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Boynton & Johnson (2006) define auditing as a systematic process of collecting and evaluating evidence about economic activities of an entity in an objective manner in order to measure the degree of compliance with the set out rules and regulations, and communicate the results to the interested stakeholders. In any auditing process, the auditor measures financial data for truthfulness and compliance to the principles of accounting. To carry out this process, the auditors must faithfully adhere to a code of accounting standards known as Generally Accepted Accounting Principles and Standards. The auditor then evaluates the accounting data with regard to these standards and then compiles a document that he/she forwards to the interested parties. The ultimate goal of this process is to enable the management to maintain a credible representation of the company’s financial position. This also assures the stakeholders that the information contained in the financial reports is a true representation of the company’s accounts.
Application of Generally Accepted Accounting Principles and Standards to financial, operational, and compliance audits
Electro Technologies Ltd is an electrical contracting company based in Atlanta. The company offers electrical maintenance and contracting services to the state of Georgia. Among the clients that the company serves are banks, real estate companies, universities and government institutions. The company also sells generators and other power back-up systems such as power supplies. The company continuously audits its operations on a day-to-day basis, i.e. all accounting clerks and project officers must adhere to a prescribed way of doing things. For instance, if an accountant is to issue some money to a project engineer for any project expense such as fuel, the engineer must first account for any amount of money previously issued. The project engineer may do so by handing in a receipt and as well entering the distance travelled during the previous trip on a ‘vehicle logbook’.
The company auditor also carries out a monthly audit to determine compliance with the auditing requirements. This precedes the more intense quarterly auditing exercises that are carried out every four months. An external auditor carries out the quarterly auditing exercises and gives his report and recommendations. Such an audit begins with the auditor examining the accounts of each client, particularly emphasizing that the accounting personnel record all the payments received from the clients. After doing this, the auditor then investigates the expenses of the company paying particular attention to labor expenses. Once the auditor obtains and examines all these records, the auditor writes an unbiased report giving findings of his audit. This report is, then, ready for use by the interested parties.
Elements of the Generally Accepted Auditing Standards
The Generally Accepted Auditing Standards are a group of auditing standards approved by members of AICPA. According to Boynton & Johnson (2006), a qualified person should carry out the auditing task. Secondly, this person should maintain an independent mindset in carrying out the process. As well, only well-trained individuals should carry out the auditing process. The persons involved should exercise professional care in performing the audit and when writing the report. The auditor and his team should aptly prepare for the process before starting on the actual work. He/she should also offer guidance to all the junior members in the team. Before beginning the exercise, one should carry out a thorough investigation of the entity with a view of understanding the environment in which the entity operates. The auditors should then proceed to gathering enough data, which is reliable enough to form a good indication of the financial position of the entity. During reporting, the auditors should present the financial statements in accordance with the Generally Accepted Accounting Standards and should point out any circumstances where auditing is inconsistent with these principles.
The effect that the Sarbanes-Oxley Act of 2002, and the Public Company Accounting Oversight Board (PCAOB), will have on audits of publicly traded companies. The Sarbanes-Oxley Act of 2002 was a result of the fraudulent cases that occurred all over the world, an example of which being the Enron scandal. The act applies to all publicly held companies and their auditors and intends to reduce cases of financial fraud, and increase the transparency of financial reports in order to protect the investors from economic crimes. The act seeks to strengthen the internal control of public companies and punish business executives who are involved in fraudulent activities. The act requires that both the chief executive officers and chief financial officers of a company take individual responsibility for a company’s financial statements. This means that these individuals will be criminally prosecuted for any corporate mistakes with regard to financial impropriety. The act proposes heavy financial penalties for those who participate in fraud of any manner (Romney, 2011).
Additional requirements that are placed on auditors from this Act, and the actions of the PCAOB
The enactment of the Sarbanes-Oxley Act of 2002 gave way to the formation of the Public Company Accounting Oversight Board (PCAOB). The PCAOB is “a private sector nonprofit corporation that oversees the audit processes of audit companies in order to protect the interests of investors and the general public interest” (Louwers et al, 2007). The board has authority to enforce Securities and Exchange Commission’s regulations and regulate the practice of certified public accountants.
References
Boynton, W. C. & Johnson, R. N. (2006). Modern Auditing: Assurance Services and the Integrity of Financial Reporting. (8th ed.). Hoboken, NJ: Wiley.
Louwers, T., Ramsay, R., Sinason, D., & Stawser, J. R. (2007). Auditing and Assurance Services. New York, NY: McGraw-Hill.
Romney, M. B. (2011). Sarbanes-Oxley Act. Grolier Multimedia Encyclopedia. Web.
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