Professional Documents
Culture Documents
KHOOSHAL
STUDENT ID: 160169
COHORT: BACF/16A/FT
MODULE: ADVANCED
AUDITING
MODULE CODE: ACCF 2113
Abstract
This paper analyses the changes and challenges of auditing as there is an upsurge in
fraudulent activities in financial accounting in the global economy in the 21st Century.
Determining how Changes and Challenges has affected Auditing in the 21st century with
particular reference to is still a subject of discussion in most jurisdiction. Bringing
together existing knowledge on the purpose, types, elements, basic principles,
environmental changes and challenges, globalization, value for money audit and auditing
and expectation gap
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Auditing may be defined as,
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Table of contents
Abstract 1
1. Introduction 4
2. Background and literature review 5
3. The Traditional Audit 7
4. Automating the Audit 8
5. Challenges facing the modern- 9
day Auditing profession
5.1.Factors impacting on the external 10
Audit Function
5.2.Risk of Big four audit dominance 14
6. The future Audit 16
7. Summary 16
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The evolving role and challenges faced by the audit profession.
In the event that choices are to be predictable with the expectation of the leaders,
the data utilized as a part of the choice procedure must be dependable.
Temperamental data can make wasteful utilization of assets the drawback of the
general public and to the chiefs themselves. In the lending decision example,
assume that the bank makes the loan on the basis of misleading financial
statements and the Borrower Company is ultimately unable to repay. As a result
the bank has lost both the principal and the interest. In addition, another
company that could have used the funds effectively was deprived of the money.
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2. Background and literature review
Auditing has been variously defined. But a more enduring definition has been
offered by the report of the Committee on Basic Auditing Concepts of the
American Accounting Association which defines Auditing as a systematic process
of objectively obtaining and evaluating evidence regarding assertion about
economic actions and events to ascertain the degree of correspondence between
those assertions and established criteria and communicating the results to
interested users.
However, International Federation of Accountants (IFAC) handbook (1997)
Technical Pronouncements defines an Audit as a mechanism that enables the
auditor to express an opinion on whether the financial statements are prepared in
all material respects in accordance with an identified financial reporting
framework.
Of course, coming nearer home, The Financial Reporting Council (FRC) was
established under the Financial Reporting Act 2004 (FRA 2004) as the oversight
body for auditors in Mauritius.
The FRCs functions include: (i) ensuring the adoption of IFRS and ISA; (ii)
monitoring the practice of auditors to maintain standards of professional conduct;
(iii) monitor and enforce compliance with financial reporting, accounting, and
auditing standards; (iv) license auditors and establish and maintain an register of
licensed auditors; (v) conduct practice quality assurance reviews of licensed
auditors; (vi) establish an Enforcement Panel to investigate and sanction all
licensed auditors and firms based on its practice review findings; (vii) review
financial statements and reports of a public-interest entity; and (viii) advise the
Minister on matters relating to financial reporting and accounting and auditing.
The FRC is a member of the International Forum of Independent Audit
Regulators.
Additionally, auditors are also regulated by the Mauritius Institute of Professional
Accountants (MIPA), established under the FRA 2004. Membership in the
institute is mandatory for all qualified individuals. To practice accountancy
publicly in Mauritius, all qualified individuals must register with MIPA as a
Public Accountant and then receive a practicing certificate from the institute.
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MIPAs responsibilities under the Act include to: (i) establish, publish, and
review a Code of Professional Conduct and Ethics for Professional Accountants
which must be consistent with the IESBA Code of Ethics; (ii) keep and maintain a
register of Professional Accountants, Public Accountants, and Member Firms;
(iii) establish membership requirements; (iv) conduct examinations for registering
Professional Accountants; and (v) establish continuing professional development
requirements.
Therefore from the foregoing, Public Sector Audit can be inductively derived.
Public Sector Audit suggests Public accountability which reflects the obligation to
answer publicly for the discharge of responsibilities that affect the public or the
public interest in very important way. The obligation to report is the
accountability; and it is the responsibility of auditors or auditors-general to
express an opinion by way of audit report in accordance with the Constitution and
other laws of the land on the financial statements.
The Constitution as amended and the Audit Act of 1958 empowers the auditors,
among others to report on the adequacy of the accounting system and
management control system, including those designed to ensure Economy,
Efficiency and Effectiveness. In practice, the approach must go beyond just the
mere or mechanical audit exercise. The audit exercise must include and examine
thoroughly the management structure and even regulatory administration.
