Category: Audit

The Peculiarities Of Auditor Profession

Auditing as a profession is fundamental all around the world to many different stakeholders. It is a profession that also allows accountability to be taken on the true reflection of financial statements. Solicitors in the legal profession carry out work on behalf of the client whereas the auditor works to provide an independent opinion of the client’s financial statements. A statutory audit is a legal requirement by limited companies around the world, the “purpose of the statutory audit is to provide an independent opinion to the shareholders on the truth and fairness of the financial statements”. (ICAEW, 2006). Therefore, the auditor must be independent in his judgment and professional opinion, holding no ties with the client that could influence their decision e.g. owning shares in the company they audit, or cause a conflict of interest on the financial statements of the client, and find them free from error both unintentional (material misstatement) and intentional (fraud).

Stakeholders would much rather be provided with an independent audit opinion that can provide a true reflection and aid the company to perform better, rather than have a non-independent auditor give a bias opinion on the financial statements, therefore not giving confidence to stakeholders about the companies’ performance and ultimately their investment holdings. External auditors are required to comply with ethical standards set out in the IFAC code of ethics, therefore needing to be objective, professional, confidential and act with integrity in their search, thus improving trust in the profession and being perceived to operate independently.

An audit’s purpose is to assure stakeholders such as investors, creditors, shareholders, and the public interest, that the company is operating truly and fairly, this bridges the gap between the management running the company and shareholders. “Independence is driven by the critically important professional traits of objectivity and skepticism” (Accountancy Age, 2018). This reflects how audits need to be independent to find the balance between assessing how objective financial statements in their reflection of the companies’ position but also being apprehensive whilst auditing the company before coming to a conclusion. The audit report benefits companies in showing if they are a “going concern” in future decisions such as takeovers and mergers or applying for additional loans with a bank, therefore adding creditability to the companies’ performance.

The auditing profession has had many scandals consistently over the years which is caused by poor judgment, standards, controls and lack of independence. A recent example of poor independence is the Carillion scandal in 2017. Carillion was one of the largest construction companies in the UK having contracts with both the public and private sectors, due to poor corporate governance inside the company the auditor’s independence diminished. “KPMG says that Carillion was audited ‘appropriately and responsibly” (ACCA,2018). KPMG stated that carillon was a “going concern” in the future and that there were no issues, therefore this wasn’t a true and fair reflection of the companies’ position. Furthermore, KPMG was the auditor for “19 years”, alongside 2/3 previous carillon finance directors being former KPMG employees, this only augments the lack of independence by KPMG and how it fueled the eventual downfall. Auditors should remain independent and tenders should go out every 10 years so that the auditors don’t build strong relationships which ultimately compromised independence as seen with KPMG and Carillion. The scandal was documented on front-page news, only adding to the public perception on auditing as an industry and its lack of independence in providing credible judgments. The scandal not only impacted KPMG and its reputation but many stakeholders both internal and external. “A survey has revealed that just 9 percent of company secretaries surveyed by ISCA think that the audit process has improved since the collapse of Carillion” (Accountancy age, 2018), this reflects the notion that scandals will widen the gap between public perception and auditor’s perception on the service.

Auditing as a profession exists because capital markets wouldn’t have independence without there presence, the job of auditors is to act with integrity, care, objectivity and to be independent in their search and convey this in the audit report to advise clients to eliminate them. One threat that can affect auditing is the self-interest threat. This threat is where the auditor doesn’t want to lose the client and therefore their behavior ultimately overlooks any issues due to financial (outstanding audit fee and bribes) or non-financial interests, therefore professional judgment is compromised. The implications of this will lead to an inaccurate audit report and independence is also compromised, not reflecting the companies’ true performance due to other interests. An example of this is the audit of HP limited, the “engagement partners brother held 200000 shares in the company” (Auditor forum, 2012), however as the partner informed the company it did not compromise his role, but this does reflect a self-interest threat if the engagement partner did not inform the company, the company was later sued by HP for failure to act with integrity.

Another threat to independence is the intimidation threat. The auditor’s objectivity is compromised in the audit environment, for example, a dominant director who has too much power and influence over the firm, therefore this will affect the auditor’s judgment to remain professional in his duties. An example of this is Sports Direct. Mike Ashley is a dominant owner, and had a deal with his brother’s company and the auditors felt they “did not need to disclose a related party transaction” (Gaurdian,2019) alongside also having an outstanding tax bill that was discovered late from Belgium which was over 600 million. Grant Thornton stepped down soon after and discontinued their services as the threat was too large potentially affecting their image in the long run. There isn’t a safeguard apart from terminating services that can counter this threat altogether.

A final threat to independence is familiarity, this refers to how independence is compromised due to long association between the auditor and client and how this will affect the views of the auditor due to relationships formed. This would harm the auditor’s ability to remain independent over all those years and may lead to material misstatements unintentionally. An example of this is the recent case regarding BT and how PWC has stepped down as auditors after 3 decades of association due to BT overstating profits by 500 million (Guardian, 2019). This goes to show that the auditors missed errors whilst auditing BT and their objectivity was compromised due to a longstanding relationship.

Auditors are faced with copious threats in addition to the ones above that could compromise their audit, professional bodies have published guidance on how firms should combat these issues. “ISQS 1, states firms should only undertake arrangement when they are competent to do so” (ACCA, 2009), therefore auditors need to ensure effective planning and research before taking on a client, and assess all potential risks during the planning stage.

Audit safeguards are used as a means of protecting and helping to ensure threats are minimized, and this will consequently help the auditor to carry out their duties accurately and provide an opinion with reasonable assurance. “IFAC code 2016 splits the safeguards into 3 categories” (GMC,2019). Firstly, firm-wide safeguards which relate to a clear message to audit staff and teams to essentially act in the public interest through leadership and messages sent down from the top, the problem with this approach is that it may not be effective at reinforcing, therefore the message could be overlooked. The second is engagement specific safeguards such as a non audit professional, reviewing the auditors work, the upside is that they may able to give an opinion on mistakes however they aren’t specialized in that area to point out all errors. Finally safeguards within the client’s profession such as how the client’s systems, policies and procedures operate, and the relevant experience to make decisions, if the client had an independent internal audit department who regularly reviewed systems, processes and governance, this would ensure the firm would act professionally and would be reflected in the external auditor’s report, however this depends on how influential the internal audit department can be.

A potential safeguard to the familiarity threat is that the government will appoint auditors to clients, therefore long standing relationships are not formed and effective rotation is carried out by firms, therefore leading to independence to remain intact and true reflection in the audit report. The downside to this is that governments also change and this impacts their policies and political ties, therefore whoever is in charge in government will also have ulterior motives, therefore reducing the independence of those appointing the auditors. ICAEW believes that “The most effective way to ensure the reality of independence is to provide guidance centered around a framework of principles” (ICAEW, 2016). The presence of an audit committee within a firm would allow the company to profit from the advice and valuable communication to ensure individuals act independently, it would allow managers to be restricted and questioned on power and decisions with regular independence reviews, further strengthening corporate governance, unless the committee also has motives.

When audit scandals occur the failure is usually blamed on the auditors due to “their independence has been compromised by the non-audit fees payable to them” (ICAEW,2016). If a company is auditing a client they know the problems that are occurring and therefore can provide non-audit services and gain additional income, this affects the auditor’s ability to be independent. Non-audit services provide huge revenue for the big 4, therefore this has become an issue towards independence as the majority of non-audit revenue exceeds statutory audit fees. A safeguard is for audit firms to only be able to audit clients and not provide both services something KPMG and Delliote has done for its FTSE 350 companies (BBC, 2018) due to “erosion of trust”, this will improve the independence in auditing and allow firms to solely concentrate on auditing duties, however it can be noted further improvement internally such as extra training and changes in policies could build upon these changes to strengthen the culture.

For the independence to not decline, the current regulatory framework set out by the ISAAB and FRC needs to ensure that the quality of the audit remains high, if the quality of the audit remains high this then will keep independence intact alongside providing an accurate audit report which will allow the company and shareholders to make better informed decisions. Poor audit quality will lower independence and will be noticed upon the shortcomings of companies (audit failure). Its easy to notice poor audit quality but audit quality as a whole doesn’t have an actual definition, as what benchmarks audit quality changes over time with developments of companies and scandals, as auditing as a profession also evolves over time. “However broad concepts such as independence and competence will remain over time” (GMC,2019). It can also be noted that audit quality is subjective, those in auditing will have their own notion of what is a successful audit is, e.g. audit has been completed and with reasonable assurance the statements are free from error and bias, whereas the public may see audit quality as helping capital markets and investors in decision making with accurate financial statements. Therefore, audit quality derives from a combination of the auditors their skills, expertise and professional judgment combined with how they working with clients, in addition to working practices such as effective governance, ethics and regulation. All this combined together will result in a truer reflection of the client, aiding all parties involved as they believe the auditors have followed the framework. “The result showed that the independence and audit procedure positively affected the audit quality” (Journal of Accounting and investment, 2019). The study looks into 45 responses via a survey in east java regarding how audit procedures and independence positively correlate with high audit quality, thus reinforcing the notion of independence arises from a quality audit. It is also important to consider the agency theory, and how shareholders want to know that directors of companies act in their best interest, therefore they can apply pressure on external auditors to carry out a quality audit which will reinforce their confidence in the companies’ performance, ultimately the downside to this is not all shareholders have the power to pressure auditors to be independent.

The problem with independence in auditing is that there are so many stakeholders involved in a company and this creates an expectations gap between them, this is “the difference between what the public expects from the auditing profession and what the auditing profession actually provides” (ACCA,2019). This follows on and results in a reasonable gap. The public would like auditors to do more than what they actually do but this isn’t physically possible as auditors also have other clients and the availability of resources. Therefore, this strengthens the notion that the public are demanding more from auditors than what they actually do, thus a deficient performance gap exists, as auditors are conflicted with what their actual job should be, leading to a fall in audit quality. There has been an improvement to close the gap in recent times as “auditor’s report now lists out respective responsibilities of management and auditors of a company” (XPLAIND,2018), therefore auditors have more skepticism over companies and make it clear that prevention of fraud is managements responsibility and auditors are responsible to detect it and convey this across to management to deal with, reinforcing the notion that there have been efforts to close the gap and increase independence and audit quality. As well as this as the role of an auditor becomes more defined to the public regarding their job role expectations, duties may fall off. However, on the flip side the auditor’s role may have new expectancies as a result of the role becoming clearer.

To conclude auditor independence has always been in question, especially after scandals, the blame is shifted onto the auditors, and standards are revised, therefore auditing as a profession isn’t complete and needs continuous improvement. The positive is that it creates a better environment as time passes. John Kingsman in his review said “the FRC is built on weak foundation…. and company directors should be investigated” (Business Telegraph, 2019). A lot of independence issues are due to company directors and CEOs being former employees of accounting firms or having close ties, this ultimately affects independence regardless if the external auditor is independent. The CMA proposed that “FTSE 350, should be split between at least two firms, one of which should be from outside the big four” (Guardian, 2019). This enhances the notion that auditing also lacks independence due limited availability of firms and big 4’s domination, therefore rendering this suggestion difficult to achieve unless 2 medium-sized firms work unitedly and combine resources. There are many suggestions on how auditing can improve going forward and it will always be an ongoing issue, however the feasibility of ideas needs to be considered.

