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Free «Audit Risk and Auditor Misconducts» Essay Sample

Audit risk and auditor misconducts remains as some of the most important issues in the contemporary corporate world. It is important for one to understand that organizations and businesses across the globe face numerous challenges as a result of audit risks and auditor misconducts. According to Miglietta, Anaclerio & Bettinelli (2007), Corporate Governance has became an important issue because business activities are nowadays a concern not just for shareholders, but also for the community in general, influencing individuals’ savings and investment decisions (p.52). As a result of this, there are different audit rules and auditors’ code of ethics that have been formulated over time to ensure that audit risks and auditor’s misconducts are minimized. However, there are still reported cases of audit risks and auditor’s misconducts that have been reported among different businesses and organizations. In addition, most of these audit risks and auditor’s misconducts are related to material misstatements.

Notably, audit risk is an important aspect to auditors since they cannot and do not check all transactions that are carried out on a daily basis in a particular company or organizations. As a result, an understanding of audit risk concepts is an avenue that is utilized by auditors to ensure that accurate information is provided in order to report correct financial statement. Traditionally, auditors have used a risk-based approach in order to minimize the chance of giving an inappropriate audit opinion, and audits conducted in accordance with ISAs must follow the risk-based approach, which should also help to ensure that audit work is carried out efficiently, using the most effective tests based on the audit risk assessment (Jones, 2009).

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Notably, audit risk is an important aspect to auditors since they cannot and do not check all transactions that are carried out on a daily basis in a particular company or organizations. As a result, an understanding of audit risk concepts is an avenue that is utilized by auditors to ensure that accurate information is provided in order to report correct financial statement. Traditionally, auditors have used a risk-based approach in order to minimize the chance of giving an inappropriate audit opinion, and audits conducted in accordance with ISAs must follow the risk-based approach, which should also help to ensure that audit work is carried out efficiently, using the most effective tests based on the audit risk assessment (Jones, 2009).

On the other hand, an auditor’s misconduct involves the inability of an auditor to deliver the implicit audit quality set by the regulations (Quick, Turley & Willekens, 2008). In this regard, the auditor would fail to follow the stipulated laws and regulations that regard auditing practice. As a result, he or she would provide figures that are inaccurate and thus fail to deliver correct financial report or statement. In other words, auditor’s misconduct involves intentional reporting of inaccurate audit information by auditors.

To begin with, it is important to mention that when auditors are mandated with the task of ensuring that the figures in financial statements that are given out to the public concerning the financial status of the company are correct. However, there have been reported cases of inaccurate reporting of these figures thus providing misleading information in regard to the performance of the company. Whereas there are few cases whereby the auditors would fail to notice misstatements in financial statements, most of these cases are intentional or in other words are justified.

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According to Rittenberg, Johnstone & Gramling (2009), the auditor is expected to design and conduct an audit that provides reasonable assurance that material misstatements will be detected (p.130). In line with this, the auditor would thus enable the company to reduce audit risks that are involved in its financial statements. However, cases that have been reported in the past that involve audit risks indicate that there was a high level of auditor’s misconducts whereby the auditor deliberately failed to report on the misstatements that were detected in the financial statement of a particular company or organizations. As a result, the information that is given out in regard to the financial status of the company would be inappropriate as it fails to give true information that concerns the business or organization’s financial status.

Therefore, it can be said that audit risk may increase as a result of auditor’s misconducts in carrying out their auditing activities. In such cases, when auditors fail to follow the laid down procedures and guidelines, or in some cases intentionally ignore the found out mistakes in the reporting of the financial statements of businesses and organizations, then audit risk are increased. Remarkably, it is worthy to state that audit is determined and managed by the auditor (Rittenberg, Johnstone & Gramling, 2009, p.131). In other words, the auditors have the ability to manage audit risks during the processing of carrying out auditing activities. For instance, an auditor can determine whether the audit risk would be higher or lower in any financial statement that is prepared by a business or organization. It has been noted that an auditor determines the level of detection risk needed to control for the potential misstatements in each significant component of the financial statements. For instance, depending on the judgment tools that are employed by an auditor, he or she may either increase or reduce the level of detection.

