Corporate Auditing

This article provides an overview of corporate auditing, including the differences between non-audit services and audit services, the advantages and disadvantages of engaging auditors for non-audit services, and the debate on whether auditors should be prohibited from providing non-audit services to audit clients. The article also discusses the recommendations made by the UK Competition and Markets Authority's Audit Services Market Study and the Financial Reporting Council in Australia.

Running head: CORPORATE AUDITING
Corporate Auditing
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Table of Contents
Part 1: Business Report to the Financial Reporting Council (FRC)................................................2
Introduction:................................................................................................................................2
Differences between non-audit services and audit services:.......................................................2
Advantages and disadvantages of engaging auditors to perform non-audit services from
company’s perspective:...............................................................................................................3
Discussion on whether the auditors should be prohibited from providing non-audit services to
the audit clients:...........................................................................................................................6
Conclusion:..................................................................................................................................7
References:......................................................................................................................................9

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Part 1: Business Report to the Financial Reporting Council (FRC)
Introduction:
In December 2018, the “UK Competition and Markets Authority’s Audit Services Market
Study (CMA)” has published update and recommendations. The main purpose of such release is
to segregate between audit services and non-audit services within accounting firms into various
legal organisations. The proposal is introduced in Australia as well by the Financial Reporting
Council as well. The current report would provide a distinction between audit and non-audit
services along with analysis of involving the auditors for performing non-audit services from the
business perspective. Based on such evaluation, recommendation would be provided regarding
whether the auditors need to be restricted in providing non-audit services to their client
organisations.
Differences between non-audit services and audit services:
An audit could be defined as the statutory requirement for majority of business
organisations, while the non-audit services are mainly voluntary in nature (Arens, Elder and
Beasley 2016). At the time of providing audit services, the auditors are liable to develop opinions
on the accuracy and fairness of the financial statements along with their adherence to local
legislation and global financial reporting standards. This would engage the auditors in the below-
stated activities:
 An analysis of risks related to the business organisation
 An analysis of the internal control adequacy
 Accumulation of evidence for confirming the assertions embodied in the financial reports

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 Design of the processes in order to ensure reasonable expectation to identify material
errors occurring due to fraud (Burton et al. 2014)
 Consideration of whether the organisation is a going concern
On the other hand, non-audit services would not take into consideration the above-stated
activities. The scope of the services is not mentioned in the statute and therefore, it would be
agreed between the organisation and the audit firm. In addition, at the time of providing non-
audit services, a detailed letter of engagement has to be agreed with the client before the
commencement of work (Cohen and Simnett 2014).
Advantages and disadvantages of engaging auditors to perform non-audit services from
company’s perspective:
There are certain advantages that an organisation could have by involving the auditors in
performing its non-audit services and they are enumerated briefly as follows:
Validity:
Many small organisations do not have in-depth overview of the accounting principles.
They prepare the accounting information to the best of their knowledge based on the primary
accounting regulations. The professional accountants could review such information and they
could provide them with an understanding on validity and accuracy of financial information
(Cooper and Owen 2014).
Identification of errors:
The auditors could be used by business owners for identifying errors in their accounting
processes. The business owners might experience issues in reviewing historical financial
information along with identifying trends when errors take place. By using external audits, they

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could identify trends for planning future output of production along with estimating sales for
upcoming months.
Minimisation of tax and legal issues:
The professional auditors provide the business owners with crucial information regarding
tax and legal issues in relation to accounting information. Legal issues might take place at the
time the business owners provide fraudulent or wrong accounting information to the investors,
lenders and general public. The business owners are usually responsible for not reporting the
financial information of their organisations correctly (Farooq and De Villiers 2017). Inaccurate
accounting information could raise the tax liability of an organisation. The overstatement of
value in inventory, income and other items could increase the tax amount of the organisation
considerably. The small organisations operating as sole proprietorship require correct accounting
information, as there would be reporting of income on the personal income tax owner of the
business owner. Wrong accounting information could trigger business and personal tax return
audit.
Education to business owners:
The external audit could provide education to the business owners on the significance of
accounting information. On certain occasions, the business owners could work closely with the
external auditors for enhancing their accounting process. Moreover, they could provide the
business owners with necessary information on the recent accounting issues (Fuhrmann et al.
2017).
However, there are a number of drawbacks in using auditors for non-audit services,
which include the following:

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Confidentiality:
The organisations need to provide access to the external auditors to private and
confidential information constituting of client billing records and internal staff salary
information. The organisations have to provide the independent auditors with login information
for accessing the internal database and financial records (G. Brody, M. Haynes and G. White
2014). This might place confidential information at risk, even if it mandates that the auditors sign
confidentiality agreements.
Learning curve:
When an independent auditor is asked to provide non-audit services, the right individuals
have to be in place for speeding on the accounting and financial procedures of an organisation,
which might be extremely complex. This might be a significant drawback because if the
independent auditor does not spend the necessary time to learn about the organisation, the
services to be provided would not achieve success (Hay 2015).
Money:
The wages for an external auditor to provide non-audit services would be higher in
comparison to the pay rate of an internal accounting staffs, since the contractors typically charge
more for freelance work compared to those they would earn in permanent positions. If an
organisation knows that it needs regular non-audit services for long-term, it is financially viable
to appoint an internal and permanent staff.

