Factors Affecting The Reliability Of Audit Report Accounting Essay

Factors touching The Reliability Of analyse Report Accounting EssayIntroductionThe shutting of an item-by-item visited depend closed with a written aro procedurevass subject. fit in to section 205 of the Companies Act 2001, the scrutinizeors sh solely turn a typography to the sh arholders on the visited monetary statement (FS). The objective of an examine is to render an sagacity about the beddidness of the customers monetary statement.Audit overcompensate contains development value for users. Durendez Gmez-Guillamn (2003) states that tushvas report is rig as an important element for make loan decision. Basicall(a)y the alsoshievas report conveys whether the assertions made by vigilance atomic number 18 credible or non.Types of size up report.Unmodified report harmonise to ISA 700, an unmodified report should be issued when the meeters conclude that the FS argon drumd, in all worldly respects, in accordance with the applic fit financial report age frame make for.limited report. til now if the attendants found that the FS be non free from real misstatement found on the grounds earned or is unable to obtain sufficient book take the stand to make a evidence, the inspectors should issue a modified report in accordance with ISA 705.All qualification may arise from all disagreement or uncertainty in the scope of the audit. indecisionUncertainty may arise from, firstly a constraint during the audit run for i.e. not all records are made available to the auditors, the auditors baffle nominate after the inventory counts. Secondly, inability to gather evidence concerning a interrogative for e.g. an story record that have been destroyed or lost or the directors are screen information.DisagreementsDisagreement is due from factual discrepancies, unsuitable story policies, in nice or misleading disclosure or locomoteure to keep an eye on with an accounting standard or legislation. Some judgment of convictions it s et up be refractory with the guest work outing on the fact.Further to a greater extent it is important to calculate the exercise of these band and this could be grouped asHaving a actual that not pervasive effect on the FS.Having a pervasive (fundamental) effect on the FS.Except for thought process.An except for opinion is given when the effect is signifi throw outt only when not pervasive uncertainty or disagreement. An example of an uncertainty could be the part destruction of accounting record and disagreement could be the out or keeping(p) application of depreciation policy to a particular class of immovable assets.Adverse opinion.An adverse opinion is given when the matter concerned is a fundamental disagreement such(prenominal) as failure by the node to recognize a provision which would convert a profit into loss.disavowal opinion.A disclaimer opinion is given in the presence of quaternate fundamental uncertainties and it is impossible for the auditors to form an opinion.Factors affecting the reliability of audit report. misery by auditors to issue a safe audit report wad arise from two main causes.Auditors may identify a existent misstatement and fail to report it i.e. the auditors lack independency.Auditors may fail to detect an live error or hoax in the financial statement.Lack of auditors freedomPrinciples of auditors independency freedom is the main means by which the auditor demonstrates that he can perform his task in an objective manner (FEE 1995).Independence is fundamental to the reliability of auditors reports and an indispensable component for the auditing profession. Independence has been described as a position to take an unbiased view point in the performance of audit test, analysis of results and attestation in the audit report (Appah 2008). It simply means the auditors ability to express an honest and impartial polish and to a fault the ability of reporting reality to users. In addition, independence also means the a bility to resist managerial pressures that impair or are perceive to impair an auditors impartingness to carry his work objectively and honestly.Without independence the auditors opinion is suspicious and the audit is considered to be worth slight. If the auditors failed to maintain independence in their work, this can affect the reliability of audit report to the sense that the auditors may have discovered material misstatement during the audit test and may deliberately give notice it and issue an unmodified opinion.Independence in fact and appearance cogitation to Mautz and Sharaf (1964) thither are two aspects of independenceIndependence in fact (real independence) andindependence in appearance (perceived independence).These two concepts are essential in maintaining independence. Real independence refers to the actual state of mind of the auditor. An auditor possessing the unavoidable state of mind testament always react in the position way as he has the ability to make f encesitter audit decision in any compromising situation. More importantly, auditors should not but be in divine serviceless in fact, but they should appear as independent in dedicate to acquire the worldly concern trust on the auditors opinion. Auditors are expected to be seen as independent while examining the clients FS and collecting audit evidence which support their opinion (St take downson 2002). Precisely, auditors are supposed to be independent while deciding on reporting strategies without any pressures from their clients oversight (Cullinan, 2004). church and Zhang (2002) argue that independence in fact ensures the reliability of audited financial statements and independence in appearance helps to promote public confidence which will automatically increase the trust of the users on audited FS.Factors affecting auditors independenceSize of Audit regularVarious studies have proven that macror audit staunchs are much able to resist managerial pressures i.e. higher auditors independence (Gul 1989, Abu Bakar et al. 2005, Alleyne et al. 2006). wee audit firms may impair independence because they have a purpose to provide a to a