Auditing Theory and Practice: Earning Management and Auditor's Role

Running head: AUDITING THEORY AND PRACTICE
Auditing theory and practice
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1AUDITING THEORY AND PRACTICE
Executive summary
Aim of the task is to focus on the concept of earning management and role of the auditors in
context of the same. The report will further state earning management’s impact on substantive
procedures carried out for auditing the financial report. The report will further research on the
evidence in context of earning management of Oroton Group and the way in which the same is
dealt by the auditor along with the report issued by them. Finally, the report will highlight the
means through which the auditor can reduce the earning management.

2AUDITING THEORY AND PRACTICE
Table of Contents
Introduction......................................................................................................................................3
Answer (a).......................................................................................................................................3
Answer (b).......................................................................................................................................4
Answer (c).......................................................................................................................................7
Answer (d).......................................................................................................................................8
Answer (e).....................................................................................................................................10
Conclusion.....................................................................................................................................12
Reference.......................................................................................................................................14

3AUDITING THEORY AND PRACTICE
Introduction
Audit quality is considered as of great importance from the perspective of shareholders,
managers and society. The same has become more relevant in context of financial crisis globally
as the greater quality of the accounting figures help is reducing the asymmetry of information as
well as strengthen the financial stability. Though the exiting theoretical frameworks do not
provide any consensus regarding in context of expected impact of audit on earning management,
empirical finding regarding this is mixed and suggests that the additional research can be useful
for understanding how the audit quality can reduce the earning management (Brad et al., 2014).
The task will focus on earning management and auditor’s role in context of the same. The report
will further highlight the means through which the auditor can reduce the earning management.
Answer (a)
Earning management –
Before focussing on earning management it is necessary to know the meaning of
earnings. Earning that is also known as the net earning or the bottom-line profit is the most
significant item under financial statement. It indicates the level to which the entity is engaged in
the value-added activities. It provides the signal that assists in direct allocation of resources in
the capital market. Considering the importance of earning, it is not surprising that the
management of the entity has vital interest in the way in which the same is reported. Owing to
this fact each executive is required to understand the impact of the accounting approach they
choose which in turn will allow them to make best possible decision for the entity. In other
words, they must learn for managing the earnings (Omar et al., 2014).