Abstract
The auditing standards entail consideration by the auditor for compliance with laws and regulations. For this reason, the auditor must be well versed with the legal and regulatory framework applicable to a company with the procedures adopted to comply with the structure. The audit standards, therefore, cover management representations, audit evidence gathered, planning procedures, and documentation structure. The terms of the audit are also included as an auditing standard and state the arrangement between the auditor and the company on remunerations and other specifics.
Introduction
This paper presents an analysis of auditing standards for public limited companies. It starts by describing vividly the concept of auditing in the business world. Auditing is a process of investigating books of accounts by an independent auditor to form an opinion as to whether the books of accounts present a true and fair reflection of the financial position of an entity. For the process to be complete, standards have to be adhered to by the auditor. It is important to note that third parties, who are users of financial statements, ought to receive an accurate reflection of the financial position of a firm. Audit of the financial statement is among the guarantee provided by auditing firms where they supply an independent view on published financial information. Companies employ the services of either external or internal auditors. The strength of internal control is best established by an internal auditor while the external auditors may rely on a small scale on the details by the internal auditor. One of the importance of audits is their ability to reduce a material misstatement in the books of accounts. In this context, a misstatement is classified as a false or insufficiency of information that can ultimately mislead the users of financial statements. Audits are also important for the financers in deciding whether to loan a company or not. The lending institutions use auditors’ opinions as a basis for their decisions. Auditing standards are imperative for the auditing process to be complete and accurate. Some of the standards to be discussed in this writing include the independence of an auditor and his responsibility during an audit, documentation of audits, audit evidence, internal controls and assessment of risks, the planning process of an audit, materiality of an audit, and terms of engagement.
Purpose and extent of the audit of books of accounts
The main aim of an audit is to be able to make an opinion on the financial statements. It is important to note that the management through the accounting officers is vested with the responsibility of drawing upon the financial statements. The auditor, therefore, investigates whether rules for the preparation of the statements have been followed. If the financial statement does not give a true reflection of the position of the business, the auditor is obliged to form a qualified report (Whittington & Pany, 2010). This report will indicate that the financial statement does not give an accurate status of the business entity. The scope that will be covered by an auditor is strictly determined by the terms of engagement. These are the initial agreements between the auditor and the shareholders declaring on the span to be covered by the auditor. Terms of engagement form the basis of the contract between shareholders and the auditors. In the same vein, it is important to note that the terms of engagement cannot restrict the area to be covered by the audit about declarations made in the legislations or pronouncements. This means that the scope of the audit will be determined by the terms of engagement, legislation, and decree by the governing body (Cutting, 2008). This standard of the audit also states that the scope of the audit should cover important aspects of the enterprise while ensuring the sufficiency and reliability of the information contained in the financial statements. In addition to the mentioned factors, proper disclosure of accounting entries avoids the formation of an adverse opinion and a subsequent qualified report. The scope also recognizes the nature of the test to be carried on the audit, the procedures to be followed, and the audit opinion.
Documentation of audit
Auditing standards require an auditor to make enough and relevant documentation that will give an analysis of the basis for the report formed by the auditor. The documentation will subsequently show that the audit was done by relevant laws and regulations. A record of procedures used in the audit, the audit evidence obtained and conclusions reached by the auditor’s forms part of the audit documentation. Some of the documentation include working papers, audit programmers, analyses, issues memoranda, letters of confirmation, and representations (Cutting, 2008). Furthermore, checklists and extracts of important documents are included in the documentation of audits. In a situation where the auditor’s sort information from an external source, this will be indicated as correspondence on significant matters. Since the process of auditing is a detailed procedure, there is a need for the auditor to schedule the work to be done (Ayala & Giancarrlo, 2006). This will be documented to avoid loss of track during the process of auditing.
The benefit that accrues from the use of Audit
Documentation is that the auditor understands the timing, degree, and results of audit procedures. The audit evidence obtained and conclusions reached on important aspects of the audit is derived from audit documentation. In a situation where the auditor points out audit evidence that challenges the auditor’s conclusions on a significant matter, then there should be documentation of how the conclusion was drawn. Documentation of the nature, timing, and extent of the audit includes the person who performed the audit and the dates when the work was done (Kohn, & Colapinto, 2004). It also encompasses the person who reviewed audit documentation and the dates when the review was done. In a situation where there is a change in documentation following the date of audit, then there should be a reentry of procedures used in the audit. Conclusions reached under the new procedures should also be well indicated. The period when the change was effected with the person who reviewed the change is specified in the documentation (Braithwaite, & Drahos, 2000). The reasons for the change and its effects on the conclusion are highlighted in the audit documentation. In recognition of the fact that audit documentation is vital, confidentiality and safe custody procedures should be set by the auditor. The document should also be accessible while meeting the requirements of the company both in the long and short period.
