EVALUATION OF AUDITING PROFESSION.

Running head: EVALUATION OF AUDITING PROFESSION
Evaluation of auditing profession
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EVALUATION OF AUDITING PROFESSION
Executive Summary
The aim of this report is to analyse the auditing profession in the contemporary world. The
report will provide a highlight on the issue of increase in the corporate fraud in the last two
decades. The report raises a major question on the credibility of the accounting firm
especially the big four firm, on their involvement in the major corporate scandal. Further, at
the end the report discusses about the steps that the government and professional accounting
bodies must take to mitigate the occurrence of such accounting fraud like judicious increase
in the use of technology in the auditing and many more.

EVALUATION OF AUDITING PROFESSION
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Contemporary Auditing Practices..............................................................................................4
PwC vs. Tyco 2007................................................................................................................5
Royal bank of Scotland (RBS) vs. Bannerman......................................................................6
Ways through which frauds can be committed..........................................................................6
Professional Skepticism.............................................................................................................8
Audit planning............................................................................................................................9
Opportunity and challenges in the Australian accounting profession......................................10
Conclusion................................................................................................................................12
References................................................................................................................................13

EVALUATION OF AUDITING PROFESSION
Introduction
The purpose of this report is to bring in light the Role of auditing in assessing the true
financial health of the organization (Aghghaleh, Iskandar & Mohamed 2014). In the recent
times there has been increased in the number of cases of auditing which are under the
litigation. As per the statement of the report of ACCA “Over the former two decades the bill
for litigation settlements of Big Four audit firms alone has run into billions of dollars.
Examples include Deloitte’s 2005 settlement of $250m regarding its audit of insurance
company Fortress Re and PwC’s $229m settlement in the lawsuit brought by the shareholders
of audit client Tyco in 2007.” The increasing liability of the auditor has been a growing
concern in terms of the quality of audit and reputation.
Discussion
Auditing is the important tools to inspect the books of account of the company in
order to authenticate the accuracy and reliability of the company (Beasley, 2015). There are
various group of stakeholder such as the investor, creditor, financial institution, and lender,
who got benefitted from the auditing of the financial books. For instance
Lender
The lender examine the financial statement of the enterprise, in order to determine the
financial creditworthiness of the enterprise. This will help the lender the in assessing the
credibility of the firm in advancing the loan to the company.
Investor
Investor make their economic decision based on the financial statement which are
being audited by the company.

EVALUATION OF AUDITING PROFESSION
Contemporary Auditing Practices
In the recent years there has been increase in the cases of degradation in the quality of
the audit and its effectiveness and increase in the cases of litigation against the auditing firm
especially the big four.
This cases has come into light through the books of Richard brooks, a famous British
Investigating journalist, who has exposes in his book “Bean Counters” the working procedure
of these big four auditing company namely PwC, Ernst &Young, KPMG and Deloitte.
In his book Richard brooks has highlighted the massive conflicts of the Big four
company. Brooks claim that the auditing firms fight among themselves to take the work of
providing the consultancy services (Bell, Causholli & Knechel, 2015). They prefer to take the
accounts of the company which are independent.
There is aim is to get high value for their services, and not interested in providing the
right opinion on the statement of the accounts.
Richard brooks who is a famous award winning journalist, who has served the income
tax department as the tax inspector for more than 16 year. The journalist had made a serious
allegation on the big four Company, according to the journalist the dual role of the big four
company has a disastrous impact on the world economy.
The authors claims that if these financial firm had performed their job effectively.
Then financial crisis would not happened to the extent to which it had occurred. Therefore the
event would have not become catastrophic events. The prominent reasons stated by the
authors, of the financial crisis are the ineffectiveness of the auditors, in detecting the material
misstatement. For instance company which have become bankrupt in the financial crisis were
involved in providing the mortgages which are not valuable as they should be. The authors

EVALUATION OF AUDITING PROFESSION
stated that these material misstatement if detected earlier would have resulted in the
prevention of the financial crisis to happen.
There are certain instances in the past as well the present which has raised serious
questioned on the truthfulness and credibility of the accounting and auditing profession.
Some of the famous scandal in the auditing history are mentioned below.
 Enron scandal
Caparo Industries Plc (Caparo) v
Dickman (1990) and Royal Bank
of Scotland (RBS) vs Bannerman
Johnstone
MacLay (Bannerman) (2002).
In the first case Caparo pursued
the firm Touche
Caparo Industries Plc (Caparo) v
Dickman (1990) and Royal Bank
of Scotland (RBS) vs Bannerman
Johnstone
MacLay (Bannerman) (2002).
In the first case Caparo pursued
the firm Touche
 Caparo industries PLC vs. dickman
 Royal bank of Scotland vs. Bannerman Johnstone Maclay