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Discussion on whether the auditors should be prohibited from providing non-audit services
to the audit clients:
When an organisation fails, the audit quality is often called into question. This is because
they are accused of using inappropriate accounting treatments due to compromise of their
independence owing to the close relationship with the client.
Arguments for general prohibition:
The “Auditing and Assurance Standards Board (AUASB)” restricts the auditors in
providing non-audit services to their clients, if they contain independence threat for which there
are no adequate safeguards. For instance, the services provided by the big four audit firms are
under vigilance after the concern expressed by a parliamentary committee regarding serious audit
market problems (Australian Financial Review 2019). In these circumstances, the firm needs to
resign as a auditor or it needs to refuse providing non-audit services.
Secondly, under ASX Corporate Governance Principles, the audit committee in the form
of shareholders’ representative is needed to look after the relationship with the auditors along
with keeping the nature and degree of audit services under review. It is necessary for the audit
committee to satisfy that objectivity and independence of the auditor remain uncompromised.
Thirdly, it is believed that the difference between the values of income from various
sources is artificial. According to the ethical code, audit appointment need not be accepted, if the
client provides an unduly big proportion of the gross practice income of an organisation. With
the help of this approach, any undue financial dependency on a client would be restricted in the
absence of irrelevant limitations on balance between various kinds of income.

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Fourthly, the shareholders are able to analyse the degree of non-audit services provided
by the auditors (Hay, Knechel and Willekens 2014). According to the legislation, the audit
clients have to report the overall amount of non-audit fees to be paid to the auditors.
Arguments against general prohibition:
It has been identified that unnecessary restriction of the provision of non-audit services
would have unfavourable impact on audit quality via restrictions in skills and knowledge. The
cumulative knowledge on which the auditors rely would be minimised greatly. As a result, this
would lead to poor business understanding and minimised probability of key identified issues.
When the auditors could not have adequate familiarity with the business of an organisation, the
auditors would be probable to determine about such issues only later in the process leading to an
increased chance of unidentified misstatements. For this reason, the big four audit firms in
Australia have rejected the move of most of their UK counterparts to stop giving non-audit
services to their big clients (Australian Financial Review 2019).
The auditors need to be able to use the experience and knowledge of their colleagues
having expertise in key risk areas. These areas mainly include treasury operations, taxation,
regulatory compliance, information systems, due diligence, fraud, actuarial assessments,
financial management and business processes. When such exchanges are restricted within an
organisation, a rigorous segregation of audit and non-audit services would probably result in fall
in audit quality (Kilgore, Harrison and Radich 2014).
Conclusion:
Based on the above discussion, it could be stated that there is no connection between
audit failure and levels of non-audit fees. This is because of the already implemented

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comprehensive safeguards and rigorous segregation of non-audit services. This would result in
rise in cost and decline in audit quality. By assuming that there is no undue economic
dependence due to the client and auditor relationship and presence of adequate safeguards, the
organisations need to ascertain whether the auditors would be utilised for non-audit services by
consulting with the guidelines of the profession.

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References:
Arens, A.A., Elder, R.J. and Beasley, M.S., 2016. Auditing and Assurance Services, Global
Edition. Pearson Education Limited.
Australian Financial Review., 2019. Aussie arms of Deloitte, EY, KPMG And PwC refuse to
carve out audit work. [online] Available at: https://www.afr.com/business/accounting/aussie-
arms-of-deloitte-ey-kpmg-and-pwc-refuse-to-carve-out-audit-work-20190131-h1apfm [Accessed
13 Apr. 2019].
Australian Financial Review., 2019. 'Deep-rooted problems': PwC, KPMG, EY, Deloitte face
'serious' audit market revie . [online] Available at:
https://www.afr.com/business/accounting/deeprooted-problems-pwc-kpmg-ey-deloitte-face-
serious-audit-market-review-20190217-h1bcp1 [Accessed 13 Apr. 2019].
Burton, F.G., Starliper, M.W., Summers, S.L. and Wood, D.A., 2014. The effects of using the
internal audit function as a management training ground or as a consulting services provider in
enhancing the recruitment of internal auditors. Accounting Horizons, 29(1), pp.115-140.
Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A
Journal of Practice & Theory, 34(1), pp.59-74.
Cooper, S. and Owen, D., 2014. Independent assurance of sustainability reports. Sustainability
accounting and accountability, pp.72-85.
Farooq, M.B. and De Villiers, C., 2017. The market for sustainability assurance services: A
comprehensive literature review and future avenues for research. Pacific Accounting
Review, 29(1), pp.79-106.

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Fuhrmann, S., Ott, C., Looks, E. and Guenther, T.W., 2017. The contents of assurance
statements for sustainability reports and information asymmetry. Accounting and Business
Research, 47(4), pp.369-400.
G. Brody, R., M. Haynes, C. and G. White, C., 2014. The impact of audit reforms on objectivity
during the performance of non-audit services. Managerial Auditing Journal, 29(3), pp.222-236.
Hay, D., 2015. The frontiers of auditing research. Meditari Accountancy Research, 23(2),
pp.158-174.
Hay, D., Knechel, W.R. and Willekens, M. eds., 2014. The Routledge companion to auditing.
Routledge.
Kilgore, A., Harrison, G. and Radich, R., 2014. Audit quality: what’s important to users of audit
services. Managerial Auditing Journal, 29(9), pp.776-799.