Auditing represents a process of assessing and evaluates the efficacy of an entity’s internal management systems and resource use designs. Developing and enhancing effective internal management systems plays an important role in achieving the entity’s goals, missions, and objectives. Through auditing, companies develop structures of acquiring viable financial reporting systems on its activities. Similarly, auditing enables business entities to regulate fraud, collusion, and cases of errors in appropriation of assets thereby minimising losses hence increasing productivity. Since companies employ internal auditors to check on the effectiveness of the financial and assets management systems, independent and objective audit structures are necessary in effectively assessing the progress of the internal systems.
Auditing in the under company laws and regulations sets out measures to ensure financial and asset accountability within specified timelines. As Whittington (2014) denotes, With the view of protecting the company from undetected errors in financial presentation, auditors in declaring dividends out of capital, profits and losses, as well as assets provide shareholders with reliable information necessary for assessing the conduct of the company’s affairs. Such auditing reports inform the collective power to reward or punish the leaders charged with ensuring transparency and accountability in the company. All limited liability companies, as prescribed in different sets of legal and legislative frameworks, must prepare financial statements for every fiscal period. Unless stated in any other directives of policy regarding company exemption from auditing, such financial statements require auditing from registered and practicing independent auditors for authentication purposes (Beattie and Fearnley 2011).
True and fair view
In auditing this phrase describes financial statements devoid of material misstatements and presenting a faithful analysis of the financial health of a company. The true aspects of this phrase describe the factual correctness of the data as provided in the auditing laws and regulations. It aims at controlling the presentation of falsehoods that hoodwink interested parties into engaging in business with the company. The fair aspect in the statement implies the faithfulness of the data presented in the reports. It aims to take into account not the legal compulsion of auditing but as the economic substance of representing financial capabilities of companies (Gray and Manson 2000).
Roles of auditors
According to international Standard on Auditing, auditors have the obligation to consider all the practical laws and regulations governing auditing and financial statements in every given country (Walton 2011). Since companies work under different laws and regulations, financial statements and assurances requires engagement of such management teams in such companies in relation to the prescription of the laws. Correspondingly, differences in the laws and regulations governing the services of companies present different implications on the financial statements of such companies. These, in turn, regulate the culture of financial disclosures in the reports. Since non-compliance to regulatory and legislative frameworks comes with punishments such as fines and other litigations impacts, it is the role of auditors to ensure compliance to auditing rules and regulations with respect the stated goals and objectives of the line company. In cases of non-compliance with the laws and regulations which causes material misstatement, the auditors’ have the obligation to recommend on the integrity, transparency and accountability of the management team and other employees of the company (Gray and Manson 2000).
Material misstatement in the financial reports
As in most companies’ rules and regulations, management team are responsible for ensuring the company operations takes place in accordance with the laws and regulations such as those governing reported amounts and disclosures in the financial reports. Even though ensuring compliance to such laws and regulations solely lies in the hands of the management team, it is the role of auditors to identify material misstatements in the financial reports arising from management’s non-compliance to rules and regulations (Eggert 2014).
Securing assurance in the financial statements
According to Eggert, auditors are responsible for adequate assurance that financial reports from companies are devoid of any material, capital, or asset misstatement arising from unethical issues such as fraud, collusion, forgery, and errors (2014). In order to achieve this objective during auditing of financial reports, the auditor must consider all the applicable laws, directives, and legislative frameworks governing the services of the company. However, there exists a soft landing for mishaps associated with undetected errors arising from unavoidable risks such as companies operating under more than one set of laws and regulations.
Ensuring objectivity in compliance
While undertaking audits, auditors must obtain appropriate audit evidence regarding compliance with the provisions prescribed in the line laws and regulations. In line with ensuring objectivity in compliance, auditor must ensure appropriate response to suspected and detected non-compliance arising from laws and regulations (Campbell 2005).
Requirements of auditors
In most regulations, auditing takes place on an annual basis. Companies must employ certified public accountant registered and practicing as prescribed in the laws and regulations governing auditing and financial transparency. It is the responsibility of the auditor to carry out a complete assessment and audit of the accounts of all offices responsible for custody, management, collection, and use of financial resources belonging to the company. Based on the regulations on the specified country and the company’s services, auditors must employ general standards, principles, terms, and conditions governing auditing procedures (Campbell 2005).
Auditing laws and regulations stipulates filing and preservation of all audit reports for future references. Auditors must submit such reports to the legally prescribed bodies regulating auditing in the specific country. In order to understand the entity and their regulating structures, auditors require adequate understanding of legal and legislative frameworks applicable to the company and the sector in which it operates. Similarly, auditing laws require auditors to understand the steps and designs set out in the company towards ensuring compliance with the sectorial laws and regulations (Bucker 2014). Since such laws present direct consequences on the financial and fiscal disclosures of the company, obtaining evidence of compliance helps the auditor understand the underlying factors the necessitate errors, and omission, if any, in the financial reports. Likewise, the auditing laws requires the auditor to perform all the audit procedures with the goals of identifying issues of non-compliance with the legal and regulatory frameworks that presents material consequences of misstatements in the financial reports. Such a requirement necessitates auditors’ role in inquiring of the management team’s role for governance in ensuring acquiescence to the set out rules and guidelines. Similarly, the auditors must assess and inspect correspondence to such inquiries with the relevant regulatory authorises overseeing the sector of service the company offers (Buckner 2014).