EVALUATION OF AUDITING PROFESSION
 PwC vs. Tyco 2007
 Deloitte vs. fortress re 2005
PwC vs. Tyco 2007
PwC has settle the Tyco against the lawsuit brought against him for an amount of
$225 million. In this case PwC has agreed they were failed to detect the serious accounting
fraud occurred in the client company. It is considered as one of the biggest payout in the
service industry in the form of the settlement against the fraud (Carpenter & Reimers, 2013).
The total compensation amounted to be more than 3.2 billion us dollar. From the view point
of the corporate government expert said that the loss which has been compensated by the firm
is just as the drop of the total loss suffered by the investors of the Tyco company. According
to them the total loss was could be around 10 billion USD.
Royal bank of Scotland (RBS) vs. Bannerman
This case study is one of the famous example of auditing failure, Bannerman is the
auditing firm of the APC Ltd. RBS Ltd had advanced loan to APC Ltd, on the basis of the
audited financial statement of the APC Ltd. Later on APC Ltd went into financial difficulty
and become insolvent. Now the RBS filed a court case against Bannerman, in order to
recover his total loss of 13 million USD. RBS claimed that based on audited financial
statement by the Bannerman they had advanced the loan. The RBS claimed that Bannerman
has been negligent in his duty towards the auditing of financial records and has violated the
principle of duty and care.

EVALUATION OF AUDITING PROFESSION
Based on the increase in the fraud and with the increase in the litigation claim against
the auditing firm (Chui, & Pike, 2013). It is pertinent to discuss the role Royal banking
commission. The industry of auditing need to be verified same as the banking industry.
Ways through which frauds can be committed
When an auditor come across any misstatement while auditing the financial statement
of an enterprise then auditor must perform professional skepticism in his work and like the
auditor must perform analytical review procedure, carry out in-depth substantive procedure.
Misstatement that is generated while auditing may be because of the two reasons intentional
manipulation or unintentional.
 Intentional manipulation or fraud are the deliberate mistake done by the management
in order to manipulate the earning of the organization, in order achieve any direct or
indirect benefit.
 Intentional manipulation are generally done by the management or the top person of
the organization like CEO, CFO, and General Manager.
 Intentional error are difficult to identify in auditing because they have been placed in
the books of account by using expertise by the management.
There can be different purpose for such fraud like to refrain from paying any
government taxes, to withhold the payment of dividend to the shareholder even when there
are sufficient profit and utilize that money for self-benefit, to receive higher remuneration
than those of the regular ones, making payment against any fictitious voucher, manipulating
the total wage role either by including dummy names for some personal benefit.

EVALUATION OF AUDITING PROFESSION
There are various ways through which such fraud can be done, and as an auditor it is
their responsibility to have skeptical mind while going through the books of account (Dai, &
Vasarhelyi, 2017).
Fraud can be done through many ways like
 Recording of fictitious journal entry to manipulate the operating result.
 Inappropriate adjustment of assumption in order to conceal some significant fraud.
 Embezzlement of cash
 Suppressing the purchases and expenses
 Alteration of accounting records.
Unintentional mistake is the error identified during audit which have been done
unintentionally that is without any purpose in mind. This mistake is generally done while
preparing the financial statement like wrong posting of account balance, arithmetical error,
Unintentional mistake occurred because of the carelessness on the part of employee
while recording the data in the books of account .These errors are of no such important
because they are generally of the small amount and can be rectified on identification and does
not have much impact on the overall financial position.
Professional Skepticism
Professional skepticism must be practiced in the auditing in order to detect fraud or error
in the financial statement. Some of the common auditing procedure must be followed in order
to improve the auditing quality and effectiveness of audit.
1. An auditor while performing his duty should never compromise with his position i.e.
an auditor should be honest , sincere ,and must follow integrity while discharging his

EVALUATION OF AUDITING PROFESSION
duty, the auditor should be fair enough that is he should not allow the bias or any
prejudice to overlap its objectivity.
2. Confidential: the auditor should always respect the confidentiality of any material
information which they have acquired during the audit of the business of the client
and an auditor should not disclose any such material information to any one without
the prior consent of the client (Eshleman, & Guo 2014).
3. The auditor must ensure that the client has complied with all the applicable law and
regulation.
4. The auditor must check that all the commitment which are made by the client and the
contingencies have been disclosed properly.
5. The auditor must ensure that the management had not omitted any material
information while preparing the financial statement of the organization.
6. If any threat is found in financial statement of an enterprise while reporting, auditor
must ensure that appropriate action has been taken to eliminate such threat like
reporting such matter to the concerned authority or withdrawing himself from the
audit by giving proper reason to the concerned authority for his discontinuance.
7. The auditor must perform professional skepticism while performing the audit of the
account of an entity.
8. The auditor should Scrutinize the amount of loan from the books of accounts which
the company has obtained from the financial institution by paying a close look over
the bank details, examining the memorandum of association and article of association
and also evaluate whether such loan is taken by the company is within the permissible
limit as per the provision of the company act (Ettredge, Fuerherm, & Li, 2014).
9. Auditor should verify the existence, ownership title, valuation of fixed assets and
should determine the nature and extent of liability.