Audit Expectations Gap

Introduction and breakdown of the theory

Even though there are differences in the definition of the audit expectation gap, one can argue that the universal understanding of the expectation gap is that there are differences in what a user expects auditors to be responsible for in their work in terms of scope and performance and what auditors themselves believe their professional responsibilities are. I base this observation on Liggio’s first mention of the term in 1974 that described the gap as different expectations when it comes to auditors’ performance and multiple adaptations of the term throughout the last couple of decades (Commission on Auditors’ Responsibilities, 1978; Monroe and Woodliff (1993); Jennings et al. (1993); Porter (1993)). Many of these authors’ additions have addressed how the role of an auditor has been perceived by the public as well as what the audit profession entails.

Porter’s (1993) empirical study introduces the reasonableness gap and the performance gap to further break down and explain the expectation gap issue. The reasonableness gap describes society’s irrational demands and expectations toward auditors whereas the performance gap focuses on shortcomings in auditor’s performance. The performance gap can be deconstructed further to distinguish between deficient audit standards and regulations and deficient performance shown by a lack of professional competence by individual auditors.

Reasonableness gap

The reasonableness gap describes how society and people interested in the financial audit expect more of auditors than they can give in practical terms. Stakeholder must understand the relationship between costs of the audit and benefits and how increased audit scope inevitably leads to higher audit fees. When talking about audit stakeholders we must differentiate between powerful, influential stakeholders and weak, less influential stakeholders (Gray & Manson). Powerful stakeholders have economic and/or political power and can use it to influence the direction of a company. This would include institutional shareholders, company directors, lenders but also outside bodies including international as well as national regulators and the financial press and media. One can argue that their expectations toward the financial audit differ greatly from an outsider, as their professions suggest that they are familiar with auditing procedures.

Campbell & Mitchell’s 1988 study on the expectations gap and going-concern uncertainties reveals that both bankers auditors were of the opinion that the role of auditors includes providing “early warning signals” and it is argued that opinions on going concern issues between auditors and stakeholders were generally similar. The authors conclude that the expectations gap on going concern issues therefore should not be difficult to eliminate. I believe that opinions on the role of the audit in this case were similar, as Campbell & Mitchell were comparing opinions of auditors to bankers, a profession expected to be well informed about audit procedures. This ties in well with my previous point about the different expectations of professionals and a public outsider, however, one could argue that this result lacks generalisability, as the majority of stakeholders cannot be expected to be as sophisticated as bankers in this matter. Furthermore, all stakeholders have access to published financial reports and financial statements, but more powerful stakeholders can potentially gain access to more information than smaller stakeholders. Therefore, I do not agree with the statement that the expectations gap on going concern issues should be easy to eliminate, especially regarding the concept of going concern, which most people are perhaps not familiar with.

It seems logical to assume that high level management possesses great power over a company, but I want to elaborate on important outside players. These individuals are not directly associated with a company but have influence, especially over the public expectations of the audit. Sikka et al (1998) argue that auditors duties expand under regulatory (state) and internal (academics & press) pressures. Academics or the media have influence on the public view of the audit profession and their expectations of the audit process, as for the majority of people they are the only form of contact with auditing. Humphrey et al. (1993) argue that the public will never be educated enough to accept that the audit standards are anything but deficient, but I believe it is the authors’ responsibility to open up public discussions to reduce the expectations of, in this regard, uneducated members of society. I will discuss this opinion in greater detail.

Performance gap

The performance gap describes the shortcomings of audit practices when compared to what can reasonably be expected from financial auditors. This can be further split into two main contributors, deficient standards, and deficient performance (Figure 1). The idea of deficient standards describes the difference between what the role of an auditor can realistically be expected to fulfil, but the law does not require them to whereas deficient performance occurs when auditors fail to comply with professional audit standards. This is often caused by a lack of care in the audit process and/or insufficient knowledge and experience. Sikka et al. (1998) say that audit standards are not strict enough, which ties in with critic’s opinion that in order to give a fair and true view of a company, audit reports must be free of fraudulent misstatements. Furthermore, Humphrey et al. (1992) demanded that auditors “must accept their role as fraud hunters, as the public expects a fair and true view of the company”. I agree with the point that a financial report that contains misstatement, fraudulent or by mistake, does not present a fair and true view of the company. However, paragraph 5 of the ISA-240 states that even if a financial audit is carried out in full accordance with audit standards, there is an unavoidable risk that misstatements may not be detected (Gray & Manson). If auditors would introduce procedures to increase likelihood to detect misstatements and fraudulent activities, the cost of the audit would inevitably rise, and cost/benefits discussion must be had.

Recommendations to potentially reduce deficient performance and deficient standards include the introduction of post qualification experience or even “force competence and audit independence from practitioners” by withdrawing practising certificates (Gray & Manson). Another possibility is the Increased monitoring of auditor’s performance, which links back to Porter’s view on weak audit standards. This could ultimately be punished with disciplinary procedures of accounting bodies following investigation of audit failures (Gray & Manson). Regulatory and informal pressure would ultimately lead to an extension of the duties and liabilities of auditors. Critics argue that a company can only be presented in a fair and true way if there are no misstatements or fraudulent activities.

Review of the literature on the audit expectations gap

They argue that businesses are becoming increasingly complex and advances in audit technology have not caught up to this rising challenge (Humphrey et al. 1992). Porter (1993) argues that societies expectations can only be reasonable if they are compatible with the auditor’s role in society at the point where audit procedures are beneficial to perform from a cost point of view. Furthermore, Sikka et al. argue that regulatory bodies are insufficiently independent of their own community as they shy from introducing audit (and accounting) standards that would significantly add to the liabilities of their audit members. Porter (2001) believes that the expectation gap will inevitably never full close and cases like the Enron scandal contribute to widening it further. In 2008, Porter’s research on the development of the expectation gap in the UK and New Zealand in a 10 year time span has proven that the expectations gap is ever changing and that due to a) better monitoring of audit performance and b) wide spread discussions about corporate governance and financial affairs in the UK the gap has decreased from 1998-2008.

Even though researchers seem sceptical, empirical studies have shown that there is potential to mitigate the extent of the expectations gap. The financial audit is dynamic and changing through advanced technology and increasing public expectations, can we ever get close to eliminating the expectations gap and if so, what are the next steps?

The issue of advances in the profession and changing public expectations – an endless cycle?

Having critically evaluated expectations gap theory and following the review of the literature I have identified the issue of a potentially endless cycle of an increasing expectations gap (Figure 2). Millichamp & Taylor discuss this as a current issue, and how financial report users “want more disclosure from companies, in particular nonfinancial information and forward-looking information”, and how the “role of the audit extends from a purely financial certification” (Chapter 32, current issues, p.488). This opens up discussions on how we must deal with increasing expectations if we want to reduce the gap in the future.

Technological advances and increased expectations

Crucial to this discussion is the cost – benefits relationship associated with the procedures undertaken by financial auditors. One can argue that technological advances will reach the point where they enable auditors to validate every transaction of a company. This will have a considerable impact on the cost – benefit relationship of the financial audit. A complete check of a company’s transactions will now be a realistic procedure to include in the financial audit without astronomical increases in audit fees, as this will be automated enabled by technology. This results in increasing expectations of auditors because society recognises technological changes and realises that technology has allowed this to become the new norm. Auditors will be required to have checked a company’s full register of transactions and complete financial statements as part of the audit report.

The role of academics and the media – a potential dilemma?

The review of the literature has revealed that academics and researchers show strong interest in increased monitoring of financial auditors and defending stakeholders right to a fair and true view of a company, regardless of their economic or political power. However, because of their influence on regulatory bodies as well as society, I conclude that academics and the media must lead the change for increased public awareness and understanding of the audit profession. The public’s perception of the auditing process is shaped by academic papers and news articles, especially following a major corporate scandal.

Conclusion

I concluded that academics and the media actively help the enforcement of stricter audit standards and performance monitoring to decrease the performance gap, however, they also play an integral part in the attempt to reduce the reasonableness gap, and ultimately the expectations gap.

Going concern issues (Concerning deficient performance & deficient standards): -auditors must decide if going concern period selected by directors is appropriate and decide if the financial information used to assess going concern issues is appropriate and satisfactory. Even though directors have disclosed going concern statues of the company, auditors must form an independent view. Auditors must therefore consider a wide range of factors to determine if going concern conclusions are valid.

References

1. Adapted from 2020 Audit lecture on Audit Theory and Ethics by Samantha Bell (Gray & Manson, 7th, Chapter 2, Fig 2.2 p.49)
2. CAMPBELL, J.E. and MUTCHLER, J.F., 1988. The ‘Expectations Gap’ And Going-Concern Uncertainties. Accounting Horizons, 2(1), pp. 42.

Knowledge Audit Review: Background And Approach

INTRODUCTION TO KNOWLEDGE AUDIT

Currently all the organisations are adapting to knowledge management system and knowledge audit methodologies for the effective usage of knowledge in the growth of organisation. It also helps in effective decision making at the time of need. A knowledge audit is a process which is used for identifying and accessing the knowledge. Along with this, its availability, structure, flow, use, needs and importance to the organisation can be known. Knowledge audit is a planning document which provides structural view of organisational knowledge (Debenham & Clark, 1994). It will also help in examining the culture and capabilities of the organisation. Careful usage of knowledge audit will help in managing the organisation’s knowledge as well as helps in achieving the target objectives and goals.

The main purpose of this paper is to critically evaluate the knowledge audit methodology that is implemented in National School of government. The key concepts that are specified in this report are the knowledge management system and the knowledge audit methodologies. This report includes the objective of the article, background of the organisation and the knowledge audit approach it has followed along with this, it also discusses about the major findings in the study, recommendations and comparison to the similar studies.

MAIN OBJECTIVES OF THE ARTICLE

The main objective of this article is to analyse the knowledge Audit Methodology (KAM) that is being followed in the National school of Government. Along with this, the authors aim to provide the comparison between already existing knowledge audit methodologies along with the KA used in this case study. The authors aim to share the outcome of their case study and also to engage the fellow knowledge management practitioners on their experiences on knowledge audit methodologies in different organisations. The different stages in the knowledge audit methodology is also mentioned in this article.

BACKGROUND OF THE ORGANISATION

National School of Government (NSG) is a government institution which primarily focuses on providing training to the public servants. In order to deliver enhanced knowledge managements services to its users, the organization ahs decided to incorporate a knowledge management system which would assist them in achieving their targeted goal. This implies that the organization is hugely reliant on knowledge for achieving its ultimate objectives. It is equally important to manage and utilize the knowledge that is being generated in an effective way to achieve the desired targets. To achieve these, Knowledge management systems along with Knowledge audit methodologies must be employed. The knowledge management system helps in storing the knowledge that is being generated and also helps in retrieving the data when needed. Whereas the knowledge audit is a process for identifying the need of knowledge, its availability and its mere significance to the organisation. This will also help in improving the operational efficiency as well as in making informed decisions.

KNOWLEDGE AUDIT APPROACH FOLLOWED IN THIS RESEARCH PAPER

Conducting a knowledge audit is an important step in establishing Knowledge management initiative. Knowledge audit will help in identifying, sharing, acquiring and accessing the knowledge that will be required for the growth of the organisation. The aim of knowledge audit approach followed in this study is to bridge the gap between current and future knowledge requirements of all the business processes and operations in the organisation. In order to study and analyse the knowledge audit methodology in National school of government, a qualitative approach has been followed in the provided study. There are mainly five stages in the methodology which incorporates- knowledge needs analysis, inventory analysis, flow analysis, mapping and audit reporting.