Similarly, legal audit, regularity audit and performance audit must be carried out.
It must be noted however, that an audit in itself is an indispensable part of a
regulatory system whose primary aim is to reveal deviations from accepted
standards and violations of the principle of legality, efficiency, effectiveness and
economy of financial management as far as auditing is concerned. The discovery
of deviations from standards and laws by auditors must be made early enough to
take corrective action and to make corrective action worthwhile, make those
involved accountable to accept responsibility; to obtain compensation where
necessary, or to take steps to prevent or at least render more difficult such
breaches in government businesses or activities.
As public sector officers became more conscious of the need to ascertain the
actual utilization of resources, the concept of value for money audit started to
emerges, public sector auditor conducting value for money audit painstakingly
examines and assesses the performance of government officials executing
programmes, project, or activity to determine whether they are achieved at a
minimal cost. The primary objective is therefore to confirm that relevant results
expected from the programmes, projects and activities are achieved economically
and efficiently. The auditors accumulate evidences to confirm that those entrusted
with public resources are utilizing them economically, effectively, and achieving
stated objectives. Causes of uneconomical practices are established and reported
to the management for corrective action.
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To confirm that the functions are performed economically and efficiently, the
auditor will consider whether the organization is complying with the significant
laws, regulations, rules, circulars, and guidelines relevant to the particular
functions. It will be appropriate to confirm whether the organization is following
sound procurement practices in the acquisition of goods and services. Whether
organization is acquiring the appropriate cost and properly protecting and
maintaining them. The audit will confirm that the organization is complying with
laws and regulations that will significantly affect the acquisition protection and
use of the organization and there is in place adequate management control system
for measuring, monitoring and reporting on the application of economy and
efficiency.
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Lanza (1998) contends that minimal effort answers for accomplishing an
underlying mechanized review encounter incorporate starting CAATS that
encourage information extraction, arranging, and investigation strategies. These
projects require small preparing, have no record measure restrictions, give point
by point review logs to use as work paper documentation, and take into
consideration the making of auditor-indicated reports that might be connected to
present and future informational collections. These devices ought to be at first
used to supplant manual review exercises on the grounds that these are regions
where the most generous advantages may be gathered.
In advancing toward the future review, the degree to which information, controls,
and procedures are computerized must be considered. An organization that is
overburdened by manual review procedures should stand up to this issue sooner
or later if the goal is to yield ideal advantages from the future review. Basically, if
the association computerizes its information, controls, and procedures in a way
that legitimately lines up with the functionalities of the innovation being
actualized, the business will probably be in a position to improve review quality.
On account of this, one could contend that the customary manual and review is
turning into an untenable position. Additionally, it could be contended that the
utilization of simple CAATS, for example, those depicted prior will in the end be
addressed as far as review utility. Luckily, the possibility without bounds review
is not a current marvel and there is an assortment of systems that have been
proposed to achieve this level.
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5. CHALLENGES FACING THE MODERN DAY
AUDITING PROFESSION
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credibility crisis for the auditing profession. One of the consequences of this was
the demise of Arthur Andersen and the resultant decrease in the number of big
audit firms from five to four. A further consequence was the drastic interventions
by governments, regulators and the auditing profession itself, which have given
rise to various and onerous new laws, regulations and standards that govern
financial reporting and the auditing thereof.
The period 2000 through 2006 has been a very turbulent time for the auditing
profession, a period that witnessed numerous scandals and their aftermath (Enron,
WorldCom, Parmalat), strident calls for changes in the way that auditors practice
their profession, and regulatory initiatives that significantly change the way the
profession is governed. Long-held attitudes and customary practices have been
challenged and found to be deficient by the media, the investing public, and those
charged with regulating financial reporting and auditing. Issues of auditor
independence, the role of corporate governance, the responsibilities of
management, the appropriateness of consulting services, and the overall
professional obligations of auditors have all been discussed and debated by a
broad array of interested groups and individuals. The theme linking these debates
has often been what is wrong with the auditing profession? and its close relative
what can be done to improve the auditing profession? As a result, this period has
probably resulted in more substantive changes to the auditing profession than any
other period in modern day business history.
The above developments also gave rise to the risk of a Big Four auditing firm
domination of the audit market, and the possible effect that a collapse of one of
these remaining firms poses to the effective functioning of the audit market.