Responsibility of the auditor to examine for errors and fraud in an audit
In auditing, the planning process must invoke the probability of misstatement due to frauds or errors. Errors refer to unintentional misstatement in the books of accounts and may include omissions of an amount of money or a disclosure. On the other hand, fraud refers to an indecent act by a person at the management level in manipulating the financial statement to obtain personal gains (Hribar, Kravet, & Ryan, 2009). Most of the persons who indulge in this act include those given the responsibility of governance, employees, or third party. Among the fraud, misstatements are fraudulent financial reporting and misstatement of assets and liabilities of a limited company after misappropriation. This can cost the value of the company to decrease since the investors shy away. The management is responsible for the detection and prevention of errors. It is imperative to note that audit has no guarantee about the absence of material misstatement resulting from fraud and errors (Ayala & Giancarrlo, 2006). The auditing standards necessitate the auditor to plan and conduct the audit with professionalism. The initial stages of an audit prompt the auditor to conduct inquires from the management about the assessment of misstatements as a result of fraud and errors. Strong internal control measures are important in eradicating the possibility of frauds and errors (Braithwaite, & Drahos, 2000). Management, therefore, is obliged to investigate any error or fraud and examine mitigating measures. The procedures employed by the auditor while investigating fraud and errors must be documented. A misstatement as a result of fraud or error must be communicated to appropriate regulatory agencies. In a situation where the auditor is unable to proceed with auditing due to numerous errors, he or she can form a qualified report detailing the circumstances.
Evidence of the audit
Before a conclusion is made, the auditor must examine whether enough and appropriate evidence was gathered for the audit. Indicators of the sufficiency of audit evidence will involve an assessment of internal controls, risks of misstatement, and materiality concept. Rations and trends can also be used to assess the sufficiency of audit evidence. Compliance procedures as a source of audit evidence assure the auditor with continuation, occurrence, proper presentation, and disclosure of item (Hribar, Kravet, & Ryan, 2009).
The source of audit evidence is important in deciding on the reliability of audit evidence. Internal audit evidence is more reliable as compared to external audit. Procedures of substantive and compliance such as observation, computation, and analytical review are the real source of audit evidence.
Audit risks assessments and internal controls
There is a need to understand and design procedures that reduce the levels of audit risks. An audit risk means the probability that the auditor gives an inappropriate view when the books of accounts are materially misstated. The components of audit risks are inherent risks, control risks, and detection risks. Inherent risk is the vulnerability of transactions to misstatement that is material either individually or when included in other balances that had been misstated (Hribar, Kravet, & Ryan, 2009). This factor assumes that no internal control systems are operating in the company. On the other hand control risk is the probability that a misstatement could occur in a transaction and could be material on its own or when included in a group of transactions. A peculiar description of this kind of risk is the inability to prevent it and build a corrective measure on a timely basis. Finally, detection risks illustrate that the auditor’s substantive test will not reveal misstatement in the books of accounts that could be material in nature. It is a standard procedure that the auditor should assess inherent risks at the stage of the financial statement while assessment of control risk is done at the assertion stage for every accounting entry. This conclusively states that the auditor is bound to evaluate the value of accounting and internal control mechanisms in detecting, preventing, and correcting misstatements that are material in nature. In addition, the auditor has to evaluate control procedures, control environment, and a rigorous appraisal of control risks with the test of control. A suitable substantive procedure will come in handy to supplement the prevention of risks. Conclusions reached during the assessment of risks and must be documented appropriately. It is the responsibility of the auditor to correspond with the management on the specific weakness of functioning of accounting or internal control mechanism.
Materiality of audit
Any information is material if the misstatement influences the decision criteria of the users of such details. Materiality is predetermined by the size and nature of items evaluated from the situation of the misstatement. To be in a position to determine the materiality concept, professional judgment is strictly employed. Consideration of materiality is done based on account balances, classes of transactions, permissible and regulatory requirements, and the impact of misstatement. It is crucial to put into consideration the timing, nature, and extent of the audit when determining materiality. If the auditor considers that the misstatement can cause financial information to be materially misstated, then he or she should consider prompting the management to alter the financial statement or prolong the audit procedures (Cutting, 2008).
Going concerned
It is essential to consider going concerned when planning, performing, and reviewing audits. This will extend to the evaluation of financial and other indicators of going concerned. When the going concern is in doubt, the auditor is bound to gather evidence to solve the ability of a company to continue in its operation into the foreseeable future. The auditor should also consider declaring in the reports the management plans where going concerned is relevant following mitigating factors. If going concerned is not addressed adequately, the financial statement should reveal the condition that raises doubt about the continuity of the entity into the future. Furthermore, it should state that the financial statement excludes necessary adjustments about recovery and classification of recorded assets and liabilities when the entity is doubtable on its going concern. Where disclosure is not adequate, qualified, or adverse opinion is made but if the disclosure is adequate, the report should contain highlights of the problem of going concerned and ultimately draw attention to disclosure made.
Conclusion
In conclusion, the paper offered an explicit discussion on the auditing standards of public limited companies. It was apparent that auditing is a process of investigating books of accounts by an independent auditor to form an opinion as to whether the books of accounts present a true and fair reflection of the financial position of the company. Some of the standards to be followed are reflected in such concepts as going concerned, materiality, detection of errors and fraud, terms of engagement, documentation, purpose, and extent of audit and internal control mechanism operating in the company.
References
Ayala, A., & Giancarrlo, I. (2006). A market proposal for auditing the financial statements of public companies. Journal of management of value, 41 (2), 23-35.
Braithwaite, J., & Drahos, P. (2000). Global Business Regulation. Cambridge: Cambridge University Press.
Cutting, T. (2008). How to survive an audit. PM Hut. Web.
Hribar, P., Kravet, T., & Ryan,W. (2009). A New Measure of Accounting Quality. The CPA Journal 79(3), 17-24.
Kohn, S., & Colapinto, D. (2004). Whistleblower Law: A Guide to Legal Protections for Corporate Employees. Westport: Praeger Publishers.
Whittington, O., & Pany, K. (2010). Principles of Auditing and Other Assurance Services. 17th edition. New York: Irwin/McGraw-Hill.