The first and foremost step to be followed in the knowledge audit methodology is to determine the key requirements of the knowledge required. This step will help in determining the knowledge needs in the organisation by considering the viewpoint of all the employees in the organization. To accomplish this, a survey was conducted with the NSF staff employees so as to analyse their views and perspectives. Not just this, additional comments sections were also provided to the staff so as to share their views on the additional knowledge requirements that are needed. It was found that the response rate was about sixty-nine percent (69%).

After analysing the knowledge needs from the staff members and employees of the organization, the next task is to conduct inventory analysis. Further, it is imperative to perform knowledge inventory analysis. For this, it is important to consider the sources of knowledge that needs to be considered which can be done either explicitly or tacitly. Explicit sources of information include corporate intranet, internet, library, HR directory, Statistical analysis, emails, hard drives, electronic systems and many more. Tacit source of knowledge includes experienced employees, competencies and information about the organisation. The key participants that are to be included in this process include- Strategist, senior management, HR manager, Marketer, Information technologist, knowledge analyst and operations department.

The next step in knowledge audit methodology is to understand the knowledge flow analysis. In this step, the required inputs will be procured from the employees and staff members of the organization. For this, various group discussions were held at different organisational levels. Employees were grouped together depending upon their job and designation levels. This helped in identifying the knowledge gaps and improving the overall efficiency of business processes. The results were documented so that these can be utilized as a valuable resource while formulating refined knowledge management strategies.

The fourth stage of knowledge Audit methodology is knowledge mapping. This step involves visual representation of the knowledge flow that is being followed in the organisation along with their corresponding knowledge resources and assets. This will aid the organisation in easy determination of the knowledge flow at certain period of time. Along with this, the knowledge gaps could also be identified through this.

The last phase of knowledge audit process is KA reporting which involves the process of detailed reporting of the assessment to its staff. This could be done either through emails or it is uploaded in the organisation’s knowledge hub. This step not only gives final report to the staff but also creates sense of ownership to the staff by acknowledging their contribution of knowledge in achieving the organisational goals and objectives.

MAJOR FINDINGS OF THE STUDY

The knowledge audit methodology along with the knowledge management system is implemented in the national school of government. This provides the efficient management and utilization of the available knowledge in the organisation. Along with this, it will help in bridging the knowledge gaps in the organisation. Thereby, improving the overall business processes and will also help in decision making purposes. The knowledge audit methodology that is adapted in national school of government has five stages. It was observed that there are primarily five stages which initiate from the requirements analysis to the understanding of knowledge in organisation to the knowledge audit reporting to its staff. These will help in acquiring the knowledge and views from staff across different organisational levels. Further, it will also play an integral role in boosting up the morale of the employee. In addition to this, it will also help in building a sense of ownership to the staff by acknowledging their contribution of knowledge in achieving the organisational goals and objectives. Through the literature review provided in the research paper, it can be understood that although there are differences and similarities between different types of knowledge audit methodologies, yet most of the activities that are involved are alike. Careful usage of knowledge audit will not just help in managing the organisation’s knowledge but will also help in achieving the target objectives and goals. Further, it can eb comprehended that the usage of knowledge management framework will not only helps in achieving the targets by usage of knowledge but will also help in examining the culture and capabilities of the organisation for the successful implementation of knowledge management. The knowledge audit will help in setting business goals and will also provide insights to the bigger picture of the business goals and ultimate objectives to be achieved. Substantially, it will help in bridging the gap between present and future scenarios of business by implementing refined business strategies. Knowledge audit will not only help in identifying the knowledge needs but it will also help in identifying the obstacles and duplications in knowledge flow of the organisation. From this analysis, it could be understood that it is important to conduct knowledge audits frequently in an organisation. So, that the goals and objectives could be achieved in response to the changing knowledge needs in the organisation. It is important to clearly define the audit objectives before implementation of KA. All the staff members of the different levels of organisation must be involved so that more views and data could be gathered. In essence, there are many types of knowledge audit methodologies, however, a suitable approach for the organisation must be selected in order to meet business goals. In order to achieve this, the selected model can even be moulded as per business needs or culture followed in the business organization.

RECOMMENDATIONS MADE IN THE STUDY

The type of knowledge audit methodology that is to be incorporated must solely depend upon the culture of the organisation. There are few recommendations that are made in this research paper for conducting knowledge audit in public sector organisation. These are mentioned below

• As per discussion made by the author, it is important to conduct knowledge audit regularly in order to respond to the ever changing knowledge needs in the organisation.
• The author of this research paper has mentioned, that it is important to define the objectives of knowledge audit at the initial stages and inform these with to all the staff members in the organisation so as to set clear goals and objectives of the organization to be achieved.
• The authors have recommended that involving the staff members from different levels in the organisation will certainly help them in gathering required knowledge for conducting the audit process.
• The authors of this paper mentioned that involvement of all the staff members will help in promoting a sense of ownership and their commitment in the KA process.
• It is also recommended that a suitable methodology must be implemented in the organisation which can also be customised depending upon the culture of the organisation.

COMPARISON TO SIMILAR STUDIES

The comparative analysis of the knowledge audit methodology of national school of government is discussed against various KA methodologies in KM literature of the research paper. Each type of knowledge audit methodology might differ from each other in the number of stages involved but the overall activities would be same.

(Henczel, 2000) has given a knowledge audit framework which majorly involves seven stages which incorporates- planning, data collection, data analysis, data evaluation, Communication and recommendations, implementing recommendations and knowledge audit as a continuum. As compared to the KA methodology implemented in the NSG, the only difference is between the number of stages that are followed by the two. But the activities that are performed for acquiring and managing the knowledge are almost similar. (Choy, Lee and Cheung,2014) has proposed a framework which involves three stages namely pre-audit preparation, audit process and Audit analysis. The difference between this methodology and the KA methodology in NSG is the emphasis placed on cultural assessment and some other difference is in terms of the activities performed. Knowledge analysis is the second stage in the KA methodology of NSG but it is the third stage in (Choy, Lee and Cheung,2014) methodology. On the contrary there are total five stages in NSG’s KA methodology. (Gourova, Antonova and Todorova, 2009) has proposed a knowledge audit methodology with emphasis on core processes. The stages involved in this methodology are identifying organisational and core processes, prioritizing processes, identify and meeting key people, knowledge inventory, knowledge flow, knowledge mapping, audit reporting and knowledge re-auditing. The first five stages in (Gourova, Antonova and Todorova, 2009) methodology functions are accomplished in first stage of NSG’s KA methodology i.e; knowledge need analysis. Another difference between both methodologies is a new step known as knowledge re-auditing is involved. (Ganasan & Dominic P, 2011) has proposed a 6 stage KA methodology. The phases and activities are much similar when compared to the NSG’s KA methodology. The only difference is that the NSG’s KA methodology doesn’t contain KA re-auditing phase but it conducts knowledge audits regularly. (Kumar,2013) has proposed the knowledge audit framework which is very similar to the NSG’s KA methodology. But the difference is that (Kumar,2013) methodology doesn’t include KA reporting and the last stage is KA mapping. KA reporting involves sharing the detailed report of the knowledge audit with all the staff members in the organisation.

REFERENCES

1. Henczel, S. (2000). The information audit as a first step towards effective knowledge management: an opportunity for the special librarian. Inspel, 34(3/4), 210-226.
2. Choy, S. Y., Lee, W. B., & Cheung, C. F. (2004). A Systematic Approach for Knowledge Audit Analysis: Integration of Knowledge Inventory, Mapping and Knowledge Flow Analysis. J. UCS, 10(6), 674-682.
3. Gourova, E., Antonova, A., & Todorova, Y. (2009). Knowledge audit concepts, processes and practice. Wseas transactions on business and economics, 6(12), 605-619.
4. Ganasan, A., & Dominic P, D. (2011). Knowledge audit made comprehensive thru 6 stages. 2011 International Conference On Research And Innovation In Information Systems. doi: 10.1109/icriis.2011.6125730
5. Kumar, A. (2013). Knowledge Audit: Its Learning Lessons. LAP LAMBERT Academic Publishing.
6. Debenham, J., & Clark, J. (1994). The knowledge audit. Robotics And Computer-Integrated Manufacturing, 11(3), 201-211. doi: 10.1016/0736-5845(94)90035-3

The Healthy Built Environments Program Audit And Audit Instruments

Audits-of-place provide valuable data that can bridge the divide between health determinants and the design of built environments. This report discusses the role of auditing in developing healthy and sustainable places. It begins with a case-study of the Healthy Built Environments Program (HBEP) audit tool as used in Higgins, ACT. The methodology of the audit is explained along with a short discussion of the results. The report will go on to analyse the strengths and weaknesses of the HBEP tool as compared with current international and local walkability audit tools. It will discuss the role of auditing in the context of Health Impact Assessment (HIA) and policy development. Peer-reviewed academic journals, United Nations and Australian Government Department documents have informed the recommendations made as a result of this research.

INTRODUCTION

The Healthy Built Environments Program (HBEP) and audit toolkit was developed by Professor Susan Thompson, Dr Jennifer Kent and colleagues of the UNSW Faculty of Built Environment. The program focuses on research, education, workforce development and advocacy as a strategy for connecting health professionals with the built environment (Thompson, 2015).

METHODOLOGY

The mini-audit was conducted on-foot. It involved observing the vicinity of Higgins Place. Data was collected through written notes, photographs and Google Maps.

Six factors were considered in assessing the health-supporting capacity of the environment:

• Access and Circulation (ease of access via. paved and grass areas, including for mobility-disabled)
• Shade (sun exposure protection in walking and gathering areas)
• Safety (perceptions of safety regarding times of day, presence of others, vehicles and cyclists)
• Transport (availability and useability of active transport)
• Food Facilities (availability, affordability and quality of food available)
• Places to Meet and Socialise (availability and quality of public outdoor facilities, including green space)

The HBEP tool encourages users to analyse aspects of the environment regarding each of these factors, with the primary users of the area in mind. Guided questions require the auditor to give examples (direct observations) and use rating scales (perceptual observations) (see Appendix 1). In collating the data, qualitative (comments) and quantitative (ratings) data were analysed as either positive or negative. Higher levels of positive feedback correlate with more health-promoting areas.

RESULTS

See Appendix 2 for a data summary of the HBEP audit conducted for Higgins Place in June 2019. Table 1 outlines the major findings. Further discussion of this exercise is presented as an online presentation (accessible via https://youtu.be/OLugkReDH6I).

DISCUSSION

The HBEP tool assisted a Public Health student with little prior auditing experience to explore the associations between design and health outcomes for a specific environment. In conducting the audit of Higgins Place, it was important to consider the main users – families (many with young children) and older adults (often living with mobility disabilities). Many aspects of the environment did well to promote health (such as the large weather shelter, ample disabled parking and provision of bike racks). Other aspects, through poor design and maintenance or changes in user needs, could pose a risk to health (such as the lack of food facilities and damaged footpaths).

AN ANALYSIS OF THE AUDIT INSTRUMENT

OTHER AUDITING TOOLS

The HBEP audit is one of numerous ‘health of place’ auditing tools that have been developed in the last decade. These tools are designed by various stakeholders with differing objectives in mind. The objective of the developer impacts the methodology of the audit (including geographic scale, data collection techniques and degree of detail) (Dannenberg & Wendel, 2011). The HBEP tool was designed to introduce students to the user-perspective based concept of auditing for health (UNSW Faculty of Built Environment, 2013). It is broad in its scope of health-related factors and relies primarily on perceptual data collection.

