Audit& Financial Accounting Reporting
‘Itis not enough to be independent the auditor must be seen to beindependent’
Auditors’independence is one of the ethical pillars of professional auditingvoid of bias, free to approach any piece of audit work in their bestability, intention and without conflicting interests. As suchauditors should be seen, appear and conduct themselvescorrespondingly to their professional code of honesty. When auditorsoperate in a state of independence they earn public trust investorsrely on the opinions of auditors’ assurance on their financialstatements this means that auditors need to be objective, unbiased,impartial and skilled in projecting trustworthiness to the investorsif auditors are void of such important aspects, investors’credibility on them is negligible, which may drive investors awayfrom the company(William et al. 2009: 5).
Inthis light, in order to protect the integrity and the reliability offinancial statements, auditors are obligated to assume independenceif their work is to remain relevantly, fair and effective. Manypeople participate in investment markets directly or indirectly, withthe advent of technology investors and the general public alike hasaccess to financial information of various companies that aid them inmaking financial decisions(Sawyer`s Guide for Internal Auditors, 2012:8).Therefore, the reliability and importance of reliable businessinformation cannot be underemphasized. It is within the precipice ofindependency in accounting that many financial and businessrelationships have been woven increasing business activities, as wellas career development(Robert & Jacobson, 1998: 12).
Independencyof auditors is a two pronged concept it refers to the auditors’mental stability ‘independencein fact’and the ability to make and exercise impartial, purpose financialstatements. In the modern world today, business opportunities largelydepends on the reliability of financial statements Investorswillingness to invest in companies is motivated by credibility offinancial statements since prices are more likely to be authentichence greater assurance that the information disclosed is reliable.Put precisely, investor’s confidence overlaps substantially withobjective audits ‘Auditors should not only be independence, butalienate themselves from situations that may lead outsiders doubttheir independency(Canadian Institute of chartered Accountants, 2012:5).
Auditors’independence may either be internal or external internalindependence means that auditors are free from internal parties’influence which might harm auditors’ results. The internalmechanisms which may impede auditors’ independence are inadequaterisk management, poor organization governance and internal controls.External independence of auditors means been free from externalparties that have interests on the financial statements(Dunn, 1996: 11).
However,when independent auditors are involved in providing consultancy andauditing, the internal and external independence of auditors isconvoluted. Business enterprises as well as individuals conductauditing with the goal of deriving credible financial statementswhich provide reliable assurance of the information source. This aimis not met if the beneficiaries of audit data feel that the auditorscould have been influenced by parties especially company bosses orindividual auditors conflicting interests (if the auditor is party inshareholding the business)(U.S. Securities and Exchange Commission, 2003:5).
Auditors’independence rests on three pillars investigative, programming andreporting independence. In the auspice of programming independence,the auditor is protected in their selection of strategies ofconducting audit. In this aspect, auditors are free to use any methodin any piece of work in whichever way they deem best. This notionrest on the fact that, business company keep changing their businessactivities, auditing principles and techniques keep changing therebyleaving the auditors to decide on which approach to use in conductingauthentic auditing the approach chosen cannot be inhibited in anyway(Lindberg& Beck, 2004:2).
Whileprogramming independence provides authority to auditors on the choiceof approach use in carrying out audit work, investigative auditindependent, on the other hand, provides auditors overridingindependent to implement their chosen method of auditing withoutinterference from internal or external party. However, this does notmean that auditors should have privy to all details pertaining thebusiness organization and as such their queries should be answered inthe most objective way. In auditing collection of such information iscritical for objective financial audit report and therefore anyinformation useful to the auditors should never be restrained fromthem(Mautz & Sharaf, 1961: 15)
Similarly,auditors must reporting independence in selecting the best approachof presenting any financial information which they believe isimportant about the business. In most scenarios where company bosseshave overriding power over the auditing process when the directorswant to mislead the shareholders they interfere with the auditing byfalsifying financial information by inhibiting auditors fromreporting the correct financial statements about the company’s. Inthis light therefore, auditors’ independence is compromised.Auditing independence could be real or perceived independence thisidea rests on the independence of facts and appearance. Real ofindependence of auditors refers to independence of mind in makingindependence decisions and their actions in particular situations. Anauditor, who is independent of fact, can make decisions incompromising situations especially when company bosses are involved(Anderson, 2008:8).
