Category: Auditing

Introduction

Although internal and external auditors have different roles as far as their responsibilities and authorities are concerned, but it has been advocated that the synergy between the two can effectively cover more audit areas (Felix, et al., 1998). That is to say, notwithstanding the difference in the scope and objectives of internal and external auditors, there are still commonalities in the objectives of the two functions, which provide some basis or rationale for their interdependence on each other (Al-Twaijry, et al., 2004). However, it is an area of contention as to how far this interdependence or reliance on each other’s work can be placed. Keeping in view this research problem this proposed study has the following research aim.

Aim

The aim of this proposed study is to investigate the extent to which external and internal audit are dependent on each other and how this extent of dependence is determined in the Saudi Arabian private corporate sector.

Objectives

The research aim presented above can be segregated into following research objectives:

• To review available literature and conclusions reached by researchers in the past related to the relationship between external and internal audit;
• To find out the nature of relationship between external and internal audit;
• To find out the extent to which external and internal audit are dependent on each other;
• To find out the factors, which determine the extent of dependence of external and internal audit on each other; and
• To find out the implications of external audit’s dependence on internal audit.

Questions

The research objectives can be used to formulate research questions as follows:

• What does the available literature and conclusions reached by researchers in the past tell about the relationship between external and internal audit?
• What is the nature of relationship between external and internal audit?
• To what extent external and internal audit are dependent on each other?
• What are the main factors which determine the extent of dependence of external and internal audit on each other? and
• What are the implications of external audit’s dependence on internal audit?

Methodology

While choosing the research methodology for a study, it is pertinent to establish the justification for doing so. There are two broad approaches which can be followed in the conduct of a study, namely qualitative and quantitative research (Thomas, 2003). In addition to these two approaches, a researcher may employ a mixed approach, which is a mixture of both qualitative and quantitative approach. A qualitative research approach involves the evaluation of information at hand with making use of any analytical tools, so that there are no empirical findings obtained but instead qualitative aspects of information are determined which are then used to formulate an opinion regarding the subject matter (Creswell, 2009).

On the other hand, a quantitative research approach involves the testing and analysis of quantitative information, which result in quantitative or empirical findings to support the research aim. With respect to the research aim identified earlier in this report, the researcher aims at conducting this study on the basis of a mixture of both quantitative and qualitative approach. The approach will be quantitative in a way that researcher will conduct surveys of both internal and external auditors of the selected Saudi companies, which will generate quantitative information. On the other hand, it will be qualitative also as the researcher will conduct interviews with representatives of internal and external audit functions of the selected companies, which will generate qualitative information (Johnson & Christensen, 2010; Newman, et al., 1998).

Selection of Companies

Since internal audit function is still not common in Saudi Arabian corporate sector therefore the researcher will select private companies through purposive sampling technique. This technique will involve selecting those companies only which have an internal audit function within their organizations.

Survey Questionnaires

The survey questionnaire for external and internal auditors of the selected companies will be based on following design:

The responses obtained through survey questionnaires will be analyzed statistically.

Interview of External and Internal Auditors

The researcher also aims at conducting short interviews of the internal audit department heads of the selected companies and their external auditors. The interviews will be aimed at supplementing the information obtained through the survey questionnaire and a thematic analysis of the same will be conducted to find out how far survey results match with the findings obtained through interviews.

Brief Literature Review

According to Burnaby and Klein (2000), the work of internal auditors contributes significantly in the work of external auditors. On the other hand, the study carried out by CICA (Canadian Institute of Chartered Accountants) shows that it is a common practice for external auditors to take assistance from the work of internal auditors in the country (Canadian Institute of Chartered Accountants, 1989). But at the same time, there are some studies which have concluded that there are significant differences noted among business entities with regard to the usage of each other’s work by internal and external auditors (Felix, et al., 2001; Felix, et al., 1998). Although, there are many supporters of internal and external audit coordination so as to avoid any duplicity of work and increase efficiency and effectiveness in auditing process, at the same time, some have viewed this coordination in different manner. As for instance, Gaston (2000) has expressly stated that it is not suitable for the purposes of bringing transparency in the audit process to allow internal auditors of an entity to take part in external audit matters. He stated that internal auditors shall not be allowed or permitted to “…..unduly focus on those areas of financial controls that are the subject of external audit interest” (Gaston, 2000, p. 37). Similarly, Gramling (1999) also has a similar point of view and argues that if internal audit function existing in an organization is not up the mark, that is to say, it does not fulfills the requirements of objectivity, competence and independence, then any reliance placed on its work can reduce effectiveness and efficiency of external audit process significantly.

There have been a number of studies carried out in relation to the determination of dependence of internal and external audit on each other. Morrill and Morrill (2003) investigated the relationship between internal and external audit and found that there is a significant relation between internal audit expertise and external auditor’s work. Usually, when the relationship between internal and external audit is evaluated, it ascertains the level of reliance external auditor can place on internal auditor’s work and expertise. In this regard, majority of prior research works have been carried out by researchers in the US context in which the focus has been to examine decisions for relying on the internal auditor’s work based on its evaluation carried out by external auditor (Al-Twaijry, et al., 2004). Apart from this, Asairy (1993) in his study found that internal auditors in Saudi companies claimed that the quality of their services to their respective entities was largely influenced by the work of external auditors of the companies. Maletta (1993) in his work found that there were two main characteristics noted by external auditors in the work of internal auditors before they decided to rely on it; these characteristics were objectivity and competence. Moreover, Nagy & Cenker (2002), Brown (1983), Schneider (1985), Margheim (1986) and Messier & Schneider (1988) found that competence and work performance were two main factors, which were considered by external auditors before placing reliance on the work of internal auditors.

Al-Twaijry et al. (2004) conducted a study in Saudi Arabian corporate sector’s context to explore the relationship between internal and external audit and to investigate the factors which are influential in promoting the relationship. The researchers used survey questionnaires to obtain responses from internal and external auditors of selected corporate entities and also conducted interviews with them to supplement information obtained through surveys. Following this methodology, the researcher concluded that external auditors in the Saudi Arabian corporate sector are reluctant to rely on the activities and work of internal auditor and in this respect they signified serious concerns regarding their independence, scope and other attributes. These findings were also justified by responses obtained from internal auditors, who rated the cooperation and coordination level between them and external auditors as low (Al-Twaijry, et al., 2004). Further studies which are relevant to the research topic include those by Lowe, et al. (1999), Dezoort, et al. (2001), Jamal (2011), William & Schneider (2010) and Kumar & Sharma (2001).

Resources Needed

In order to conduct this proposed study, the researcher will require information / data from both primary and secondary sources. As far as secondary information is concerned, the researcher will take into consideration published material related to the subject matter, which is available through online sources, journals, books, and other sources of second hand information. On the other hand, with regard to gathering primary information as required by the chosen methodology, the researcher will conduct surveys and interviews of internal and external auditors of companies chosen for the proposed study.

First of all the researcher will need to select companies, which will be private companies only, operating in Saudi Arabia. However, it is pertinent to select only those companies which have internal audit departments. These companies will be selected on a random basis from the list of companies obtained from Saudi Arabian stock exchange.

For conducting surveys, the researcher will need to communicate with the management of selected business entities and audit firms in Saudi Arabia and will have to approach relevant staff in the organization for obtaining assistance in the conduct of survey.

In a similar manner, the researcher will have to obtain express consent from related authorities to interview selected individuals. Moreover, for interview purpose, the researcher will have to approach interviewees himself and meet them in person.

Project Schedule

Below is a description of schedule to be followed by the researcher which includes dates of completion for each step involved in the preparation of proposed study.

List of References

Al-Twaijry, A A M, Brierley, J A & Gwilliam, D R 2004, An examination of the relationship between internal and external audit in the Saudi Arabian corporate sector, Managerial Auditing Journal, 19(7), pp 929-944.

Brown, P R 1983, Independent auditor judgement in the evaluation of the internal audit function, Journal of Accounting Research, 21(2), pp 444-455.

Canadian Institute of Chartered Accountants 1989, The Independent Auditor’s Consideration of the Work of Internal Auditors: An Audit Technique Study, Toronto: sn

Creswell, J W, 2009, Research Design: Qualitative, Quantitative, and Mixed Methods Approaches, Sage Publication, New York.

Dezoort, F T, Houston, R W & Peters, M F 2001, The Impact of Internal Auditor Compensation and Role on External Auditors’ Planning Judgments and Decisions, Contemporary Accounting Research, 18(2), p. 257–281.

Felix, W L, Gramling, A A & Maletta, M J 2001, The contribution of internal audit as a determinant of external audit fees and factors influencing this contribution, Journal of Accounting Research, 39(3), p. 513-534.

Felix, W L, Gramling, A & Maletta, M 1998, Co-ordinating Total Audit Coverage: The Relationship Between Internal and External Auditors, Institute of Internal Auditors, Altamonte Spring.

Gaston, S J 2000, Getting Value for Your Internal Audit Dollar, Canadian Institute of Chartered Accountants, Toronto.

Jamal, S F 2011, The Impact of the Function of the Internal Auditor on the Scope of Work of the External Auditor: A Field Study on the Saudi Environment, King Saud’s University, Riyadh.

Johnson, B & Christensen, L 2010, Educational Research: Quantitative, Qualitative, and Mixed Approaches, SAGE Publications Incorporation, Thousand Oaks.

Kumar, A & Sharma, R 2001, AuditingTheory And Practice, Atlantic Publishers & Dist., New Delhi.

Lowe, J D, Geiger, M A & Pany, K 1999, The Effects of Internal Audit Outsourcing on Perceived External Auditor Independence. AUDITING, A Journal of Practice & Theory: Supplement , 18(1), p. 7-26.

Margheim, L L 1986, Further evidence on external auditors’ reliance on internal auditors, Journal of Accounting Research, 24(1), p. 194-205.

Messier, W J & Schneider, A 1988, A hierarchical approach to the external auditor’s evaluation of the internal auditing function, Contemporary Accounting Research, 4(2), p. 337-353.

Nagy, A L & Cenker, W J 2002, An assessment of the newly defined internal audit function, Managerial Auditing Journal, 17(3), p. 130-137

Newman, I., Ridenour, Carolyn S & Benz, I 1998, Qualitative-Quantitative Research Methodology: Exploring the Interactive Continuum, Southern Illinois University, Illionis.