It is valuable to compare this tool to those used in research and practice. For example, the Heart Foundation Neighborhood Walkability Checklist (HFNWC) was developed as an advocacy tool to facilitate community-led policy change (National Heart Foundation of Australia, 2011). The tool uses quantitative input, providing an overall ‘walkability score’ (see Appendix 3). The Walking Route Audit Tool for Seniors (WRATS) assesses walkability for ageing communities. WRATS was developed based on literature review and focus groups. It ranks 59 items (addressing safety, functionality, aesthetics and destinations) on a 3-point scale (see Appendix 4) (Kerr, Carlson, Rosenberg & Withers, 2012). Strengths and weaknesses of the HBEP audit compared to these quantitative, walkability-specific tools are outlined below.

STRENGTHS

• Range of healthy behaviour determinants covered (food, socialisation etc.), not solely walkability
• Emphasis on perceptual and qualitative data, valuable in latter design stages and assessing impact on healthy behaviours (especially in population groups) (Watkins, 2012)
• Guiding questions encourage critical thinking (e.g. WHY do you feel safe here?)

WEAKNESSES

• Potential auditor-bias. Results are dependent on the auditor’s area of expertiese, prior perceptions of health and/or design, knowledge of area and community). Quantitative, scale-rated audits could minimize this.
• Focus on visual and perceptual observations, lacking geographic or quantitative data. Such data is often required to validify policy change and to evaluate change over time and/or location. For example, a retrospective audit with the HFNWC would indicate if the area’s walkability has changed through a change in score.

THE ROLE OF AUDITING IN THE CONTEXT OF HEALTH IMPACT ASSESSMENT

HEALTH IMPACT ASSESSMENT

Health Impact Assessment (HIA) is a public policy intervention tool. Since its development in the late 1990s, the collection of instruments has been used to ‘judge the potential effects of a policy, program or project on the health of a population, and the distribution of those effects within the population’ (WHO European Centre for Health Policy as cited in in Harris, Kemp & Sainsbury, 2012). Figure 1 outlines the HIA process. In Australia, public health and policy researchers are calling for an emphasis on HIA in Environmental Impact Assessment (EIA). EIA is mandatory for any policy or action that is likely to impact environment, history or biodiversity under the Environment Protection and Biodiversity Conservation Act, 1999 (Australian Government Department of the Environment and Energy, 2019). HIA is fundamental in health and urban design policy-making as it provides a linear process to assess a project’s effects on the wider determinants of health (Harris et al., 2012).

The enCouncil framework identifies ‘monitoring, environmental and health auditing’ as the final stage of the HIA process. Audits can measure a project’s compliance with conditions outlined in the HIA. They can also evaluate the longitudinal success of the HIA process in promoting health (Western Australia Department of Health, 2007, p. 16). A literature review highlighted some recommendations for the incorporation of auditing in HIA.

• Ahammed (2007) critiqued this ’Australian approach’ of retrospective auditing in EIA (of which HIA is often a component of). He suggests that using audit tools throughout the assessment process would increase compliance and reporting between the numerous agencies involved.
• Quigley & Taylor (2003) caution against using the results of audits to establish cause-effect relationships between determinants of health and health outcomes. A successful HIA intervention can make it impossible to test the accuracy of detrimental health outcomes predicated in the earlier stages of the process. For example, if a mitigation measure such the installation of temporary walking paths during construction work is implemented, there should be no associated behaviour change (it is unlikely people will begin to walk more, but they should walk less). They suggest audit tools should be used to assess the HIA process in itself.

The concept of HIA (and the role of auditing throughout the process) will continue to emerge as policy-makers, health professionals and urban designers acknowledge the unmistakable connection between health and place. Auditing tools are essential in monitoring the HIA process as well as assessing the success and adherence to resulting plans.

CONCLUSION

The results of the mini-audit in Higgins show a clear relationship between the aesthetics and functionality of the environment and users’ likelihood to participate in health-promoting behaviours. The HBEP tool allowed the auditor to identify some areas for improvement and make some practical recommendations. An analysis of the audit tool presented some issues with user bias and a lack of quantitative evidence. It is important to contextualize audit methods, timeframes and objectives. Auditing and monitoring tools are an integral part of conducting and evaluating HIA processes. The literature suggests that more research and real-world experience will be valuable in clearly defining the role of audits in impact assessment.

REFERENCES

1. Ahammed, A. K. M. Rafique. (2007). The Role of Monitoring and Auditing in the Environmental Impact Assessment (EIA) Process in Australia (Research Thesis). The University of Adelaide – School of Social Sciences, Australia.
2. Australian Government Department of the Environment and Energy. (2019). Environmental Assessment and Approval Process. Retrieved from environment.gov.au: https://www.environment.gov.au/protection/environment-assessments/assessment-and-approval-process
3. Dannenberg, A. L., Wendel, A. M. (2011). Chapter 20: Measuring, Assessing and Certifying Healthy Places. In A. Dannenberg, H. Frumkin & R. J. Jackson (Eds), Making Healthy Places: designing and building for health, well-being, and sustainability (pp. 303-318). Washington, DC: Island Press.
4. Harris, P., Kemp, L., & Sainsbury, P. (2012). The essential elements of health impact assessment and healthy public policy: a qualitative study of practitioner perspectives. BMJ Open, 2(6). https://doi.org/10.1136/bmjopen-2012-001245
5. Kerr, J., Carlson, J. A., Rosenberg, D. E. (2009). Walking Route Audit Tool for Seniors (WRATS). Retrieved from Active Living Research: https://activelivingresearch.org/walking-route-audit-tool-seniors-wrats
6. Kerr, J., Carlson, J. A., Rosenberg, D. E., & Withers, A. (2012). Identifying and Promoting Safe Walking Routes in Older Adults. Health, 4(Special Issue I), 720-724. https://doi.org/10.4236/health.2012.429112
7. National Heart Foundation of Australia. (2011). Neighbourhood Walkability Checklist [Pamphlet]. Retrieved from https://www.heartfoundation.org.au/images/uploads/main/Active_living/Neighbourhood-walkability-checklist.pdf
8. Quigley, R., & Taylor, L. (2003). Evaluation as a key part of health impact assessment: the English experience. (Policy and Practice). Bulletin of the World Health Organization, 81(6), 415–419. https://doi.org/10.1590/S0042-96862003000600010
9. Thompson, S. M. (2015). NSW Research and Workforce Development Program on Healthy Built Environments. Retrieved from City Futures Research Centre: https://cityfutures.be.unsw.edu.au/research/projects/nsw-research-and-workforce-development-program-on-healthy-built-environments/
10. UNSW Faculty of Built Environment. (2010). Healthy Planning Mini Audit. Australia: UNSW
11. UNSW Faculty of Built Environment. (2013). Healthy Built Environments Program Annual Report 2013. Sydney, NSW: City Futures Research Centre.
12. Watkins, D. (2012). Qualitative Research: The Importance of Conducting Research That Doesn’t “Count.” Health Promotion Practice, 13(2), 153–158. https://doi.org/10.1177/1524839912437370
13. Western Australia Department of Health. (2007). Health Impact Assessment in Western Australia Discussion Paper. Retrieved from http://hiaconnect.edu.au/old/files/HIA_in_WA_Discussion_Paper.pdf

The Audit Firms Reputation And Its Effects On Audit Quality And Results

Abstract

In this paper we will look at the connections between the reputations of auditors and their clients. In my research I have found in several research papers that the clients of the same auditor have very similar histories of misconduct. It is easily deduced that a client’s misconduct history and reputation is almost as important as its size. The research papers I have studied show the relationship between an auditor and their preferred client. Clients chosen by Auditors who have a history of accepting clients with records of misconduct are likely to relapse in the future regardless of any measures taken by the auditors. Reputation is how a firm’s worth is judged; firms tend to take in the same type of clients repeatedly, in a reversal of the situation. There is a correlation between firms with a past of misconduct and clients with the same.

We interpret our results within a positive assortative matching framework and conclude that auditors’ differential reputation concerns relate to their client acceptance and continuance decisions. MY CONTRIBUTION WILL BE AGAINST THIS

Introduction

Most research available focuses on the relationships between clients and their choice of auditors and why. The reverse is somewhat uncommon in that it is sometimes overlooked why auditors would select certain clients over others normally. Clients normally choose auditors by their size and reputation as a firm (DeFond and Zhang, 2014). This is the case despite clients don’t understand the differences in quality or the intermediate results of the audit. (Causholli and Knechel, 2012). An auditing firm’s reputation is normally considered one of the most important currency in today’s auditing world. Unfortunately, it is rather audit quality rather than reputation that is truly relevant. That isn’t to say reputation isn’t an important factor; because clients can only understand so much of what an auditing firm does for a business it comes down to reputation when clients are selecting a firm. Clients judge by observing the end results available to them; which is reputation, but reputation can be affected by the number of restatements that are released by a firm. The simple way clients judge an auditing firm doesn’t in any real way take into consideration what goes on during an audit. A firm could consistently produce quality work and simultaneously possess a mediocre reputation; which could eventually lead to reduced work quality. Meaning, clients often use only an auditor reputation to assess quality and fail to understand the relationship they have with a firm. The auditors protect their reputation by carefully selecting the clients they choose accept and over other. Due to this an auditor’s clients are more likely to be similar in terms of the history of misconduct.

Certain auditors fous on similar clients with a history of misconduct (Egan, Matvos, and Seru, 2018). This study makes use of U.S. Broker-Dealer Market (BD) setting as there are more records available, and those sent to the SEC are of public record.

This is not to say that all clients and auditors with a history of misconduct pair with the other. Auditors who deal with extremely public clients are far less likely to perform in such a way as to damage their reputation further. This means that auditors who have only minor instances of misconduct on their record are the least inclined to accept client with a history of continuous misconduct. By using a data from employment records of BD’s it’s possible to notice the positive matching correlation of auditors and clients. This also showcases the reluctance of auditors to accept BD’s with a history misconduct in a public market. It shows that auditors without a history of misconduct will not stay with BD’s who do have a history of misconduct.

Setting, Data, and Summary Statistics

Auditors with a history of misconduct also seem to be able to negatively affect clients and increase their chances of future misconduct. There should be research indicating this negative correlation and how auditor preference can impact clients. The data also shows a correlation between the reputation of the auditor and their clients they choose to accept.

Research Design

The conclusions reached in this paper are determined studying research that uses the BD’s in place of the clients and studying their correlation with auditors. The clients are sorted by size from smallest to largest; while the auditors are sorted by their size and the size of their clients. The idea was that if the size is irrelevant, clients of all sizes would match with the larger firms. This turned out to be mostly the opposite with less than 20% of auditors and clients matching. For large auditors matching with larger clients, as well as the opposite there was a 50%.

The percentage of client misconduct is measured by the percent of client advisors with a history misconduct. The percentages are used to organize the clients from smallest to largest in terms of misconduct on record. The auditors are assigned using their average rates of misconduct in the prior year. The percentage of clients with high histories of misconduct and auditors with low histories is slightly less than 20%; while the percentage is 42% for clients and auditors with matching histories of misconduct. It was also found that the relationship between the client’s history of misconduct and the auditor’s history is 50% as important as the two matching in terms of size.

An auditor’s and client’s choices alone seem to create a clear pattern; with a significantly greater chance of a high misconduct auditor matching with a low misconduct client (27%) than the opposite of a low misconduct auditor matching with high misconduct client (19.29). This suggests that an auditor holds far greater say over who they form relationships with than the client. This doesn’t consider the length of time these auditors and clients stay together; this is likely because a high misconduct client can have on an auditor’s reputation. This is supported by the research which shows that low misconduct auditors separate from a high misconduct client far sooner than a high misconduct auditor and a low misconduct client. It can also be inferred that auditors have a greater control over who they select regardless of client reputation. This is because auditors with a better reputation and therefore larger and more prone to some misconduct can selectively choose their low reputation clients. The result of this research is that an auditor history decides the future conduct of their clients.