Auditors must remain alert throughout the auditing process since some auditing procedures elucidate issues of non-compliance and suspected cases of non-compliance with the regulatory and legislative frameworks set out in the sector. Complacency during the procedure harbours chances of errors in reporting. Such errors and misrepresentation of facts can present wrong information about the company to the shareholders during the annual general meetings. Consequently, the auditors need to request written representations of all cases and suspected cases of non-compliance to the laws and regulations (Campbell 2005).
Importance and Roles of auditing
In order to ensure objectivity and control measures in achieving company goals and mission, entities require audit systems to check on the use of their resources. Business entities and companies require different structures of internal control systems to expedite supervision, management, assessment, and monitoring the productivity process. Such systems help in prevention and detection of irregular allocation of resources, misuse of funds, and help in determining the employee productivity levels. Assessing such factors helps in promoting functional efficiency of the business entity. In the internal perspective, auditing helps reviewing and updating company’s internal control strategies and development of improvements mechanisms to ensure productivity. Similarly, internal auditing ensures documentation of material misstatements that provides a basis for in depth management investigation into unwarranted trends within the company (Lessambo 2013).
Assessing the risks of misstatements
As Lessambo (2013) denotes, auditing helps companies in assessing the risks and potential consequences of material misstatements. Inadequate checks and balances within the company’s management systems present laxity in identifying cases of financial impropriety within the company’s fiscal statements. Equally, auditing enables companies to determine productivity structures that present losses and minimal incomes to the company thereby and defining the allocation of resources to productivity structures that presents fewer risks with high profit levels. Other than the allocation of resources, audits helps in enabling the company to assess the status of its assets and liabilities thereby developing liquidity states in relation to other competitors in the sector.
Many companies lose billions of shillings in fraud and collusion cases. Internal auditing plays a vital function in detecting, regulating, and preventing cases of fraud and collusion. Engaging in frequent and vigorous assessments and evaluation of a company’s internal control systems help in detecting and preventing accounting anomalies. Since auditors and other accounting professionals help in the development of designs and structures for proper internal control systems in the production of the company, cases of fraud, and collusion relatively goes down. Avoidance presents the best form of prevention of fraud. In cases where a company boasts of integrity in the public domain due to an effective and diligent audit structures, employees and vendors find it difficult to engage in fraudulent activities (Lessambo 2013).
Reducing the cost of capital
In the business sector, the costs of capital remain an important factor in the success and progress of an entity. Regardless of the size of a firm, risks associated with an investment have a direct correlation with the degree of return of investment (ROI). If the risks are more, the company requires high rate of return on investment. Developing efficient and effective audit systems help companies regulate the form of risks including cases of misstatements in the financial reports, chances of fraud and collusion, and misuse of company resources (Lessambo 2013). In the same way, auditing helps in assessing and detecting the suboptimal management risks that often arise from inadequate reporting on the company’s production operations.
Limitations of auditing
Professional judgment and limited sampling
Auditors use intricate professional skills in the judgment of risks, selection of viable auditing procedures, and evaluation of the outcomes of the auditing process. Despite the provisions within the general auditing laws and regulations, cases of misjudgement based on professional experiences often arise. Such cases often overlook errors and misstatements presents in company’s fiscal reports. Correspondingly, auditors use test group styles that limit the number of transactions and balances with the aim of effective, fast, and cheap audit process. Such limited sample sizes compromise the actual representation of the full population in question (Bachert 2012).
Management misrepresentation and risk of collusion for fraud
In the auditing procedure, there exists a general assumption that external evidence offer represented facts better than internal reports from directors of the company. However, the external auditors depend on the reports from directors to assess the financial health of the company. This implies that management representation of facts presented to the external auditors’ compromise the authenticity of the external auditor’s report (Gazzaway 2010). Similarly, perpetrators of fraud, especially those within the management positions of the company may conceal reports of fraud detection in the reports presented to the auditors. Even though auditors can use sound audit methodologies, management’s conspiracy to conceal fraud and fraud related cases can pass unnoticed (Gillespie 2004).
Even though the law compels most companies and large institutions into publishing audited financial reports every year, having independent and regular auditing of companies ensure improved productivity and efficiency in service delivery. Public declaration of a company’s financial status not only improves public picture of the company but also entices prospective shareholders and business partners into engaging in business with the company. Similarly, auditing improves the company’ reputation in financial management thus increasing the prospects of funding from major financial institutions. Despite the minimal number of limitations that come with auditing, it is important to note the benefits of audit outweigh the negative impacts.
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