Over the last two decades, the auditing profession has suffered from various scandals such as Enron and other high-profile audit scam settlements. The involvement in PwC in the Satyam scandal has brought it to its knees in an operational environment in India.
Such is the scenario that once the auditor or firm is engaged in the scandal, their career is literally over. Audit liability has increased many folds since the scam of Enron.
The liabilities have also enhanced the audit quality and reputation of the profession. This has also created barriers to new entries within the core audit market in itself.
Auditors are required to show two major skills while carrying out activities as independence and competence.
Auditors should have the required skills to carry out their job with due care and fairly. An auditor is also expected to complete tasks in good faith and integrity.
The auditor’s liability represents the legal liability that is assumed when the auditor is performing professional duties.
The auditor is liable for client accounting misstatements in the financial statements. There is always the risk of fraud and material misstatement in financial statements.
This forces auditors to be professionally competent and employ all the auditing and accounting standards carefully.
The auditor who performs his duties negligibly can face suit from the company, its shareholders, or even creditors who rely on the work of auditors.
The auditor can be held responsible for financial disadvantage to the firm caused by incorrect representation of books of the company. This leads to the auditors to take out professional liability insurance.
Types of Auditors liability
Auditors are potentially liable for both criminal and civil offenses. Criminal liabilities occur when the organization breaches the law or regulation.
On the other hand, disputes between individuals and/or organizations tantamount to civil liability.
Auditors are bound by the laws and regulations of the state or countries they operate in. They are also bound the ethics applicable to them as issued by the auditing boards.
Auditors under criminal law can be prosecuted for acts such as frauds and insider trading.
The audit is subject to legislation as per the Companies Act of the country. This Act includes the sections on qualifications of auditors, how they can be appointed, and what would be their functions.
As per general law, the auditors can be prosecuted in criminal court for either knowingly or recklessly issuing an inappropriate audit opinion.
This relates to issues related to contract law and the law of tort. The contract law seeks parties for breach of contractual obligations.
That would mean the company can seek remedy from auditors only in the terms of the engagement letter.
The shareholders can, therefore, sue the auditors directly in terms of the letter of engagement for failing to handle work with due care.
Firms must manage their exposure to claims of intelligence. It means applying audit standards and code of ethics for auditors and also complying with terms and conditions as agreed in the letter of engagement.
The audit firms should also make the investment of time and money to make the improvements happen. The firm would improve audit only when it will lead to long term reduction of legal and insurance costs.
Disclaimers of liability
Auditors can be exposed to litigation from third-person parties whom they have not disclaimed liability. Hence, it is necessary to include a disclaimer of liability in the workings of the audit reports.
Disclaimers can not be entirely reduced. Further, the laws provide no protection from threats from litigations under contract law.
Liability Limitation Agreements
Limited liability agreements have been used a lot in recent years to reduce threats of litigations from clients.
LLAs are simply included in terms of engagement that impose a certain threshold of the amount of compensation that can be collected from the auditor in case of litigation.
Such LLAs are to be approved by auditors annually and generally are to be ascertained fair and reasonable by the judges when the case rises.
It’s difficult to estimate fair and reasonable amount while setting letter of engagement. This is because threshold has to be estimated before any potential litigation known to auditor and client.
The level of compensation therefore would be very discretionary and sometimes open to court as well in extreme circumstances.
It has to be noted that litigations in the field of audit profession have been rapidly increasing. The potential costs and risks of auditing large corporates would increase for auditors outside the Big Four.
The brunt of penalties that auditor’s misdemeanors can attract may damage the capital markets. Until and unless things change, auditors should take bear of the burden of liability.
The role of the auditor when it comes to giving an opinion regarding the financial well-being of the organization is tantamount. This is primarily because of the reason that numerous different stakeholders are supposed to rely on the report that is extended by the auditor.
Hence, in this regard, it is quite rudimentary for auditors, as well as organizations to be aware of the responsibilities and duties of the auditor, and how they work is supposed to be carried out in order to extrapolate the best possible results for all the relevant stakeholders.