The size of the audit firm must be considered as the research shows that two high misconduct auditors and clients can have very different percentages of misconduct depending on how large the audit firm is. This research can be used as an early warning system for investors who are looking into the audit. Audit firms with a high history of misconduct have a greater chance of having a higher misconduct percent the larger they are. This is definitely a relationship to research in this case, the influence audit firms can have over their clients in this case is significant and could be potentially be leveraged and the auditor’s role in this relationship studied.

Reference List

1. Causholli, M., & Knechel, W. (2012). An examination of the credence attributes of an audit. Accounting Horizons, 631-656.
2. Curtis, Q., Donelson D., Hopkins, J. (2019). Revealing Corporate Financial Misreporting. Contemporary Accountng Research, 1337-1372

Audit: Definition, Importance And Objectives

Abstract

We will talk about the definition of Audit and then will continue with it’s importance and objectives and then go to main research title which is “The Different Types Of Audit” and speak about everyone of them in details. the objectives of the audit can be categorized into (primary objectives, and subsidiary objectives). And there are many importance of auditing. And what is the goal of all this types.

Introduction

The term audit usually refers to a financial statement audit. A financial audit is an objective examination and evaluation of the financial statements of an organization to make sure that the financial records are a fair and accurate representation of the transactions they claim to represent. The audit can be conducted internally by employees of the organization or externally by an outside Certified Public Accountant (CPA) firm.

Body

Almost all companies receive a yearly audit of their financial statements, such as the income statement, balance sheet, and cash flow statement. Lenders often require the results of an external audit annually as part of their debt covenants. For some companies, audits are a legal requirement due to the compelling incentives to intentionally misstate financial information in an attempt to commit fraud. As a result of the Sarbanes-Oxley Act (SOX) of 2002, publicly traded companies must also receive an evaluation of the effectiveness of their internal controls. Standards for external audits performed in the United States, called the generally accepted auditing standards (GAAS), are set out by Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA). Additional rules for the audits of publicly traded companies are made by the Public Company Accounting Oversight Board (PCAOB), which was established as a result of SOX in 2002. A separate set of international standards, called the International Standards on Auditing (ISA), were set up by the International Auditing and Assurance Standards Board (IAASB). Auditing are one of the most important department in any company or banks etc. (1)

*Importance of audit: An audit is important as it provides credibility to a set of financial statements and gives the shareholders confidence that the accounts are true and fair. It can also help to improve a company’s internal controls and systems (2)

*The objective of an audit is to express an opinion on financial statements, to give the opinion about the financial statements, the auditor examines the financial statements to satisfy himself about the truth and fairness of the financial position and operating results of the enterprise.

Types of Audits

External Audits

Audits performed by outside parties can be extremely helpful in removing any bias in reviewing the state of a company’s financials. Financial audits seek to identify if there are any material misstatements in the financial statements. An unqualified, or clean, Auditors opinion provides financial statement users with confidence that the financials are both accurate and complete. External audits, therefore, allow stakeholders to make better, more informed decisions related to the company being audited. External auditors follow a set of standards different from that of the company or organization hiring them to do the work. The biggest difference between an internal and external audit is the concept of independence of the external auditor.

Internal Audits

Internal auditors are employed by the company or organization for whom they are performing an audit, and the resulting audit report is given directly to management and the board of directors. Consultant auditors, while not employed internally, use the standards of the company they are auditing as opposed to a separate set of standards. These types of auditors are used when an organization doesn’t have the in-house resources to audit certain parts of their own operations.The results of the internal audit are used to make managerial changes and improvements to internal controls.

IRS tax audit

IRS tax audits are used to assess the accuracy of your company’s filed tax returns. Auditors look for discrepancies in your business’s tax liabilities to make sure your company did not overpay or underpay taxes. And, tax auditors review possible errors on your small business tax return. Auditors usually conduct IRS audits randomly. IRS audits can be conducted via mail or through in-person interviews.

Financial audit A financial audit is one of the most common types of audit. Most types of financial audits are external. During a financial audit, the auditor analyzes the fairness and accuracy of a business’s financial statements.

Auditors review transactions, procedures, and balances to conduct a financial audit.

After the audit, the third party usually releases an audit opinion about your business to lenders, creditors, and investors. (3)

Operational audit

This is a detailed analysis of the goals, planning processes, and outcomes of business processes. The review can be conducted internally or by an external source. The intended result is an evaluation of the operations, most likely with recommendations for improvement. (3)

Compliance Audit

In many countries, all companies are required to perform specific audits as opposed to legal audits to comply with the requirements of specific laws and regulations. (4)

Environmental & Social

Environmental and social audits include an assessment of the environmental and social impacts of the organization resulting from economic activities. Things are increasing to environmental scrutiny due to the rise in the number of companies that report environmental and sustainability reports in their annual report describing the impact of their business activities on the environment and society and the initiatives they take to reduce any other negative consequences.

Environmental auditing has provided a means to provide confirmation of the accuracy of the data and claims presented in these reports. If a company detects, for example, the level of carbon dioxide emissions during a period in the sustainability report, the environmental auditor will verify the validity by collecting the relevant audit evidence.

High- level Review of Procedures

High-level auditing is a special type of audit that measures general compliance with the company’s main policies and sound business practices aimed at reviewing and providing the auditor with an understanding of the process and determining the nature of detailed tests that may be required in certain areas. (6)

Despite the different types of accounting audit, all types facilitate and work to achieve the goal of the organization.

Conclusion

Audit plays a valuable role for companies and charitable organizations to maintain integrity and specific goals. And it protects organization from financial misstatements, presenting a reliable health picture of the organization to the markets. The types of audit performed on a particular auditable unit can be any combination of the types described below. The type of audit to be performed is determined in the initial planning process. Audit had different types and that helps to complete auditing quickly and effectively.

Reference

1. Tuovila, Alicia. www.investopedia.com. [Online] 14 July 2019. https://www.investopedia.com/terms/a/audit.asp.
2. Morey, Chris. www.plusaccounting.co.uk. [Online] https://www.plusaccounting.co.uk/knowledge/blog/why-are-audits-important/.
3. audit, Finance gateway internal. [Online] https://finance.columbia.edu/content/types-audits.
4. Bragg, Steven. www.accountingtools.com. [Online] 7 May 2018. https://www.accountingtools.com/articles/types-of-audits.html.
5. Note, IEDU. www.iedunote.com. [Online] https://www.iedunote.com/audit-types.
6. Services, SW Office of Audit and Consulting. [Online] https://www.alaska.edu/audit/types-of-audits/.

Critical Refection And Self-Awareness & Action Plan

Executive Summary

The main purpose of this report is to gather own personal skills, which can help to evaluate what has been learnt and plan how to develop more or improve them. Methods including analyse experiences before and during university to identify skill areas which relate to personal and professional development. Different people have their preferred learning style, which understands own learning style and uses it effectively is necessary to successfully further develop skills. The main finding learning process is a five steps cycle (Atkins and Murphy (1993) cyclical model), consider this module, one can be achieved improvement step by steps.

Recommendation: applying for a job with more independent research, continue writing journals to keep up to date with your work or life, finding different learning style which works for you.

Introduction

The ability to be a self-reflector is important skills that students would benefit from developing different skills and experience during university, therefore use (Part A: self-audit) that can to analyse current skill levels and how it can be important to the industry. Critical reflection has been described as an extended and abstract outcome of learning (Biggs 2003), implies that student can absorb different experiences and knowledge during university, also (Part B: Critical reflection and self-awareness) evaluate the experiences and skill before and during university. Critical reflection can support professional development through assessment of decisions and actions, and it can lead to improvement in service delivery and patient experiences of care (Brookfiled 1987; Mezirow 1994.), show on (Part C: action plan).

Critical reflection and self-awareness

One of my interesting personal experiences is leaving China and deciding to study in the UK in a private school by myself when I was fourteen years old without any help from my parents, and I have been through many difficulties at the beginning. For example, overcoming the language barrier and stay positive and motivated. It has been a tough time and I have not enjoyed my life in a new environment but looking back now I have realised how much these experiences have positively impacted my skills and development. A much more culturally diverse environment from what I was used to in China helped me to build my cultural awareness and socialising skills. This is important for a future career in the industry as it may interacting with people from different countries and backgrounds. This benefits a lot when it comes to customer services as you would understand and communicate with them and it can also help with marketing research as better knowing a different culture.

One of the important abilities I have developed during my time in the UK is adaptability. I believe that being able to adapt to any kind of new environment is vital in real life, such as going to a new school or having a new job. As talked about having a new job, a good level of adaptability will show flexibility and uniqueness of you, which can offer an attractive skill to have when applying for a job. Another important skill is listening, which I developed while I was learning English. I could not express myself well by using English, but I do understand what the person saying, so I always listen to the words and try to picture everything in my mind. I believe listening skill is essential for everyone in the industry. By listening to the customers, you will understand their needs and maximise the satisfaction to build a better connection with them as they are likely to be royalty to the brand, meanwhile further develop the brand image. Also, with a good listening level, I can be more productive as a result of a better understanding of the task and expectations from managers, therefore it helps to set up the goals for me to produce a perfect task.

During my time in university so far, I have already had a few group presentations for the workshop. This requires doing a lot of research on the task and at the same time you need to build a good connection with your new team members. I was not confident enough to present my work in front of a group of audience and then I was thinking about skipping the presentation day, but then I realised how important is my role within a group, so I gave up the idea of skipping the lesson and finished my group presentation. Through this experience, I have realised that negative energy could affect you through feelings and actions. As a team, a team spirit is needed for everyone. This developed my teamwork skills drastically through disappointment that is feared when presenting to a group of audience from a lack of confidence. Furthermore, teamwork is the key to the success of all businesses because good teamwork can create ideas, solve problems and better quality of work. As developing good teamwork skill, it increases output by having quick feedback so problems can be solved faster. For example, when comes to decision-making in the industry, speed is required to solve the problems as there are limit time and opportunities. So, a variety of skills involved in a team will help to spread the workload which provides efficiency and productivity to the industry.

Different people have a preferred learning style, according to Felder and Silver learning style module (FSLSM), each learner according to four dimensions: active/reflective, sensing/intuitive, visual/verbal, and sequential/global. After I complete questionnaire provided on NC STATE UNIVERSITY website, I have found my result:[image: ]

For active/reflective, I have scored seven favours to reflective, which means I have a moderate preference for reflective. So, I may learn less easily by doing something active, for example, discussing or applying or explaining it to others. But it helps me with the lectures in the university as normally you need to require sitting through lectures without getting do anything physical but take notes and think quietly and as a result, a high level of attention can be achieved.

For future development in industry, I could use my reflective learning skill to think deeper for every single task or problem as I can think carefully and reflective on me. But then it is difficult for me when requires explaining details within a group as I prefer to think quietly. Teamwork is common for every industry thus this could impact my role within a team because teamwork requires a lot to discussion and presentation. However, the work I received could be more individually, so I can do my best with the work and at the same time it will not affect the work process of the team.

Action plan

I can use Atkins and Murphy cyclical model to help me with every action or experience and go through each of the steps and further improved my skills and knowledge.