However,difficulties arise in assessing auditors’ state of mentalindependence since it is not an observable phenomenon, but theirobjectivity must be beyond measure passive independence is importanttoo. It is imperative that auditors act, behave and appear to beindependent when conducting audit work this is vital especially whenother factors or parties might collude to affect the auditor’sreport therefore, independence in appearance adds credence to auditthe report. In many cases, auditors work for fees and this has inmany instances presented a dilemma on the part of auditors. If theauditor perceives that his/her income or that of the client isthreatened, their professional audit freedom might be contravened atthe expense of company’s shareholders (Securities exchange act,1934:7).
Likewise,if auditors are enticed with a large fee by company bosses, this willeventually alter independent auditing and reporting. In this light,the underlying goal should be protecting the auditors from thebusiness leadership board. However, as long as auditors depend ontheir client fee for auditing services, their audit reports andindependent always remain questionable. In other instances, auditorshave a close relationship with clients who add bias and suspicion ofauditors’ independence. Similarly, since audit firma andindividuals work for fee, this means they develop close ties with theclients for future consultancy fees thereby annulling theirindependency (General, 2005:13).
Statutoryand professional responsibilities of auditors
Thesuccess of any business enterprise or investment largely depends onastute financial management which has a basis on factual financialinformation. Investors and businessmen rely on the authenticity ofauditors’ information regarding company financial standing.Financial statements and reports from the auditors serves as a mirrorto possible investors, shareholders, suppliers and other parties whomight seek to do business with a firm. It is based on this impetusthat the work and duties of auditors authentic and independent rest.It is the responsibility of Auditors to ensures that financialstatements and reports profit and loss, balance sheet and cash flowreflects the true and objective view of the company’s financialstatements. As such, auditors owe organizations leadership andshareholders critical duties. Auditors are obligated to check theaccuracy of accounts however, this duty does not mean that auditorsneed to confine themselves only to the duties of assessingarithmetical accuracy of financial accounts but their role transcendsfurther to substantially ascertaining the right and true financialreport of the company’s affairs (pcaobus, 2014: 6).
Therefore,auditors are tasked with various duties in their profession thatfalls under three main branches accessing books of accounts,obtaining financial information and explaining it to relevantparties, and attending general meetings. Auditors are responsible fordeveloping familiarity within business in order to ascertain whichapproach to adopt in carrying effective audit this involves meetingrelevant company heads for authorization and collection of relevantguiding information. Auditors’ should pre-plan the auditingprocedure depending on the complexity of the area under audit andensure efficient audit coverage of all areas preplanned for audit.
Inaddition, it is the responsibility of auditors to carry out theirauditing work with optimal independence, completing assigned tasks ina thorough, timely and accurate well documented way. Auditingprofession calls for audits to conduct themselves in an ethical andprofessional manner avoiding scenarios that would lead to conflictor criticism this means that, auditors have a responsibility todevelop a cooperative and friendly personality that aligns withstaffs in the department under audit. In this respect, auditorsshould familiarize themselves with relevant individuals, premises andlocation of data for auditing prior the actual auditing period(Gilbert & Engle, 2005:15).
Inaddition, auditors should return files and maintain all records usedin the same manner as found and they should never at any time removeor misplace certain records from the place they were found. It is theprofessional responsibility of auditors to remain accountable andresponsible for the audit work assigned to them ensuring that theirrecommendations and findings are promptly communicated to therelevant management. This can be achieved by ensuring that all workis completed as per set objectives, performing a follow up exerciseand ensuring that all supporting documents are well maintained (CRC,2002: 11).
Furthermore,auditors have statutory obligations that require them conductthemselves in astute professionalism. Statutory duties demand thatauditors desist from professional negligence as pertaining auditreporting regulations issued by the government. It is the statutoryduty of auditors to report to organizations shareholders on thefairness and authenticity of the information given by the companydirectors on the true state of financial affairs. Most importantly,auditors have a statutory obligation in giving ‘fair and true auditopinion.’ Whereas statutory obligations of auditors cut across manynations, there exists some variation in statutory obligations on theauditors.
Nonetheless,the main goal is to protect the interests of the public customersand investors of financial institutions. Just like all otherprofessions, auditing and accounts body of ethics, responsibilitiesand statutory obligations exist to ensure professionalism in auditwork is maintained as well as providing comfort to clients offinancial advice. Public trust is gained when auditors comply withthe statutory obligations and duties (pcaobus, 2014: 3).
