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Analysis of the Benchmark for External Auditors - Assignment Example

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 This assignment discusses the auditor's job of the audit client's financial statements. The external auditor's report gives more credibility of the balance sheet, income statement and statement of cash flows. The assignment considers the Statement of Auditing standard no. 2…
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Analysis of the Benchmark for External Auditors
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QUESION INTRODUCTION: The benchmark for external auditors is independence. must be independent in performing an audit. Independence means that the auditor is influenced by one or more parties from freely issuing a qualified opinion, adverse opinion, disclaimer opinion without being influenced by many factors. The Statement of Auditing standard no. 2 states that there should be independence in mental attitude at all times is required. The factors include threat or intimidation, auditor's self -interest in getting an unqualified or other type of opinion. The auditor's job is to express his unbiased opinion on the fairness of the audit client's financial statements. BODY: Without exception, all external auditors should not allow their independence to be affected by his or her own interests. For, Auditing Standards mandate that external auditors must accept an audit engagement if they feel that their self interests affects their independence. Independence mean not only independence in fact but also go hand in hand with independence through appearance. The auditing Standards on independence rule states that the auditor must not have any material self interest in the clients. An auditor has self interest if the auditor, the auditor's spouse and children owns a share of stock or two in the audit client. The Companies Act of 1948 is the legal framework for external auditors to follow in terms of independence (Power 1997, 17). Clearly, many auditors will not allow their independence to be affected by self -interests . Likewise, it is mandatory that all external auditors will not allow their independence to be affected by self - review. The auditor is required under all audit situations to consider if self -review will affect his independence. The auditor must not continue with the audit or sign as external auditor if he or she believes that self review will infringe on the auditor's independence. Clearly, it is mandatory that all external auditors will not allow their independence to be affected by self - review. Further, all external auditors should not allow their independence to be affected by advocacy. The auditor's membership in a group will have a strong impression that the auditor is not being independent in terms of auditing a client. The Code of Ethics for external auditors commands that the external auditor must not have his membership in an organization affect the independence of the auditors. The auditors must be independent in fact and in appearance. For any sign that tinges on decreasing the independence of the external auditor would signal that the external auditor should immediately withdraw from the engagement. Definitely, all external auditors should not allow their independence to be affected by advocacy. Furthermore, all external auditors must not permit their independence to be affected by familiarity. It is a fact that many external auditors can easily finish their audit assignments for many of their former audit clients. The auditors will just focus on accounts that seem doubtful or where the internal control is weak because they had already issued an unqualified opinion on the prior financial statement. The external auditors already know a lot of the company's basic financial ins and outs in terms of presentation of the balance sheet, income statement and statement of cash flows. The auditor must not assume that the accounting records are automatically similar as last year's audit findings. The external auditor should perform each repeat audit engagement with a prior client as if, it was a new audit. The only difference with the repeat audit client is that the repeat audit is often done in lesser time than a first time audit. must perform the audit in compliance with generally accepted auditing standards. Undoubtedly, all external auditors must not permit their independence to be affected by familiarity. Also, "I believe this is the case for many industry professionals at the entry and senior levels. In addition to preconceived notions about process complexity, there often are additional unspoken fears of regulatory disclosure, discoverability and lack of senior management buy-in that deter implementation and prompts employees to ask themselves, "Why should I do it"(Hirsch 2007). This shows that greenhorn auditors generally lack the mastery in terms of auditing programs when compared with the veteran external auditors. And, all external auditors should not permit their independence to be influenced by threats or intimidations from the current or prospective clients. In short, all external auditors must make all other parties concerned with the audit client's business of his unwavering independence in auditing and issuing the auditor's opinion before auditing a client before the audit engagement. during the implementation of the audit program and before the issuance of the auditor's opinion. Evidently, all external auditors should not permit their independence to be influenced by threats or intimidations from the current or prospective clients. CONCLUSION The benchmark for external auditors is independence. Clearly, many auditors will