Schneider, A 1984, Modelling external auditors’ evaluations of internal auditing, Journal of Accounting Research, 22(2), p. 657-678.

Thomas, R M 2003, Blending qualitative and quantitative research methods in theses and dissertations, Corwin, Thousand Oaks.

William, M F & Schneider, A 2010, A hierarchical approach to the external auditor’s evaluation of the internal auditing function, Contemporary Accounting Research, 4(2), p. 337–353.

Introduction

The field of auditing has successively transformed itself from an amateur field in early 13 century to its mature current form in the 21 century (Gul, 2007). Today, the field is seen to have transformed itself into a developed complex system that is guided by formulated ethical, legal, and economic standards. At the same time, majority of present day auditors perform their functions independently as professionals. This can be evidenced not only in the actions of auditors to provide credible audit reports but also in providing assurance services for wide variety of business activities (Gul, 2007). Thus, the modern day auditors are believed to enjoy distinctive professional status in the society. In its origin, auditing has its place largely in western countries but over time, it has evolved to other societies like Hong Kong. In Hong Kong, auditing has played a major role in transforming the society as one of the reputed international centers for finance and business (Gul, 2007). The country regulates auditors and other financial reporters through a credited body known as the Hong Kong Institute of Certified Public Accountants (HKICPA). It is this body that today oversees all aspects of ethics, responsibility, and duty as it pertains to auditing in the country.

Over time, HKICPA has transformed the field of auditing in the country and it is in this respect that this research paper aims at making analysis and evaluation at the adequacy of the current system of regulation of the auditing profession in Hong Kong. Generation of useful information will largely involve carrying out literature review of secondary data sources. The secondary data sources in this case will include books, journals, and reliable internet sources. Information generated will be in tandem with the objective and purpose of the research.

Evolution of auditing body in Hong Kong

England is credited as the place where first professional bodies were initiated (Gul, 2007). From here, there was wide dispersal of these professional bodies to other regions like United States, Australia, Canada, Hong Kong, Malaysia, Singapore, and other countries (Gul, 2007). British colonized Hong Kong and it is from this basis that auditing and the entire accountancy field in Hong Kong was pioneered by British in the country (Gul, 2007). At that moment, the British accountants and auditors had their head office in Britain. As a result, no formal accounting body existed and operated in Hong Kong until 1973 when the Hong Kong Society of Accountants (HKSA) was formed (Gul, 2007). Before the formation of this body, there existed the Authorized Auditors Board that was regulated by the Government’s Registrar of Companies, which ensured the registration of accountants for public service. Therefore, the emergence and operation of this body was seen as a first and vital step in the growth of auditing field.

Immediately the society was formed, it started to expand its networks and cooperate with international bodies (Lulu, 2011) where in 1977 the society officially became a member of the International Federation of Accountants (IFAC). The year 1982 became critical for the society, since it was during this period that the society established the Accounting Standards Committee mandated to prepare and issue accounting standards in the country. Further, during the same period, there was the initiation of the Joint Examination Scheme with the Association of Chartered Certified Accountants (ACCA) for all accountants in the country (Gul, 2007). Much more, in the year 1995, the society became a credited and associate member of the International Accounting Standards Committee (IASC) team where before this there was in 1994 the establishment of the Steering Committee on Professional Accreditation to guide and manage the society’s independent need to set its own examinations (Gul, 2007).

In 2004, the Hong Kong Society of Accountants (HKSA) was transformed into the Hong Kong Institute of Certified Public Accountants (HKICPA) which today constitute the only statutory body permitted to license accountants in the country (Siu and Ku, 2009). At the same time, this body that has been vested with the responsibility of enacting and ensuring regulations and standards of accountancy profession are in place and existence (Siu and Ku, 2009). Since its formation, HKICPA has been at forefront in ensuring that quality and status of the accounting field in Hong Kong is upheld with dignity and professionalism (Gul, 2007). The role in terms of success that are associated with HKICPA include increase in the number of membership from 4,754 in 1989 to over 26,000 members by the end of 2007 and the number is predicted to grow in future (Gul, 2007). Nevertheless, it has been observed that in future, HKICPA will continue to play a bigger and important role in both Hong Kong and the region.

Code of Ethics for Auditors in Hong Kong

As it was expressed earlier in the text, accountants in Hong Kong have acquired a professional status in the society and therefore they have to be ready to operate under conditions set in order for them to be considered as professionals (Sale and Sale, 2001, p.182). First, before any discipline can be regarded as profession there are certain conditions such discipline has to fulfill or accomplish. The conditions include the discipline need to be premised on the motive of public service and that the discipline needs to have complex body of specialized knowledge (Gul, 2007). At the same time, the discipline should have limited admission to the right of admission, it should have an international recognition, and it should exhibit commitment to the current professional practice (Gul, 2007). Moreover, a discipline only graduates as a profession when there is existence of a voluntary organization that always aims at regulating and improving the discipline and lastly, there should be a code of ethical conduct (Gul, 2007).

In Hong Kong, what is evident is that the larger public demands that accountants be classified and regarded to be professional need to operate under and observe a high ethical standard as this will accelerate the public confidence in the entire accountancy profession (Kiernander, n.d). As a result, members of the accounting body in Hong Kong are expected to comply with the Code of Ethics for Professional Accountants established by the HKICA (Kiernander, n.d). In almost all situations members are expected to abide by the regulations of the code of ethics in cases members abrogate this requirement then there is always disciplinary action on such members. Some stringent disciplinary measures may include automatic dismissal from the members’ body and revocation of the operating license for such members. Therefore, some of the guidelines established under the Code of Ethics for Professional Accountants in Hong Kong are discussed below. It must be noted that part A and B of the Code constitute the relevant part for the auditors and this is the section that will be analyzed in this research paper. Part A talks of fundamental ethical principles that all members have to abide by. More so, in this part A, there are established guidelines with relation to threats and safeguards associated with the fundamental principles. As a result, accountants in Hong Kong are required to operate under the guidance of five major principles.

The first principle has to do with integrity, where honest is required on the part of the auditor in carrying out his or her duties (Kiernander, n.d). Next principle has to do with objectivity where professional auditors are restrained from all forms of bias, conflict of interest or even undue influence in carrying out business or making judgments (Hong Kong Institute of Certified Public Accountants, 2008; Kiernander, n.d). The third principle has to with professional competence and due care, whereby the auditor is seen to have the duty of continuing and maintaining the professional knowledge and skills with regard to the dynamics in the profession. More so, the auditor has to be fully versed and updated with the current developments in the practice, legislation, and techniques as the field embraces changes (Kiernander, n.d). Principle 4 explains the need and importance of confidentiality, whereby, a professional auditor has to ensure confidentiality of information obtained when carrying out duty, should retain secrecy, and not to disclose to third parties. Nevertheless, the auditors are advised that such information should only be disclosed within proper and legitimate authority and legal requirement (Kiernander, n.d). Last principle has to do with overall professional behavior, every auditor is expected to respect and abide by all the relevant laws and regulations available, and more importantly refrain from all actions that may paint the profession in bad image (Hong Kong Government News, 2011).

Part B of the code reinforces part A by outlining how the principles should be applied by accountants in carrying out their duties. As a result, this part B of the Code of Ethics is sub-divided in sections of: professional appointment, where an auditor has to weigh all reasons, options, and alternatives available before accepting any auditing duty (Kiernander, n.d). Sub-section two deals with conflicts of interest in which case auditors are required to identify all possible elements that may pose conflict of interest in their duty. Other sub-sections in this part B have to do with fees and types of remunerations for auditors, marketing of professional services by accountants and auditors, gifts and hospitality, custody of client assets (Kiernander, n.d). In addition, these sub-sections are included: objectivity, independence of professionals and more importantly this part outlines ways of solving ethical dilemmas for accountants (Kiernander, n.d; Kwok, 2008, p.20).

Regulation of auditors in Hong Kong

Before looking at how regulation of auditing activities in Hong Kong is carried out, it is important to note one major influence on the practice of auditing. Development, growth and function of auditing has benefited from the role played by the International Federation of Accountants (IFAC) which has been at forefront in developing and implementing international auditing standards (Tohmatsu, 2008). IFAC principles and requirements for auditors remain dynamic especially with the emergence of globalization of business and commerce (Graham, 2007). Consequently, IFAC designed the Global Quality Standard for auditors. The requirements of this Global Quality Standard include reframing national auditing policies to reflect or be in line with the International Standards of Auditing (Gul 2007). Second, all auditors around the world to operate within the limits of IFAC Code of Ethics while at the same time, creating training programmes to keep partners and staff up to date on international developments in financial reporting (Anonymous, 2011). Lastly, to ensure there is preservation of quality control standards there should be regular quality assurances exercises that will help monitor the compliance of the body’s policies especially with regard to compliance with international auditing standards (Burkholder, 2011).

In Hong Kong, duties, functions, responsibilities and liabilities of auditors is found in numerous legislations enacted, quasi-legal instruments, the audit contract, together with common law and equity (Gul 2007). As a result, the major statutory sources of authority in Hong Kong can be found: in the Companies Ordinance (Cap 32) regularly known as CO (Hong Kong Institute of Certified Public Accountants, 2010). Further, auditor’s duties, functions, responsibilities, and liabilities are further defined by the HKICPA, which has clearly set out Hong Kong Standards on Auditing (HKSAs), Auditing Guidelines (AG), and the Practice Notes (PNs) usually refined from time to time (Gul 2007). Standards or requirements set by these various regulation bodies provide auditors with detailed guidance in key areas that sometimes legislation has not provided for. Generally, there is that need for auditors to comply with the standards which when achieved results into good practice. Without forgetting, it must be stated that auditing standards enjoy some legal status and recognition and in most cases provides for that strong evidence that a proper standard has been adopted and followed in the auditing process (Rathore, 2009). When auditing standards are observed and respected, the understanding is that there is little likeliness of incurring mistakes and related unethical issues by professionals when carrying out their duties (Hong Kong Government News, 2011). The legal power of auditing standards can be captured in the ruling made by Justice Woolf in Lloyd Cheyham and Company vs. Littlejohn Company (QBD) in 1985 (Gul 2007). In the case, the judge noted that,

“While they are not conclusive, so that a departure from their terms necessarily involves a breach of duty; and while they are not clear, rigid rules they are very strong evidence as to what is the proper standard which should be adopted, and unless there is some justification, a departure from this will be regarded as constituting a breach of duty” (Gul 2007, p.63).

