Question

discuss the issues, and future of the audit report

Answer 1

Issues, and future of the audit report

issues of the audit report.

1. Gathering sufficient audit evidence.
2. Exercising due professional care.
3. Demonstrating an appropriate level of professional skepticism.
4. Interpreting or applying requirements of GAAP.
5. Designing audit programs and planning engagement (inherent risk issues, nonroutine transactions).
6. Using inquiry as form of evidence (relying too much on this method).
7. Obtaining adequate evidence related to the evaluation of significant management estimates (failing to gather sufficient evidence).
8. Confirming accounts receivable.
9. Recognizing/disclosing key-related parties.
10. Relying on internal controls (rely too much on/failing to react to known control weaknesses).

COMMON AUDIT PROBLEMS

The exhibit above highlights the top 10 audit deficiencies the SEC claimed. The most common problem—alleged in 80% of the cases—was the auditor’s failure to gather sufficient evidence. In some instances, this failure was pervasive throughout the engagement; in other instances the allegations were more specific. For example, many of the cases involved inadequate evidence in the areas of

Asset valuation. The auditor did not obtain evidence to support key assumptions.

Asset ownership. The auditor did not obtain evidence to indicate the company-owned certain assets.

Management representations. The auditor did not corroborate management responses to inquiries.

Some cases involved the auditor’s failure to examine relevant supporting documents (for example, examining a draft, instead of a final, sales contract) or failure to perform steps listed in the audit program. Overall, this failure contributed to management’s success in overstating assets, the most common fraud technique.

Due professional care. The SEC claimed that auditors failed to exercise due professional care in 71% of the enforcement cases and to maintain an attitude of professional skepticism in 60% of the cases. In general, this failure on the auditors’ part can be found throughout the sanctioned audit engagements.

Applying GAAP. In almost half of the cases, the SEC said the auditors failed to apply or incorrectly applied GAAP pronouncements. Many of the GAAP violations related to unusual assets with unique accounting valuation issues (often described in the lower levels of the GAAP hierarchy).

Audit program design. Planning the audit engagement is crucial to its success. Deficiencies in audit planning were cited in 44% of the cases. Specifically, the auditor failed to

Properly assess inherent risk and adjust the audit program accordingly.

Recognize the heightened risk associated with non-routine transactions.

Prepare an audit program (or inappropriately reused one from prior years).

Audit evidence. Another common deficiency the SEC alleged, present in 40% of cases, involved overreliance on inquiry as a form of audit evidence. The agency cited auditors for failing to corroborate management’s explanations or to challenge explanations that were inconsistent or refuted by other evidence the auditor had already gathered.

Failure to obtain adequate evidence relating to the evaluation of significant management estimates was present in 36% of the cases. The SEC claimed auditors failed to gather corroborating evidence and to challenge management’s assumptions and methods underlying the development of those estimates.

Accounts receivable. The SEC cited numerous deficiencies in confirming accounts receivable (present in 29% of the cases). These deficiencies included

Failure to confirm enough receivables.

Failure to perform alternative procedures when confirmations were not returned or were returned with material exceptions.

Problems with sending and receiving confirmation requests (for example, failing to corroborate confirmations received via fax or allowing the client to mail confirmation requests).

Related parties. Another common problem (in 27% of cases) was the auditor’s failure to recognize or disclose transactions with related parties. The auditor was either unaware of the related party or appeared to cooperate in the client’s decision to conceal a transaction with this party. Such transactions often resulted in inflated asset values.

Internal controls. In 24% of the cases, the SEC alleged the auditors over-relied on internal controls. It said that they typically had failed to expand testing in light of identified weaknesses in the client’s internal controls. In other cases, the auditors seemed to implicitly assume the presence of a baseline level of internal controls, even though the auditor documented that the client essentially had no controls in place.

AUDITOR SOLUTIONS

Based on the deficiencies the SEC found, there are a number of areas that warrant specific attention from CPA firms that do audits and from individual auditors themselves.

Audit issues. The three most common deficiencies all reflect engagement management problems affecting many areas of the audit: a failure to gather sufficient, competent evidence, lack of due care, and lack of professional skepticism. In many cases, the best remedy for such problems is for auditors to develop a properly designed and executed quality control system. Such a system creates a culture that encourages all members of the audit team to maintain a baseline acceptable level of performance, regardless of perceived day-to-day engagement and firm pressures.

CPA firms should evaluate their own quality control systems to ensure policies and procedures emphasize the importance of proper audit planning, supervision, and review, including timely involvement by engagement and concurring partners. Additionally, firms should reexamine existing quality control procedures to make sure they are detailed enough to assure firm leaders that audit teams are examining appropriate documentation (final documentation, not drafts) and that teams complete all audit program steps. Those procedures should emphasize that auditors should corroborate management representations with additional evidence and not overuse management inquiry as a form of audit evidence.

The firm’s “tone at the top.” Another means of reducing office-wide audit problems is to address the attitudes at the firm’s highest levels. Here are some values a CPA firm’s managing partners should clearly communicate to their employees. Firms should

Future of the audit report

Future of Audit: The transformed auditor's report. The Auditing and Assurance Standards Board of the Institute of Chartered Accountants of India has issued new and revised auditor reporting standards on Auditing (SAs) which are applicable for audits of financial statements for periods beginning on or after 1 April 2018

Audit Report future

• Provide assurance on Financial Statements. ...
• Prove management integrity on their shareholders. ...
• It is the requirement of law and regulation. ...
• It is the requirement of shareholders. ...
• Parent company's requirement. ...
• Help stakeholders to understand about entity's financial and operational situation.