Navigating the Credibility Gap: A Critical Analysis of Financial Auditing

Journal of Business Ethics (44(2-3), pp.195-200) and various academic journals and books, including Journal of Accounting Research, Accounting Horizons, Accounting, Organizations and Society, Managerial Auditing Journal, and others, along with online resources such as the AICPA, PWC, BP's financial statements, etc., provide an extensive list of articles, studies, and research papers on various aspects of auditing and accounting. The content spans topics like financial reporting quality, audit committee effectiveness, internal control mechanisms, information technology audit quality, financial misstatements, and more. It highlights the significance of considering laws and regulations in audits of financial statements. This comprehensive collection showcases the credibility gap between theoretical concepts and real-world practices.

Financial Auditing

Table of Contents
INTRODUCTION...........................................................................................................................5
1. Critically analyzing the audit report on the consolidated financial statements of BP Group..5
2. Comparing and contrasting the audit reports presented on the year ended 2012 and 2015....7
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Financial auditing is the process in which monetary reports are evaluated with the aim to
provide fair view to the stakeholders about organizational performance. In this regard, financial
auditing plays a vital role in developing faith in the mind of stakeholders. Moreover, it provides
investors, directors and managers with the suitable framework for decision making and thereby
aid in the growth aspect. The rationale behind this, financial auditing provides deeper insight
about the extent to which annual statements are evaluated and analyzed according to specific
rules related to it. The present report is based on British Petroleum (BP) which is multinational
oil and Gas Company. It has attained seven positions in the oil and gas sector all over the world.
In this, report will describe the extent to which BP has complied with audit rules and regulations.
Besides this, it will also shed light on the deficiencies take place in the audit report of 2012 as
compared to 2015.
1. Critically analyzing the audit report on the consolidated financial statements of BP Group
In the present era, before taking investment decision investors make thorough analysis
of audit report with the aim to get information about company’s performance and position. In
accordance with ISA 250 there are several objectives which auditor undertakes while making
evaluation of financial statements. At the time of doing investigation it is the prior responsibility
of the auditor to gather enough evidences for assessing the material amounts which have high
level of impact on the financial aspects. By this, auditors are in position to present the fair view
of financial statements and information (Sharma and Iselin, 2012). Along with this, auditors
follow specified process while carry out investigation with the aim to reduce the effect of
materiality.
Independent auditors report presented by BP for the year ended at 31 December, 2015 clearly
shows that investigators have complied with all the rules and regulations of IFRS. Moreover,
IFRS contains the rules which are accepted at international level and thereby develops trust in
the mind of stakeholders that company’s financial view is appropriate. Along with this, parent
company of BP has prepared report by following the rules of UK GAAP including FRS 101.
Further, audit report of BP Group presents that financial statements are prepared by the firm in
accordance with Companies Act 2006. In 2015, auditors had reviewed all the financial

statements such as income and cash flow, balance sheet, changes in equity format and related
notes by taking into consideration IFRS. This aspect shows that auditors have fulfilled their
responsibilities to the large extent.
Further, according to the laws auditors are required to assess the risk of material misstatement.
Hence, auditors responded towards the each risk in the best possible way. Moreover, assessment
of risk and giving response towards it is one of the main responsibilities of an auditor. Hence,
audit report presented that auditors make verification of all the accounting principles. Audit
report clearly entails that there were no new standards have adopted during the year which does
not have high level of impact on the financial statements. However, it is to be critically evaluated
that each rule and regulation of IFRS has its own significance (Kasim and Sanusi, 2013)
. In 2015, changes were introduced in IAS 28 which is related to making investments in
associates. Along with this, IFRS 9 entailed different measures in relation to classifying and
measurement of the asset level. In addition to this, changes were also made in IFRIC 21 which
provides information about the aspects of employee contribution. This aspect shows that auditors
made their best efforts in relation to identifying the deficiencies which are involved in the
financial statements. In addition to this, whole report is presented by the auditor in a highly
structured format.
Further, it is reported by the auditors in the audit report of 2015 is that BP group had
prepared income and cash flow statement, balance sheet, changes in equity and summary notes
according to IFRS which is adopted by EU (Huault and Richard, 2012). In addition to this,
auditors ensured that they have followed the rules which are issued by International Accounting
Standard Board. In accordance with the section of .05 regarding general principles of audit it is
the accountability of an auditor to ensure that financial statements are free from the risk of
material misstatement.
Section .07 entails that auditors are responsible for identifying and gathering enough evidences
for evaluating the material misstatements which are prevailed in the financial statements. Hence,
audit report of BP for the year ended at 31st December 2015 presents that auditors were identified
and thereby commented on each material misstatement on the basis of evidence. This aspect
shows that auditors were performed their tasks more effectively and efficiently. Along with this,
section .08 presents that auditor needs to follow other audit process while forming an opinion