In summary, it can be said that Hong Kong regulation of auditors’ activities is carried out under formal established standards by the relevant statutory bodies. Whichever statutory body may apply, it is always necessary for auditors to respect and operate within standards established and in cases where some auditors do not comply with these standards then such auditors have to justify the reasons for departure. At the same time HKSAs as a body makes it mandatory for all auditors to exercise professional judgment when making application of HKSAs principles and only accept departure in exceptional instances but the aim should be to achieve objective of the engagement ethically (Gul 2007). Point to note is that, in some cases where auditors fail to comply with the HKSAs, and then such auditors are subjected to relevant committee under the HKICPA that upon hearings, the committee may recommend disciplinary actions for the auditor involved (Hong Kong Government News, 2011). In other gross cases, courts actions in conjunction with the HKSAs are adopted in ensuring the auditors involved in misconduct are punished.

Adequacy of Auditor’s Regulation System in Hong Kong

Prior to the formation of a formidable accounting and auditing body in Hong Kong, the overall auditing field was loosely regulated an aspect that made it difficult to control practitioners in the field. Nevertheless, with the formation of HKSA and the subsequent transformation of the body into HKICPA, it can be stated that regulation in the auditing field in Hong Kong has experienced some level of sanity, coordination, and proper planning. Today, HKICPA remains the supreme body in making sure that all practitioners comply with all statutory bodies’ governing auditing in the country (Hong Kong Institute of Certified Public Accountants, 2009). At the same time, the role of independent bodies like judiciary cannot be ignored since they have become legal custodians in ensuring regulatory measures with regard to auditing are obeyed by all stakeholders. In essence, it can be said that, Hong Kong’s auditing regulation system is largely intertwined with international auditing standards and the eventual result has been an evolution of an auditing regulatory regime in the country that has an international outlook (Lulu, 2011; International Monetary Fund, 2003).

Nevertheless, it has to be noted that the HKICPA regulation regime in Hong Kong is still young and this has seen some instances where the body has been forced to reluctantly surrender its powers to other bodies like Financial Reporting Council (Accountancy Asia, 2010). At the same time, lack of transparency in some instances has forced the government to require the body to have its key aspects of regulation subjected to independent oversight bodies (Accountancy Asia, 2010). This has led to presence of the independent oversight bodies in functions such as audit investigations, in practice review of the body’s activities and in disciplinary processes (Accountancy Asia, 2010). Moreover, the HKICPA still grapples with the issue of how well should the award audit practice certificates and register audit practices be formulated especially with Hong Kong auditors in mainland China (Yiu, 2011). Other key areas that have yet to receive adequate attention include the issue of unlimited liability of auditors and the overall imbalance of auditors versus other practitioners involved in preparing financial statements (Accountancy Asia, 2010). Therefore, the above-identified areas of weakness should be the basis upon which continuing cycle of improvement need to be adopted.

Conclusion

In conclusion, it can be stated that regulation of auditing field in Hong Kong remained unorganized for a long time until early 1970s when the first formal body to regulate practitioners was formed. With time, HSKA as a professional body evolved and revolutionalized the field of accounting and in particular that of auditing. This revolution was manifested through enactment of laws, regulations, and appropriate standards to guide members in the profession. As the needs, requirements and expectations of the public increased on the role and need for auditors to act as professional; there was need to transform HKSA into a bigger body that has structured organization systems. This resulted in the formation of HKICPA. Today, HKICPA has transformed the auditing field and placed it to the international level through adoption of international standards and practices. Nevertheless, inadequacies remain challenge to HKICPA as body, which makes auditing as a practice to experience some problems. However, through collaborative efforts of both stakeholders, these challenges should be the basis upon which all stakeholders need to build and create an auditing regulation environment that meets needs and desires of all stakeholders in Hong Kong.

Reference List

Accountancy Asia. 2010. “Marching on: Growth, consolidation rife as China builds accountant army”. Web.

Anonymous. 2011. “Standards, sustainability and ethics are key concerns for accountancy profession.” Accountancy Ireland, Vol. 43, No. 2, p.46.

Burkholder, S., 2011. “IAASB calls for ‘fundamental review’ of auditor reporting to better serve users.” Accounting Policy and Practice Report, Vol. 7 No. 11, p.403.

Graham, L., 2007. Accountants’ handbook: Special industries and special topics. NJ: John Wiley and Sons.

Gul, F. A., 2007. Hong Kong auditing: economic theory. Hong Kong: City University of HK Press.

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Hong Kong Government News. 2011. Hong Kong Institute of CPAs approves corporate governance upgrades but calls for more clarity in exchanges overall approach and some proposed code of changes.Hong Kong Government News. New Delhi. Web.

Hong Kong Government News. 2011. Preparation of Accounting records and financial statements for an audit client. Hong Kong Government News. New Delhi. Web.

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Hong Kong Institute of Certified Public Accountants. 2009. PCAOB Rulemaking Docket Matter No. 027. Web.

Hong Kong Institute of Certified Public Accountants. 2010. Practice Note 710: The summary financial report. Web.

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Kwok, B. K., 2008. Financial analysis in Hong Kong: qualitative examination of financial statements for CEOs and board members. Beijing: Chinese University Press.

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From an audit perspective the emphasis is to be placed on the application of proper interest rates for both the deposits accepted and loans provided by the bank. Since there are different types of deposits and loans carrying different interest rates, there is a possibility that interest revenue as well as interest expense is calculated applying different rates. Therefore the verification of interest revenue and expense calls for a systematic audit approach.

Possible Risks

• Applying different interest rate for interest revenue and expense
• Calculation of interest on wrong average balance of deposit or interest
• Calculation of interest revenue and expense for a wrong period
• Interchange of deposit accounts leading to wrong credits of interest
• Interchange of loan accounts leading to wrong debits of interest

Scope of Audit

The scope of the audit includes verification of interest revenue and expense to check whether correct interest rates and periods have been applied for calculation and whether interest debits and credits have gone to the correct loan and deposit accounts.

Approach

A systematic audit approach should consist of the following steps

• Gathering proper understanding of different loan and deposit accounts along with the applicable interest rates. This calls for the compilation of a complete list of deposit and loan accounts with the applicable interest rates. The period applied in the calculation of interests is to be reckoned and a summary of the balances appearing on different loan and deposit accounts at the end of all the months to be obtained.
• Review of the month end balances will reveal any abnormalities in the application of interest rates or applying a wrong period for calculations. This review is an important step in the audit approach.
• Review of the loan documents for certain selected type of loan accounts where the revenue is more is to be undertaken. A similar review of the deposit accounts would reveal any abnormal changes in the deposit balances.
• A brief audit of the calculation of interest revenue and interest expense in respect of certain select accounts for the whole period under review will reveal the accuracy level of interest calculations
• Preparation of similar statements showing the interest revenue and expense for the yearly period for the past five years would provide the general trend of the revenue and expense account.
• A questionnaire on the internal control systems being adopted by the bank for ensuring the appropriateness of the application of interest rates and the authority for specifying different interest rates for different deposit and loan accounts need to be submitted to the management and the answers to be verified by test checking the existence of the internal control.

Checking the Reliability of Client’s Electronic Data

Integrity of transactions carried out through electronic data interchange refers to completeness, accuracy, timeliness and authorization of information. Audit procedures concerning the verification of electronic data is largely concerned with evaluating the reliability of such data by checking the reliability of the systems in use for capturing and processing of such data. In this connection the auditor should ensure that there exist adequate controls (i) to validate the input, (ii) have the capability to prevent the duplication or omission of certain transactions, (iii) provide for adequate safety against different persons accessing the system, (iv) ensure that there are adequate mechanism to prevent alterations to the data already entered in the system except with proper authority, (v) prevent incomplete processing of transactions – there should be mechanisms to reject the processing of a transaction if complete information is not fed, (vi) ensure that there is proper system for the distribution of information processed and (vii) ensure that the data and information processed are properly recorded, backed up and kept secured within the system.

Internal Control Weaknesses in Information and Data Flows

In the case of Alexandria Corporation the following weaknesses are identified and suitable corrective actions are recommended.

The audit opinion given by the auditors does not meet all the audit requirements in accordance to ASA 700 and ASA 701. The primary objective of ASA 700 is to ensure that the mandatory requirements when giving an unqualified audit opinion are met. These mandatory requirements are in relation to the audit format, it content in connection to the purpose of which the audit is being carried out, this is general purpose financial report (GPFR). Therefore the report should be reported in harmony with the laid out financial reporting guideline or frame work. When an audit follows this frame work, it should achieve fair presentation, auditors’ opinion, performance when carrying out the audit and his responsibilities in the audit. The main objectives of the ASA 701 Modifications to the Auditors report was to provide a frame work through which auditor would rely on in providing for opinions in relation to the financial opinion. These modifications were in relation to issuance of “other than unqualified” auditor’s report

The audit carried out has met some of the provisions of the ASA 700. Firstly, the audit began by identifying the financial entity on which the audit was carried out, this is, Highboury limited. In addition, the audit report has given its mandate whereby its states that the audit was carried out audit opinion whereby its states that the audit was carried out to provide reasonable assurance whether the audit was free from any material misstatements. In further states the procedures that were used in the preparation of the audit which includes, examination, on test basis of the financial records available and the evidence of all the transactions in the company. In addition the report stated the financial policies, accounting standards and other important estimates that were used in the process. At the end of the audit report the opinion of the auditors is given whereby they state that the audit was carried out with a view to give a fair presentation in accordance to the accounting standards and the statutory requirements in order to give an unqualified opinion which represents the financial records and position of the company’s operations and its cashflows ((CPA Australia, 2006).