greater extent personalized service to their audit clients which will ultimately develop a close sexual intercourseship between them (Shockley 1981). Since lifesize firms have umteen clients, they are not affected by their clients fees so they have less incentive to report favorably to their clients. only, DeAngelo (1981) reported that large audit firms are more credibly to issue reliable report since they idolise of losing their reputation if they are found to be associated with accounting scandals. However there is no assurance that larger firms are more able to resist pressures from their clients as pointed by Goldman Barlev (1974) due to the fact of the case which happened with Arthur Andersen and Enron. train of Competition in the Audit Services MarketCompetition inwardly the audit market is a major factor affecting auditors independence (Sucher and Bychkova 2001 Umar and Anandarajan 2004 MacLullich and Sucher 2005). High direct contest compel the auditors to tolerate managerial pressures and neglect any material misstatement detected during the audit test and issue untimely report as they fear of losing the clients due to the fact that the same work are easily available elsewhere. However, Gul (1989) argued that the level of competition do not cause auditors to be less independent. The existence of competition create a fear in the mind of the auditors as this same services are easily available in the market so they will extend to create a good image of themselves and increase their independency in position to maintain their clients and attract new ones.Tenure of an Audit Firm Serving the Needs of a Given ClientAn audit firms advance is the length of time it has served the audit needs of a particular client. about researchers have viewed tenure as a factor which affects the a uditors independence negatively (Abu Bakar et al., 2005 Alleynes et al., 2006). Tenure may result into friendship with the audit client and make the auditor to ignore imperfections that have a significant material touch on the FS (Moore et al. 2006). Mautz Sharaf (1961) emphasized that a long tenure creates complacency, lack of innovation, less rigorous audit procedures and a learned confidence between the audit firm and the clients. It may happen that the audit client has changed the business activities but the auditors are still using the same old audit procedures. current relations make the auditors to rely upon last years auditing and prevent them from devising new evaluation of the experience corpse, therefore affecting the reliability of audit report.Size of Audit Fees Received by Audit Firm (in relation to total percentage of audit revenue)Large size of audit fees caused a higher risk of losing auditors independence. The IFACs Code of Ethics for Professional Accountant s (1996, para 8.7) adumbrate that client size (measured from size of fees) could raise doubts as to independence. Since audit firms depend on fees for their survival, a step such as qualifying the audit report could be ignored so as not to insult the client and also for the fear of losing income. It is exclusively relevant if the audit firm receive a major proportion of its fee revenue from a particular client. Conversely Pany Reckers (1983) argued that the large size of the clients audit fee (measured as a percentage of office revenues to the audit firm) do not salute any significant impacts on AI but it inclined the public to be less confidence in the auditors independence.Non-audit services (NAS)The provision of NAS such as book-keeping and financial statement preparation services, inner audit services, tax income and legal services to audit client is regarded as a say-so factor which affects auditors independence drastically. Wines (1994) found out that auditors receiving N AS fees are less probable to qualify their opinion than auditors that dont receive such fees. The NAS fees make auditors financially dependent on their clients and less willing to restraint managerial pressure for the fear of losing their business. Brandon et al (2004) found that auditors would not perform their audit services objectively and joint provision would impair perceived independence. Joint provisions help the auditors to be in a better position in concealing any material facts since they will the same person who will prepare the FS and the same one who will perform the audit. Moreover as the level of clients pressures increase, the auditors became less concerned on the theatrical role of internal lead system (Muhamad and Karbhari, 2006), thus affecting the quality of audit report since these internal deficiencies will remain concealed. sorrow by auditors to detect material misstatement in the financial statement.The second factors affecting the reliability of audit rep ort is failure by auditors to detect an existing fraud or error in the FS. truly often, when material misstatement is discovered, the board members are surprised by the natural event and even more surprised by the fact that the auditors did not detect it. Failure by auditors to detect an existing fraud or error during the audit is expensive to their firms because they suffer damages for fine-looking an anomalous audit opinion and at the same time affect the audit quality. Material misstatement has increased considerably over the recent years and professionals believe this trend is promising to continue.ISA 240 The Auditors Responsibilities relating to Fraud in an Audit of Financial Statement states that misstatements in the FS can arise from either fraud or error.Error is an un intended misstatement in FS, compromising the slackness of an amount or a disclosure, such as a mistake in gathering or processing data, an irrational accounting estimate and a mistake in the applicat ion of accounting principles.The ISA 240 refers fraud as an intended act by one or more individuals among way, those charged with nerve, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Aderibigbe and Dada (2007) define fraud as a deliberate deceit plan and executed with the intent to strip another person of his property or rights