Relevant skills of university and professional could be communicative, leadership, adaptability, language and creativity etc, firstly, activities like career workshop/meeting, this could help students for future employment by building the connection between different people and also providing employment opportunities, further increase their awareness of the future industry. For academic skills like language skill, applying for language class is a good choice as you can learn to speak another language and understand a different culture, so lay the foundation for future marketing and customer service work. Doing a part-time job or internships have the potential opportunity to learn many things outside the textbook. For example, how to communicate with others, time management and manage your finance. If you choose a part-time job to relate to your course, you will be able to gain experience and expertise in this field and these experiences will look good on your CV.

Conclusion

Critical reflection is important, it gains attention to the different purpose of reflection thus may help to achieve more collaborative approaches to learning. Learning about different personal or professional skills will provide many opportunities and it is important to know how to take the opportunities and show the best of you, which is an important learning process. And also, self-reflection is one of the important keys to success, it gives a better understanding of own behaviour and the ability therefore, to be self-motivated. But improvement can only be achieved with understanding a level of knowledge for certain types of skill.

References

1. Biggs, J. (2003) Teaching for Quality Learning at University 2nd Edition. Buckingham: Open University/SRHE.
2. Biggs, J. B. & Collis, K. F. (1982). Evaluating the quality of learning: The SOLO taxonomy. New York: Academic Press.
3. Brookfield, S. (1987) Developing Critical Thinkers: Challenging adults to explore alternative ways of thinking and acting. Milton Keynes: Open University Press.
4. Felder, R.M. and Soloman, B.A. (1997) Index of Learning Styles Questionnaire. Available at: http://www.engr.ncsu.edu/learningstyles/ilsweb.html.
5. Felder, R.M. and Silverman, L.K. (1988) Learning and teaching styles in engineering education. Engineering Education, 78: 674–81.
6. Habermas, J. (1978) Knowledge and Human Interests (second edition). London: Heinemann.
7. Mezirow, J. (1994) Understanding transformation theory. Adult Education Quarterly, 44(4) pp. 222–235.
8. Messick, S. (1996) ‘Cognitive styles and learning’, in De Corte, E. and Weinert, F. E. (eds), International Encyclopedia of Developmental Psychology, 638-41. London: Pergamon.
9. Pask, G. (1976) ‘Styles and strategies of learning’, British Journal of Educational Psychology 46, 128-48.

Audit Theory Evaluation In Audit Industry

This essay will critically discuss and evaluate auditing theory in relation to the audit industry by paying particular attention to Flint’s postulate; “the essential distinguishing characteristics of audit are the independence of its status and its freedom from investigatory and reporting constraints” . Primarily this essay will investigate how this postulate is linked to the agency theory alongside the lending credibility theory and how when auditor independence is compromised, the credibility of their opinion is lost. We start by looking at a couple of basic definitions. Theory itself is defined as “a supposition or a system of ideas intended to explain something, especially one based on general principles independent of the thing to be explained.” Auditing theory therefore explains what the purpose of auditing is whilst also showing why the auditing postulates are so important. Agency theory attempts to portray the principle-agent relationship, where due to information asymmetries and conflicting self-interest, agents cannot be considered trustworthy by the principle. By the use of mechanisms, the principle is able to align the interests of the agent with the principle including risk and reduce the opportunity for opportunistic behaviour. Within auditing, the stakeholders are considered the principle, management are considered the agent and the mechanisms relate to the use of an audit firm. This theory goes hand in hand with the lending creditability theory which demonstrates how “audited financial statements are used by management to enhance stakeholders’ faith in management’s stewardship”. By linking these theories to auditing we are able to understand the significance of Flint’s postulate of audit independence.

First, we discuss how auditor independence is linked to agency theory. Agency theory discusses the relationship between stakeholders and management, and how this relationship creates a principle-agent problem. The use of an audit firm aims to reduce this principle-agent problem and therefore the independence of management. However, the use of an audit firm creates a new principle-agent problem between stakeholders and the audit firm. If the audit team is not independent from management then they cannot be trusted by stakeholders and the original principle-agent problem between stakeholders and management persist. Stakeholders cannot trust an audit firm that is not independent from management as they may be manipulated by, influenced by or in collusion with management in order to fulfil their own professional and personal self-interests. There are many reasons why management may not be considered trustworthy, such as their own financial reward, job security or relationships with third parties who are not relevant to the principle. Auditors too have many incentives to act unprofessionally and therefore ignore the independent requirement of the auditing role, these include the large audit fees paid for by management and the threat of losing employment by the audit client or company. A 2016 survey revealed that the average audit fee for public companies was $7.4 million. The International Federation of Accountants lists the main threats to auditor independence alongside an additional threat listed by the Auditing Practices Board. This is an example of the existing problems presented by the principle-agent relationship within audits.

Next, we discuss how auditor independence is linked to the lending credibility theory. Within auditing, auditors give their opinion on the truth and fairness of financial statements prepared by management. Lending credibility theory suggests that by auditing these financial statements, it adds credibility to them, therefore increasing stakeholder’s confidence in management. The perceived increase in reliable information leads to improved quality investments by stakeholders. However, if we consider the threats to independence discussed above which lead to a lack of independence between management and the audit firm, we can assume that no extra credibility is gained by auditing these financial statements. This is why Flint describes independence as a ‘distinguishing characteristics’ of the audit and why it must always be present in order to improve the credibility of the reports for the benefit of the users. Today, creditability consists of five fundamental principles; integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. By focusing on independence, we can see how easy it is for the fundamental principles such as integrity and objectivity to be neglected as a result of independence being compromised, leading to overall creditability decreasing at a detrimental rate.

Having looked at of these two theories in detail, we can begin to understand their relevance to the modern-day audit and the potential downfalls in the theories. Both of these theories make the assumption that management has a certain level of corporate governance, in which financial statements are kept. It is not always the case that companies have financial statements that are readily available to be audited for stakeholders to use as a mechanisms to improve the credibility of managements stewardship. They also assume that agents are always untrustworthy, this is also not always the case. In the case of management, stakeholders may have already used other mechanisms, such as payment in the form of shares, in order to align their interests. In this case the use of an audit would not add the same level of credibility that it added before, meaning that if the cost of the audit was greater than the benefits achieved from the audit, it would not be beneficial to audit the financial statements. Furthermore, it may be that the agents are simply trustworthy and that there is no need for mechanisms as they have pride in what they do which means their interests have already been aligned with those of the principle. However, even though it is important to look at the other end of the spectrum, this proposition is almost impossible as any uncertainty about the agent’s trustworthiness is likely to call for the use of mechanisms in order to cover any of the doubts had by stakeholders. Lastly, it is important to note that audit firms are not always brought into solve the original principle-agent relationship where the principle doesn’t trust the agent. Audit firms may also be brought in due to legal requirements, or alternatively because the agent wants to prove to the principle that they are trustworthy and not the other way around.

Audit fees also demonstrate a huge role in auditing theory. Audit fees are a type of agency cost, this is the internal cost of an agent working on behalf of the principle. As mentioned above, audit fees are paid for by management to the audit firm to give an opinion on the truth and fairness of the financial reports. A large agency cost can be associated with a large agency risk, however this is not a useful indication of a managements trustworthiness as different companies require more substantial auditing procedures resulting in varying costs. This may be a limitation of the theories as the cost of using mechanisms doesn’t translate into a direct representation of the credibility gained. Additionally, due to the current payment nature of audit fees, true independence can never be met. This could only be resolved by using a third party completely independent from the principle and the agents in this relationship. Yet, this is unlikely to happen as no one would be willing to pay for such a procedure if they were not able to gain directly from this investment so that their benefits were greater than their costs. For this reason, true independence can never be met, this is further exacerbated by the audit of public sector companies in a situation where the auditor becomes a stakeholder creating bias. In this case, although independence has not been directly compromised, a complicated web of inter-connectedness has caused independence to be compromised. This application of the theory is not limited to public companies, as companies that are considered systemic and possess the ability to have detrimental effects on the economy, may also cause the auditor to become a stakeholder, and therefore cause his interests to be compromised at the principles expense. Remember, a stakeholder is anyone with an interest of concern in the company.

Next, we look at how these theories have become dated due to the introduction of new technologies and how they must seek modernisation. Technologies such as artificial intelligence and blockchain have had a significant impact on auditing, they allow for continuing and automatic audit processes to occur, these come at a much smaller cost then traditional auditing methods and mean stakeholders can constantly monitor management without the need for a physical audit firm. This constant monitoring reduces the threat of auditor independence discussed in Flint’s postulate as these technologies allow for data to be collected openly at any time reducing the scope for manipulation through fraud or error. This evolution in technology will cause a shift in the role of auditors so that they look less towards the truth and fairness of financial reports and more towards the way the reports are recorded in accordance with regulation. With the aid of technology and the potential future role of auditors, the impact a non-independent auditor could make by manipulating reports is significantly reduced and therefore directly increases credibility of any audited reports. This causes Flint’s postulate to become increasing less important, but nonetheless, it is unlikely to become completely redundant as human intervention is always likely to be necessary.

By looking at the Grant Thornton case, the auditors at the time of Nichols Plc and the University of Salford, we see how the independent nature of audit was compromised over the course of four years with respect to eight audits. This case relates to a former senior partner joining the internal Audit Committees’ of Nichols and the University despite continuing to work for Grant Thornton under a consultancy agreement after retirement. This behaviour, that was described as ‘reckless’ lead to serious familiarity and self-interest threats due to the close working nature with both agents. This caused Grant Thornton to receive a severe reprimand and a fine of £4,000,000 along other fines for particular individuals. Sanctions of this stature are common within the modern-day as regulators clamp down on the very prevalent issue of independence, these seem sufficient enough to warn other’s from taking similar risks relating to independence. This is a prime example of how the agency theory and lending credibility theory become dysfunctional as soon as auditor independence is compromised. Originally in this case, the principle, being the stakeholders, did not trust that Nichols Plc and the University were operating within the principle’s best interests. As a result, the audit firm was employed in order to resolve this principle-agent problem, however due to the former senior partners new roles at Nichols Plc and the University the auditor’s independence has been compromised as they have an indirect relationship through the former senior partner with potential to create bias. Any audited financial reports have therefore lost credibility and the principle is back to his original problem with the extra expense of the ineffective audit firm. If at any point the auditor is manipulated by, influenced by or is in collusion with management it creates a bias towards management, which means the opinion of the audit firm cannot be trusted by stakeholders.

In conclusion, it is clear there is a main theme of trust within flints postulate of independence, and that if everyone could be trusted, there would be no need for third party auditors. Auditors independence was mainly first enforced by the Companies Act in only 1985 which is evident, as the threats to independence are ever so present, proven by the continued growing and evolution of audit regulations such as audit firm rotation and audit fees. It is true that it may be impossible to ever be completely independent as an auditor due to the sheer number of stakeholders. This could imply that Flint’s postulate only modestly represents an ongoing fight to maximise auditor independence due to its significance towards producing an unbiased opinion. Furthermore, it is clear that technology is having a huge impact on this postulate, diminishing the traditional role of an auditor by reducing the need for independence as a result of easy and open information. This also causes the agency theory and lending credibility theory to require modernisation within their meanings as traditional credibility gained by the use of an audit may already exist through technology. Generally, it is clear that this postulate and these theories are extremely relevant to the current modern-day audit as they represent the reasons behind the need for an audit and why when they work together, they ensure credibility to stakeholders about managements stewardship.

Audit Quality Crisis And Solutions

Introduction

Developments in auditing have always been driven by corporate scandals (Economist, 2018). Huge scandals such as Enron and WorldCom, that left the world without confidence for the audit sector, led the FRC to tighten regulations. Most recently, the collapse of Carillion and BHS and the almost failure of Patisserie Valerie have come to light. The FRC along with other major regulators and boards have had to start proposing further solutions to cracking down on the disaster that is Audit Quality.

