Auditor Independence and Professional Skepticism

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Auditor代写 Auditor Independence and Professional Skepticism In a corporate world largely characterized by the influence of special interests

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Auditor Independence and Professional Skepticism Auditor代写

In a corporate world largely characterized by the influence of special interests, it is essential to have an independent review of the financial records to ensure they represent a true and fair position of a given company. The role of an external audit is to fulfill that objective to reassure investors and stakeholders that their interests are safeguarded and boost their confidence in the principals (Asare and Wright 2012). With special focus on commonly acceptable accounting standards, this report discusses the essence of independence and healthy skepticism in auditing, the challenges that undermine audit professionalism, and the most viable means of mitigating such threats.

Literature Review

As per ISAs standards, the central function of an audit is to review the financial statements with the key purpose of obtaining reasonable assurance that they communicate a genuine account of the company’s financial position. Therefore, an auditor’s task is to look out for potential material misrepresentation of facts either through bona fide error or fraudulent manipulation (Asare and Wright 2012). Ultimately, the auditor issues a statement detailing whether the financial reports are accurate in all material respects by applicable standards such as ISAs.

As the guardian of business interests of the company, whoever is in charge of carrying out an audit must, therefore, be an independent party. The requirement of independence is critical since it serves to ensure that any given audit conducted is free of any conflict of interests. Auditor independence takes two broad perspectives (Asare and Wright 2012). First, the auditor in question must have no material interests in the financial position of the firm. Second, the auditor must be free from any undue influence, coercion, or bribery from parties who have special interests in the business being audited.Auditor代写

The ISA is unequivocal on this issue; for there to be a genuine audit, the party reviewing the financial records must have autonomy (Asare and Wright 2012). A perfect example of violation of autonomy is a scenario where an audit firm hires an individual from an oversight body such as the Securities and Exchange Commission in order to get an insider scoop of how it operates. Such a move would undermine the objectivity of the person in question since they believe they are hired on a ‘quid pro quo’ basis.

Professional Skepticism

Given the sensitivity of the occupation and the interests that are usually at stake, every competent auditor or any qualified official working in a similar capacity must approach their tasks with doubt and suspicion. As ISA espouses, auditing is a high stakes operation meaning it is always advisable to err on the side of caution as opposed to trusting what is presented in the transactions. Therefore, a professional auditor must be keen to flush out any information that seems to contradict audit evidence previously obtained or any other red flags that may raise questions about the authenticity of the responses, documents, or records presented. Professional skepticism basically requires an auditor to use intuition and reasonable judgment and to recommend additional procedures other than those highlighted by ISA where they sense a subtle and complex fraudulent manipulation of accounts (Asare and Wright 2012).

Having the auditors’ sixth sense helps avoid overgeneralization, assumption, and negligence that would result to untimely oversight of material misstatement resulting from error or fraud.

Professional skepticism allows an auditor to highlight red flags that would otherwise be overlooked and include them in their report to draw the client company’s attention. The auditor owes the client at least that much; any professional misconduct in that regard comes with legal liability (Asare et al 2015). For example, when an external auditor is hired by a firm to review its books and fails to uncover concerns previously brought to light by an internal audit, it means that the former did not exercise professional skepticism.

Challenges Auditor代写

On paper, auditing appears to be a noble occupation since it involves the promise of saving a firm from conspiring elements within it working to defraud the stakeholders. Equally, auditors are seen as guardians of public interest since they help relieve shareholders of any concerns and worries after they verify the company’s state of affairs (Asare et al 2015). The idea of having an independent third party reviewing financial transactions, therefore, relieves stakeholders who believe that their interests are protected.Auditor代写

In light of corporate scandals involving audit oversights and even auditor complicity in fraudulent activities however, the idealistic notion of independence has been greatly compromised. According to the Securities and Exchange Commission, auditing requires supervision (Abel and McKay 2016). This is based on the fact that wherever big money and special interests are involved it is always reasonable to assume that enormous challenges exist that are likely to frustrate efforts to undertake an independent audit. Such challenges usually frustrate the noble objective of conducting autonomous reviews. Numerous scandals have been reported where audit firms have engaged in questionable practices.