about the financial statements. On the basis of this aspect, the objective of an auditor is to
perform activities by keeping in mind the rules and regulations of IFRS and GAAP (Smith-
Lacroix, Durocher and Gendron, 2012). Thus, audit report of BP shows that auditors placed
emphasis on assessing the rules of IFRS and GAAP which are followed by the business
organization during the period of 2015.
Besides this, section .10 suggests that auditors need to follow specific process of audit which in
turn helps them in identifying the laws and legislation which are not undertaken by the firm. By
this, material effect can be identified by auditors in the best possible way. Thus, while
conducting audit auditors followed the rules of IFRS with the aim to assess the deficiency level.
In contrast to this, for making evaluation of the evaluation of parent company’s accounts auditors
had undertaken the rules of GAAP for conducting evaluation of the appropriateness of
company’s account (Stoel, Havelka and Merhout, 2012). Further, section .12 presents the extent
to which business unit is complied with the legal framework. Audit report 2015 presented that
BP was complied with the legal framework while preparing the financial statement such as
accounting principles and conventions.
In accordance with .15, auditors need to alert in relation to the aspect that there may issues
related to the compliance and non-compliance. Further, section from .17-.20 contained rules
regarding the audit process when non-compliance is identified or suspected. Along with this,
section from .21 to .23 having rules about the reporting process or aspects when non-compliance
is identified or suspected (Consideration of Laws and Regulations in an Audit of Financial
Statements, 2016). In addition to this, .24 to .26 sections comprise information about the
reporting aspect of non-compliance pertaining to the financial statements (Fung, 2014).
Legislation related to .28 provides deeper insight about the extent to which laws had been
followed for the purpose of documentation. Hence, by taking into consideration such aspect it
can be said that there are several laws and legislation which are introduced by the higher
authority regarding the preparation and reporting aspect of auditing.
2. Comparing and contrasting the audit reports presented on the year ended 2012 and 2015
There are several aspects due to which changes made in the format of audit report 2013.
Moreover, in the accounting year 2012 brief audit report format had been followed by BP. Audit
report for the year of 2012 shows only summary statement of the deficiencies which are

prevailed in the final accounts. On the contrary to it, audit report of 2013 and 2015 contains
detailed information about the risk, materiality and actions taken by management for resolving it.
British petroleum being one of the leading companies in the energy and oil sector contributes a
major portion in GDP of UK. Audit report refers to the written statement which provides the
assurance about the correctness and fairness of the financial statement of the company. It is
always into a standard and mandated format defined by the regulations of the country. UK has
faced a great evolution in the form of audit reports since 2012. Format of audit report was just
slightly changed since the very beginning by additions or deletions of some words, phrases or
paragraphs (Financial statements of BP, 2015). But in 2014 the whole format was changed to
provide detailed expansion of audit report and requirements. The audit report now is exhaustive
and extensively covers all the areas of risk evaluation. Although the companies Act 2006
remains followed in both the years.
All the stakeholders of the company including the customers, users, shareholders,
government and big audit firms strongly supported the detailed audit format adopted as it has
greatly added the value and enhanced content of the audit report. Further audit report now is
detailed and therefore easily understandable by the general public. The audit report extended
now shines like focussed light on the black box of conventional audit report (The revolution in
audit reports, 2015). The extended audit report now present a clear process of audit regarding the
input and outputs of conducting audit. The reports now present a better understanding and assists
investors in decision making regarding continual of their relationship with the company
(Vanderhoof and Altman, 2013). New audit report presents a clear review about the financial
statement of the company and better outlook.
Addition of materiality to the audit report is appreciated by the general public and they
have given positive sign towards the audit reporting as well as audit in general. The latest audit
reports explains in detail the risk areas and the responses of auditors to those areas which reflect
and highlights the areas where risk of material misstatement is high. Moreover it also includes
provision regarding reporting the conclusion to the audit committee (Kouakou, Boiral and
Gendron, 2013). Therefore the audit report now provides better assurance and creates confidence
in the audit reports.

