Auditing

Chapter 4 Auditing

Financial auditing is the process of examining an organization (or

individual) financial records to determine if they are accurate and in

accordance with any applicable rules (including accepted accounting

standards), regulations, and laws.

External auditors come in from outside the organization to examine

accounting and financial records and provide an independent opinion

on these records. Law requires that all public companies have their

financial statements externally audited.

Internal auditors work for the organization as internal employees to

examine records and help improve internal processes such as

operations, internal controls, risk management, and governance.

Auditing Standards

The Public Company Accounting Oversight Board (PCAOB) maintains

external auditing standards for public companies (issuers) registered

with the Securities and Exchange Commission (SEC).

As of 2012, PCAOB has 15 permanent standards approved by the SEC

and a number of interim standards that reflect generally accepted

auditing standards, as described in standards issued by the Auditing

Standards Board (ASB), which is part of the American Institute of

CPAs (AICPA).

The ASB also issues Statements on Auditing Standards (SASs) that

apply to preparing and releasing audit reports for nonissuers

(companies not required to register with the SEC). AICPA members

who audit a nonissuer are required by the AICPA Code of Professional

Conduct to comply with these standards. As of 2012, there are more

than 60 active standards.

For internal auditing, the Institute of Internal Auditors provides a

conceptual framework called the International Professional Practices

Framework (IPPF) that provides guidance for internal audits. Some of

the guidance is mandatory, while others are considered strongly

recommended, but not required by law.

Audit Planning

Audit planning includes deciding on the overall audit strategy and

developing an audit plan.

Auditing Standard No. 9 from the PCAOB describes an external

auditor's responsibility and the requirements for planning an audit.

According to standard No. 9, an audit plan is expected to describe the

planned nature, extent, and timing of the procedures for risk

assessment and the tests to be done on the controls and substantive

procedures, along with a description of other audit procedures

planned to ensure the audit meets PCAOB standards.

For internal auditing, the Institute of Internal Auditors provides

guidance for audit planning. Planning starts with determining the

scope and objectives of the audit.

Internal auditors need to understand the business, operations, and

unique characteristics of the department/unit being audited and to

develop an audit plan that defines the procedures needed to do an

efficient and effective audit

Auditor

An auditor is a person or a firm appointed by a company to execute

an audit. [1]  To act as an auditor, a person should be certified by

the regulatory authority of accounting and auditing or possess certain

specified qualifications. Generally, to act as an external auditor of

the company, a person should have a certificate of practice from the

regulatory authority.

Types of Auditor

 External auditor/ Statutory auditor is an independent firm

engaged by the client subject to the audit, to express an opinion

on whether the company's financial statements are free of

material misstatements, whether due to fraud or error.

For publicly traded companies, external auditors may also be

required to express an opinion over the effectiveness of internal

controls over financial reporting. External auditors may also be

engaged to perform other agreed-upon procedures, related or

unrelated to financial statements. Most importantly, external

auditors, though engaged and paid by the company being

audited, should be regarded as independent.

 Internal Auditors are employed by the organizations they audit.

They work for government agencies (federal, state and local); for

publicly traded companies; and for non-profit companies across

all industries. The internationally recognised standard setting

body for the profession is the Institute of Internal Auditors - IIA

(www.theiia.org). The IIA has defined internal auditing as follows:

"Internal auditing is an independent, objective assurance and

consulting activity designed to add value and improve an

organization's operations. It helps an organization accomplish its

objectives by bringing a systematic, disciplined approach to

evaluate and improve the effectiveness of risk management,

control, and governance processes"

4.2 Auditor-Client Realtionship

Consistent with our predictions, strong social exchange relationships

develop between auditors and their clients in response to auditor

perceptions of fair treatment and support received from the client.

