Introduction of advanced auditing practices: Essay

Introduction of advanced auditing practices: Essay

(2500 Words)

Overview

 

Perhaps, every organization wants to initiate an analytical auditing system and auditing strategy that could maintain the organization’s capability, strength and competitiveness. The dramatic changes and advances in communications and information technology facilitated the way towards a sustained progress in the international business and finance environment. The low cost and the efficiency as well as the attractiveness of conducting and entering any business venture – local or international in nature were made available by these technological advances which characterize the global marketplace. Today, greater challenges are faced by financial managers and accountants as opportunities for growth as well as possibilities of risks increase in the current and more attractive business world.

 

This paper aims to discuss the significant role of an analytical auditing system in relation to the introduction of advanced auditing practices. It sought to find relevant applications of information gathered through management accounting. In the end, it suggests some ways to effectively implement the gathered information for the advantage and benefit of the company paying particular attention to an analytical auditing system.

 

Introduction

 

Analytical auditing is the inspection and verification of the accuracy of financial records and statements. Private businesses and all levels of government conduct internal audits of accounting records and procedures. Internal audits are conducted by a company’s own personnel to uncover bookkeeping errors and also to check the honesty of employees. In large companies, internal auditing is an ongoing procedure. A company that trades stock on a registered stock exchange or is preparing to issue new shares of stock must submit to an external audit. These companies are known as publicly traded companies (2000. An external audit is used to give the public a true statement of a company’s financial position. It is made at least once a year by public accountants who are not regular employees of the company. The auditors make sure that the company has followed proper accounting procedures in its financial records and statements. They compare the current financial statements with those of the previous year to determine whether the statements are calculated consistently. If they are not, they present a distorted picture of the company’s financial position. The auditors also inspect real estate, buildings, and other assets to see if their value is overstated. Debts and other liabilities are checked to see if they have been understated (1999).

 

Analytical auditing practice has a much longer history than many of the other developments that can be considered and the large firms of accountants, in which many financial auditors work have become influential advisory institutions throughout the world.  Thus Analytical auditing has provided the model which has influenced the design of auditing practice in many other fields. Although environmental, medical, or value for money audits are conceived as distinct from financial auditing, the latter continues to exert its normative influence as a centre of gravity for debate and discussion. And it is in the context of Analytical auditing that the dependency of acts of verification on judgment and negotiation is most apparent. The power of the analytical auditing model lies in its benchmarking potential for other audit practices. In part this potential is realized indirectly through the work of accountant advisors, for whom the analytical auditing model is a fundamental component of their expertise and whose advice in areas of control is shaped by it. But the influence can also be direct as entities such as hospital trusts, privatized industries, charities, and many other organizations become subject to an intensification of financial control and reporting requirements. This is an expanding domain, not just of neutral checking but also of judgment and of an evaluation of the fundamental purposes of organizations. Paradoxically, given the influential role of the analytical auditing model suggested above, its status as a practice is unclear. What do audits produce and how are they effective? (2002).

 

Analytical auditing is subject to expectations and demands which are, justifiably or otherwise, often disappointed. Nevertheless, the official procedural knowledge base of auditing has evolved in response to scandals and corporate failures in such a way that the essential puzzle of what audits produces their effectiveness remains hidden from view as an article of faith. Finally despite, and probably because of, this puzzle it is argued that financial auditing maintains itself as an institutionally credible system of knowledge. Notwithstanding crisis and scandal it satisfies the aspirations and demands of a variety of regulatory programs. Particular audits may fail but the system as such cannot. The possibility of effective auditing is necessarily presupposed by regulatory intentions. Traditionally, analytical auditing has applied itself to the domain of finance, but organizations are increasingly finding value from internal audits that monitor other aspects of their activity. Environmental and social audits, for example, have been championed by firms in response to the ethical concerns of both shareholders and the public in relation to the company’s impact upon the locality. Analytical auditing is growing in importance too, partly in response to recent major scandals such as the collapse of banks, and also in order to monitor the increasingly complex demands being made upon accountants ( 2002).

 

However, auditing remains something of a mystery to those outside of the profession, and has become more specialized as accounting has become more sophisticated. For example, while best practice has evolved certain tools for analytical review or establishing audit trails, an element of subjective judgment remains as auditors decide what evidence to include. Further, rules of thumb can never be ruled out. Audit risk has developed as an issue too, as the models for reducing the probability of mistakes being made on sampling, for example, become more subtle. In countries such as Canada these have changed dramatically. Here, a Bayesian approach was introduced in 1980. Auditors recognize the limitations of their science. They are not held responsible for detecting fraud, for example. Analytical auditing provides a degree of assurance, but not insurance, as to the financial position of the firm (2002).

 

The Cyclical Testing Method

 

Readers of financial statements of foreign companies audited by major international accounting firms through the cyclical testing method assume a uniformly high quality of information. International differences in audit objectives, standards and practice, however, of the cyclical testing method result in varying levels of audit assurance. Cyclical testing method users and accountants whose clients demand expertise in all phases of financial accounting and reporting matters whether domestic and international need to be aware of these differences. The development of cyclical testing method standards and practice in different countries is influenced by numerous factors including the nature of financing, the size and complexity of businesses and capital markets, tax laws and the legal environment. In the United States and the United Kingdom, many owners provide much of the financing for public companies, and capital markets are large and sophisticated ( 1996). As a result, shareholders’ needs significantly influence financial statements and independent audits, and private-sector bodies have a strong impact on both accounting and audit standard setting. In Germany, a small number of large banks and pension funds traditionally supply most business capital, and ownership and voting rights generally are concentrated. One result is less demand for independent audits and for a sophisticated, investor-oriented financial reporting system. Another is that the German accounting profession has less influence in establishing accounting standards which are set primarily by commercial laws. However, as in the United States and the United Kingdom, the accounting profession has played an important role in developing audit standards. International differences in business, legal and cultural environments also have led to varying audit objectives. Consistent with a strong investor orientation, the audit objective in the United States is to express an opinion on whether the financial statements present fairly, in all material respects, financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The strong presumption is that to present fairly, financial statements must conform to generally accepted accounting principles (GAAP). Departures are permitted only in rare instances (1996).

