Audit and assurance has been an imperative practice in business to ensure transparency of the financial statements. To ensure total transparency, both internal and external audits are done. The auditors are required to write reports regarding the conducted audits, which is reviewed by various stakeholders in the organization. The nature of the auditor’s report should enable the stakeholders to understand if the organization has been enforcing transparency in its financial statements. There are various developments that can be done to the external auditor’s report. The wording of the auditor’s report has especially been among the major developments in the development of the external auditor’s report (Desai, Gerard & Tripathy 2008).This has been due to various recommendations of how to improve the external auditor’s report.
Perceptions of the External Auditor’s Report
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External auditors play an imperative role in ensuring provision of the independent credibility of the published financial statements. This is because the published statements are used by various stakeholders in making decisions regarding the firm. For example, investors use the published financial statements to make investment decisions. On the other hand, creditors use published financial statements in determining the credit worthiness of the business. The credibility of the financial statements is based significantly on the report of the external auditor. The perceived effectiveness of the external auditor is another major determinant of the stakeholders’ decision making process. Therefore, the external auditor should act independently in the factual analysis and appearance (Healy & Jules 2012).
Independence of the auditor is essential in ensuring independence of the report on the financial statements in an organization. Various international and national professional accounting bodies have been working rigorously with regulators in ensuring enforcement of independence of the external auditor. This is to ensure consistency of the regulations regarding independence of the auditor, at both national and international levels. This will play an imperative role in reassuring various public stakeholders that the report of the auditor will be objective in concluding an entity’s financial statements (International Organization of Securities Commissions 2002). Credibility of the external auditors is based on the standards of independence and environment of the organization, in ensuring, that the auditor is free from any interests and influences.
The credibility of the external auditor’s report is based on the independence of the auditor in conducting the audit in which he writes a report. However, regulations relating to independence of the auditor vary depending on the jurisdiction of the audit. However, significance variations relate to the matters such as the scope of the person and entities, which vary from both the internal and external environment, where the independence regulations apply. In addition, regulations of the auditor’s independence may vary depending on the financial business and other relationships that the firm or the audit firm may have with the entity (Desai Gerard& Tripathy 2008). Regulations relating to independence of the auditor also vary depending on the services rather than the audit services an auditor provides to the entity.
However, there has been a growing consensus within different stakeholders in the organization, on the need to develop a framework of principles, which governs the independence of the auditor. This is due to the fact that the existing frameworks are not sufficient to protect the interests of different stakeholders. To provide clarity in the regulations of various prohibitions are proposed to ensure safeguard of different stakeholders.
The establishment of standards that govern the independence of auditors is not sufficient in providing an assurance that the auditors will be independent. To ensure independence, standards must be supported by various internal and external frameworks. For example, the organization should ensure development and maintenance of proper working internal systems and processes, which ensure monitoring and identification of threats to independence of the auditor in the organization (IAASB 2011).
How the Wording of External Audit Report has EvolvedWant an expert to write a paper for you Talk to an operator now
The auditor’s report is the main basic form of communication to various stakeholders in the organization. This is due to the limited nature of communication between an auditor and various stakeholders in the organization. However, there have been concerns that the space of the auditors to exercise their professional evaluation and judgment without fear of liability should be improved (Manohar 2012).
External auditing has evolved over time due to the delineation of responsibilities given to the auditors as well as cultural changes in the external auditing over time. The users of financial statements have also increased in scope. In addition, the complexity of business organization has increased over time, with organizations developing multiple ownership structures and across borders. Globalization has also been another major factor affecting the conduct of business across borders, hence affecting the conduct of the external audits. Extensive improvement of technology and information has also been another major factor affecting the conduct of external audits. Technology has led to evolvement of business conduct from the paper based documentation to electronic documentation. Accounting standards and regulations have also proliferated from simplicity to the complex requirements in both principle and regulations (International Organization of Securities Commissions 2002).
Change of the accounting standards and regulations has been prompted by the need to improve corporate results and increasing global competition, which has led to major scandals involving accounting frauds leading to failure of companies. This has continuously resulted to a vast change of the rules involving corporate governance. The change in the rules of corporate governance was prompted by the need to increase the accountability in internal audits, audit committees and external auditors. In addition, audit as a profession was dominated by male. However, this has evolved over time to become a profession that has a competing number of male and female.
