
assumptions are either said to have violated the principles of accounting or might
have certain other concerns.
2) There is an existing uncertainty of the materials in the statements. This uncertainty
relates to the various events and conditions influencing the organisation (Krishnan
and Wang 2014). Due to existence of such events or conditions the organisation
might be unable to continue surviving as a going concern.
3) There have been heightened risks surrounding the application of going concern in
the financial statements of the company. These risks might be caused due to
complicated economic as well as market conditions (Hardies, Breesch and

5AUDITING
Branson 2016). It is seen that going concern is judged in all the stages of audit
and not just in specific functions.
4) Persistent risks in the business which are evaluated on the basis of number of
material misstatements seen in the financial statements of the company. Business
risks also include risks which reduce the earnings of the company by directly
impacting its profit condition (Hardies, Breesch and Branson 2016). The cash
inflow consequently gets affected. This can ultimately mean that the company
might not be following the going concern or might stop to follow going concern in
future.
5) Economic risks of the company include reduced demand of goods and services or
increased number of defaulters. The defaulters arise when the customers take
goods and services in credit and defaults their payment (Hardies, Breesch and
Branson 2016). Sometimes, when the company becomes insolvent and is unable
to raise necessary fund for its operation, then also it is termed to be economically
risky.
Cultivation of the appropriate level of scepticism by the auditors
A professional scepticism in the activity of audit can be defined as an attitude of
making questions regarding the appropriateness of the financial statements. The auditors are
said to have cultivated the appropriate level of scepticism when they are alert to the possible
misstatements and have the ability to critically assess them. Therefore, the auditor should
always plan and perform the audit in relation to professional scepticism that would recognise
the circumstances of material misstatements.
The different conditions which judge the scepticism of auditors in relation to their
activities can be stated below.

6AUDITING
1) Consideration of the integrity of the audit client and matters that impact the
auditor to act with professional scepticism after accepting the engagement with
the client.
2) An auditor should be sceptical while performing the risk evaluation procedures.
This should be included in the planning stage of the audit activity (Chiang 2016).
The audit team should not always rely at the face value of the explanation
provided by the management. The team should obtain corroboratory evidences for
all the explanations of the management.
3) The auditor should always be ready to bring up any challenge against the
management. These challenges might even be related to matters that are subjective
or complex (Chiang 2016). During the fraud cases when there are associated risks,
the auditor should search for reliable evidences which are sufficient enough to
properly handle the situation.
4) All the evidence collected for risky cases must be thoroughly evaluated and
assessed. All the contradictory evidences that question the sufficiency as well as
appropriateness of the collected evidence should be criticised properly. The
auditor must always be alert to address these situations.
Some other aspects where professional scepticism proves to be important can be
accounting estimates, process of going concern, relationships and disclosures of the related
parties, considerations of the important principles and regulations.
Response to question 3
Discussion of the statement “Beware of the auditors, they only tick boxes”
The management of the companies should always be aware of the auditors because
the auditors review and critically analyse the financial statements of the companies. They

7AUDITING
scrutinise the numerical figures for gaining evidence of any material misstatement (Larner
and Mason 2014). The aims of the audit procedures are to check the reliability and
consistency of the management of the system. The audit also ensures whether there is any
kind of hazard or risk present in the business. The efficiency of the business is also cultivated.
The audit also takes into account whether the management system is correctly placed across
all the parts of the organisation.
Audit tick marks are the notations used by the audit team for denoting the audit
actions that have been taken with respect to a particular company (Larner and Mason 2014).
These tick marks provide useful evidence for the completed actions of audit team. These tick
marks also improve the usability of the documentation used in audit.
The management should be cautious before the preparation of the financial statements
of the company. In case the financial statements are misleading, it can cause serious
consequences. The auditors generally look at the financial statements and the accounting
records of the companies (Schilleman et al. 2014). Therefore, the management should always
be concerned with the preparation of these documents. The external auditors communicate
with the internal auditors in cases when they find any dispute occurring in the financial
statements. However, the external auditors are never biased or influenced by the internal
auditors (Schilleman et al. 2014). The external auditors might also charge or accuse the
internal auditors if any fault is detected in their parts. Therefore, the internal auditors of the
companies should always be extremely cautious and careful of their duties and
responsibilities.
The auditor looks into the matters of compliance of the company’s financials with the
laws and regulations laid down by the accounting board. The company should always account
for their financials in an appropriate way abiding by the principles of accounting. This would