Though the audit report identifies the company which it conducted the audit for in accordance with ASA 700, other audit frame work required to be used in the financial statements were not used. The audit report did not identify the each of the financial statements on which the audit was carried on but just gave a general opinion. According to ASA 700, the audit should have inspected all the financial statements of the company which included the balance sheets, income statements, and change in equity statements among others. After the audit on these statements, the report should have indicated the name of the financial statement and what was the opinion in the end separately before giving a general opinion at the end. After auditing the financial statements the auditors should then have given a summary of the various accounting and auditing policies used and other explanatory notes which explain in detail some of the financial issues in the statements, this should be done separately on all the financial statements separately and if possible the directors declaration. Though the audit report gave a date when the audit case carried out, it failed to give the financial period in which the audit covered which is a requirement of the ASA700. As an auditing requirement, ASA 700 should be used in conjunction with ASA 701 which provides guidelines and frame work for any upcoming modifications or changes to the audit report when the prevailing circumstances call for it.

The audit report should have indicated that the people who are in charge of governance of the reports shall also be accountable in ensuring that the audit gives a fair presentation. According to ASA 700 (2006), the responsibilities of those in charge of the governance of the report involves: “first, designing, implementing and maintaining the internal control systems which would be in harmony with the preparation and fair presentation of the financial reports which includes free from material errors and fraud, free from misstatement among others.” Secondly selecting and applying the appropriate accounting policies and finally creating accounting policies which are appropriate to the prevailing financial conditions. Hence the given audit report fails to show this framework.

According to the new requirements of ASA 701the report should have included a qualified, unqualified opinion, adverse or disclaimer, nevertheless it fails to provide for this. By failing to provide for the opinion, the auditors failed to fulfil the ethical duties as called for by the ASA 700 guidelines and frame work. In addition under the ASA 701 framework the audit report should have indicated that the audit was carried under the provisions of the regulatory requirements of the given country (CPA Australia, 2006).

Guy (2006) states that “An auditor’s report is a formal opinion, or disclaimer thereof, addressed by either an internal auditor or an external audit on evaluation performed on an organization or segment thereof.” The aim of the auditor’s report is allow the auditor to report his or her opinion as to whether the financial statements show a true and fair view of the firm’s financial position. The report is addressed to the shareholders for a statutory audit or to the individual or body that had requested the audit to be carried out for private audits. “An auditor’s report has three main components, which are auditor’s independence, responsibility and audit opinion” (Guy, 2006).

Auditor’s independence

Auditor’s independence also referred to as the cornerstone of audit, is the most fundamental part of an audit process in determining the objectivity of the audit opinion. It is basically a state of mind shown by integrity and objectivity to the audit procedure. It is the independence of an internal or external auditor to perform his responsibilities in a free and objective way. In coming up with an auditor’s opinion, the auditor should be free from any biasness or coercion and do his or her work with due diligence. Taking into consideration that the aim of an audit is to enhance the reliability of the financial statement by showing a dependable assurance from an independent source that they show a true and fair view according to the auditing standards; however, this function cannot be achieved if the users of the audit report know that the audit process was not carried out in a credible manner and the auditor independence may have been undermined by other factors, such as the conflict of interest or coercion by other stakeholders of the business.

However, auditor’s independence and objective of the audit can be compromised in the following grounds: self interest, where an auditor’s has personal interest in the entity; self review threat arises when the auditor had undertaken an audit-related service to the entity earlier and the auditor reviews his or her work; advocacy threat, arises where the auditor promoted the client’s position irrationally; in as case where the auditor is involved in disagreement with the client or management; familiarity threat, which arises due to over contact of the auditor with the client for a long period may undermine the independence of the audit; and intimidation threat of the auditor by the client.

Reporting independence guarantees the auditor’s responsibility to disclose to the users of financial statement any information they deem ought to be revealed. If an organization’s management has been misleading stakeholders by manipulating financial information, they will try all means to ensure that the auditor does not report their acts. It is in these of cases where the auditor’s independence is likely to be undermined. Auditor’s independence can be enhanced by putting in place the five pillars of auditing, which are, competence, objectivity, professional competence, confidentiality and professional behaviour.

An independent auditor is able to detect misconduct by the management in an entity which would otherwise not have been detected, removing directors’ biasness in presentation of accounting statements about the firm’s financial position, hence they play a big role in boosting good corporate governance.

Auditor’s responsibility

Auditing processes should be undertaken with professional scepticism, and in accordance with the accepted regulations of practice within the auditing profession. To attain this level of performance, an auditor should take responsibility for the completion of the stated responsibilities in a professional way. Thus, the auditor’s responsibility in an audit report include: disclosing any compromise or objectiveness of the audit that arise; undertaking allocated duties in an independent and self-driven way; planning and carrying out the actual audit exercise and preparing the auditor’s report on time and as per stated.

ASA 700.37 states that “The auditor’s report shall state that the responsibility of the auditor is to express an opinion on the financial report based on the audit.” ASA 700 requires the auditors to acquire the necessary information of the risks involved in an organization’s regulatory framework and the business environment standards and essentials. In addition, ASAs requires the auditor to assess the internal controls of the entity to measure the extent of the credibility of the financial reporting; the auditor should measure the relevant controls if they are effective and efficient in operations of the firm; and check if the controls in place are compliant with the standards and regulations (Tomasic, 1992).

Users of the auditor’s report should also understand the auditor’s responsibility towards the report so as to avoid any interference of opinions, that is, to bridge the expectation gap between the users of the auditor’s report and the auditor. It occurs mostly that the users believe that it is the duty of the auditors to prevent fraud and errors whereas it is the duty of the management; this creates a conflict of perception.

The auditor’s opinion

“The purpose of auditing financial statements is to allow the auditor to show an opinion whether the financial statements are prepared, in all material respects, according to the Generally Accepted Accounting Principles and UIG Consensus views.” An audit undertaken according to the SASs is aimed at providing a reasonable assurance that the accounting statement taken wholly or partly does not have any material misstatements and the SAS expects after the audit process, the auditor to give an opinion on the financial statements in the auditor’s report.

Therefore, an auditor’s opinion is a qualification that accompanies accounting statements provided by the independent auditor after carrying out an auditing process. The auditor’s opinion shows the scope of the audit, the auditor’s opinion on the adherence of generally accepted accounting principles and information used in the audit, and the auditor’s opinion on whether the accounting statements reflect a true and fair position of the entity’s situation.

The auditor’s opinion on the accounting statements is based on the principle of acquiring reasonable assurance; thus, in an auditing process, the auditor does not assure that a material misstatement, arising from fraud or error, will be discovered. Hence, the consequent detection of material misstatements in accounting financial statements does not show: failure to obtain reasonable assurance; inadequacy in planning, performance or judgment; the lack of professional competence and due care; or failure to comply with SAS.

An auditor can give either of the four types of audit opinions: first, an unqualified opinion, this makes no reservations about the accounting statements and holds that they give a true and fair view in accordance with the relevant accounting reporting standards; second a qualified opinion, expressed when the auditor is not able to ascertain the possible cause of the materials misstatements may be due to limitation in scope of his or her work, disagreement with the management, or there are significant uncertainties affecting the financial statements; third a disclaimer of opinion, this is expressed when the auditor is unable to form an opinion due to insufficient audit evidence; and fourth an adverse opinion, issued when the effects of disagreements are so material and pervasive to the financial statements that the auditor concludes that the financial statements do not show a true and fair view.

An independent auditor’s opinions can be helpful to users of financial statements in ascertaining the reliability and credibility of financial statements. This helps stakeholders of an entity to make informed decision on the firm concerning its going concern assumption, firm’s management and the overall operation of the entity. Auditor’s opinion helps in identifying the weakness in an entity’s control system and opinions on what needs to be done to provide a more secure operating system (CPA Australia, 2006).

Reference list

CPA Australia (2006). ASA 700 The Auditor’s Report on a General Purpose Financial Report. Melbourne: CPA Australia.

Guy, D. (2006). Auditors’ reports. Menomonee Falls, WI: Tax Management Inc.

Tomasic, R. (1992). Auditors and the reporting of illegality and financial fraud, Australian Business Law Review, 20, 150-198.

An audit committee is established in a company through the board of directors and is charged with the supervision of financial disclosure. The enactment of the Sarbanes–Oxley act of 2002 strengthened the role of audit committees in a bid to monitor publicly owned organizations so that they can be prevented from squandering money. The audit committees act as the watchdogs that evaluate the financial records presented by organizations to verify if they are correct and genuine. This paper will highlight the various roles played by audit committees in enhancing the quality of financial reporting and disclosure.

Without a supervising body, public organizations can lose huge amounts of money through white-collar crimes. This is because organizations are able to combine their activities and thus cover their tracks so that they cannot be discovered. The audit committees are usually made up of professionals who do not work in the organizations that they are supposed to supervise. This goes a long way in preventing them from having any vested interests in their place of operation (Abbot & Parker 48).

The committees are very influential because they are the ones that vet the external auditors that are contracted by public companies. This in itself is very important because if the public organizations were left to choose external auditors on their own, they would go for the ones whom they know can cover their tracks on their behalf. The committee has a mandate to monitor the operations of the internal auditors so that they can compare the work done by external independent auditors against the work done by internal auditors.

The external auditors are under obligation to forward their findings concerning any form of squandering money in the organization they are currently working with to the audit committee so that legal action can be taken against the personnel that is found guilty of the offence. Investigations are supposed to commence once the external auditor has forwarded the report to the committee. The external auditor cannot be terminated or swapped with another without the authority of the committee. This is because it is known that managers and other senior personnel can swap auditors if they were allowed, and thus bring the ones that are willing to assist them to cover their tracks. This is why it is a requirement for public organizations to get authorization from the committee before they swap external auditors.

Glaum and Street explain that the role of external auditors is to analyze the financial records they are assigned to and forward their findings to the audit committees (78). The audit committees enhance the accuracy of financial records by shielding external auditors from being manipulated by anyone on what to report about their clients. The analysis of financial records is usually carried out quarterly.

The internal controls are also subjected to supervision by audit committees. The committee ensures that the internal controls adhere to the principles of accounting. In most organizations committee members go through orientation, that is, in form of unofficial gatherings that usually take place after normal working hours. During such gatherings, the committee members are given an opportunity to mingle with the key officials of the organization.