directly or indirectly, disregardless of whether the perpetrator benefits from his/her actions.According to ISA 240, there are two types of fraud videlicetmisstatements resulting from fraudulent financial reporting (management fraud) andmisstatements resulting from misappropriation of assets (employee fraud)Fraudulent financial reporting (FFR) involves intentional misstatements or omissions of amounts or disclosures in FS to deceive FS users. Some types of FFR implicate manipulation, falsification or alteration of accounting records, misrepresentation or intentional omission of events, transactio ns or other significant information and intentional misapplication of accounting principles relating to measurement, recognition, classification, presentation or disclosure.Misappropriation of assets involves the theft of an entitys assets such as embezzling receipts, stealing physical or intangible assets and making the institution to pay for goods and services not received. Such acts are often attach to by false or misleading records or documents in ready to conceal the fact.Responsibilities of the auditorsVarious studies that have been conducted in different countries showed that many users perceived that it is the responsibility of the auditors to detect irregularities (Leung and Chau. 2001 in Hong Kong Dixon et al (2006) in Egypt Fadzly and Ahmad. 2004 in Malaysia). Since the resolve of Enron, Boynton et al (2005) argue that auditing standards have been revised to re consider the auditors responsibilities regarding fraud.Moreover ISA 315 requires the auditors to evaluate th e effectiveness of the clients internal control system in observe or preventing material misstatement occurring. Boynton et al (2005) emphasized that this condition was not previously needed, such an evaluation was only inevitable if the auditors chose to rely on the internal control system in attempt to lessen the extent of the audit procedures. All staff members are required to communicate their result in order to combine the minor irregularities detected by each of them and required to consider the incentives and opportunities existed in the organization that induce the occurrence of fraud.An auditor who is conducting an audit in accordance with ISAs should obtain reasonable assurance that the FS taken as a whole are free from material misstatement whether from error and fraud. besides an auditor cannot provide absolute assurance that the FS are free from material misstatement since some material misstatements of the FS may not be detected, even though the audit is correctly planned and performed in accordance with the ISAs.Furthermore frauds are more difficult to detect than errors since the former involve the use of educate and well organized plan to conceal them. It should be razed that management fraud is more difficult to detect than employee fraud as management is often found on the higher position and is more able to directly or indirectly manipulate figures. Such attempts may be even more difficult to detect if they are accompanied with collusion because collusion may cause the auditor to believe that audit evidence is persuasive when in fact, it is false.It is worth to note that the ultimate responsibility in relation to fraud espial and prevention rest with those charged with the governance of the entity and management. It is their responsibility to implement appropriate internal control systems to prevent fraud in their companies.Factors affecting the ability of auditors to detect material misstatement.Poor audit planningPlanning is crit ical to the effectiveness and efficiency of an audit combat (Mock Wright, 1992). It can be concluded that information obtained in the planning do have an impact on the subsequent audit procedures and the audit evidence to be evaluated (Joyce, 1976). The planning head consists of materiality appraisements, risk assessments and decision on the kind of evidence to be collected.If the initial risk assessment is wrong, the planned audit procedures may be incorrect or insufficient, thus reduction the reliability of the FS and increase the auditors exposure to lawsuit and unfavorable outcomes (Palmrose 1987).If the auditors fail to assess risk, a material error could arises in the raw data of an account balance ( inwrought risk (IR)), passes through the internal control system of the entity undiscovered (control risk (CR)) and escapes detection by the auditors tests and procedures (detection risk (DR)). The risk assessment stage is vital as it enables the auditors to identify areas where there is a high probation of material misstatement, plan audit work that address those errors and minimize the chance of giving an incorrect audit opinion. The risk assessment comprises of three important elements viz. IR, CR and DR. If any of these three elements are wrongly assessed, it affects the subsequent procedures and many misstatements would go undetected. IR is important as it identifies risks which are inherent within the industry. CR enable auditors to assess whether the clients internal control system can identify or prevent any material misstatement occurring. The assessment of inherent and control risk will have an impact on detection risk as they will determine the extent of audit procedures.Furthermore, if the auditors fail to determine materiality level, this can cause many material misstatements or omissions go undetected. IASB defined materiality as information is material if its omission or misstatement could influence the economic decision of users take n on the rear of the financial statement. Determining materiality is a matter of professional judgment. It can be concluded that both materiality and risk assessment afford to determine the nature, extent and timing of audit procedures.Inexperienced AuditorsAlthough a boffo audit depends on a good planning stage, the ultimate triumph depends on the auditors experience to conduct the audit. experient auditors have the appropriate and adequate accomplishments required in order to achieve audit objectives to the satisfaction of the client. truly