Audit Quality

There is currently an audit ‘expectation gap’ between what the public and financial statement users believe auditors are responsible for and what auditors themselves believe their responsibilities are. (Lexicon/Financial Times, No date). It has been shown that the public expects a lot more from auditors than what they can actually achieve at an affordable cost.

There is no set definition of ‘Audit Quality’. There are many factors that influence the quality of an audit and as a result, judging it can be subjective and challenging to both the auditors and external stakeholders. Achieving a high standard of audit quality allows clients and investors to build trust and confidence in the audit profession. They can do that by delivering an independent, understandable and reliable professional opinion.

Section 393 of the Companies Act 2006 requires accounts to “give a true and fair view of the assets, liabilities, financial position and profit or loss” of the company. The provide a quality audit, the auditors must then truthfully state whether the accounts represent the company truly and fairly. It must be noted however, that the auditor provides an opinion, not a guarantee. (ACCA 1, 2014)

The ISA 320, Materiality in Planning and Performing an Audit Act, aims to provide guidance on how materiality in audit should be approached. Materiality is a subjective concept and therefore it would be inappropriate for a standard set of rules to be set. This lenience means that accounts do not have to be 100% true and accurate. However, given the sheer size of the companies that undergo the audit process, analysis of the accounts in absence of the concept of materiality would be near impossible. The auditor will allow for a certain amount of error without it affecting their opinion, but in turn this means certain levels of fraud can be missed. (ACCA 2, 2015)

In the words of the Competition and Markets Authority (CMA): (Report) “Competition and regulation should work hand in hand to ensure that audit firms and individuals within those audit firms have the maximum incentives to carry out high-quality audits”

The current audit quality crisis

With scandals constantly being brought to public light regarding audit quality there is no denying that the auditing sector needs to drastically change. The Financial Reporting Council have been slammed for being far too content with only apportioning the blame once the scandal has been brought to light rather than proactively challenging and fixing the issues in present time.

The current audit quality issues:

1. Companies can choose their own auditors and as a result they pick those whom they have the best chemistry or ‘cultural fit’ rather than those that offer the toughest scrutiny.
2. There is lack of competition within the audit sector and for companies, the choice is very limited. The Big Four conduct 98% of the FTSE 350 audits and 99% of the S&P 500 companies audits.
3. Auditors focus on quality appears to be diluted due to the fact that over 75% of the revenue of the Big Four comes from other services such as consulting.
4. Conflicts of interest. Management hold influence over the auditor because they can harm their interest such as not appointing or reappointing the auditor, making the audit more difficult and costlier by being less cooperative and terminating their contract.(McLoughlin, 2018)

One of the most recent criticisms and scandals regarding audit was the failure of the Big Four spotting issues at Carillion before the construction fell into administration last year. The four collectively prioritised profits over proper scrutiny of the company during their internal and external audit. MP’s accused the four of ‘feasting’ on the carcass of Carillion after banking a huge £72m for consultancy work in the years leading up the firm’s collapse. (Makortoff, 2018)

Another scandal in recent years was the investigation launched into Grant Thornton’s audit of Patisserie Valerie between 2015 and 2017. The board discovered £10m of secret overdrafts and a total of £40m worth of fraud which in turn brought the company close to collapse. As a result Grant Thornton received its largest fine from the FRC totalling a rather insignificant £3m. (Morrison, 2018)

Further, The FRC sanctioned PwC and senior audit partner Steve Denison over the 2014 audit of BHS and Taveta Group, after Sir Philip Green sold the company for just £1 days after PwC signed off its accounts for the previous year. As a result, thousands of people were left without work and pensions were left in a £571m deficit. (Chapman, 2018)

Suggested solutions to improve audit quality and the benefits and limitations of each solution

In 2013, The Competition Commission announced stricter obligations for the accountancy sector, including requirements that FTSE 350 companies put their audit business out to tender at least every 10 years and rotated after 20. However, since then, the market share of the Big Four has significantly increased rather than fallen like CMA expected.

At present, the mindset of the Financial Reporting Council is to be content with apportioning blame once disaster has struck rather than to proactively challenge companies and flag any issues of concern to avert avoidable business failures in the first place. (From report)

The current audit quality crisis has led to a major discussion by multiple bodies about possible solutions to fix the broken audit sector and improve the quality of audit being given to clients.

Solution 1

The first solution proposed by the CMA is to introduce a French-Style system, by which audits of the FTSE 350 companies should be carried out by at least two firms, sharing equal liability; one of which will be from outside the Big Four. This proposal will give smaller accounting firms the access to auditing much larger clients which in turn will help them to develop experience and credibility.

Automatically, this means that there will be checks being done twice, by two different companies both with different views and opinions. This proposal should hopefully eliminate bias and conflicts of interest as it should be hoped that both the audit firms will not easily influenced by the management.

However, the smaller firm could struggle to keep up with the same level of expertise and capital needed to provide the level of service that FTSE 350 companies expect.

Solution 2

Another solution proposed and supported by both Deloitte and KPMG, is to split the audit and advisory businesses within the Big Four firms. The Big Four have been slated for making millions of pounds in consulting fees, advising failing companies on how to turn themselves around and then pocketing millions tidying up when that advice fails.

The FRC’s Ethical Standard (2016) already has measures in place to control the amount of non-audit services that an audit firm can provide to a company (Ashworth, 2018). However, by completely splitting the two sectors apart into separate businesses, it potentially opens up millions of pounds worth of fee income to smaller companies. Although it does not increase the amount of audit firms, it does mean they would no longer be conflicted by their consultancy sector, and so, more firms would be able to compete for the contracts out for tender.

As seen in the Carillion case, it is apparent that the Big Four can be biased to a client’s audit when they have a multi-million pound consultancy contract with them. The management can hold influence over the auditor because they know if the firm does not do as they wish, they can make the audit costlier by being less cooperative and/or terminate both their audit and consultancy contracts. By splitting the two sectors apart, conflicts of interest should be minimised.

*However, forcing the Big Four to split into separate audit and non-audit businesses could also have a negative effect on the audit quality. The Big Four rely heavily on their income from consultancy services. Removing this aspect will financially weaken the company meaning they may struggle to meet the needs of their clients during audit.

Solution 3

A controversial proposed solution is to break up the Big Four. The CMA has been put under increased pressure to break up the oligopoly as the audit sector has been deemed as failing due to its lack of competition.

Splitting up the four firms into eight removes the oligopoly situation and automatically brings twice as much competition into the sector without reducing the skill set and experience.

However, increasing competition does not always mean increasing quality. It is prohibitively expensive and rather difficult to convey to clients the differences in the audit you will provide in comparison to the competition, especially if there is 8 very large companies all providing similar services and expertise. This in turn may create a greater incentive to cut corners and break rules in order to get ahead of competitors. (From Report)

The other obvious dilemma of going ahead with this proposal is the complexity of going through with such measure. Due to the international size and scale of the Big Four it would be a long and difficult process to go ahead with.

Solution 4

Another proposed solution is to introduce US-style rules. There has been discussion of introducing a UK version of the Sarbanes-Oxely Act, which was brought into the US following the major Enron crisis. The act is in place to ensure that senior managers individually take responsibility for mistakes made in company accounts. The act holds much heavier penalties than the sanctions currently available in the UK. (Taylor, 2018)

BENEFITS AND LIMITATIONS

A highly talked about solution is the proposal of a new regulatory body being created to independently appoint auditors on behalf of FTSE 350 companies. The regulatory body is to be called the ‘Auditor, Reporting and Governance Authority’ who will restore new leadership and powers into the auditing sector. (From report) The FRC currently regulate the auditors, however, at present, the client will personally choose their own auditor.

Conclusion

Audits only seem to get noticed when things go wrong. A lot of emphasis on the issue of audit quality. The IAASB is making it clear that audit quality is something to be taken seriously. Higher quality audits and public confidence in audit reports issued should reduce the ‘expectation gap’

By emphasising the issue of audit quality in its current Work Plan, the IAASB is making it clear that audit quality is something to be taken seriously. Higher quality audits and public confidence in audit reports issued should reduce the ‘expectation gap’. However with audit firms coming under pressure to cut fees, produce competitive tender documents and provide ‘added value’ to the audit in the form of non-audit services, it is easy to see why audit quality is often compromised. Future changes to make the requirements of ISQC1 and ISA 220 more robust could help, as will promoting the use of professional scepticism in the conduct of all audits.

References

1. Economist (2018) ‘What is an audit for?’ Economist [Online] 26th May 2018 [Accessed on 19th January 2019] https://www.economist.com/finance-and-economics/2018/05/26/what-is-an-audit-for
2. Lexicon/Financial Times (No Date) Definition of audit expectation gap [Online] [Accessed on 20th January 2019] http://lexicon.ft.com/Term?term=audit-expectation-gap
3. ACCA 1 (2014) True and Fair statement published by FRC. [Online] [Accessed on 19th January 2019] https://www.accaglobal.com/uk/en/technical-activities/technical-resources-search/2014/june/frc-true-fair.html
4. ACCA 2 (2015) Performing effective (and effecient) audits – the importance of planning and materiality. [Online] [Accessed on 19th January 2019] https://www.accaglobal.com/us/en/member/discover/cpd-articles/audit-assurance/effective-audits.html?fbclid=IwAR0zTMwUEPQ9DjMufWVnNhg_FVWLEWizas1vZIWDDcI8beYkk4wUVPI2xTM
5. McLoughlin, B (2018) The CMA recommendations for audit reform are finally published. AccountancyAge [Online] [Accessed on 19th January 2019] https://www.accountancyage.com/2018/12/18/the-cma-recommendations-for-audit-reform-are-finally-published/
6. Makortoff, K (2018) ‘Big four accounting groups escape break up threat from CMA’ The Guardian [Online] 18th December 2018 [Accessed on 19th January 2019] https://www.theguardian.com/business/2018/dec/18/big-four-accounting-groups-escape-breakup-threat-from-cma
7. Morrison, C (2018) ‘Patisserie Valerie auditor Grant Thornton faces probe over financial irregularities’ Independent [Online] 21st November 2018 [Accessed on 19th January 2019] https://www.independent.co.uk/news/business/news/patisserie-valerie-finances-scandal-grant-thornton-watchdog-frc-investigation-a8644086.html
8. Chapman, B (2018) ‘PwC partner banned for 15 years and fined £500,000 over BHS audit’ Independent [Online] 13th June 2018 [Accessed on 19th January 2019] https://www.independent.co.uk/news/business/news/pwc-partner-bhs-audit-banned-fined-financial-reporting-council-a8396666.html
9. Ashworth, L (2018) ‘Deloitte calls for audit market cap and ban on selling extra services to audit clients’ CITY A.M. [Online] 8th November 2018 [Accessed on 19th January 2019] http://www.cityam.com/268807/deloitte-calls-audit-market-cap-and-ban-selling-extra
10. Taylor, M (2018) Big Four break-up: What does this mean in practice? AccountingWeb [Online] [Accessed on 19th January 2019]https://www.accountingweb.co.uk/business/finance-strategy/big-four-break-up-what-does-this-mean-in-practice

Auditor’s Code Of Ethics And Of Conduct

Introduction

Ethics is a system of moral norms for individual or any social or professional group. The term ‘Medical ethics’ is known for a very long time and the role of an auditor could be easily compared with the role of a doctor. Only with a difference that auditor’s beneficial effect is not aimed for an individual but a company (organization). The auditor’s code of ethics sets multiple professional standards for auditors to act upon accordingly. To act ethically not only for the individual interest or the company but for the interest of the public.