 

Annual certification approach

 

The annual certification approach is a description and discussion of the auditor’s responsibility to consider fraud in the audit of financial statements. It is divided into different titles that includes an introduction; the description of the characteristics of fraud; description of the responsibilities of those charged with governance and of management; the inherent limitations of an audit in the context of fraud; the responsibilities of the auditor for detecting material misstatement due to fraud; professional skepticism; discussion among the engagement team; risk assessment procedures; identification and assessment of the risks of material misstatement due to fraud; responses to the risks of material misstatement due to fraud; evaluation of audit evidence; management representations; communications with management and those charged with governance; communications to regulatory and enforcement authorities; auditor unable to continue the engagement; documentation; effective date (1994).

 

This annual certification approach distinguishes fraud from error and describes the two types of fraud that are relevant to the auditor, that is, misstatements resulting from misappropriation of assets and misstatements resulting from fraudulent financial reporting; describes the respective responsibilities of those charged with governance and the management of the entity for the prevention and detection of fraud, describes the inherent limitations of an audit in the context of fraud, and sets out the responsibilities of the auditor for detecting material misstatements due to fraud. The annual certification approach also requires the auditor to maintain an attitude of professional skepticism recognizing the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor’s past experience with the entity about the honesty and integrity of management and those charged with governance. Moreover the annual certification approach requires members of the engagement team to discuss the susceptibility of the entity’s financial statements to material misstatement due to fraud and requires the engagement partner to consider which matters are to be communicated to members of the engagement team not involved in the discussion.

 

The annual certification approach requires auditor to do certain things such as performing procedures to obtain information that is used to identify the risks of material misstatement due to fraud; identifying and assessing the risks of material misstatement due to fraud at the financial statement level and the assertion level and for those assessed risks that could result in a material misstatement due to fraud, evaluate the design of the entity’s related controls, including relevant control activities, and to determine whether they have been implemented; determining overall responses to address the risks of material misstatement due to fraud at the financial statement level and consider the assignment and supervision of personnel, consider the accounting policies used by the entity and incorporate an element of unpredictability in the selection of the nature, timing and extent of the audit procedures to be performed; designing and performing audit procedures to respond to the risk of management override of controls; determining responses to address the assessed risks of material misstatement due to fraud; considering whether an identified misstatement may be indicative of fraud; obtaining written representations from management relating to fraud; and communicating with management and those charged with governance. The annual certification approach provides guidance on communications with regulatory and enforcement authorities. The standard provides guidance if, as a result of a misstatement resulting from fraud or suspected fraud, the auditor encounters exceptional circumstances that bring into question the auditor’s ability to continue performing the audit. Lastly the standard establishes documentation requirements (2000).

 

Modifications of Analytical Auditing Approach

 

The analytical auditing approach mentioned that it is management’s responsibility to ensure that the entity’s operations are conducted in accordance with laws and regulations. The responsibility for the prevention and detection of noncompliance rests with management ( 2005). There are policies and procedures that can assist management in discharging its responsibilities for the prevention and detection of noncompliance this includes monitoring legal requirements and ensuring that operating procedures are designed to meet these requirements.

 

In introducing the analytical auditing approach, proper research and studies should be made in order to define and maneuver the direction of the whole plan. Setting up the ideas and presenting them to the figures of authority for a rich exchange of views will be helpful in generating plans that will be best for the organization. The company should be conscious and cautious in terms of the savings and the transparency of the expenditures. The people involved should also have the guts and the character to make the long-term plans a success by initiating efforts that will make such conjured ideas possible and tangible in the future. Specifying the date and time frame of executing the introduction of the analytical auditing approach that will make its attainment possible will push and business to start right on and take the challenge. As much as possible, hesitations should not be acknowledge unless there are enough reasons to postpone the initial execution of the plans that will be more risky than the imagined drawbacks of the analytical auditing approach. They should be sensitive in making delays and lagging off from the defined plan and tactics as well as in the changes and differences of the actual application and that of the plan.

 

It would also be advisable to get help and consult from a professional finance consultant, certified accountants, and other corporate professional with sufficient know-how in management accounting especially with respect to pricing decision-making (2005). The rationale behind this is that they can provide information and views that were not pointed out and brought up during the planning period. They can also plan and foresee circumstances that serve as a financial back up for the emergencies and difficulties that were not foreseen while coming up with the plans.

 

In managing the introduction of analytical auditing approach in the company with respect to the principle of management accounting, it is of primary importance that the resources and the welfare of the company are identified. From these resources, the people in the general management especially the manager to be selective in choosing the price and other financial resources that the company will invest in. The nature of the analytical auditing approach should be studied so that the opportunities that it offers can be fully exhausted by the company ( 2004).

 

Strategic planning could be only successful if the circumstances of the introduction of analytical auditing approach that will be made are well examined and researched (2005). This will prepare the whole business in the problems and issues that the company may confront during the introduction of the analytical auditing approach. However, this does not assure that there will be no problems that will exist and confront the venture. The analytical auditing approach cannot be put in isolation from the whole organization. The price, budget and all the investment, and profit growth possibilities that the company can venture in all depend on its overall capacity which will make the operations of the business possible. Coordination between and among the department within the organization as well as among all the staff and employees should be fostered in the workplace for the immediate success of the business endeavor.