Auditing is the process of acquiring and assessing proof concerning statements about actions and events to establish the extent of correspondence between those statements and set up criteria, and giving out the results to parties concerned (Grant & Simnett, 2012).
The Australian Auditing Standards Boards outlined principles that should underpin the objectives of an audit and help the conduct of the auditor in using professional requirements of the auditing standards, understood clearly, are universally applicable, and entrench the expectations auditor must accept and abide. Ethical principles are: integrity, objectivity, professional competence and due care, confidentiality, and confidentiality (Richard & Catherine, 2005). The credibility of information in auditing is sometimes questionable due to conflict of interest, consequence, complexity, and remoteness. In this case, it requires assurance engagement is. This is an engagement in which an assurance practitioner communicates a final solution that will build confidence of outcome for the users. It comprises of the following five elements: three party relationships. Assurance is valuable because it creates independence and expertise (Broadley & Derek, 2006).
The role of the auditor is to provide the client with resources, discuses the audit findings with the management before disclosing information to the providers. On the other hand, the client must engage the auditor and pay the auditors fees. In order to combat pressures on the independence and objectivity, the auditing profession has issued a series of ethical rulings and professional standards to guide the auditor in the conduct of his or her duties (Broadley & Derek, 2006).
The evolution of audit functions dates back to the thirteenth century. Until 1900s audits focused on the solvency and detection of fraud and error. In between the early 1900s to 1940s, there was a shift where achievement of credibility of financial reports was due to objectives of financial reports and accuracy. Approaches in auditing audits evolved, and it took the following approaches: statement of financial position approach, transaction cycle approach, financial risk approach, and business risk approach (Krishnan, 2005).
Audit Committee's efficient and effective practices.
The following are practices that any committee ought to exercise so as to discharge their duties properly for the benefit of the organization and the clients.
The Effectiveness of the Audit committee: Audit committees must become skilled at how to work brighter and smarter and give themselves time to finish the long line of their duties. In fact, owing to the workload they struggle to know and understand what to put on the list as their top priority. They have a lot to perform in order to attain their success. Research has shown that an organization that is leading on the audit committee effectiveness are not just managing, but excelling in doing their responsibilities that always evolve. They ought to concentrate on the following ten main areas (Zhang, Zhou, & Zhou, 2007).
Financial Statement: The main reason for audit committee is to examine and make sure that there is integrity of financial statements. They need to review the financial statements annually and on an interim basis. They do so by reviewing statements carefully, assessing the quality of earnings, understanding them, and accepting management's conclusions. To accomplish these effectively, they need to know deep accounting policies used. Those committees who lead devote a lot of efforts to this part of their work (Raghunandan & Rama, 2007).
Risk Management and Internal control: Audit committee has remained focused on understanding the internal control in the firm. This is possible due to the SOX and Bill 198 which set out the listing requirements and also stock exchange. Despite the fact, the audit committees play a critical role in managing long term success of the company in performing against its strategy (Dezoort & Salterio, 2001).
The board is in charge of approving a strategic plan that considers principal risks into report. It is also accountable to guarantee implementation of a suitable risk management system. In the past, aspects that informally dealt with by the board done without the distinction between the board responsibilities and those done by the audit committee. Even though, the audit committee focuses on internal control, they are acknowledging that they may lack expertise and knowledge to provide necessary oversight in areas such as fraud and information technology. These are areas where management overrules controls. The message should be brave in encouraging outsiders or train the committee members to get the necessary skills (Richard & Catherine, 2005).
The Compliance and Ethics: In public organization, there is implementation of the codes of conduct in their SOX and 198. The boards ought to oversee the code with correct monitoring functions. In most organizations, constant exposure rules would believe a material revision to code or an overruled by the board management to material alteration, needing a new release to be filed (Richard & Catherine, 2005).
The Oversight of Management, and the Internal Audit: Audit committees work best when they have industrious relationships with management and internal audit with open, straight, and ongoing lines of communication. The most effective chair set out the time required in between the meetings to promote those relationships meeting unofficially, conversation on the phone, talk about issues, and preparation of upcoming meetings. Committees need to have assurance in management's competency and thus should have a voice in assessing management. The audit committees who take the lead promote close relationships through regular communication and secret meetings. This causes the internal director to feel comfortable. It makes the char of the internal audit committees to provide to provide information and discuss issues they concerned (Krishnan, 2005).