Further detailed analysis of matters on exception provides detailed regulations regarding
compliance of Companies act 2006, Listing Rules and ISA's (UK and Ireland) reporting. Further
expansion of audit scope has demonstrated the clear and exhaustive explanations regarding
materiality and allocation of performance (Dando and Swift, 2003). This provides clear evidence
of the detailed analysis and study of financial statements of the company and improvements in
the processes in current year in comparison with previous year.
The audit report is regarded as one of the important statements presented among the
officials by assessing the financial statements of the business. The opinion need to be expressed
by an enterprise on the existing financial performance of the firm. The right of forming opinion
on the accuracy of the financial statements by the auditors. The Officials of International
auditing board members has presented various auditing and the reporting standards (Hope,
Langli and Thomas, 2012). The business has taken important step by revising the standard in
order to guide the audit conducted by an individual using SA 700 in order to form appropriate
opinion (Leung, 2016). This revised standards will guide an individual in examining the financial
reports of 2012 and 2013. There are various changes takes places in the preparation and its
presentation of the factors in the audit report gets changes which is mention below:
Purpose- The purpose of the auditing gets changed as in the 2012 to focuses on the
general aspects of the firm but on the other hand the 2013 audit report emphasises on the specific
streams. The errors and frauds are given more importance in order to uses CAAT techniques to
reduce the technical failure.
Considerations- In the audit report of 2012 there are no clauses related to the one person
company in which the single owner have full right to conduct the audit of the organization
(Feroz, Park and Pastena, 2008). On the contrary, 2013 audit report legalizes the inclusion of one
person company.
Frameworks- the guidance to notes are optional for the auditors to guide their overall
report in order to complete it with a high precision. On the other side, the guidance notes are
compulsory for all the users of the business in order to follow. The compliance of these
frameworks will help an entity in order to form good opinion by assessing the financial reports.
IFRS 9 is the one of the most important standard that is now followed by the firm in its annual
report. This standard was earlier not followed by the firm in preparing its annual report. In this

standard proper classification of assets and liabilities is done in the proper manner. Apart from
this there are some specific rules in respect to impairment of asset that are prepared in this
standard (K. Johl and et.al., 2013). After following this standard now assets of the British
petroleum is valued at fair value. As per rules assets cannot be values at their market price. By
using discount rate fair value of the asset is measured in proper manner by the charter accountant
(Geiger, Raghunandan and Riccardi, 2013). Hence, it can be said that tis standard make reporting
better in comparison to the previous time period. Hedge accounting also get changes after
application of the IFRS 9 rules. Now after introduction of the mentioned standard accounting for
hedge is done in systematic way. Hedging is basically done in respect to the financial securities
on which firm used to make investment each and every year so that best use of the cash can be
made in the business (Pedrosa and Costa, 2012). Usually firms makes an investment in shares in
order to ensure that their cash will not remain idle and extra income will be generated in the
business. Thus, it can be said that use of these standard help stakeholders in knowing condition
of the business firm in proper manner. There is a great importance of the IFRS 9 because it
improve reporting of the business transactions and assets better than earlier (Iyer, Bamber and
Griffin, 2012). This is the reason due to which most of the business firms are using IFRS 9 in
order to prepare their accounting records. With passage of time many new improvements may
come in the IFRS 9.
CONCLUSION
From the above assignment, it has been concluded that auditors of BP followed the rules
and regulations of IFRS while preparing report. This in turn encourages investors to take suitable
decision by considering the reports of auditors. Moreover, rules of IFRS and IAS are highly
related with the fair presentation of financial information. Thus, it can be revealed from the
report from auditors that business unit has employed the rules of IFRS. On the other side, parent
company adopted the regulations of UK GAAP while preparing and presenting the financial
statements. Besides this, it can be inferred that in both 2012 and 2015 auditors of BP followed
Companies ACT 2006. Hence, it is one of the main similarities which take place in the audit
report of 2012 and 2015. Further, it has been articulated that additions were made in the report of

2015’s report. Moreover, detailed description were mentioned in the audit report about the
performance of company and management’s action.