Other gatherings involve the external auditor and the committee, and the details of their gathering must remain confidential because no one is supposed to know about their coming together. This is important because if there is something wrong in an organization, its management would not know when the committee and the external auditor converged. The audit committees foster accuracy in financial reporting by perusing the records to establish whether there is equality in how the reports are presented.

In most cases, audit committees demand financial statements be accompanied by brief literature that is meant to explain why the figures are the way they are on paper. Technology has enhanced the work of audit committees because they do not have to handle the bulky statements anymore since organizations can now present their statements on the Internet which is very reliable, cost-efficient, and convenient.

Since the establishment of audit committees, the rate of white-collar crimes has drastically reduced in public organizations. This is because the committees have been able to identify the culprits and most of them have ended up in jail after losing their luxurious jobs. In case a company collapses when there is an audit committee in place, the committee is held responsible for the loss incurred because it is the one that is supposed to prevent such occurrences.

Audit committees are very effective in the US but then in some developing countries, this is not the case due to the nature of their cultures. For instance, in most Arabian countries there are no such bodies, especially where the country is headed by a dictator. This is because the few wealthy people are not comfortable with them. After all, they know the organizations are not meant to benefit the public but for their financial gains. Audit committees are designed to make public organizations remain accountable just like their counterparts in the private sector (Abbot & Parter 56).

In conclusion, before the enactment of the Sarbanes Oxley act, individuals working in state corporations were very sure that they could squander money and not get caught because they were entrusted by the government, hence they were unquestionable. Many countries are now considering setting up audit committees but one of their major problems is the lack of qualified individuals to occupy such positions. All state-owned organizations should have an audit committee that has members that are drawn from relevant fields. The roles of every audit committee should be clearly defined to avoid a clash of roles. In essence, the duties of audit committees involve supervision of financial operation, thus ensuring the quality of financial reporting.

Works Cited

Abbot, L. and Parker, S. “Audit Committees and Auditor Selection.” Auditing: A Journal of Theory and Practice 19(2000): 47-66.

Glaum, M. and Street, D. L. “Compliance with the Disclosure Requirements of Germany’s New Market: IAS versus US GAAP.” Journal of International Financial Management and Accounting 14.1 (2003): 64-100.

Introduction

Government institutions prepare their statement following the direction provided by the Government Accounting Standard Board (GASB) and not the Generally Accepted Accounting Principles. This work reviews the financial statements of the University of Alabama System. The paper discusses the employee pension disclosures in the financial statement of the institution. It also discusses the impact of the recent changes on the financial reporting of liabilities on the profitability of the institution. Further, it highlights some of the social and economic factors that may hinder the future success of the University.

Employee pension plan disclosures

Employees of the University of Alabama System take part in the Teachers Retirement System of Alabama. Covered employees contribute 5% of their earned compensation to the pension plan. The University also contributes to the plan (The University of Alabama, 2012). The total contribution to the plan for the past three years is summarized in the table below.

Source of data – The University of Alabama, 2012

From the table, it is evident that there was an increase in total contribution to the fund. For the three years, the employer’s contribution was greater than employees’ contribution for the three years. Apart from the Teachers Retirement system, some employees take part in the TIAA-CREF and VALIC programs. These are optional contributions. In these programs, the employer also contributes up to 5%. The trend of the contributions is shown in the graph below.

Teachers Retirement System of Alabama does not make separate measurements of assets and the actuarial accrued liabilities for individual employers. The actuarial accrued liabilities amounted to $28.3 billion while the actuarial valuation of assets amounted to $20.1 billion as of 30^th September 2010. The net effect is an underfunded actuarial accrued liability of $8.2 million (The University of Alabama, 2012).

The GASB proposed changes in accounting and financial reporting and not how the government approaches pension funding. As proposed, “Governments would recognize a pension liability on the face of their financial statement”. Currently, the unfunded liability appears as notes to the financial statements. The proposed changes in reporting of pension liability will increase the long-term obligations of the University since they will be included alongside other long-term liabilities (Governmental Accounting Standards Board, 2011; Guardian News and Media Limited, 2011).

Economic conditions that will affect the future growth and success of the institution

The increasing number of enrollment is a threat to the future growth and success of the institution. The table below shows the number of enrollments over the past five years.

Source of data – The University of Alabama, 2012

From the table, the total enrollment has been on an upward trend since 2006. This shows increased demand for education. The increase leads to overstretching and the dilapidation of available resources at a high rate.

Apart from increased enrollment, uncertain State appropriations affect tuition levels. For instance, in 2011, the appropriations were reduced by 3%. The University budget is likely to be bloated with increased tuition, increased enrollment, and internal services thus hindering growth. The same volatility can be extrapolated to the future and it hinders the University from planning for the future. A combination of increased demand for education as a result of population growth and reduced State appropriations poses a threat to the future success of the University (The University of Alabama, 2012; Granof & Wardlow, 2011).

Treatment of federal grants in the financial statement of the institution

From the financial statements of the institution, the federal, state, and local grants and contracts were treated as operating revenue. However, the Federal Pell grants were reported under non-operating revenues in the financial statements (The University of Alabama, 2012). Further, the University did not receive a supplemental grant within the period under review. Work-study was treated as a scholarship allowance. These were deducted from revenue from tuition and fees. They are classified under operating revenues.

Treatment of endowments, earnings on endowments, and restricted funds

Endowments and life income investments are treated as noncurrent assets in the financial statement of the University. Further, the University treated restricted funds as current assets. According to GASB statement number 35, the net assets should be classified into three categories these are, assets invested in capital items restricted net assets (consisting of assets and liabilities), and unrestricted assets. Both permanent and term endowment falls under restricted net assets. Further, earnings on the endowment are included in the restricted earnings. All three items should be treated as noncurrent items in the balance sheet. However, the University recognized only endowments as noncurrent assets. Restricted funds and earnings on endowment were treated as current assets. This contravenes GASB requirements (Governmental Accounting Standards Board, 2011).

Conclusion

The paper reviewed certain aspects of financial statements of the University of Alabama System. From the discussion, changes in reporting of pension liability increase the long-term liabilities of the institution. Further, an increase in enrollment and uncertain State appropriations cast doubt on the future success of the business. Finally, the University did not report restricted funds and earnings on endowment as per the GASB requirements.

References

Governmental Accounting Standards Board. (2011). GASB proposed to significantly improve pension reporting. Web.

Granof, M., & Wardlow, P. (2011). Core concepts of government and not-for-profit accounting. Hoboken, New Jersey: John Wiley & Sons

Guardian News and Media Limited. (2011). Public sector pension changes: How will they affect you. Web.

The University of Alabama. (2012). 2010 – 2011 financial report. Web.

Introduction

The purpose of the given strategic audit report is to describe the current performance and mission of Commercial Bank of Dubai (CBD) and analyze external and internal factors using EFAS matrix, IFAS matrix, and SFAS matrix. Based on the findings, the report will produce TOWS table to suggest strategic alternatives for the smooth functioning of the financial system and provide recommendations for the future development of this bank.

CBD is a public joint stock company formed in 1969 through an Emiri Decree. The bank offers a variety of conventional and Islamic commercial banking services, such as deposits, loans, credit cards, investment advisory services and so on (Irish Stock Exchange 15). People of the United Arab Emirates hold 80% of its share and Investment Corporation of Dubai owns the remaining part; however, this bank converted into a national Public Shareholding Company in 1982 and established itself as a progressive and modern banking institution.

Current Performance and Mission

The performance review of CBD illustrated that the net profit in the last year has decreased by 11.3% in comparison to the previous year while operating income raised by 5%, net interest income jumped by 3.6% and non-interest income boosted to 8.3% along with an increase of 22.9% from fees and commission. Although the bank has increased its operational expenses by 13.8%, this was the result of an enhanced retail distribution network. Therefore, the company is now improving its corporate and personal banking products by focusing on the strategic initiatives of CBD.

Due to the concurrent turndown of the financial service sector, the top management of the bank continued its careful approach to the corporate and SME sector and focused on boosting its market share in the diversified segments along with attractive digital capabilities (Kassem). The major achievements during the year pointed to launching four new outlets fully equipped with innovative digital technologies that gained customer attention for its unique mobile apps. As a part of the corporate social responsibility, the bank sponsored ‘World’s Elite Cyclists’ teams and “National Olympic Committee” while it is ready to get hold of a corporate loan portfolio of the Royal Bank of Scotland (RBS) operating in the UAE and issue a five-year bond. With an array of diversified product and funding base, the bank upholds its mission “to be loved for our passion and excellence.”

EFAS Matrix

Opportunities

CBD concentrates on the diversification of its products and services considering market demand, customer choice, economic and cultural factors; for instance, in 2008, CBD introduced sharia-compliant banking, which known as ‘Attijari Al-Islami.’ Furthermore, this bank established the first digital-only bank in the UAE to target digitally connected clients to manage their finances using technology; customers of this bank will get all financial services through their smartphone. Current performance of CBD represents that it has a financial capacity to expand business with new products and services in new and existing markets.

CBD was established through mergers of three banks; thus, the focus on this strategy will enhance the business opportunities to expand the banking services in the prospective domestic and international market (Irish Stock Exchange 15).

Threats

According to the annual report 2016 of CBD, the operating environment in the UAE remained competitive; however, the activities of the direct competitors, for example, PNC Financial Services Group, First Gulf Bank, Emirates NBD (UAE), BankDhofar, Abu Dhabi Commercial Bank, and Pacific Capital Bancorp, have created an overall challenging environment for trade (Commercial Bank of Dubai 19).

In the era of technology, ensuring cybersecurity is one of the biggest challenges faced by the management of the bank because CBD could suffer serious financial losses due to fraudulent transactions of hackers. Most common risks, for instance, include worms, Trojans, keystroke loggers, apps, software vulnerabilities, and web-based spyware, which are mainly created to collect customer information. In order to mitigate this threat, CBD needs to take different measures to proactively detect network vulnerabilities and prevent attacks. Therefore, it would require considerable funds to build a strong system.