The Relationship with the External Audit: Audit committees are enhancing relationships which are honest and professional with external auditors while dealing with tasks for choosing, giving back, assessing and keeping them, as well as managing autonomy. They ensure their comfort ability with the auditors' capacity to undoubtedly, frankly and efficiently talk matters and concerns, and with the lead partner's industry, potential and professionalism. They also remain in touch most of the times with lead partners before meetings, to reinforce and further cement the direct reporting relationship (Grant & Simnett, 2012).
The resources and investigation: The bills provide the audit committee to hire experienced advisers of their own. They must be having access to internal resources in order to support their objectives. They also need authority that is indisputable to allow the engage advisers from outside and to conduct investigations when warranted. When the committee is launching investigations, they need to ensure that they understand essential elements and apply them for success. They ought to take action quickly, retain right advisers, counsel and experts. Effective communication that is appropriate both internally and externally is mandatory (Grant & Simnett, 2012).
Composition of the Committee: The driver of the committee's success is possible by having directors on the audit committee with authorization, freedom and financial literacy together with honesty, fit cynicism, and verdict. They should also have knowledge of the firm and the profession, and the ability to confront decisions. The members of the committee cannot succeed by themselves even if they are the best. They need leadership of an effective chair (Broadley & Derek, 2006).
Training: Members of the audit committee who are new need a tough course program. This will allow them to know their role and the financial reporting process of the company so as to exert an impact to the company immediately. These programs should be long enough and sufficiently cover key topics and have appropriate participants. The orientation should touch on areas such as key relationships and committee processes. Formal and informal continuing education for members of the audit committee is also noteworthy. Those committees who lead create a training approach. These should be one that is more integrated by articulating clearly at the beginning of the year the time and topics that the committee will devote to training. They even n as well incorporate selected topics into agendas of meetings (Broadley & Derek, 2006).
Meeting: In meetings, the core work must be conducted. The committees need to the appropriate time for effective deliberation of issues fully throughout the year. All members must be active. The chair must drive the meeting agendas, distribute appropriate information on time. This must amends before the meeting. Private Sessions should be held with the financial management, the internal auditor director, external auditors, counsel, and other necessary managers. The committee members should meet themselves to give room for candid and frank session on sensitive issues (Raghunandan & Rama, 2007).
Charter and evaluation: The charter should be well written clearly in order to communicate the purpose of the committee, its composition, its roles and responsibilities, their authority and performance assessment. This plays a decisive role in guiding the committee's tasks all round the year. This also communicates to stakeholders, through disclosing information on the company website and in filings. They will make the committee be on toes and forced to evaluate themselves regularly so as to discharge all their responsibilities. The committee evaluated as a whole and also every member evaluated individually (Grant & Simnett, 2012).
The legal liability of auditors: A financial report is the creation of accounting system, and judgments made by those charged with governance and management. The main reason of carrying out audit is to capture a degree confidence of the financial report users. In order to form a judgment on the financial report, the auditor must critically observe the data and allocations of the financial report. Accounting standards make room for the choice of all accounting methods and calls for the accountants to exercise judgments (Broadley & Derek, 2006). Those responsible for preparing financial reports can be biased due to their own interests. Therefore, an auditor should prepare and carryout audit with professionalism. He should do a critical assessment of evidence, and have a questioning mind. At the same time, he must exercise judgments in a professional way by using relevant knowledge, experience, and training acquired (Grant & Simnett, 2012).
An auditor should be given the mandate and authority to assess capabilities and competence, review objectivity, obtain an understanding of the work, and evaluate the appropriateness of the work of the expert for the relevant assertion. This is possible by discussing or reviewing the reasonableness of assumptions and methods used. Also, the relevance, accuracy, and completeness of source data used taken into account; considering consistency of expert's work with results of other audit procedures (Broadley & Derek, 2006).
Ethics, Independence, and Corporate Governance.
Ethics is Codes of ethics which are rules set and developed by the community in order to support the welfare and ethical behaviors of individuals. The codes state explicitly the values required and outlined how members should behave towards one another. They provide objectives for the purpose of sanctions. They are principally attitudes of mind rather than compliance with written rules of conduct (Richard & Catherine, 2005).