not allow their independence to be affected by self -interests . Clearly, it is mandatory that all external auditors will not allow their independence to be affected by self - review. Definitely, all external auditors should not allow their independence to be affected by advocacy. Undoubtedly, all external auditors must not permit their independence to be affected by familiarity. Evidently, all external auditors should not permit their independence to be influenced by threats or intimidations from the current or prospective clients. Conclusively, all external auditors should be independent in performing an audit. QUESTION 2: INTRODUCTION: The external auditor's report gives more credibility of the balance sheet, income statement and statement of cash flows. The financial statements come from the audit clients accounting department. The external auditor's sole responsibility job is only to prepare his or her opinion on the fairness of the clients' financial statements. The external auditors must pas the chartered accountants exam in order be permitted by United Kingdom law to get new audit clients. This will explained in the next few paragraph. BODY: The modern audit report has been very successful in its aim to remove the expectation gap by giving business organizations sufficient, relevant information to the different financial statements users. The triumph in the business world must be achieved through many methods. One such met/hod is the attachment of the external auditor's report. The external auditor's audit program will enumerate lists down the minimum audit procedures to lay out in order to determine the fairness of the balance sheet, income statement and the statement of cash flows. Further, all external auditors are trained to set up the optimum auditing procedures in order to come up enough audit evidence to support his or her audit opinion. The audit programs is the standard set of auditing procedures that must be done to come up with enough evidence to prove or disprove assertions made by the clients in their financial statements. The findings of the audit procedures or programs have improved the confidence level of the different users of the financial statements. This confidence level pertains to the companies' assertion, rights and obligations, completeness and other material financial information presented by the auditor's clients. Undoubtedly, the present day auditors are trained to implement the auditing procedures in order to come up with a valid and relevant audit report (Neale, and Buckley 1992). Further, the Enron - Arthur Andersen auditing scandal is a very good example. Here, Enron fraudulently prepared its financial statements to mislead its readers. The connivance between some of the officers and employees of Enron and its external auditors was discovered. The discovery led to both company's fall from grace. The auditor should study the client's internal control environment to eliminate future frauds like Enron. Enron's financial statements were window -dressed. The main reason for the fraudulent presentation is that the current and future investors in Stakeholders would prefer to invest their money in a company that has a higher asset than another company's assets. Also, a new investor would choose to put their hard -earned money in a company that would have lower liabilities when compared with another company's debts. Also, an inquisitively curious investor may prefer to invest in the company that has a higher net sales when compared with the net sales of another company. Generally, loan banks and other credit granting companies would prefer to lend money to a person who plenty of cash . These banks and credit grants facilities would definitely approve business loans if the company's latest income statement show that the company is making money or not. Meaning, many companies will choose to invest in a company that has enough net profits to for the long term business loans. There was connivance between the external auditors and Enron officers. For, Enron had formerly hired an Arthur Andersen auditor into its top management position. The Arthur Andersen external auditors were wrongly enticed by the fraudulent officers of Enron to sign an audit report stating that the financial statements were fairly presented (Fusaro, and Miller 2002, 5). Truly, the Enron - Arthur Andersen auditing scandal is a very good example. CONCLUSION: Further, the auditor can implement an internal control environment to eliminate future frauds. Internal control includes the mandatory separation of the three major business functions of recording business transactions (accounting), approving (of sales discounts, write off of doubtful accounts, etc.) and handling of assets (cashier receives cash). In auditing parlance, the most difficult fraud that the auditors can detect is fraud is masterminded by the audit client's management colludes where employees are forced to pursue their part for a fraudulent financial statements. The auditor can implement an internal control environment to eliminate future frauds. Convincingly, there das connivance between the external auditors and Enron officers. Clearly, Enron's financial statements were window -dressed. Convincingly, there was collusion between the external auditors, Arthur Andersen and its audit client Enron's officers. Conclusively, the modern audit report has been very successful in its drive to remove the expectation gap with the conveyance of sufficient, relevant information to the members of companies to whom the auditor's report. QUESTION 3: INTRODUCTION: Window dressing is described as showing a better picture than what the real picture of the company is. This situation can be best described as