EVALUATION OF AUDITING PROFESSION
10. Auditor before performing audit should acquire the knowledge of client business in
order to discharge its duty in an efficient and effective manner.
11. Auditor should determine that that internal control within an organization operating
effectively such that audit risk can be reduced to an acceptable level.
Audit planning
Audit planning plays an important role in overall audit process and in the detection of
fraud and error, when the audit process is not properly planned by the auditor then the
purpose of the audit cannot be achieved therefore the auditor should do proper planning
before starting the audit.
 The auditor should formulate an audit programme on the based on the knowledge of
the client business.
 The auditor should determine the efficacy of the internal control operating within an
organization.
 The auditor should check the documentary audit evidence which are obtained within
an organization and ensure that those evidence are reliable enough to include as the
basis to form an opinion on the entire financial statement of the enterprise.
 The auditor should ensure that proper distinction has been made by the auditor
regarding the capital expenditure, revenue expenditure and well recognised
accounting principle and practice has been followed.
Opportunity and challenges in the Australian accounting profession.
 Emergence of the artificial intelligence
The advent of the artificial intelligence can be pursued as a challenges and
opportunity as well in the field of auditing practice (Gul, Wu, & Yang, 2013).

EVALUATION OF AUDITING PROFESSION
The artificial intelligence (A.I) has been sought as opportunity.
 AI has been considered as game changer in the auditing industries.
 The technology has already been successfully used in the areas such as the home
energy, financial investment portfolio, driverless motor cars and many more.
 AI is having the computing system which is faster and more intelligent than human.
 AI or machine learning can be used to automatically match the accounting entries.
 AI can help in the earlier detection of fraud, by making the delicate machine learning
models in order to solve complex calculation.
Another opportunity of AI is that it can assist deep learning, which is form of the
AI. With the help of the deep learning, it can organize the unstructured data such as
the emails, media announcement, and conference call. This features of deep leaning
by evaluating the data from the different sources provide the evidences of fraud.
Machine learning help the auditor in analyzing the larger number of contract at a
much lesser time than the traditional methods. Thus AI helps in contributing quality
audit and increase in effectiveness.
AI intelligence can be considered as challenges in auditing.
 Implementing AI in the entity can increase the cost of Auditing, this would not be
beneficial for the small and medium business firm.
 Unavailability of the skilled capital, who understand the concept of machine learning,
deep learning, data mining.
 Loss of employment, when the machine learning will capture the market, the people
already working in their specified field will have to loss their job. As the application
of artificial intelligence is expanding in each and every fields very quickly.
 Increase in Auditing fraud

EVALUATION OF AUDITING PROFESSION
The fraud in the auditing has increased at an alarming rate (Gunny, & Zhang, 2013).
This has diminishes the reputation of the profession in the eye of the people. People
have started to lose faith in the audited financial statement.
 Barrier in Communication and implementation of ethical standards in an organization.
 Excessive regulatory compliance
Opportunity in Australian accounting profession.
 Use of information technology, enhances the quality of an audit.
 Less government intervention
 Knowledge in accounting is easily accessible
 Increase in the reliability of the financial reporting
 Australian accounting standard and standard of auditing has been acceptable across
the globe
 An Australian CPA, is widely recognized and accepted all over the world, because of
their quality and ethical value.
Conclusion
From the detail analysis of the report it can be summarized that from the last two
decades there has been sharp increase in the corporate fraud, this substantial rise in the fraud
and scandal raises a serious question on the credibility of the auditors and the accounting
profession. Auditing and accounting risk has been increased to such an extent that the major
accounting firm like PwC, EY, KPMG and Delloit are under the question.
There are evidences which support that these firms are not full filling their ethical and
accounting responsibility judiciously. These firm are under the allegation of litigation claim

EVALUATION OF AUDITING PROFESSION
to the different company, for which they provide auditing services (Hennes, Leone, &
Miller,2013).
So in order to curb, these unethical practice certain means and stringent measure need
to be taken by the government of the respective country. For instance, auditing of the listed
company which is of high net worth, should be given to the medium and size auditing firm,
who have a good reputation in the market in provide quality auditing services. Another
measure can be the inclusion of the information technology (like AI, Business analytics, deep
learning), application of auditing (Issa, Sun, & Vasarhelyi, 2016).
With the use of these corrective measures the quality of audit with respect to
effectiveness, efficiency, can be improved, and it is possible to revive the credibility of
auditing back to its glorious form (Kokina, & Davenport, 2017).
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