In 2014, Auditor代写

KPMG was charged by the Securities and Exchange Commission for violating the principle of auditor independence by providing book-keeping and other non-audit services their clients. The SEC also uncovered that prominent KPMG personnel also owned stocks in those client firms, a further violation of the ISA standards (Bray 2017). The audit firm agreed to settle the case by paying $8.2 million in fines after being found guilty of orchestrating events that raised auditor objectivity questions (Abel and McKay 2016).

These cases forced a reevaluation of professional audit conduct where it was established that one of the biggest challenges to autonomy and healthy skepticism is the structural imbalance of power caused by special interests. Consider a scenario where an audit firm is hired by a company that has deliberately altered its books to commit fraud. The conditions of hiring could involve an illegal quid pro quo arrangement where the auditor is required to deliberately overlook the red flags in return for securing a permanent contract.

Earlier in 2001, for instance, it was uncovered that energy conglomerate Enron had reported an inflated revenue figure amounting to over $100 billion through systematic institutional fraud (Healy and Krishna 2003). As the chief auditor of Enron’s books, Arthur Anderson was in the spotlight with allegations of either professional negligence or active participation in the cover up. Either way, Anderson failed to fulfill their professional duties to notify Enron of material misrepresentation of the company’s financial position.

Regulation: Mitigating the Threat

Since it has been determined that special interests often frustrate the noble objective of independence and the exercise of healthy skepticism, there is a growing need to regulate such threats and mitigate the damage. One of the most effective regulatory mechanisms is rotational hiring of auditors and audit partners, which is stipulated under Section 139(2) of the Companies Act (Asare et al 2015). Since most financial scams result from years of ‘creative accounting’, provisional rotation from time to time would help minimize such odds since incoming auditors can detect patterns of foul play and report red flags. It also helps to have a second opinion from a qualified auditor.Auditor代写

Similarly, companies are advised to rotate audit partners, which ensures objectivity by presenting a fresh look at facts that may have been genuinely missed or detect fraudulently misstated figures. Essentially, rotation reduces the chances of fraud based on the fear of being discovered and it also provides a chance to correct genuinely misrepresented facts (Abel and McKay 2016).

Another effective means of mitigating the threat involves the formation of an audit committee, which may comprise members of the board of directors or an independent taskforce to review the audit report. The essence of reviewing audit reports is to reaffirm that the auditors acted independently and professionally. It is important to note that the fundamental function of the committee is not to look at the financial transactions of the firm but to assess the conduct of the auditor looking for red flags. Technically, the committee’s duty is to ‘audit the auditor.’ Finally, every company should welcome the recommendation under the Sarbanes-Oxley Act to allow the Public Company Accounting Oversight Board to conduct official oversight of the audit reports. Collectively, these measures will help protect the interests of investors and the public.Auditor代写

Conclusion

As a profession, auditing is intended to restore transparency and accountability to business. In order to fulfill this task, auditors must conduct independent reviews of financial transactions to ensure there are no material misstatements that could present a deceiving picture of a client company’s financial position. Auditors are also required to be healthily skeptical to ensure they flush out details that may have been overlooked or cleverly put in place. Evidently, and in light of this report, there are serious challenges to independence and professional skepticism largely because of the imbalance of power between special interests and the need for transparency. Moving forward, firms should adopt a best practice approach that entails rotation of auditors and partners and allowing audit oversight specifically to mitigate such threats. Ultimately, firms must work closely with auditors and third parties to restore dignity to business as reassurance to investors and other stakeholders.

References Auditor代写

Abel, A.S. and MacKay, I.A., 2016. Money Laundering: Combating a Global Threat; the Vigilance of CPAs Plays an Important Part in an International Effort to Deter Financial Crime. Journal of Accountancy222(3), p.44.=.

Asare, S. K. & Wright, I., 2012. Investors’, auditors’, and lenders’ understanding of the message conveyed by the standard audit report on the financial statements. Accounting Horizons (June): 193-217.

Asare, S. K., A. Wright, I. & Zimbelman, F. 2015. Challenges facing auditors in detecting financial statement fraud: Insights from fraud investigations. Journal of Forensic & Investigative Accounting 7(2): 63-112.

Bray, C. April 2017. “KPMG Fires 6 Over Ethics Breach on Audit Warnings.” The New York Times. Retrieved < https://www.nytimes.com/2017/04/12/business/dealbook/kpmg-public-company-accounting-oversight-board.html?_r=0>

Healy, P.M. and Palepu, K.G., 2003. The fall of Enron. The Journal of Economic Perspectives17(2), pp.3-26.

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