a store displaying on its windows its best selling products of the company to entice the store passers -by to enter the store and buy the displayed products. Usually, the store windows display the cheaper goods in order to entice people to enter the store, browse around and buy. This is exactly the situation in Enron as well as WorldCom. The following paragraphs will explain what window dressing is (Dassen, Hayes et al, 2005; 57). BODY: There is a need to introduce changes in terms of auditor liability in the light that many auditing firms have been charged in court. Enron's assets intentionally were clearly overstated to benefit Enron. Enron's balance sheet was also understated to show a lesser total liabilities. As a result, many new investors were misled to put their hard -earned money in Enron. The window dressing was done by the accounting department of Enron being instructed by higher management to record inexistent sales. This is in complete violation of International Accounting Standards that assets like cash and receivables should be recorded when an exchange transaction has taken place. Evidently, Enron's business assets were window -dressed (Fusaro, and Miller 2002, 21). Further, Enron's liabilities were also falsely window - dressed. Enron violated U.S. GAAP. The Enron's window -dressing occurred in this category when the company falsely transferred some of its major liabilities to one of its companies outside the United States. Thus, the financial statement liabilities were fraudulently lesser than the actual liabilities figures should be. Clearly, Enron's liabilities were also window - dressed (Fox 2003, 247). Enron and Arthur Andersen were forced to close down in response to the public lost of faith in both fraud companies, Enron and Arthur Andersen. The final outcome was that Enron finally closed their business. All the officers of Enron in the accounting and top management positions were dragged into court and found guilty. The external auditors of Enron, Arthur Andersen, dropped out of the auditing segment after the guilty verdict on fraud charges. (Colbe 2004, 208). The WorldCom accounting scandal is one of the reasons that triggered the compulsory implementation of the Sabarnes -Oxley Law. This is the largest accounting scandal in history. The officers of WorldCom entered tried to window dress their stock market price. The company's stock market price had decreased because company profits started to decline. Worldcom's CEO Bernie Ebbers and CPA Scott Sullivan prepared fraudulent financial statements to show that the company is not actually generating losses. The officers of Worldcom had to do this in order to stop the decline in the stock market price of the company. Just like in the Enron scandal, the company's external auditor, Arthur Andersen, had not lived to its job of generating enough evidences to advice Worldcom not to prepare false balance sheet, income statement and statement of cash flows. The fraud occurred from 1999 -2002. (Zekany, Braun, and Warder 2004). CONCLUSION: The U.S. Sarbane -Oxley Law of 2002 specifies mandates that the external auditors must perform peer review. The peer review will help reduce or even eliminate the number of frauds in the United states and abroad. Many United States auditors have set up their audit branches in the United Kingdom. One such auditing firm is Price -Waterhouse. Likewise, the auditors must now frequently test the internal controls and the external auditors must give an official opinion on the effect of the current internal control environment on the decrease or total elimination of fraud and errors in the preparation of the financial statements (Tarasi 2003, 30). The United Kingdom group of external auditors must do its best to prevent an Enron and Worldcom repeat. This law will now make the external auditors think twice before doing any fraudulent acts. The new law exerts punishment unishes auditors and clients responsible for fraudulent financial reports. A good internal control environment will decrease the temptation and chance of fraud to occur. Conclusively, the external auditors should perform all auditing procedures in accordance with generally accepted auditing standards to be free from liability. Question 4 INTRODUCTION: The audit society in the United Kingdom continues to grow. One main reason for the growth is that the external auditors have decided band together to exchange information. This information includes information improvement of auditing skills. another is updating of their code of ethics for accountants. The following paragraphs will explain this. BODY: The continuing growth and expansion of the audit society will be beneficial to all interested parties to the company's business transactions. These interested parties will need the income statement, balance and statement of cash flows for their decision making purposes. The external auditors must recommend to managers that there should be an immediate implementation of the harmonization of accounting standards in the current borderless economy(Heely, and Nersesian 1993, 81).Definitely, the current growth and spread of the audit society in the Around the world will rebound to the advantages distributed to the many interest parties in society(Andreas 1999, 14). In addition, all external auditors must around the world must adhere to the agreements in terms of auditing standards, auditing procedures and code of ethics for accountants. The audit society will help because the expert auditors can share their long years of audit experience to the neophyte auditors who are still learning the tricks or the ins and outs of the external auditing trail. The stakeholders rely very much on the audited financial