External Factor Analysis Summary (EFAS)

IFAS Matrix

Strengths

• Brand value: From the last four decades, CBD is providing financial services with trusts to the customers; thus, it has a strong brand image in the banking sector of the UAE.
• Customer satisfaction: As nationals of the United Arab Emirates owned 80% of its share, the prime intention of this bank is to design product and service line that will consider the needs of the clients.
• Market growth: At the initial stage, CBD had only one branch, but now it is a highly profitable institution, which has about 24 outlets.
• Financial position: According to the annual report 2016, this bank has enough financial strength to implement new strategic options to decrease expenses and increase revenue; however, the following table 1 provides more information about the financial capabilities of CBD.

Table 1: Financial position. Source: CBD (2).

• Performance of the employees: CBD has started its operation with only ten employees, but now it has more than 1200 efficient workers;
• Technology: According to the annual report 2016 of CBD, this bank introduced the ‘Active Saver’ mobile app, a first-of-its-kind app, and the first digital-only bank in the United Arab Emirates to offer differentiated products, and innovative service and maintained its competitive edge.
• Long experience: From the last four decades, CBD has provided reliable and high-quality services to the clients to build trusted relationships;

Weakness

Operating Costs: According to the annual report 2016, CBD has failed to reduce operating expenses, which adversely affects its financial position, and overall performance of the bank (table 2).

Table 2: Financial position. Source: CBD (62).

• Higher charges: As the clients of the bank need to pay more for the services than traditional bank accounts, CBD focuses more on the purchasing power of the customers

Internal Factor Analysis Summary (IFAS).

SFAS Matrix

Strategic Factor Analysis Summary (SFAS)

The core constituents of this matrix have been derived from the exhaustive analysis of the above two matrices; the following table contains the details:

Analysis on Findings

The result of EFAS matrix of the bank shows that CBD scored 4.35, which indicates that Commercial Bank of Dubai is performing well in protecting the business from external challenges by means of using key advantages. At the same time, IFAS matrix is utilized to scrutinize the strengths and weaknesses of the functional sector of this bank. A total weighted score of CBD is 4.3, which shows this bank is responding to the internal business environment in an exceptional manner.

TOWS Table

The following table demonstrates the TOWS Matrix of CBD, which suggests strategic plans for its future development.

TOWS Matrix

Strategic Alternatives

It has been reported that in the current year CBD has experienced a turndown of 5.9% in its annual profit due to the challenging operating atmosphere in the UAE, diminishing from the corporate and commercial banking along with the higher level of debt defaults for reducing oil price. At the same time, the bank has raised its income from personal banking, online banking, and non-net interest income, which ultimately indicates the success of diversification strategy of the CBD (Kassem).

The Commercial Bank of Dubai has introduced its three years strategic plan from 2016 to 2018 to attain a higher growth and profitability and ensure diversified income sources from new business segments rather than the traditional ones (Irish Stock Exchange 77). Due to the associated risks and uncertain business environment, CBD is required to evaluate and assess the existing strategies, and design and choose the strategic alternatives. The following table contains the strategic alternatives for CBD:

Strategy 1: Significantly Emphasis on Personal Banking Business

Strategy 2: Introducing Digital Banking

Strategy 3: Attention to the Islamic Banking Business

Strategy 4: Merger

Recommendation

This strategic audit report suggests to put a stronger emphasis on the digital banking system to meet long and short-term goals of CBD as this strategy scored 32 out of 35. To implement this strategy, the management of CBD needs to focus more on the cybersecurity to avoid fraudulent transaction. The following table gives more suggestions for each strategy-

Conclusion

From the result of EFAS, IFAS, and SFAS matrix, it can be concluded that CBD holds a highly profitable and stable position in the financial institutions. CBD faces several external and internal challenges to ensure cybersecurity, satisfy the customer, and gain a competitive advantage over the competitors; however, this bank has excellent brand awareness and financial strengths to make a profit in the adverse business environment. At the same time, the board of directors and employees of this bank are highly qualified, well trained, skilled, and specialized; therefore, high performance of the human resources make it easy to hold a strong market position in the UAE. However, this strategic report recommends this bank to reform personal banking business and give more attention to Islamic banking and merger in order to reduce high operating costs and provide more benefits to the customers through innovative banking services.

Works Cited

Commercial Bank of Dubai. “Commercial Bank of Dubai Investor Presentation – 9M 2015.” CBD. Web.

Irish Stock Exchange. “Base Prospectus.” ISE. Web.

Kassem, Mahmoud. “CBD Profit Dips on Bad Debts and Expenses.” The National, 2017. Web.

Introduction

Financial auditors play a crucial role in verifying financial statements of legal entities in order to give audit opinions. Audit opinions offer some assurance to stakeholders of business establishments that financial statements are prepared in a good manner that follows the standard financial reporting framework. The main goal of a financial audit is to offer an objective assessment of financial statements, which improves the authenticity and credibility of financial reports prepared by the top management of an organization. This paper establishes that the auditor plays important roles in offering the management of a firm with the true independent report about its going concern issues. It also summarizes that the alternative requirements could be used to improve financial disclosures to users. Finally, the paper establishes that eliminating the going concern in auditing practices could impact users negatively. Therefore, the essential component of financial auditing should be retained.

The auditor’s current role

Financial auditors are required to give independent assessments of financial statements of organizations (Bell & Griffin, 2012; Satava, Caldwell & Richards, 2006). The financial examination provided by an auditor is an essential tool that is used by the stakeholders of an organization to determine the overall credibility and performance of a legal entity. A going concern is a legal business entity that has an ability to operate without the fear of halting its operations due to bankruptcy. If a business entity becomes bankrupt, then it can no longer maintain good relationships with its stakeholders and business creditors. As such, it is forced to stop its operations. The management of an organization could focus on making the business remain a going concern. The virtue of a going concern of an entity could be established by independent financial auditors who utilize their knowledge and skills to conduct assessments on financial statements, give independent reports (Satava et al., 2006).

The accounting framework hypothesizes that firms could continue to exist in the future provided that they work toward achieving their goals and commitments. Therefore, they could not be liquidated in the near future. Bell and Griffin (2012) argue that the auditor could demonstrate some information that makes a firm unable to satisfy its financial obligations without the need to sell its property or acquire debt via restructuring. The role of the auditor is to gin deep into the financial statements of an organization and look for the signs financial stability and/or instability. The role of the auditor in reporting about the entity’s ability to continue as going concern could be impacted by the willingness of an organization to accept audit outcomes. The role could also be influenced by the experience and ability of the auditor in using financial figures to report accurately and make proper estimations. The auditor considers factors like loan defaults, negative financial results, and failure to secure credit from suppliers, among others. The analysis of the financial factors helps the auditor to decide whether or not there is the uncertainty of an entity to operate in the future as a going concern.

Current requirements

The current requirements of PCAOB are meeting the needs of users of financial statements (Carmichael, 2004). Users of financial statements could be employees of a firm, the management, shareholders of other stakeholders. The PCAOB outlines requirements that should be met by the auditor when auditing financial statements of firms (Carmichael, 2004; Zeff, 2003). The auditing framework aims to protect the needs of users of financial statements that could result from such an audit. The requirements are meeting the needs of users by ensuring that the auditor’s responsibility is defined and specified in the auditing reports. This is an essential practice in auditing because business forecasting should be left to business analysts who may forecast the performance of firm based on the available financial records. In fact, business analysts mainly utilize past financial records to forecast the future of a business establishment. It is not the responsibility of the auditor to predict the future business events of a company. The requirements also outline auditing procedures that should be adopted by the auditor. This aspect satisfies the needs of users by ensuring that they are aware of the standard auditing procedures being used. Considerations of events, conditions, and management plans are essential components of PCAOB that promote the level of auditing acceptance by users of a firm. For example, users could be interested in knowing the events, conditions, and management plans that contributed to some outcomes in financial auditing (Nagy & Cenker, 2007).

Alternative requirements

Some alternatives to the current auditing requirements proposed by the PCAOB could be used to improve disclosures for users. Increasing the level of financial disclosures correlates with the level to which user needs are met within a firm (Zeff, 2003). First, the auditor could be given the freedom to use auditing procedures that could correlate with the size and requirements of an organization. For example, the auditor can utilize auditing procedures that are customized to reflect the needs of users in a particular company. Second, PCAOB should alter the requirements that are used determine whether or not an entity is a going concern. For instance, the firm could change the period of time that is required to assess the ability of a business to meet its financial requirements. Third, an alternative requirement could be adopted to specify the amount of money that an entity could pay its creditors without the need to sell its property.

Impact on users

Meeting the going concern requirement is important in financial auditing. If the requirement is eliminated, then users could not be aware of the actual financial statements of firms. In fact, users could fear investing in a business because they could not be sure whether or not the firm is a going concern. If the users invest in a business that is not a going concern, then they could incur losses because such a firm could be declared bankrupt and put in receivership so that the receiving manager could sell the assets of the firm to pay creditors and shareholders of the firm. Eliminating the going concern requirement could also make users feel that the management is hiding them some crucial financial parameters that could be used to present an accurate examination of a firm (Carmichael, 2004).

Conclusion

The auditor plays an important role in establishing the truth and independent financial standing of a business organization. The auditor operates within the confines of the established framework of the auditing procedures to demonstrate whether or not a firm could operate independently and meet is financial requirements without disposing some of its assets. The auditor has a role to play in reporting actual findings with regard to going concern of a business. Such information is used by the management to plan in the future. Also, potential shareholders utilize the information when making decisions about investing in a company. Although the current requirements adopted by the PCAOB are aimed at meeting the needs of users, alternative approaches could be utilized to improve financial disclosures to users. Finally, eliminating the going concern would have negative impacts on users.

References

Bell, T. B., & Griffin, J. B. (2012). Commentary on auditing high-uncertainty fair value estimates. Auditing: A Journal of Practice & Theory, 31(1), 147-155.

Carmichael, D. R. (2004). The PCAOB and the social responsibility of the independent auditor. Accounting Horizons, 18(2), 127-133.

Nagy, A. L., & Cenker, W. J. (2007). Accounting firms cautiously maneuver in the new audit environment–a note. Managerial Auditing Journal, 22(2), 218-225.

Satava, D., Caldwell, C., & Richards, L. (2006). Ethics and the auditing culture: Rethinking the foundation of accounting and auditing. Journal of Business Ethics, 64(3), 271-284.

Zeff, S. A. (2003). How the US accounting profession got where it is today: Part II. Accounting Horizons, 17(4), 267-286.