Specifically, perceived client fairness predicts perceived client

support, and perceived client support predicts auditor commitment

to the client. Auditor tenure with the client also yielded greater

commitment to the client. We find that higher client commitment is

associated with more value-added services. Also, as expected, more

experienced auditors provide their clients with more value-added

audit services. Figure 1 depicts our results. We also separated

respondents into two groups and tested the predictions for each

group. The staff group consisted of staff and seniors, and the

management group consisted of managers, senior managers, and

partners. We divided the sample this way because staff and seniors

perform different types of audit procedures compared to

engagement management (Hirst and Koonce 1996; Trompeter and

Wright 2010; Han et al. 2011; Luippold and Kida 2012). The type of

work performed by staff and seniors, or their relative lack of business

experience, may limit their ability to provide insights on more

complex business processes or accounting issues. Indeed, our

analyses revealed that the management group provided clients with

significantly higher levels of value-added services compared to the

staff group. Nevertheless, our predictions were supported for each

group. Thus, our research model was effective in predicting variation

in value-added audit services for auditors at both higher and lower

levels.

4.1 Charts And Graphs

Accounting data is often presented in the form of tables of numbers, sometimes

simply as a print out from a spreadsheet or reports from an accounting software

package. While this style of presentation provides detailed figures, it may not

always be the most effective way to present and communicate information. It

may be that some key information should be highlighted, perhaps relationships

between certain figures should be emphasised, or trends identified. Appropriate

presentation of data in the form of graphs or charts can be a useful analysis tool

and if the data is then effectively interpreted this can facilitate the decision-

making process. The syllabus for Papers MA2 and F2/FMA require that

candidates should be able to describe the key features of different charts,

identify suitable charts in particular situations and interpret data presented in

charts. The material in this article is also relevant for candidates sitting Paper

MA1.

There are many software packages that allow the user to create charts that look

very professional but it is important to consider the different types of charts

available and select an appropriate chart type for the data being presented.

Presenting data in an inappropriate chart can convey information which may be

misleading. The term ‘chart’ is generally considered to include all types of graphs

and any other type of chart used to give a pictorial presentation of the data.

Some types of charts tend to be described as graphs while others use the term

chart, eg it is more common to hear the term line graph but the term bar chart.

The words ‘chart’ and ‘graph’ are considered to be interchangeable for the

purposes of this article.

A variety of chart types will be reviewed in this article, and the features that

make a particular chart type appropriate for the type of data being presented

will be highlighted. Some useful tips on presentation will also be provided,

together with guidance on interpreting the data presented in the charts. To

illustrate the point of ensuring that an appropriate chart type is selected, some

data has been presented using an inappropriate chart type resulting in

ineffective communication of information.

Column, bar and line charts for a single data set (Charts 1-5)

In each of the Charts 1-5, a single series of data is represented on the graph.

Often the data being presented in this type of chart spans a number of time

periods such as years, quarters or months but these types of charts can also be

used to represent data from one time period but, for example, from different

regions or perhaps for different output levels. These charts are drawn with two

axes, with the independent variable being shown on the x-axis and

the dependent variable shown on the y-axis.

Charts 1 and 2 are examples of simple column charts. The columns represent the

value of the data vertically and each column will be of a uniform width. Note that

the heights of the columns vary to reflect the data values but the width of each

column on a specific graph will be the same. Although the two charts are the

same basic chart type, there are some minor differences in style that are worth

pointing out. Chart 1 shows data for total sales over a five-year period with the

years being shown on the x-axis and the $ amounts on the y-axis. A key or legend

is displayed emphasising that the data relates to Total Sales and while a legend is

often included automatically by the charting software it is not necessary when

there is only one data series as long as the chart has an appropriate title. Chart 2

is also a simple column chart but the data relates to one year only and each

column represents a division of the business so the x-axis is not years but the

divisions, North, South, East and West. Notice also that the style of the chart has

slightly changed as it is presented in a 3D format, the legend has been removed

and the y-axis scale is in round thousands with the axis label having been

changed appropriately.