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Over the years, auditors (both individuals and audit organisations) are seeing increased legal and reputation risk in the business reporting environment as there are high levels of expectation on the credibility and quality of information reported by them through their audit reports.
If the auditor could not detect material misstatements that were cleverly hidden by the businesses and report them before regulators catch up, they are equally liable to the legal charges against the business, if not more. Worse, they may be stripped off their profession itself!
We have seen the importance of auditors in a business before, hence it is important that auditors do not produce bad workpapers. ‘Bad workpapers’ are produced due to weak knowledge of the auditor regarding the client or simply due an auditor’s lack of observation skills, knowledge or inability to work effectively.
Clients try to choose those auditors whose knowledge and skills in the field are perceived to be high in the market. These are auditors who are able to understand the current issues and developments relating to the business, regulatory and accounting environment as well as audit and assurance services itself. Their evaluation, findings, results of work performed and their workpapers on assignments are considered impeccable.
But how do you reach those levels? Sure, it takes years of practice and presence in the field but you need a strong foundation and advanced knowledge too.
This is what ACCA’s Advanced Audit and Assurance syllabus offers – takers of this paper work on the advanced professional skills and knowledge required in audit and assurance issues, in the context of best practices and current developments.
There are certain basic things to take note of when performing an audit to ensure that the final outcome is satisfactory to the client.
I) The top financial statements to audit are income statements, balance sheets, and cash flow statements. These financial statements are the ones often utilised for audit purposes. However, some adjustments might be made to the statements by the company after the final audit for a better representation of facts. These adjustments require close attention.
II) The purpose of auditing financial statements is to provide an objective and independent examination of the financial statements, which increases the value and credibility of the financial statements produced by the management.
It can greatly increase user confidence in the financial statements, reduce investor risk and consequently reduce the cost of capital for the preparer of the financial statements. Thus it is important that the auditors are free from any bias, ethical conflicts and display full professionalism.
III) During the audit, the auditor’s evaluation of audit results should take the following factors into consideration as the minimal standard:
– The results of analytical procedures performed in the overall review of the financial statements;
– Misstatements accumulated during the audit, particularly uncorrected misstatements;
– The qualitative aspects of the company’s accounting practices;
– Conditions identified during the audit that relate to the assessment of the risk of material misstatement due to fraud (fraud risk);
– Presentation of the financial statements, including the disclosures; and
– The sufficiency and appropriateness of the audit evidence obtained.
Auditors bear many responsibilities and are held accountable to not just their clients but also to multiple stakeholders at every stage of an engagement. After issuing a clean audit opinion, no auditor wants to learn that the client or regulators or investors have concerns with bad workpapers and reports.
Bad workpapers occur in the presence of these reasons – gathering insufficient audit evidence, exercising unprofessional care, not applying the International Standards on Auditing (ISAs) or local auditing requirements (such as that by ICAI, using inquiry as form of evidence, or obtaining inadequate evidence related to the evaluation of significant management estimates).
As audit and compliance requirements have grown more complex, the audit function does not always work as smoothly as one might hope. Auditors are human beings and mistakes can happen.
It is when these mistakes go unnoticed at different levels of approvals within the audit entity or the auditor’s own Quality Review and enter into the final audit report that the reputation and functioning of the auditor takes a hit – from being imposed with fines to regulatory action, to even complete dissolution.
In order to prevent these from happening, auditors need to carefully evaluate the results of the audit to determine whether the audit evidence obtained is sufficient and appropriate to support the opinion expressed in the auditor’s report, among others.
Adopting the best practices recommended by the national/ international accounting and audit standard setters, at the minimum level, can lead to production of higher quality audits, along with restoring stakeholders’ faith and confidence, and specifically, fulfilling the purpose of an audit.
In summary, performing an accurate audit of the financial statements and drawing a credible audit opinion as well as avoiding the wrong format in your workpapers can help you protect your reputation before things hit the fan.