Various factors and circumstances impact on work of the registered auditors and
their firms. These include:
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stood accused of not performing its watchdog function effectively and with
objectivity.
Questions were also asked about the auditing professions ability to self-regulate,
and governments responded by issuing new laws to regulate the auditors work.
The auditing profession also implemented vigorous self-regulatory processes such
as practice review, as well as other forms of auditor control, as discussed below.
Lastly in this regard it is interesting to note the cynical comment that is sometimes
heard that the auditors, through failure to perform their responsibilities with
diligence and care, actually created more work for themselves and benefited
substantially from their clients demise.
According to an article in the Wall Street Journal, the Big Four accounting firms
KPMG, PricewaterhouseCoopers, Deloitte & Touche and Ernst & Young are
more powerful than ever. The scandal that brought down US-based accountancy
firm Arthur Andersen, gave rise to an increase in work generated by the stricter
accounting and auditing standards in the Sarbanes-Oxley Corporate Governance
Act. The increase in work combined with limited resources in turn delivered
greater leverage for demanding and winning higher fees at the Big Four. So great
is the demand that they are turning away work especially when the risks seem to
outweigh the potential rewards.
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Similarly, the International Federation of Accountants (IFAC) issued new
auditing standards that introduced a new risk-based audit methodology and more
stringent documentation and reporting requirements.
The new regulations, requirements and increased legal exposure of auditors are
also often criticised and blamed for harming the auditing professions ability to
attract and retain staff. Allen Blewitt (ex-CEO of ACCA) concurs:
The auditing profession stands to lose most of its members by 2013 due to
overregulation in the light of corporate scandals worldwide. Only the big four
auditing firms will be viable in the next several years. Sheer numbers of audits are
dropping. Legislators do not understand the auditing profession. When they
regulate the profession all they see is red tape. The regulators have a blinkered
view of audit.
Lastly, it should be noted that an aspect that was heavily debated in South Africa
at the time of drafting the various pieces of legislation, namely, mandatory audit
firm rotation, was abandoned in favour of audit partner rotation after five years.
The cost of performing audits has increased significantly over the past number of
years. This is attributed to factors such as the drastic increase in staff salaries,
professional indemnity insurance, increasing technology costs, as well as the
impact of changing audit methodologies and new accounting standards, which are
time consuming to understand and to audit. At the other end of the scale are the
clients who are often reluctant to accept increases in audit fees in excess of
inflation. The dilemma that auditors face because of higher costs and lower fees is
reflected in the following remark by Moore in the CPA Journal:
Efficiency is one thing, but audit fees have been so drastically reduced by factors
such as bidding and price competition that firms have been forced to think of
ways to reduce the time spent working on audits. Accountants are under pressure
to fit the expenses of the job into the fees they can charge. Many of the firms
involved in the continuing high-profile accounting scandals had their work papers
done by firms that easily passed peer review. The auditors probably did their jobs
efficiently, but didnt have the luxury of thinking about what might be wrong.
Auditing fees should be high enough so that auditors can think on the job instead
of quickly and mindlessly doing paperwork that will pass inspection.
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Auditing firms in South Africa, like their counterparts in overseas countries, are
experiencing significant shortages of trainee accountants and qualified staff.
South African auditing firms have the added challenge of transformation and
targets to deal with. Accordingly, there is a high demand for staff amongst
auditing firms, and especially as regards attracting and retaining black trainees
and accountants. This shortage of auditing staff has driven up salary costs, and
consequently audit costs and audit fees.
The skills requirement of auditors has also undergone significant changes over the
last number of years. Nowadays auditing staff face many new challenges, and in
order to overcome these they should be schooled and trained in techniques that
surpass traditional accounting and auditing procedures. These include, inter alia,
computer skills, communication and presentation skills and professional and
business ethics. All of these aspects involve costs, affect the firms recruiting,
training and retention of staff, and ultimately impact on the audit fee.
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management. Such misunderstandings not only result in a loss of confidence in
the auditing profession, but also often give rise to lawsuits against audit firms,
resulting in legal fees and productive management and auditors time lost in the
litigation processes.
It would therefore appear that the challenges facing the auditing profession are
enormous, and conventional wisdom would suggest that the only ones capable of
tackling them head-on are the Big Four firms, due to their size, the extent of
knowledge- and information-sharing implicit in their global network, and the
resultant economies of scale.