Audit Case Study: Introduction

Auditing is the process of examining the financial statements of an organization, correcting errors, and eliminating possible cases of fraud. The auditing process is a core activity that enables a company to control its internal activities in an efficient manner. Through auditing, most companies are able to achieve their business goals and objectives (Wang & Tuttle 2009).

Several critics have risen concerning the auditing process. While some businesspersons find it worthwhile to invest in the auditing exercise, some find the auditing exercise unworthy.

In this case, we have the XYZ Ltd Company; a pharmaceutical manufacturing company that was formed because of the splitting of the parent company, ABC Ltd. XYZ Ltd is the smaller of the two newly formed companies and the previous sales manager of the parent company is the Managing Director.

The managing director does not find it worthwhile for the small company to carry out yearend audits. According to him, yearend auditing is an unnecessary exercise that will only increase the expenses of the company without necessarily adding value to the business.

This paper will give a stringent analysis of the newly formed XYZ Company and determine if indeed there is a need to carry out yearend auditing. The paper will also give a detailed discussion of the pros and cons of appointing the same auditors of the parent company to audit XYZ Ltd.

Lastly the paper will give an overview of the audit rotation exercise, its advantages and disadvantages. From the discussions, the paper will give decisive conclusions and recommendations that would enable the XYZ Company’s managers to make a worthwhile decision concerning the auditing process.

Overview of the newly formed XYZ Company

As indicated, XYZ Ltd Company formulated because of the splitting of the parent company. According to the previous descriptions, XYZ Ltd Company is a private limited company that is not legally obliged to have an audit (Hodgdon et al. 2009).

This is because the company Act only obliges state owned companies and public limited companies to have audited financial records, whereas, the smaller companies voluntarily choose to have auditors examining their financial statements. However, although having an audit is not a mandatory requirement for XYZ Ltd, the auditing exercise would add some tangible value to the company.

Value of auditing to XYZ Ltd

Detection and prevention of fraud

Fraud is a practice that can make businesses to undergo some massive losses. It is noteworthy that a small company like XYZ has a small operating capital that could diminish drastically if not well managed. Fraud cases such as skimmed payments from customers, cash theft, improper handling of petty cash and misuse of the company’s credit cards are some of the practices that can lead to total failure of a company.

It is quite expensive for a small business like XYZ Ltd to create an internal audit department, however, the company can create a system that checks and controls the financial operations and the company employees. An informal internal audit process would somewhat reduce fraud cases resulting from personal interests (Chi & Huang 2011). It is noteworthy that the parent company would have split due to extreme cases of fraud.

Prevention of fraud through an informal audit exercise would enable the small XYZ Company to prosper and grow into a big multinational company and even surpass the projected turnover of £2.8 million in the first year of trading.

It is important for the company to create a program that would help in monitoring employees and enforce strict rules regarding any employee who is found guilty of committing fraud cases. The establishment of an internal audit would facilitate the above-mentioned practices though a persistent analysis of the company’s operations.

Testing and monitoring of internal controls

An Informal internal audit calls for recurrent analysis of the operations within a company. The habitual analysis enables the company’s operations to occur smoothly, where, the employees are kept on toes to offer the best of services. A small company like XYZ Ltd can employ auditors who would design, modify, and control the internal activities of the company.

Though auditing, the company is able to streamline its activities in a manner that would enable it to achieve its goals and objectives (Holm & Zaman 2012). Essentially, XYZ Ltd is a profit making company that would aim at generating the maximum profits possible.

The auditing exercise would enable the company to keep track of its revenue and expenditure and the gross profits made during a particular financial year. Any form of misappropriation of resources is tracked, where; all the involved stakeholders are made answerable of their actions.

Monitoring the company’s compliance with the company policies

All companies have policies that guide then in their daily operations. In addition to the informal internal exercise, XYZ Ltd Company can employ a formal internal audit policy that works towards ensuring the company eliminates all actions that would expose it to massive losses. A company may have a policy that extends credit to its customers to prevent losses.

An auditing exercise will determine if indeed the company adheres to the policy. Moreover, the auditors will be able to carry out a cost benefit analysis of the credit policy and determine if it is a worthwhile practice. The reports from the auditors will help the decision makers to determine new policies that would work if enforced and identify the old policies to eliminate from the company practices (Deis & Giroux 2006).

An operational audit would examine the financial statements of a business to ensure the business complies with the policies of obtaining maximum efficiency from all business operations.

Monitoring the company’s compliance with the government regulations

The worst thing that can happen to a small business like XYZ Ltd is facing the adverse consequences of failing to adhere to government regulations. An operational audit exercise plays a great role in advising the business managers of all the applicable government regulations (Bon Kim & Yi 2009).

It is though an auditing process that a business would know the legal procedures of tax avoidance. Moreover, the government has strict employment laws that companies ought to follow.

The auditing exercise would advise the management team accordingly on when it should recruit new employees, when to promote or when to fire an incompetent employee. The auditors would advise the management team of the actions that attract fines as well as the procedures to obtain and comply with government regulations.

The exercise of appointing an auditor

The exercise of appointing an auditor may seem very simple, but it is associated with a lot of dilemma. The XYZ Company formed because of the splitting of the parent company.

There is no clear reason as to why the parent company decided to separate the pharmaceutical and optical divisions; however, it would be due to mismanagement reasons. Whatsoever the reason, appointing the same auditors as those of the parent company to audit XYZ Ltd Company is associated with several advantages and disadvantages.

Advantages of appointing the same auditors

Massive experience and expertise

As indicated, the auditors have audited the financial records for the parent company for the past ten years. This is a clear indication that the auditors did some marvelous work that sustained the growth and expansion of the parent company (Jackson, Moldrich & Roebuck 2010). There is a high probability that the parent company had grown too big such that the managers decided to split it for easy management.

The success of the parent company is attributed to the massive experience and the excellent work of the auditors. Similarly, XYZ Ltd Company can appoint the same experienced auditors to audit their financial records.

Appointing the same auditors would be an assurance that the newly formed company would grow and last for the next 10 years or more. XYZ Ltd Company will greatly benefit from the quality services from the expertise of the auditors.

Affordability and efficiency of the auditing services

It is evident that a small business like XYZ Ltd will find it very expensive to obtain new auditors to audit their financial books (Kaplan & Mauldin 2010). The auditors of the parent company may have some compassion with the small company and charge the company some affordable rates for the auditing exercise.

Moreover, the auditors who are already familiar with the financial records of the parent company will give an effective allocation of the amount set aside for the auditing expense to ensure that the company does not run at a loss.

Smooth flow of activities

Bringing in a new set of auditors would somewhat bring in disruptions. If XYZ Ltd Company appoints the same auditors as the parent company, the auditors will put up with the small company easily.

In fact, maintaining the same auditors would enhance their morale to improve their quality of services in the subsequent audits (David & Thomas 2013). The relationship between the auditors and the company would strengthen, and this would make the auditors to work hard to ensure their auditing work brings in some mutual benefit to all the company stakeholders.

Disadvantages of appointing the same auditors

Possibility of recurring previous mistakes

From a business point of view, an esteemed company cannot decide to separate its operations for any good reasons. There is a very high probability that the company decided to do so because it began experiencing some massive losses because of vague auditing processes.

If truly this is the reason behind the splitting of the company, it means that the auditors played a critical role in bringing down the parent company. Therefore appointing the same auditors will pose the way to recurring the previous mistakes. In the end, the XYZ Ltd Company would also face the same problem and it may end up collapsing.

Lack of the point of comparison and evaluation

It is always advisable for companies to evaluate and compare the services offered by a particular company stakeholder. If XYZ Ltd Company uses the same auditors as the parent company, it may not be able to evaluate the efficiency of the services. While the auditors may appear to offer quality services, it would be worthwhile to have a change that would formulate a point of comparison.

Probably, the new auditors would reveal fraud cases that the usual auditors would not depict. In essence, appointing the same auditors as those of the parent company will blindfold the XYZ Company and it may not be able to gauge the quality of the auditing services (Kramer et al. 2011).

Audit rotation

The exercise of changing auditors has often raised eyebrows amongst businesspeople. While some businesspersons regard audit rotation as a worthwhile practice, some of them regard the exercise as unworthy as it only encourages businesses to doubt the competence of auditors. Despite the different perceptions, audit rotation is associated with various advantages and disadvantages.

Advantages of audit rotation

Increased perfection

It is evident that there is no perfect human being; therefore, a different set of eyes on a company’s financial record would detect an error that the preceding auditors could not detect. In fact, for publicly held companies, audit rotation is done every five years, and private limited companies can employ the same practice to obtain quality audit services.

The exercise helps in identifying and eliminating intentional and non-intentional errors (Daniels & Booker 2011). Companies that embrace audit rotation will be at a safe position, as they would provide clear records of their financial statements to the bank and to the funders.

Decreased fraud and increased impartiality

Some auditors within a given audit firm may collaborate with the financial managers of a given company to “steal” from the company. Audit rotation plays a significant role in ending such cases because not all auditors would comply with such evil deals.

The shortened period of auditing will not allow audit firms to create close relationships with the management, an action that may have a negative impact on the performance of the auditors.

Audit rotation enhances the provision of impartial services by audit firms as they are obligated to rotate the auditors within the firm (Chi et al. 2009). In essence, the audit rotation exercise plays a critical role in increasing impartiality for all the stakeholders of the company.

Disadvantages of audit rotation

Disruption of the company’s activities

It is evident that audit rotation, especially if it involves changing the auditing firm would have adverse consequences on the company’s activities. Different audit firms will come up with different advisories to the management team and the company’s activities may be disrupted from one time to another (Bates et al. 2012).

Moreover, audit rotation does not allow the development of a long-term relationship between the company and the auditors, which is very important for the delivery of efficient services.

Destroyed reputation of the company

Some companies have had a tendency of frequently changing the auditing firms. The practice of changing audit firms too often would depict a negative picture of the firm. Investors would shy away from such firms, as they would perceive them as incompetent because they only do “auditor shopping” and expect better results instead of working of their performance.

In essence, audit rotation would bring out misconceptions about a profit making organization like XYZ Ltd Company.