8AUDITING
also minimise the effects of material misstatements and would also recover the company
from any kind of harassment from the respective auditor. External auditors generally provide
an unbiased audit as they do not have any affiliation towards the companies.
The companies should always be careful about their system of operations and
accounts and should prepare their risk management strategies in an effective way (Schilleman
et al. 2014). The companies should take a note of all the activities that are occurring
throughout the organisation including the activities of the non-financial areas. The data
analysis and the financial reporting should also be done effectively following the guidelines
set up by the accounting act.
Therefore, the companies should be aware of the activities of the auditors and should
maintain proper accounting system in their companies (Neogy 2014). They should formulate
the financial statements in a proper way which would address the principles and guidelines of
the accounting system. Through all these ways, the companies can sustain the scrutiny and
criticality of the auditors and can easily get away with the audit activity.
Response to question 4
Effect of the following concepts on the decision making capacity of the auditors
1) Clustering illusion
Clustering illusion is the tendency to find a particular pattern even if there is a
presence of randomness (Valdez, Ziefle and Sedlmair 2017). In audit clustering illusion can
occur when the auditor creates an impression about one client and works with the same
impression for other clients. This would have an effect on the decision making process of the
auditor.
2) Egocentric bias

9AUDITING
Egocentric bias is the phenomenon when the auditor is too biased of his own
perception about the client or his financial statements (Valdez, Ziefle and Sedlmair 2017). In
such cases the auditor fails to visibly observe the reality. Even if the financials are correct in
reality, the auditor based on his perception can report them wrongly and it would also affect
his decisions.
3) Halo effect
This can be defined as the biasness of the auditor due to the bad impression that he
has about the client (Palmer and Peterson 2016). If the auditor somehow has a bad
impression about the client, then he might scrutinise the financial statements of the client up
to the maximum level. The vice-versa of the above situation is also true. Therefore, this effect
can evidently has an impact on the decision making process of the auditor.
4) Misinformation effect
Misinformation effect results due to inaccuracy of the past memories of an individual
due to uncertain information presented after the end of the event (Palmer and Peterson 2016).
Due to this effect, the auditors might not show accurate results in their works.
5) Homogeneity effect
This effect occurs when the auditor carries out audit activities of similar clients who
are homogenous (Abdulmalik and Ahmad 2016). In such cases, an auditor might carry out
similar audit procedures in order to reduce audit costs. This affects the client severely.
6) Reporting bias
This is the phenomenon of repeated biasness in the reporting process of the auditor.
The auditor might become influential towards the client and might manipulate the issues

10AUDITING
which he is supposed to report to the audit committee (Abdulmalik and Ahmad 2016). As a
result, the fairness of audit gets hampered.
7) Rosy retrospection
This is the psychological effect that results from being biased towards the past
perceptions than that of the present (Madsen 2014). Even if the auditor finds any satisfactory
result in the financial statements of the client, he might be biased towards his negative
perceptions of the past. This would lead to inaccurate audit activity of the auditor.
8) Positivity effect
Positivity effect occurs when the auditor positively judge any situation even if it has
negative consequences (Baxter et al. 2014). In such situations, a negative result of the client
would also result in a positive report from the auditors. The auditor’s decisions might also get
affected due to these situations.
9) Loss aversion
Loss aversion can be another serious effect that leads to psychological biasness of the
auditors (Durham, Manly and Ritsema 2014). The auditors are always risk averse and try
work out in a way that would incur minimum loss. This severely affects their decisions.
10) Sunk cost effects
Sunk cost fallacy occurs when there is occurrence of costs which cannot be recovered.
These costs can lead to misappropriate decisions these costs always remain same regardless
of the outcome (Durham, Manly and Ritsema 2014). Therefore, these costs lead to disruption
in the decision making process of the auditors.