The main objective of external audit report is to communicate the conclusion of whether financial statements in an organization are prepared and presented, in accordance with the appropriate accounting standards. In writing the report the auditor must have the prerequisite knowledge in accounting, as well as various rules and regulations that affect financial statements being audited. In writing the report, the auditor must also have a thorough understanding of the industry of operation of the organization he is performing audit. The wording of the external auditor’s report has evolved over time with the cultural changes affecting auditing (Manohar 2012). The current multifaceted nature of business has also led to constant changes in the nature of wording of the external audit.
The wording of the external auditor’s report has also evolved due continuous change in technology and information systems. The need to increase transparency in the increasing change of business nature and increased global competition, leading to increased accounting frauds and corporate failures, has also prompted the evolvement of auditor’s report wording. This has led to continuous change of the regulation and accounting standards, which govern auditing and assurance. For example, the external auditor is supposed to be a complete independent third party with no stake in the organization. This was developed to ensure the auditor provision of reliable financial information which can be used by stakeholders in making decision about the organization. The changes in the auditor’s report have also been prompted by mushrooming users of the financial statements. This is dependent on the nature of the business, as well as the industry in which the organization operates. Various users of financial information have changed to a wider scope. For example, the users of financial statement include the regulatory authorities, financial institutions, lenders, government and individual investors among others (IAASB 2011).
IAASB’s Proposals and Future Developments Relating to Audit Reporting
In the recent past, the global financial system has experienced crisis, which has led to increased importance of the business environment to produce credible and high quality financial statements. The external auditors play an imperative role in ensuring and supporting the quality of financial reporting. This is in the context of capital market and public sector. Therefore, according to IAASB, the quality of audit is a matter of importance in ensuring the efficient financial system (Crump, 2012). IAASB plays an imperative role in ensuring the quality of audit, through provision of International Standards on Auditing (ISAs) and International Standards on Quality Control (ISQC). The standards outlined provide the basis of high quality audit around the globe. However, organizations should understand that standards are one of the major components of the factors influencing the quality of audit. Other factors affecting the quality of audit include financial information of the user’s perception, auditor’s skills and competence and the legal regulatory authorities (Schilder 2012).
IAASB has developed various proposals, which are meant to improve the quality of audit. The proposals are based on understanding the improvement, which should be made on the audit reporting based on the important perspectives of the user. The proposals prepared by IAASB are meant to help the audit report in meeting the interests of the public and users of the financial information. Various users of financial information, such as analysts and investors, have been leading the call for change of the IAASB standards. Therefore, the suggested proposals should provide additional information, which is useful in increasing the value of the report.
IAASB has proposed that improvements in the auditor’s reporting will be tailored towards ensuring that national financial reporting regimes are accommodated. The proposals are also based on the aspect of including the auditors in providing insights, as to the challenges that may be experienced in implementation of the suggested improvements. The IAASB has proposed that the auditor’s report should highlight various matters in the auditor’s judgment, which are essential for the user to understand the financial statements (Crump 2012).
The IAASB has proposed that the auditor should provide a conclusion of the appropriateness of the management use of the assumption of going concern. The auditor should provide an explicit statement concerning the uncertainties relating to the going-concern assumption. It has also proposed that the auditor should provide a statement as to whether there exist any material inconsistencies between the audited financial statements and other information. These proposals will affect the future conduct of audit, as well as affecting the audit reporting across the globe (Healy & Jules 2012).
Conclusion and Recommendations
In conclusion, audit reporting is an imperative practice, especially reporting by the external auditor. This is due to the fact that the audit report plays an imperative role in influencing various decision-makings of various stakeholders in an organization. The external auditor is expected to act independently in providing the users of financial information with an audit statement regarding the financial statements of an organization. The nature of the audit report has continuously changed over time due to the changing nature of different cultures and environment in audit. International regulations and standards’ organizations have also been on the forefront of ensuring development of standards that comply with the changing environment in audit reporting such as IAASB.
In regard to the nature of audit reporting in the current global business environment, the following recommendations can be considered for the purpose of improving the nature of audit report:
- There is a need to clarify responsibilities of the auditor. This is due to the fact that independence of the auditor diminishes with increase in liabilities of the auditor.
- There is also the need to consolidate international regulations with various regulations in different countries. This will facilitate consistency of audit report within national and international audit reporting given the increased globalization.
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