Increased risk of audit failure

It is evident that every time a new audit firm is appointed to carry out the auditing exercise, the firm requires some time to comprehend the company’s books of accounts. The audit firm fully understands the rules of the game of how to audit the firms accounting books when its term is almost over.

The administrative will have to invest time to evaluate the subsequent audit firm and the whole exercise is not only expensive, but it also increases the chances of failure of the auditing exercise by the new audit firm (Daugherty et al. 2013).

Audit Case Study: Conclusion

From the discussions, it is evident that auditing is a very essential exercise in any organization. Auditing enables companies to have a clear outlay of the company’s activities. Though auditing, a company can easily depict fraud cases and address them accordingly. From the discussions, it is evident that the decision on whether to maintain auditors or to employ an audit rotation depends on their performance.

If, for example, the auditors of the parent company, ABC Ltd Company, were not competent, the newly formed XYZ Ltd Company may need to appoint a new auditor to audit the financial books. Secondly, if the new set of auditors do not display their competence after a couple of years, an audit rotation will be essential (Peecher, Schwartz & Solomon 2011).

In essence, every decision made is associated with advantages and disadvantages. The company managers are obliged to make decisive decisions about the auditing process. There should be strong reasons behind any form of changes in the auditing process.

Both the internal and external auditors have a great role in maintaining efficient and reliable financial reports. The auditors should be in a position to give a detailed explanation of every figure that appears in the financial records.

The directing managers should only take the role of the overseers who should only come in whenever there are suspicions of fraud cases. All scandals relating to the books of accounts are handled in a professional manner without downsizing the involved stakeholders.

References

Bates, HL, Waldrup, BE, Jaeger, DG & Shea, V 2012, ‘Issues with mandatory audit firm rotation’, Journal of Business and Accounting, vol. 5, no. 1, pp. 70-75.

Bon Kim, J, & Yi, CH 2009, ‘Does auditor designation by the regulatory authority improve audit quality? Evidence from Korea’, Journal of Accounting and Public Policy, vol. 28, no. 3, pp. 207-230.

Chi, W & Huang, H 2011, ‘Discretionary accruals, audit-firm tenure and audit-partner tenure: empirical evidence from Taiwan’, Journal of Contemporary Accounting & Economics, vol. 1, no. 1, pp. 65-92.

Chi, W, Huang, H, Liao, Y, & Xie, H 2009, ‘Mandatory audit partner rotation, audit quality, and market perception: evidence from Taiwan’, Contemporary Accounting Research, vol. 26, no. 2, pp. 359-391.

Daniels, W & Booker, Q 2011, ‘The effects of audit firm rotation on perceived auditor independence and audit quality’, Research in Accounting Regulation, vol. 23, no. 1, pp. 78-82.

Daugherty, B, Dickins, D, Hatfield, R, & Higgs, J 2013, ‘Mandatory audit partner rotation: perceptions of audit quality consequences’, Current Issues in Auditing, vol.7, no.1, pp. 30-35.

David SJ &Thomas, EV 2013, ‘Audit firm rotation and audit quality: evidence from academic research’, Accounting Research Journal, vol. 26, no.1, pp.75-84.

Deis, DR, & Giroux, G 2006, ‘The effect of auditor changes on audit fees, audit hours, and audit quality’, Journal of Accounting and Public Policy, vol. 15, no. 1, pp. 55-76.

Hodgdon, C, Tondkar, RH, Adhikari, A & Harless DW 2009, ‘Compliance with international financial reporting standards and auditor choice: new evidence on the importance of the statutory audit’, The International Journal of Accounting, vol. 44, no.1, pp. 33-55.

Holm, C & Zaman M 2012, ‘Regulating audit quality: restoring trust and legitimacy’, Accounting Forum, vol. 36, no. 1, pp. 51-61.

Jackson, AB, Moldrich, M & Roebuck, P 2010, ‘Mandatory audit firm rotation and audit quality’, Managerial Auditing Journal, vol. 23, no. 5, pp. 420-437.

Kaplan, SE & Mauldin EG 2010, ‘Auditor rotation and the appearance of independence: evidence from non-professional investors’, Journal of Accounting and Public Policy, vol. 27, no. 2, pp. 177–192.

Kramer, ST, Georgakopoulos, G, Sotiropoulos, N & Vasileiou, KZ 2011, ‘Audit firm rotation, audit firm tenure and earnings conservatism’, International Journal of Business and Management, vol. 6, no. 8, pp. 44-57.

Peecher, ME, Schwartz, R & Solomon, R 2011, ‘It is all about audit quality: perspectives on strategic-systems auditing’, Accounting, Organizations and Society, vol. 32, no. 5, pp. 463-485.

Wang, KJ & Tuttle, BM 2009, ‘The impact of auditor rotation on auditor-client negotiation’, Accounting, Organizations and Society, vol. 34, no. 2, pp. 222–243.

Auditor’s report is a formal suggestion issued by an independent auditor or an internal auditor as a result of the audit process which is intended to be submitted to the users. The users include all the stockholders such as; the government, lenders and debenture holders, potential investors, the shareholders, the general public, insurers, customers, suppliers, stockbrokers, credit rating agencies, among others. The auditor report is considered a necessary tool when financial information is being reported to its users especially in business (Archer, et al., 1989). The directors who are responsible for the operation of the enterprise may prepare the financial statements in their favor at the expense of the users. The stockholders, therefore, require the report given by the directors to be certified by auditors and submit the opinion on the truth and fairness of the information. The auditors must prove that the statements prepared in all material aspects are in compliance with the financial reporting framework and statutory requirements and regulations.

The auditor’s report plays an important role to the shareholders as they help them to understand how their investment is going on. It provides a starting point for those who prefer buying shares for the first time. Through the reports, the shareholders will be able to determine if the company is making profits or losses and finally make a decision whether to continue investing in the business or not. The auditing reports also protect the rights of the shareholders and keep them informed that they are not exploited by the managers and the directors of the company. The shareholders will understand the reasons why there are changes in the profits as they are always given in the report. The information contained in the auditor’s report is also essential to the lenders and the debentures when determining if they can grant loans to the entity. The profits margins of the business will help the lenders to calculate the interest rate payable to them by the enterprise. The reputation of the business is evidenced in their reports as audited statements increase the credibility of the enterprise hence it can help the lenders such as financial institutions to rate the credibility of the company. Therefore the lenders can rely on the audited report when granting loans or credit facilities.

The information contained in the audit report is also useful to the government in various aspects. The tax authority which is a government body uses the reports of the auditors when assessing taxes to be paid by the enterprise. According to the statute, every entity has a liability to pay taxes to the government. The amount of tax payable varies from entity since this is determined by their reports which are different from one business to another. It’s also essential to the government when making economic policy decisions especially the ministry of finance (Schaefer & Peluchette, 2010). The nonperforming enterprises evident in the reports of the auditors can be taken over by the government so as to increase their levels of operation. The government will be able to know the value of their assets which makes it possible to dispose of them. As much as the auditor’s report is useful to the government, it is also important to the potential investors. Investors are always interested in investments that accrue high returns. For example, if buying shares of a certain company is more profitable, then it will call for more investors. The returns and the financial position of a company can only be in the reports submitted by the auditors. Investors will use the opinion expressed by the auditors in their report to rate whether it will be more profitable to make an investment decision.

Customers also rely on the auditor’s opinion to consider if they will continue to depend on the entity for the supply of goods and services. The financial statements give an expression of the financial position of the business which the customers deem necessary for proper decisions. Suppliers before making an agreement with the business to make their supply, require the information of auditors report so as to be aware of the stability of the enterprise. The reports are necessary for the supplier to make the decision on the regularity of supply and whether they will continue supplying their services to the company. The insurers also use the information when they are settling their claims and can easily calculate the actual loss of the property destroyed.

Going concerned is an important principle when preparing financial statements as it provides the underlying concept of periodic financial statements. The principle assumes that the enterprise will continue to operate or exist for the foreseeable future (ECIIA, 1996). To provide information ongoing concerns, I will seek a face-to-face audience with my client and explain the perceived ‘going concern’. I will have to discuss with my client the risks that can cause the enterprise’s going concerned to be uncertain (Ramos, 2009). I will discuss the appropriate audit procedures that will be included in the audit program. The discussion will analyze processes like vouching, accounts review, and audit tests to empower the client on proper auditing procedures. I will also highlight going concern problems like lack of disclosure of necessary information deemed to be useful in expressing suggestions. I will discuss the evaluation of management assessment of the entity’s ability to continue as a going concern with my client. This is expected to bring to light the working procedures of the management more so if in line with the required set procedures. I will enquire from my client the period to which the auditing report paid attention to –that is- whether it was yearly, quarterly etc. It is always expected that the directors and auditors consider a period of one year from the date of approval of the financial statements. The discussion will also include the procedures adopted by the management when identifying going concern problems. The discussion will be based on whether applying the going concern principle will be appropriate in the valuation and measurement of items appearing in the financial statements. The reasonable grounds for accepting the applicability of the going concern assumption will be reviewed in the talk. The talk will also be centered on the evidence necessary to convince the users that the company is likely to exist for the next period of not less than twelve months. If we do not agree on the going concern, then I will advice the client to ensure that the accounts are prepared on a market value or break up basis. If the client still refuses, then the auditors will have to qualify the accounts as a whole to the effect that they are not true and fair.

The following will be expected from the directors when making qualified audit opinion: plans for resolving matters giving rise to going concern doubts; obligation to other entities such as guarantors; budgetary system; and finally formal and informal systems for identifying risks.

There are a variety of stockholders who are interested in the auditors report. Every stockholder requires the information in making proper decisions concerning the company. The discussion of going concern with a client facilitates informed decisions that are likely to benefit the company.

References

Archer, S., McLeay, S. & Dufour, J. B. (1989). Audit Reports on the Financial Statements of European Multinational Companies: a Comparative Study. London: The Institute of Chartered Accountants in England and Wales.

European Confederation of Institutes of Internal Auditing (ECIIA). (1996). Position Paper on Internal Auditing in Europe.

Ramos, M. (2009). Risk-based audit best practices. Journal of Accountancy, 208 (6), 32-37.

Schaefer, J., & Peluchette, J. (2010). Internal control: Test your knowledge. Journal of Accountancy 209 (3), 46-49.