Market dominance by the Big Four is not only of concern in South Africa. Both
the Financial Reporting Council in the United Kingdom and the European
Commission have expressed concern in this regard. A report arising from the so-
called 17 May 2006 Directive, which examined the impact of the current liability
rules for carrying out statutory audits on the European capital markets and on the
insurance conditions for statutory audits and audit firms, including an objective
analysis of the limitations of financial liability, reached the following
conclusions, which are important for the purposes of this article.
The study, which focuses on the economic impact of the auditors liability for
statutory audits, shows that the market for statutory audits of large and very large
companies is highly concentrated and dominated by the Big-4 networks.
Moreover, the structure of this market is unlikely to change much in the coming
years.
This is because middle-tier firms face a number of barriers to entry into the
market. Such barriers are reputation, capacity and breadth of their networks, and
the exposure to unlimited liability in most EU Member States combined with very
limited professional insurance availability.
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In light of the number of large actual or potential claims outstanding, the risk of
an award or settlement in excess of the tipping threshold is far from nil, and one
of the major Big-4 networks could possibly fail as a result.
The situation is likely to be much more dire if a second Big-4 network fails
shortly after the first one. Investors confidence will in all likelihood be seriously
affected and the adjustment to the new situation is likely to be difficult, especially
if statutory audit capacity shrinks as a result of these events.
The report concluded by proposing that some form of limitation of liability for
auditors be introduced, and this was subsequently followed by the European
Commission Recommendation of 5 June 2008, which recommended and proposed
various ways in which this limitation could be achieved. The main purpose of the
recommendation is to encourage the growth of alternative audit firms in a
competitive market. The recommendation is made in response to the increasing
trends in litigation and lack of sufficient insurance cover facing the auditing
profession in Europe, and has as its aim the protection of European capital
markets by ensuring that audit firms remain available to carry out audits on
companies listed in the EU.
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an optimized fashion. Cangemi (2010) argues that, given the recent advances in
business technologies, the continuing emphasis on the backward looking audit is
simply an outdated philosophy. Instead, he believes that real-time solutions are
needed. As such, firms that successfully experiment with the CAATS described
previously should give eventual consideration to more advanced programs which
contain functionalities resembling the audit of the future and provide a higher
level of assurance.
Fortunately, recently proposed solutions better satisfy this vision. In general, the
programs in this category contain the capabilities to continuously capture
exceptions and outliers in data sets from disparate systems, provide information
and alerting mechanisms to relevant personnel in an ongoing manner, and
essentially confront issues such as fraud, errors, and misuse of resources in real-
time. Furthermore, these programs may assist in optimizing the audit function by
analyzing all financial transactions as they occur. As such, this proactive approach
increases efficiency and effectiveness in discovering problems and opportunities
for business improvement. However, prior to moving into this more elaborate
domain, additional considerations relative to business operations are warranted.
In conjunction with this position, Teeter and Vasarhelyi (2011) explain the
optimal alignment of enterprise data and audit procedures Therefore, the more
manual data an entity maintains, the less it might initially benefit from audit
automation. In order to determine the potential utility of a robust auditing system,
an organization should first consider the extent to which its data is automated.
Following this, identified manual enterprise data might reasonably be converted
to a more automated state prior to implementation of tools for automating the
audit process.
In addition, such tools are capable of testing 100 percent of the records included
in a file; this is a marked improvement over the sampling techniques historically
found in the traditional manual audit. Through these programs, auditors are able
to obtain a better understanding of business operations as well as enhanced levels
of expertise and professional skepticism.
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functionality to improve audit quality, it may eventually be desirable to consider
other methods that more closely align with the future audit.
7. Summary
In countries without a longstanding tradition of audit, the view is that developing
a capacity in audit is essential for underpinning and enhancing economic growth.
The financial statement audit is seen as a gateway to a stronger accountancy
profession and, with it, greater prosperity. By contrast, in countries where audit is
more established, the view is that audit itself must develop. The suggestion is that
new, differentiated types of reporting and new assurance offerings will keep the
financial statement audit relevant for users.
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Auditors will need to keep their skills up to date to respond to the challenges
created by heightened expectations of the profession. The digital age creates
opportunities and threats.
8. Reference
Grant Thornton (ACCA) The Future of Audit.
ICAEW Evolution changes in Financial reporting and Audit practice.
PWC Audit Today and Tomorrow.
AICPA White Paper November 2012 Evolution of Auditing: From the
Traditional Approach to the Future Audit
https://www.ifac.org/about-ifac/membership/country/mauritius
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