1.0 Auditor’s independence and objectivity

The word ‘independence’ can be described along with words like unbiased or uninfluenced. From auditors perspective the independence for a conclusion which is free from conflict of interest and influence from third parties. This conclusion comes from the auditor’s independence of mind which acts from point of integrity, objectivity and scepticism.

Independence from the clients` company assures that the auditor gives shareholders an honest opinion about the financial statements, which are not influenced by any kind of relationship between the auditor and the company of the client. The necessity for auditor’s independence and honesty arises from third parties who do not possess either the knowledge or information to understand the financial statements or what is actually contained in the annual accounts of the company. Unbiased reports and opinions provided by the auditors offer confidence and reliability for entities of the public.(Code of Ethics for Professional Accountants, 2005)

The auditor’s objectivity which can be described as an obligation to act and take decisions which are taken fairly. Auditor’s objectivity takes into consideration all the necessary tasks and evidence which is available and draws conclusions from this evidence. Combining it with professional competency which is free from conditions, and from influences of other people.

A threat to the fair objectivity of an auditor through influencing the auditors` decision can threaten the compliancy with the fundamental principles.(CPA Irelands Code of Ethics for Certified Public Accountants, 2019)

2.0 Independence in the auditor-client relationship

Independence in the auditor’s and client relationship has high importance if the auditors aim is to provide high standard service and reports which are developed through honesty. Service with an expression of professional responsibility carried out without interruptions to auditor’s objectivity. Interruptions or influences that might bend the auditor’s judgements could arise from the client`s desire to have a certain outcome. To achieve this outcome the client could offer adirect financial benefit or certain other types of beneficial offering. Auditor’s decision to accept the offering and return a favour to the client for this offering means that the auditor’s work has been compromised. Regardless of how big or small are the actions made for the benefits of the client, the quality of this work is no longer by the standards. Work ethics of the auditor’s profession in such case has been breached. Any work carried out by the auditor for this client should not be taken as valid due to being purposely biased. The auditor’s work could also become biased if the audit firm is offering service to one major client who is responsible for the biggest part of the audit firm’s profit. Such dependant relation has a high risk of influences due to the risk of having major financial losses if the audit firm should be in a position of losing the client. The auditor and the management of the audit must continuously evaluate the independence from the client. Not only factors like financial and personal relationships, but as well previous obligations and tasks carried out with the client in the past must be taken into consideration.

3.0 Five threats to the conduct and outcome of the audit

The author is presenting five different scenarios which could appear as a threat or be a potential threat to external auditor’s objectivity.

3.1 The audit firm is heavily financially dependent on one significant client

Threat which arises from such a scenario is the client powerful influence over the audit firm due to being their biggest financial beneficiary. Such financial dependency inevitably might result in a loss of independence and biased objectivity. Often a big client does not only act as a provider of profit but also a provider of reputation. If an audit firm has a well-known big company as a client it offers also a possibility to show the firm as trusted.

This trust, however, is a double-edged sword. A threat could emerge that the company which hired the audit firm, could potentially direct the firm to act or make decisions in certain ways which are beneficial to them but might go against the audit standards or ethics. In this case, the audit firm is in a cross-road of choices. Either to stick to the route of integrity and unbiased work or a road where their work had elements of influence and direction by the client. One road has the potential to lose the client and the revenue it brings and the other could have a threat of being exposed and found guilty in consciously conducting un-ethical work practices. Getting exposed would result in a loss of reputation and potentially a loss of other smaller clients and as well public’s trust. Loss of trust and loss of clients would potentially mean an outcome of going out of business.

3.2 The audit firm, its partners or staff have a financial interest in the audit client

A possibility of a threat of an audit firm, its partners or employees having a financial interest in the company where an audit is performed could be taken as one of the more common threats in the opinion of the author. Due to access to confidential financial information, a direction of the company can be interpreted. This interpretation can be used either for individual financial gain or for the benefit of third parties outside the company who would use the inside information for their financial benefit.

An example from a real-life scenario where two men executed such actions mentioned above:

Scott London a former partner of KPMG and Bryan Shaw a jeweller, two friends who traded inside information between each other which allowed Mr Shaw to gain financially in amounts over 1 million Dollars. According to the investigation, Mr Shaw was offering Mr London bribes in exchange for inside information. These bribes were either in a form of cash or expensive offerings such as a Rolex watch. One of the companies (Herbalife Ltd.) which London oversaw was at the time closely monitored by the authorities due to its controversies of fraudulent activities. When the FBI started to investigate the trades made concerning Herbalife, they found out a connection between London and Shaw. Shaw was taken into custody by the FBI and he gave up everything that was going on between him and London. Scott London had no room to argue based on the testimony and evidence gathered by the FBI and pleaded guilty in court. (Hamilton and Chang, 2013)

Scott London was sentenced in 2014 for 14 months in prison for the insider trading charges and a $100,000 fine. Which consequentially also destroyed Mr London’s career after 29 years of work in KPMG and a public disgrace for his actions. (Stemple, 2014)

3.3 There are family relationships between the firm, its partners, staff and the audit client

In a scenario where an auditor is being appointed to a client’s company to conduct an audit, the most important element before this is the prevention of potential threats. According to IFACs Code of Ethics for Professional Accountants, an investigation is required before engaging with the client. An investigation into owners of the business, and its activities.

Are there any potential threats in present or occurred in the past? Has the company or the owners of the company involved in any scandals or controversial subjects?

Are there any members of staff working in the area closely related to the financial department who would have either family or friendship relationship with the auditor? Taking into consideration all these elements will reduce potential threats for the integrity of the audit. In the course of an investigation, all such threats will be taken into consideration and evaluated. Raised alert on specific potential threat will not automatically mean rejection of the client. The evaluation will determine if there is a major risk or a minor risk which could be acceptable. Comparison on the seriousness of risks such as: A family member of an auditor working in the finance department, where an audit would be performed versus a family member working in the area of company’s facilities maintenance. The difference comes from the fact that a member of staff working in the financial department could be directly related to the work which will be performed in such an area. Facilities maintenance, however, does not handle or have access to the financial data or related information through which the auditor`s work could be potentially influenced.

Influences could arise for various reasons. Auditor finding irregularities in the work of the finance department, or perhaps, even evidence of fraud. If the findings have an impact to the well-being or professional position of the auditor’s family member, a possibility might occur that the auditor will attempt to hide or ignore certain evidence in order to maintain the well-being of the family member.

A potential possibility could be also the family member him/herself taking a course of action to individually approach the auditor and influence a certain course of action. Regardless of which side takes influential action to the conduct of an audit. The end result will still be work which was carried out beyond the range of work ethics of the auditor.

3.4 The audit firm provides non-audit services to the audit client

The audit firm providing non-audit services to a client who is serviced also with an audit has a potential threat of conflict of interest. There can be multiple ways as to how this conflict of interest or just a perception of it can emerge. The audit firm could be providing non-audit services and receiving large financial benefits. This, in turn, could potentially influence their service of audit, if a possibility occurs that the client for some reason wants to twist the outcome of this audit and threatens to stop using all non-audit services with the firm, if their requests are not met. In such cases, the audit firm has lost its independence unless they are willing to accept the losses and conduct their audit service objectively. A conflict of interest can also occur when a non-audit service is offered to look over the work of an audit service. In a case of KPMG and a fashion retailer Ted Baker, such situation happened when KPMG provided services as an expert witness in the court case which dealt with Ted Bakers overstated inventory in tens of millions of Euros. KPMG provided audit services for Ted Baker since 2001 and had continuously given Ted Baker reports that show no issues with the company.

Due to KPMG being and audit firm for Ted Baker and also provided expert witness services, a conflict of interest occurred. According to the FRC (The Financial Reporting Council), KPMG was basically conducting a self-review which is un-ethical behaviour. KPMG admitted in breaching ethical standards and was fined in a settlement for over 2 million Pounds. (Sembhy, 2018)

3.5 The audit firm has been the external auditor of the client for the past 10 years

Long time relation between the auditor firm and the client over time builds familiarity. The familiarity which could result in a trust where there is no reason of doubt. Such trust could become a threat if the client should choose to take advantage of this situation. While there are benefits of long-term relationships due to knowing the clients business activity, operation and methods of financial reporting. The trust and knowledge of how things are could also lead to a certain routine which becomes a one-way path of doing things. Such a path could lead to a comfort point where certain duties won’t be conducted with much effort and quality in mind.

Long term working relationship has a threat to build up to a point where smaller issues could be ignored and bigger issues worked around to look better than they are.

In order to safeguard the independence of an audit in the client relationship, rotation of audit firms after 10 years have been deemed as mandatory in 2016 EU Directive and Regulation (S.I 312).

4.0 Recommended actions to reduce threats to auditors objectivity

Steps to take in order to safeguard auditor’s independence in 5 different scenarios.

4.1 Safeguards for audit firm heavily financially dependent on one significant client

The audit firm should aim to diversify its business with a wider selection of clients. Eliminating reliance on one company allows stronger independence not only in decision making but also in finances. Variety of clients also ensures that you stay in business if one of the client`s company should happen to go out of business.

4.2 Audit firm, its partners or staff have a financial interest in the audit client

Conduct an investigation before assigning an auditor to the client. Acquire information through interviews and questioning from the auditors about their involvement with the client from either social or financial aspect which could pose an influence to the audit.

Continuous monitoring to be implemented in order to have updates on any changes.

4.3 There are family relationships between the firm, its partners, staff and audit client

Assessment of positions and placement of the family members inside the client company to be taken into consideration. If the family members position poses a threat to auditors objectivity then as a safeguard a different auditor should be appointed for this particular client.

4.4 The audit firm provides non-audit services to the audit client

Analysing of the services which are provided as part of non-audit service. If these services are posing as a threat to the audit objectivity then stopping of these services for the audit clients should be implemented.

4.5 The audit firm has been the external auditor of the client for the past 10 years

Rotation of auditors to the clients firm in order to minimize relations developing beyond the professional level. Occasional review of auditors work by another impartial auditor.

Conclusion

While the objectivity and independence of an auditor are guided by directives and ethical standards. The road to successfully carry out the duty with absolute integrity will require conscious efforts from the auditor. An auditor, a professional being, carrying out duties is still only a human being with everyday thoughts and emotions. Safeguards are implemented in order to minimise potential threats but are not capable of eliminating them entirely. Elimination of this threat starts from the auditors themselves. Which is taking decisions either to maintain the independence or let this independence get tarnished by other motives such as career, finance or relationships. The wrongful decisions made in the past by others in the profession and the awareness of consequences from these decisions will offer perhaps an opportunity for individual improvement. This individual improvement, in turn, will collectively benefit the overall structure of the business.

References:

1. 2005. CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS. [ebook] IFAC, p.1210. Available at: [Accessed 22 March 2020].
2. 2019. CPA Irelands Code Of Ethics For Certified Public Accountants. [ebook] CPA Ireland, p.21. Available at: [Accessed 22 March 2020].
3. Hamilton, W. and Chang, A., 2013. In KPMG Insider Trading Case, Crime And Blunders Alleged. [online] Los Angeles Times. Available at: [Accessed 21 March 2020].
4. Stemple, J., 2014. Ex-KPMG Partner London Gets 14 Months For Insider Trading. [online] U.S. Available at: [Accessed 21 March 2020].
5. Sembhy, R., 2018. KPMG Slapped With £3M Penalty Over Ted Baker Audit Conflict. [online] Independent. Available at: [Accessed 21 March 2020].