REFERENCES
Books and Journals
Dando, N. and Swift, T., 2003. Transparency and assurance minding the credibility gap. Journal
of Business Ethics. 44(2-3). pp.195-200.
Feroz, E. H., Park, K. J. and Pastena, V., 2008. The financial and market effects of the SEC's
accounting and auditing enforcement releases. Journal of Accounting Research. 29.
pp.107-142.
Fung, S., 2014. Hong Kong Auditing: Economic Theory & Practice. City University of HK
Press.
Geiger, M. A., Raghunandan, K. and Riccardi, W., 2013. The global financial crisis: US
bankruptcies and going-concern audit opinions. Accounting Horizons. 28(1). pp.59-75.
Hope, O. K., Langli, J. C. and Thomas, W. B., 2012. Agency conflicts and auditing in private
firms. Accounting, Organizations and Society. 37(7). pp.500-517.
Huault, I. and Richard, C. eds., 2012. Finance: The discreet regulator: How financial activities
shape and transform the world. Springer.
Iyer, V. M., Bamber, E. M. and Griffin, J., 2012. Characteristics of audit committee financial
experts: an empirical study. Managerial Auditing Journal. 28(1). pp.65-78.
K. Johl, S. and et.al., 2013. Internal audit function, board quality and financial reporting quality:
evidence from Malaysia. Managerial auditing journal. 28(9). pp.780-814.
Kasim, N. and Sanusi, Z. M., 2013. Emerging issues for auditing in Islamic Financial
Institutions: Empirical evidence from Malaysia. IOSR Journal of Business and
Management. 8(5). pp.10-17.
Kouakou, D., Boiral, O. and Gendron, Y., 2013. ISO auditing and the construction of trust in
auditor independence. Accounting, Auditing & Accountability Journal. 26(8). pp.1279-
1305.
Leung, D., 2016. Inside Accounting: The Sociology of Financial Reporting and Auditing.
Routledge.

Pedrosa, I. and Costa, C. J., 2012, June. Financial auditing and surveys: how are financial
auditors using information technology?: an approach using expert interviews. In
Proceedings of the Workshop on Information Systems and Design of Communication. pp.
37-43.
Sharma, V. D. and Iselin, E. R., 2012. The association between audit committee multiple-
directorships, tenure, and financial misstatements.Auditing: A Journal of Practice &
Theory. 31(3). pp.149-175.
Smith-Lacroix, J. H., Durocher, S. and Gendron, Y., 2012. The erosion of jurisdiction: Auditing
in a market value accounting regime. Critical Perspectives on Accounting. 23(1). pp.36-53.
Stoel, D., Havelka, D. and Merhout, J. W., 2012. An analysis of attributes that impact
information technology audit quality: A study of IT and financial audit practitioners.
International Journal of Accounting Information Systems. 13(1). pp.60-79.
Vanderhoof, I. T. and Altman, E. eds., 2013. The fair value of insurance liabilities. Springer
Science & Business Media.
Online
Consideration of Laws and Regulations in an Audit of Financial Statements. 2016. [Pdf].
Available through:
<https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-
C-00250.pdf>. [Accessed on 30th December, 2016].
Financial statements of BP. 2015. [Online]. Available through:
<http://www.bp.com/content/dam/bp/pdf/investors/bp-annual-report-and-form-20f-
financial-statements-2015.pdf >. [Accessed on 30th December, 2016].
The revolution in audit reports. 2015. [Online]. Available
through<https://www.pwc.co.uk/assets/pdf/revolution-in-audit-reports.pdf>. Accessed on
30th December, 2016.