Wednesday 6 April 2011

WHAT IS THE ROLE OF AUDITORS IN CORPORATE GOVERNANCE IN 21ST CENTURY

WHAT IS THE ROLE OF AUDITORS IN CORPORATE GOVERNANCE IN 21ST CENTURY

EXTERNAL AUDITOR

                                   External auditor is an auditor independent from the entity, appointed to express an opinion on an accountability matter. And  external auditor is an audit professional who performs an audit on the financial statements of a company, government, individual, or any other legal entity or organization, and who is independent of the entity being audited. External auditor must be highly qualified person like, Chartered Accountant, Cost and management Accountant.etc;

Purpose of External auditors  

                                       The purpose of external auditors are to audited the company annual reports with carefully and with responsibilities and provide the true and fair information to stakeholders of the company.

Role of external auditors in corporate governance in 21st century

                                                   The role of external auditors in corporate governance has in many terms, Minimum Skill Levels in Information Technology for Professional Accountants," and its 1992 final report, "The Impact of Information Technology on the Accountancy Profession," the International Federation of Accountants (IFAC) acknowledges the need for better university-level education to address growing information technology control concerns and issues. The Institute of Internal Auditors' (IIA) 1992 document "Model Curriculum for Information Systems Auditing," was developed to define the knowledge and skills required by internal auditors to be proficient in the information age of the 1990s and beyond. ISACA published the Model Curricula for Information Systems Auditing at the Undergraduate and Graduate Levels, first edition, March 1998. Certifications such as CISA, CPA, CA, CISSP and CIA, with their continuing education requirements, have been drivers for professionals to maintain their currency and skill levels to practice their professions.

Responsibilities of External Auditors

An auditor conducting an auditing accordance with ISAs is responsible for obtaining reasonable assurance that the financial statements as a whole are free from material misstatement, whether caused by fraud or error.’ ISA 240 (Redrafted), paragraph 5.Hence, both the entity itself and the auditors has responsibilities for fraud and error. It could be said that management, and those charged with governance, have the primary responsibility for fraud and error, whereas the auditor has secondary responsibility. It is important, however, to ensure that the extent of these secondary responsibilities are clearly understood, The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statement, which became effective for periods commencing on or after 15 December 2004.According to ISA 240 (Redrafted) the difference between fraud and error depends upon whether deception has been used, and the distinction between the responsibilities of those charged with governance and auditors for fraud prevention can be described respectively as primary and secondary responsibilities. Auditors are required, however, to maintain an attitude of professional skepticism throughout the audit, and members of the audit engagement team are required to discuss the susceptibility of the entity’s financial statements to material misstatement due to fraud.ISA 240 (Redrafted) requires auditors to perform risk assessment procedures to obtain information for use in identifying the risks of material misstatement due to fraud.