often, auditors fail to detect material misstatement despite having assessing a high initial risk assessment, the reason behind this failure is that they lack the required skill to perform the audit while simultaneously identifying relevant risk factor. Experienced auditors is regarded as an valuable asset to the audit firm since they have more practice and feedback on the types of material misstatement that could be existed in the FS and its rate of occurrence (Libby and Frederick, 1990), thus increasing the likelihood of detecting potential fraud more easily. Bedard and Graham (2002) concluded that auditors with more experience with a particular client industry have more ability to identify risk factors than auditors with little or no experience with that industry.Furthermore, Moeckel (1991) found that experienced auditors search for more evidence than less experienced auditors. It simply means that experienced auditor do not only rely upon the evidence produced by the client but they look for further relevant and reliable evidence removed the entity before reaching an opinion, thus increasing the chance of detecting irregularities. Libby and Trotman (1993) found that senior auditors have the ability to recognize evidences which are inconsistent with their judgment. cartridge clip budgetTime budget is considered as a major paradox faced by almost auditors. Time budget pressures affect the quality of an audit as it prevents the auditors from allocating adequate number of time to complete stipulate audit procedures (Margheim, Kelley Pattison, 2005) and limits auditors ability to expand the extent of audit test (Asare et al. 2000), thus affecting the ability of auditors to detect material misstatement in the FS. It is worth to note that when attainment of budget is considered as a major factor in performance evaluation, auditors are more likely to engage in impaired behaviors such as reduction of fol dispirited-up procedures, underreporting of time, and overriding auditing procedures in the work program (Azad 1994).Time pressures create a stressful working purlieu among the audit team which is likely to affect the ability of auditors to detect material misstatement since the auditors tend to behave unprofessionally. This includes behavior such as superficial interrogative of documents, acceptance of weak explanations by the client, reduction of work on an audit step be upset acceptable le vels. E.Cook and Kelley (1988) survey results showed that auditors are more likely to engage in reduced audit quality practices in order to attain the time set by the firms. It simply means as time budget pressure increased, the auditors performance decreased significantly (McDaniel, 1990).However, time budget make auditors work harder and charge all time properly (Kelley and Seiler1982, Cook and Kelley 1991, Otley and Pierce 1996a). Moreover time budget is likely to levy audit judgment by encouraging auditors to emphasis more on relevant information thus preventing them from being influenced by irrelevant information (Glover 1997). try errorAccording to ISA 530 Audit Sampling and Other Sampling Testing Procedures, audit sampling involves the application of audit procedures to less than nose candy% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to collect conc lusions about the entire population.Every audit involves the use of sampling since it is costly for the auditors to examine 100% of all the transactions that took place during a period. The auditors use some form of audit sampling to test the internal control system, help them to reach a conclusion about whether or not material misstatement exist.But sampling always involves some risk, i.e. the auditors tycoon not look at enough items or the sample result might not be representatives. This can have a drastic effect since the auditors might reach an incorrect conclusion. Sampling risk could occur in both test of control and substantive procedures. In test of control, there is the risk of assessing control risk too high or too low.Assessing control risk too high result into audit inefficiency and assessing control risk too low makes the auditor rely on inefficient control procedures which increases detection risk. In substantive procedures, there is the risk of incorrect acceptance and risk of incorrect rejection. Incorrect acceptance is the risk that the conclusion careworn from the audit sample is that the account balance is not materially misstated, when in fact it is materially misstated. Incorrect rejection is the risk that the conclusion drawn from the audit sample is that the account balance is materially misstates, when in reality it is not.Inadequate audit feesThere is limited empirical evidence on the linkage between low audit fees and audit quality. However we can say that audit fees have an impact in the performance of auditors. many Accountancy members have noted that low fees are associated with inadequate audit work. For example, an auditor might use his judgment to the client rather than confide additional time to investigating an audit issue and search for reliable evidence. This would likely to make the auditors to fail in identifying a material misstatement in the FS and issue an incorrect opinion.It can be asserted that when audit fees a re abnormally low, the concern is poor audit quality as the auditor might attempt to cut back on effort to number an appropriate audit procedure that fully identify and address material misstatement.Furthermore it can be concluded that if audit fees are low relative to the size of audit client and audit client complexity, this can cause a serious problem since the auditors would be demotivated as more time and effort would be required to perform the external audit work and to reach an unbiased conclusion, thus making the auditors to skip a lot of important audit procedures.On the other hand, inadequate fees do not pose any concern when there is severe competition among audit firms since all audit firms will tend to tender low fees for their services in order to maintain its clients and to attract new ones.