statements for their decision making activities. The stakeholders include the customers, the suppliers, the government regulatory agencies, the creditors, the employees, the board of directors, the managers and the labor unions. Surely, the internal and external auditors around the world must unite and share their expertise in order to improve their audit work (Van Riper 1994, 27).In this regard, the Blue Ribbon Committee ad the Securities and Exchange Commission have called for more effective audit committees to check future high profile accounting scandals (Bedard, Chtourou, and Courteau 2004). The main goal of the audit society is to fill a universal need. An analysis of the audit society in the United Kingdom and the United States was brought about by the need of the users of the financial statements to hire external and internal auditors to validate the financial information presented (Badawi 2005). The power of auditing the financial statements lies in its benchmarking potentials for other auditing practices. Here the chartered accountants are the authority on advising the companies on the proper preparation of financial reports. Clearly, the audit society was created to fill a universal need (Hollingsworth, and White 1999, 19). Auditors should also combine auditing program data in order to help make mergers and consolidations a successful undertaking. Currently, mergers and acquisitions are currently the new marketing strategies to survive the volatile business world. Mergers and consolidations involve specialized auditing programs The telecommunications industry consisted traditionally of legally mandated monopolies that were regulated by government regulating agencies in the United States. The improvements brought into the business and personal finance world have been ushered in by many new business strategies (Michael 2004, 52). It is also continuing to create a better environment for increasing company's profits. Mergers and acquisitions are now the new business strategies to survive. Definitely, auditors must now unite in order to help make mergers and consolidations an easy business decision (Power 1997, 91). the methods employed by the audit society includes, audit questions like that the members of society have agreed to. CONCLUSION: The continuing growth and expansion of the audit society will is a beneficial to many interest parties in society. Undoubtedly, the increasing expansion and growth of the audit society in terms of external audit will be beneficial to many interest parties in society. Clearly, the audit society was created to fill a universal need. Definitely, auditors must now unite in order to help make mergers and consolidations an easy business decision. Conclusively, the continuing growth and expansion of the audit society in relation to both internal and external audit will be beneficial to many interest parties in society. Works Cited Badawi, Ibrahim M. 2005. Global Corporate Accounting Frauds and Action for Reforms. Review of Business 26, no. 2: 8+. Bedard, Jean, Sonda Marrakchi Chtourou, and Lucie Courteau. 2004. The Effect of Audit Committee Expertise, Independence and Activity on Aggressive Earnings Management. Auditing: A Journal of Practice & Theory 23, no. 2: 13+. Colbe, Busse Von Walther. 2004. "Chapter 4.1 New Accounting for Goodwill: Application of American Criteria from a German Perspective". In The Economics and Politics of Accounting: International Perspectives on Research Trends, Policy, and Practice, ed. Leuz, Christian, Dieter Pfaff, and Anthony Hopwood:201-238. Oxford: Oxford University Press. Fox, Loren. 2003. Enron: The Rise and Fall. Hoboken, NJ: Wiley. Fusaro, Peter C., and Ross M. Miller. 2002. What Went Wrong at Enron: Everyone's Guide to the Largest Bankruptcy in U.S. History. Hoboken, NJ: Wiley. Hayes, R., Dassen, R., et al,(2005) Principles of Auditin - an introduction to International Standards in Auditing, 2nd Ed, Pearson Education Ltd, Harlow, p. 87 Hirsch, Steve. 2007. To Audit or Not to Audit: Implementing a Self-Inspection/auditing Program May Be Less Complicated and Intimidating Than You Think. Occupational Hazards, June, 40+. Heely, James A., and Roy L. Nersesian. 1993. Global Management Accounting: A Guide for Executives of International Corporations. Westport, CT: Quorum Books. . Hollingsworth, Kathryn, and Fidelma White. 1999. Audit, Accountability, and Government. Oxford: Clarendon Press. Michael, Bromwich. 2004. "Chapter 1.2 Aspects of the Future in Accounting: the Use of Market Prices and "fair Values" in Financial Reports". In The Economics and Politics of Accounting: International Perspectives on Research Trends, Policy, and Practice, ed. Leuz, Christian, Dieter Pfaff, and Anthony Hopwood:32-57. Oxford: Oxford University Press. Neale, C.W., and Peter Buckley. 1992. Differential British and U.S. Adoption Rates of Investment Project Post-Completion Auditing. Journal of International Business Studies 23, no. 3: 443+ Power, Michael. 1997. The Audit Society: Rituals of Verification. Oxford: Oxford University Press. Tarasi, Rocco. 2003. Sarbanes-Oxley Software; Ten Questions to Ask: Section 404 of the Sarbanes-Oxley Act of 2002 Requires a Company to Document and Periodically Test Its Internal Controls and the Company's External Auditors to Offer an Opinion on Those Controls. While Public Companies Are Developing Their Project Plans and Evaluating Software Applications to Help Them Manage This Process, the Area Is a New One for Most. Journal of Accountancy 196, no. 3: 30. Zekany, Kay E., Lucas W. Braun, and Zachary T. Warder. 2004. Behind Closed Doors at WorldCom: 2001. Issues in Accounting Education 19, no. 1: 101+. Read More
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