Thescope of auditing has several fronts that involve adequatelyevaluating all accounting systems and internal controls of companies,planning and timing of auditing procedures and carrying out audittests enquiries and another assessment process of all businesstransactions. It is the auditors who determine if necessaryinformation is adequately disclosed in the financial reports this isachieved through thorough comparison with existing records and othersources in order to assess if the transactions were properlyrecorded. Furthermore, auditors assist companies’ managements withdesigning accounting policies for adequate classification of recordsand disclosure. In this light, auditors play the significant role inmaking judgment and opinion of organizations financial statements. Inthis scope, auditors follow laid procedures that help in making trueand fair opinion of financial position of an enterprise. Auditors,therefore, should not perform tasks outside the scope of theircompetence while carrying out Audit work to limit bias.
Internalaccounting controls: Ms. Sufra
Internalcontrols within the accounting system of any business enterprises arevery critical in risks mitigation and monitoring. Monitoring ofaccounting transactions is important for early detection of errorsand frauds. There exist different types of internal controls thathelps check the accounting transactions within any organizationenterprise. These include preventive, detective and correctivecontrols. The presented case that involves Ms Sufra who keeps pettycash indicates several fallacies in the internal control of theenterprise accounting system. The business has contravened preventivecontrol there is no mechanism to keep irregularities at bay (Larry,2011: 45).
Thereshould be adequate separation of duties for example Ms. Sufraauthorizes and processes the transactions, this is not beenprofessional there should be supervisors who authorize, review andapprove the purchases to avoid misuse and irregular errors in thetransactions. In addition, this separation of duties would enhanceproper documentation and assets control. This means that, regardlessof the quantity of the item purchased there should be approvedpurchase request, invoice and documents ascertaining delivery of suchitems. In the presented case, the business risks cash theft,irregularities and errors in account record keeping this can bereversed by separating Ms. Sufra duties she should not be approvingpurchases, processing transaction or issuing cash at the same time.Separation of duties helps to reduce risks of fraud and errors inrecording transactions(McKenna, 2014: 4).
Inaddition, the business plan has contravened on the detective internalcontrol mechanism in which a review and approval of accounting workis necessary. The business could minimize chances of fraud risks bycarrying out surprise cash counts on the drawer, enforcing jobdescription and expectations on the part of Ms. Sufra this wouldhelp instill honesty on the part of the employee and protect assets.Similarly, by keeping cash in the top drawer contravenes the physicalcontrol of assets against theft. Even if the drawer is kept locked MsSufra goes out, chances of forgetting to lock might lead to loss ofcash. Therefore, the business should device a means of storing cashin locations unknown to other staffs (Spencer, 2005: 35).
Inthis particular case, there are a number of weaknesses in theaccounting system. In the first place, Lamya should not be trusted inapproving lists of purchasing invoices that needs paying without theconsent and deliberation with Sharifa-the owner of fashion business.There should be segregation of duties approval and payment shouldnever be done by single individual to reduce fraud case despite Lamyabeing a trusted accountant. The act of matching payable invoice andcheque is a weak internal control measure. Similarly, by leavingblank cheques with Lamya is risky as it can lead to fraud casesLamya can fill in details he wants and cash the cheque centrally tothe intended purpose(McKenna, 2014: 4).
Anotherweakness that might arise is failure to number cheques thisdocumentation is critical for internal control and as a check againstfraud. In addition, a ‘paid’ stamp needs to be appended to allinvoices immediately they are paid to prevent the resubmission forpayment. It is also important for the business adopt reconciliationof bank accounts. In order to maintain adequate internal control andlimit accounting weakness, Sharifa should adopt strategies that couldreduce chances of fraud or accounting error for example payingsuppliers twice. One recommendation is that, there should besegregation of duties in the accounting process. The person approvingand processing transaction payments should not be the same person(Bob, 2009:23).
Similarly,Sharrifa needs to keep track record numbers of all blank chequesissued for quick account error detection. It is better to have apayable officer who assembles suppliers’ invoices, authorizepurchase orders, receive all documentation then stamps the paidinvoice. Cheques should be stored in locked locations, track thesequence of cheque numbers to lower fraud cases. Lastly, there is aneed for effective documentation to avoid missing records which areused afterwards for counterchecking payables and receipts(Rezaee, 2002 4).
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