However, irrespective of the fact that there are written down guidelines and regulations that guide auditors in their work, more than often some of these auditors would fail to act responsibly and as a result mislead the public in regard to the financial status of a business or organization. In line with this, an auditor may fail to raise the level of risk detection and as a result create room for an increase in the level of audit risk. On the other hand, whereas auditors are usually advised to deceased from associating themselves with businesses and organizations whose audit risk is very high, some of them fail to honor these regulations and as a result end up helping such businesses and organizations to implement fraudulent programs in the running of their business activity. In reference to Rittenberg, Johnstone & Gramling (2009), since audits rely on testing, and to some extend on the integrity of the management, there are some clients that an audit firm should not accept since the engagement risk is too high (p.131).

The issue of audit risk and auditor’s misconduct go hand in hand in the sense that one can either be involved in audit misconduct if he or she fails to follow the laid down procedures in performing audit activities to determine audit risk in a particular business or organization. In addition, if an auditor willingly fails to raise the detection level and as a result detect a low audit risk contrary to the actual audit risk that the company has, then he or she would create room for fraudulent activities in such a business or organization. The conduct of auditors in using the appropriate detection levels and following suitable auditing procedures therefore determine by a large percentage the accuracy of the findings in the financial statements. In this regard, whenever there are no misconducts on the side of the auditors, audit risk is minimized by a large percentage (Rittenberg, Johnstone & Gramling, 2009).

 
 
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Audit risk, auditor’s misconduct and materials misstatements are some of the most important components of auditing practice the critically affects the way an auditing activities are carried out. In this regard, when one of these components is affected, there is a high probability that the other component will also be affected. To begin with, it is important for an auditor to understand the entity and its environment, including its internal control, to understand the risk of material misstatement of the financial statements whether caused by error or fraud (Beasley & Carcello, 2008, p.92). Notably, audit risk is defined in terms of materiality and therefore material misstatements also contributed highly towards determining the audit risk in a company (Rittenberg, Johnstone & Gramling, 2009, p.130). As a result of this, auditors are required to determine the internal environment areas that are susceptible to material misstatement when carrying out their auditing activities.

With this in mind, it is important to understand that auditors are required by their professional guidelines and regulations to determine whether material misstatements that are observed in a particular financial statement were made intentionally or are errors that occurred without the knowledge of the firm’s management and accounting departments. However, in cases where there are auditor’s misconducts, such errors are usually ignored since they can easily reveal fraudulent activities in a company. On the other hand, when an auditor fails to follow correct procedures in determining these misstatements, it results in an increase in the level of audit risk. Therefore, intentional errors or material misstatements in financial statements are clear indications that there may be fraudulent activities that are involved in a particular business or organization. Notably, there are mechanisms that have been developed over time to detect material misstatements and whether these misstatements are as a result of accounting mistakes or whether they are intentional errors that are made in a financial statement to conceal illegal activities in a business or organization. According to O’Reilly et al. (1999), the higher the perceived risk of material misstatements, the more assurance the auditor needs from substantive tests to limit audit risks, and vice versa.

Following the above argument therefore, numerous tests are needed in order whenever it is perceived that there is a high risk of material misstatement in a financial statement. As a result of this, critical measures are needed so as to achieve this. This therefore reveals that audit risk would definitely be low whenever material misstatements are low and vice versa. Since material misstatements are usually detected from an already prepared financial statement, it is important to understand that these misstatement acts as a good revealer of accounting malpractices.

There are different companies that have been ruined as a result of material misstatements.

In conclusion, it can be argued that audit risk, auditor’s misconduct and material misstatements are important factors that need to be considered always when preparing financial statements of businesses and organizations across the globe. In this regard, it is important to understand that these auditing factors are interrelated and an effect on one may end up affecting the other. Notably, auditor’s misconduct could increase audit risk in businesses and companies. Equally, material misstatement is a perfect indicator of high audit risks in these firms. As a result, some of the measures that need to be implemented in order to reduce audit risk include reducing material misstatement cases as well as reducing the level of auditor’s misconduct during the processing of auditing a firms financial statement.

   

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