11AUDITING
Four organisational constraints that would impact auditors decision making
Four important organisational constraint that might impact the decisions of the auditors
can be listed as follows.
1) Business model and strategy – Due inappropriateness in the strategies of the
business models of the companies, the auditors might not be able to properly carry
out their activities (Aithal, Shailashree and Kumar 2015). This might also affect
their decisions that they would be presenting in their reports.
2) Organisational structure and operation – Due to the nature of operation of the
organisation, there might be occurrence of certain transactions that show
anomalies in the accounting figures (Skovsgaard 2014). This might pay hindrance
to the activity of the auditors and their decisions.
3) Leadership – The authorities of the organisation might influence the auditor’s
decisions and might lead to introduction of biasness in the audit activities
(Bentley, Pugalis and Shutt 2017). Some of the noteworthy scandals of audit are
reported to have occurred due to these reasons.
4) Culture – The organisational culture might also sometimes affect the audit
activities and the decisions of the auditors (Ovseiko et al. 2015).

12AUDITING
References
Abdulmalik, O. and Ahmad, A.C., 2016. Audit Fees, Corporate Governance Mechanisms,
and Financial Reporting Quality in Nigeria. DLSU Business & Economics Review, 26(1).
Aithal, P.S., Shailashree, V. and Kumar, P.M., 2015. A new ABCD technique to analyze
business models & concepts. International Journal of Management, IT and
Engineering, 5(4), pp.409-423.
Baxter, D.S., Orrego, A., Rosenfeld, J.V. and Mathiesen, T., 2014. An audit of
immunohistochemical marker patterns in meningioma. Journal of Clinical
Neuroscience, 21(3), pp.421-426.
Bennett, N. and Lemoine, G.J., 2014. What a difference a word makes: Understanding threats
to performance in a VUCA world. Business Horizons, 57(3), pp.311-317.
Bentley, G., Pugalis, L. and Shutt, J., 2017. Leadership and systems of governance: The
constraints on the scope for leadership of place-based development in sub-national
territories. Regional Studies, 51(2), pp.194-209.
Chiang, C., 2016. Conceptualising the linkage between professional scepticism and auditor
independence. Pacific Accounting Review, 28(2), pp.180-200.
Durham, Y., Manly, T.S. and Ritsema, C., 2014. The effects of income source, context, and
income level on tax compliance decisions in a dynamic experiment. Journal of Economic
Psychology, 40, pp.220-233.
Hardies, K., Breesch, D. and Branson, J., 2016. Do (fe) male auditors impair audit quality?
Evidence from going-concern opinions. European Accounting Review, 25(1), pp.7-34.
Krishnan, G.V. and Wang, C., 2014. The relation between managerial ability and audit fees
and going concern opinions. Auditing: A Journal of Practice & Theory, 34(3), pp.139-160.

13AUDITING
Larner, J. and Mason, C., 2014. Beyond box-ticking: a study of stakeholder involvement in
social enterprise governance. Corporate Governance, 14(2), pp.181-196.
Madsen, P.E., 2014. Has the quality of accounting education declined?. The Accounting
Review, 90(3), pp.1115-1147.
Neogy, D., 2014. Evaluation of efficiency of accounting information systems: A study on
mobile telecommunication companies in Bangladesh. Global Disclosure of Economics and
Business, 3(1).
Ovseiko, P.V., Melham, K., Fowler, J. and Buchan, A.M., 2015. Organisational culture and
post-merger integration in an academic health centre: a mixed-methods study. BMC health
services research, 15(1), p.25.
Palmer, C.L. and Peterson, R.D., 2016. Halo effects and the attractiveness premium in
perceptions of political expertise. American Politics Research, 44(2), pp.353-382.
Schilleman, K., Witlox, R.S., van Vonderen, J.J., Roegholt, E., Walther, F.J. and Te Pas,
A.B., 2014. Auditing documentation on delivery room management using video and
physiological recordings. Archives of Disease in Childhood-Fetal and Neonatal
Edition, 99(6), pp.F485-F490.
Schuh, G., Gartzen, T., Rodenhauser, T. and Marks, A., 2015. Promoting work-based
learning through industry 4.0. Procedia CIRP, 32, pp.82-87.
Skovsgaard, M., 2014. Watchdogs on a leash? The impact of organisational constraints on
journalists’ perceived professional autonomy and their relationship with
superiors. Journalism, 15(3), pp.344-363.
Tankard, C., 2016. What the GDPR means for businesses. Network Security, 2016(6), pp.5-8.

14AUDITING
Valdez, A.C., Ziefle, M. and Sedlmair, M., 2017. A framework for studying biases in
visualization research.
Wymeersch, E., 2017. NOCLAR or How Accountants Deal with Suspected or Occurred
Breaches of the Law.