Power and Duties of External Auditors

                                      
Ø  An external auditor performs independent, third-party reviews all the financial records of a company or corporation. He evaluates all accounting, payroll and purchasing records, as well as any documents related to investments, stocks or loans. His job is to provide an accurate, unbiased analysis of the company’s financial condition.
Ø  The objectivity of an external auditor is imperative for him to be successful. No connection to the company is permitted, as it may be construed as biasing the auditor’s report. This detachment generally means he cannot be a friend or relative of any owner, manager or employee. He must not hold stock in the company or have any monetary stake in any of their subsidiaries or holdings.
Ø  To be fair and equitable, an external auditor should familiarize himself with the nature of the business he is auditing prior to starting the job. For example, service industries and consumer goods companies have markedly different expenses as well as disparate methods of calculating profits and losses. Being aware of these differences is important for his conclusions to be accurate and constructive.
Ø  Businesses often depend on an external auditor to be their financial judge and jury. His findings strongly influence the company’s reputation in both the private and public sectors. If his conclusions about assets, debts and tax responsibilities and payment do not match those on the company records, the repercussions can be serious.
The auditors’ responsibility to consider fraud and error
Ø  If an external auditor finds irregularities, he documents them and makes notes on suggested improvements. These may relate to accounting methods, internal controls or spending habits. Other areas of concern commonly relate to how employees are classified and paid. For example, companies sometimes incorrectly categorize jobs as exempt, not requiring overtime pay, when they are actually non-exempt positions. He may also make suggestions on reducing overhead through staff reductions or better inventory control.
Ø  In some instances, an external auditor’s services are required by a regulatory agency or shareholders that have doubts about the accuracy of a company’s financial claims. If he finds evidence to support their suspicions, he is typically bound to report them. The company is generally given the opportunity to defend their position either in writing or in oral presentations.
Ø  Once the auditor’s job is completed, he presents his findings to management. The areas his report normally covers include the state of accounts payable and receivable as well as his opinion of the record-keeping systems and the company’s financial strength. His comments on these topics are generally expected to be constructive and include recommendations for improvements.
Ø  Most external auditor positions require the applicant to be a certified public accountant. Other jobs may require a bachelor’s degree in accounting or finance. Experience in auditing, financial analysis or business administration is also valuable.
Ø  External auditors are employees of a public accounting firm which has been engaged to conduct the audit of a particular company's financial statements (audit client). The external auditor's responsibility is to provide assurance to the general public regarding the truth and fairness of the information presented in the audit client's financial statements. Since the public relies heavily upon an audit opinion published by a public accounting firm to make investment decisions, it is imperative that they view accounting firms as being independent, objective and free from the influence of the audit client or any other parties. Indeed, some authors have gone as far as to say that this assurance is the basis of the world's capital markets.
Ø   Overall approach to the detection of financial fraud
Ø   Fraud-related inquiries
Ø    Response to fraud risk factors
Ø   Financial statement misstatements
Ø   Fraud associated with management override of controls
Consideration of laws and regulations
ROLE OF IASC
International Accounting Standards Committee, London has issued several accounting standards. These are expected to be implemented so that Corporate Financial Reports look informative and credible. These cover several areas which extend logistical support to transparency and full disclosure which are the foundations on the premises of which finance ail positions are highlighted and operating results are disseminated. It is high time that the Governments in power properly comprehend the foregoing IASs for wider application to private, public and Government Sectors. The transparent results can provide excellent guidelines for developing thoughts relating to the diagnosis and later revival of the economy of a country

Ø  When planning and performing audit procedures and in evaluating and reporting the results thereof, the auditor should recognize that noncompliance by the entity with laws and regulations may materially affect the financial statements.
Ø  In order to plan the audit, the auditor should obtain a general understanding of the legal and regulatory framework applicable to the entity and the industry and how the entity is complying with that framework. Further the auditor may also identify instances of noncompliance by inspecting correspondence with the relevant licensing or regulatory authorities.
The auditors’ report
Ø  The auditor should review and assess the conclusions drawn from the audit evidence obtained as the basis for the expression of an opinion on the financial statements.

Ø  The auditor’s report should contain a clear written expression of opinion on the financial statements taken as a whole.

Ø  The auditor’s report should includes (a) title e.g. auditors’ report(b) addressee as required by the circumstances of the engagement and local regulations e.g. members of the company (c) introductory paragraph to identify financial statements audited and a statement of the responsibility of the entity’s management and the responsibility of the auditor (d) Scope paragraph to give reference to the ISAs or relevant national standards or practices and the description of the work the auditor performed (e) Opinion paragraph (f) date of the report (g) auditor’s address and (h) auditor’s signature. The contains of Auditor reports attached to the Companies (General Provisions and Form) Rules 1985 conform to these requirements of ISA.

Ø  In certain circumstances, an auditor’s report may be modified by adding an emphasis of matter paragraph to highlight a matter affecting the financial statements which is included in a note to the financial statements that more extensively discusses the matter. The addition of such an emphasis of matter paragraph does not affect the auditor’s opinion.

Ø  Auditor should express qualified opinion when he concludes that an unqualified opinion can not be expressed but that the effect of any disagreement with management or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion
Ø  The auditors should documents matters which are important in providing evidence to support the audit opinion and evidence that the audit was carried out in accordance with ISAs.
Ø  The auditor should prepare working papers which are sufficiently complete and detailed to provide an overall understanding of the audit
So, we can say that in 21st century in corporate governance the role of external auditors are very dominant and it’s a vital role for success the businesses of public limited companies because they never lose the confidence of stakeholder of the companies.
Assignment#3

ROLE OF EXTERNAL AUDITORS IN 21ST CENTURY
                                     




INSTITUTE OF AUDIT & ACCOUNTANCY

           UNIVERSITY OF MANAGEMENT& TECHNOLOGY




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