Ethics is values which deal with the requirements for the universal welfare, success, happiness and health of human beings. This calls for knowledge and understanding of moral principles and skills in applying them to decisions and problems. Ethical codes set up and discipline rules so as not to create ethical culture or ensure the moral integrity of employees, but indicates what members are to do and comply as stated by the APES 110 'Code of Ethics for Professional Accountants (Richard & Catherine, 2005). APES 110 set out main ethical pronouncements that relate to the undertaking of an audit. ASA 200.14/ISA 200.14 and ASA 102.5 require that auditors comply with relevant ethical requirements. It consists of three sections: General Application of the Code, Members in Public Practice, and Members in Business (Grant & Simnett, 2012).
The distinguishing feature of the accounting profession is its acceptance that it operates to safeguards the public defined as the collective welfare of the society of the people that the members serve. The code of ethics outlines by five fundamental principles which are: objectivity, professional competence, integrity, confidentiality, and due care. Decision making, which are sound, depends on knowledge and understanding of the basic principles on which decent values and rules bases, competency in decision-making skills, and the ability to choose appropriate policies and decision procedures in different situations (Grant & Simnett, 2012).
Corporate governance is a system where companies gives direction and managed. It covers the conduct of the Board of Directors and the relationship between the Board, management and shareholders. Board of Directors normally composed of a few corporate executives (such as CEO and CFO) and a majority of nonexecutive (preferably independent) directors (Richard & Catherine, 2005).
The director is not independent if he or she associates with share holders; he has been an employee as an executive for three years, and a director after such employment. On top of these, he, or she has been a principal, employee, or consultant for three years, has been a supplier or client; has a contractual engagement with a company and has worked as a board member. The period which might affect the director's ability to act for the betterment of the company and has a relationship that could shows that it is conflicting with the director's ability to act for the company's best interests (Richard & Catherine, 2005).
In 1998, the OECD developed a set of corporate governance standards covering six key area Principles of Corporate Governance: ensuring an effective corporate governance framework, rights of shareholders and key ownership functions, equitable treatment of shareholders, role of stakeholders, disclosure, transparency and duties of the board (Raghunandan & Rama, 2007).
Inside organization structure.
In planning, the auditor must gain an understanding of the firm and the surrounding environment. This includes the industry, its regulations, nature of the firm and it operations. Also, the ownership, its structures of the firm, selection of entity and their accounting policies, strategies, and objectives (Zhang et al, 2007). The ASA/ISA 315.A1points that knowledge of the entity can assist the auditor to evaluate threat and recognize troubles, establish materiality, and think about the correctness of accounting policies and disclosures. Also, recognize areas requiring significant audit deliberation, build up prospect for use when performing investigative measures, plan audit events in reply to assessed risks of material misstatement, and evaluate audit evidence (Broadley & Derek, 2006).
The structure of the organization segments the entity into small duties to be carried out by individual employees, and departments. The auditor understands this by going through the organizational charts, inquiring, and from manuals. He also gets policies and procedures by observation of actions of the workers and the top management on business transactions. The auditor gains this understanding by preparing a brief description of the business activities, undertaking a tour of the entity's physical facilities, reviewing entity's legal documents, examining minutes of meetings of the entity's board of directors, and determining how the identification of related parties occurs (Grant & Simnett, 2012). He can also gain knowledge and understanding of the firm. This is by considering previous experience with entity and industry, discussion with senior people within the entity, discussion with internal auditors within the entity, discussion with other auditors and advisers, discussion with people who are knowledgeable such as industry economists and industry regulators, review of significant legislation and regulations, and performance of analytical procedures. The firm's economic state, regulations by government, technological changes, and competition affecting the business must be considered (Richard & Catherine, 2005).
In conclusion, audit committee is part and parcel of corporate governance charged with the responsibility of giving reports and the efficiency of the organization's internal systems. The main reason is to make sure financial information given to the public is accountable, transparent, credible, objective, and of integrity. This is for enhancing better decision making and formulation of policies. When there is an effective audit committee in an organization fraud reduced, and as a result, behaviors that are not ethical and illegal reduced drastically.