An auditor can simply be defined as an independent qualified person who is mainly appointed to give shareholders an independent, professional, as well as an informed opinion of the given financial statements.
In this regard, the auditor is also supposed to benefit all the relevant third parties that are involved, in terms of providing reliable and accurate information about the company in this context.
Therefore, because of the high degree of reliance on the work carried out by the auditor, it is of pivotal importance.
Duties and Responsibilities of Auditors
In order to ensure that auditors are able to execute their tasks in a proficient manner, it is quite important to establish clarity regarding the roles and responsibilities of the auditor. Therefore, this mainly entails the following roles and responsibilities.
Firstly, it is the main duty of the auditor to provide an audit report. This means that they are supposed to provide their analysis to the members about the audit process that they have conducted.
In this regard, they are supposed to analyze the financial statements, and how they give a free and fair view of the underlying company’s affairs.
They should also ensure that the financial statements have been prepared in accordance with the relevant provisions of the Companies Acts, in addition to the underlying accounting standards that should have been followed.
In the same manner, they should also look for bookkeeping and if the company has managed to maintain proper books of accounts.
In the case where the auditor discovers the company has not kept books in a proper manner, they are supposed to notify the relevant authority and disclose it in their financial statement.
It tends to be an increasingly important role of the auditor to ensure that they are able to ensure that there are no questionable activities taking place within the company operations. In this aspect, they are also supposed to report indictable offenses.
In the case where the auditor finds out that some unethical practices, they are supposed to immediately report it to the higher authorities.
The job description of an auditor also includes to adopt a high standard of professional integrity and professional skepticism.
This includes reporting any suspicious activity, as well as informing the organization about possible chances of improvement within the company.
From beginning part of the audit process, till the end, the auditor is supposed to keep a proper documentation regarding all the audit procedures that are conducted during the audit process.
This also includes designing the audit procedures, estimating the audit risk, and then documenting the process as they go along the audit process.
Furthermore, it can also be deduced that auditor is also responsible to determine the internal controls within the organization, and comment on the overall efficacy of the operations within the firms in terms of the inherent audit risk.
In addition to that, the fact that all internal controls have been checked has supposed to be backed with sufficient substantive audit procedures.
Therefore, conducting substantive audit procedures also tends to be an important component of the audit process.
There is no doubt to the fact that auditor tends to be a highly integral part to oversee the financial operations within the company.
In this regard, they need to ensure that they are able to define the role of auditors in a highly accurate manner, so that there is proper clarity regarding the duties that they need to execute.
In this regard, it is imperative that the organization, as well as the auditor, is able to have proper knowledge and clarity regarding the tasks and activities that need to be carried out.
The main job description of the auditor entails covering all the relevant ground for audit assertions and ensuring that all the respective tasks are completed to that they can fulfill the core purpose of the audit itself, which is commenting on the financial statements of the company.
The Auditor’s letter of consent is the letter that is prepared by the client or management and communicated to the previous or current Auditor (the outgoing) to inform them about the changing of the Auditor of their company.
This letter is to allow them to provide the information requested by or will be required by the upcoming Auditor (the prospective Auditor).
In general, the company might change its Auditor every year, every three years or sometimes every five years.
It depends on the company policy as well as regulation in the jurisdiction that the company operates.
If a client wants to change Auditor, before accepting the engagement with their client, the upcoming Auditor requests typically the client to prepare the letter of content to the current or previous Auditor that they are going to change or have changed the Auditor.
The letter also informs the current or previous Auditor that the upcoming Auditor will request or ask for the information from them.
And if it is the case, then the letter is given them the mandate to provide the information or document to the upcoming.
Normally, the upcoming Auditor will send the professional clearance letter to the previous Auditor.
The information that upcoming auditors want to clarify including the reasons that they are changing resigning, if any, any problem that they face during their audit, any reason that upcoming Auditors should not accept the engagement, etc.
Upon the request from prospective Auditors and generally at the pre accept the stage of the audit engagement.
To mandate an outgoing auditor to respond to the request of the coming auditor.
The letter is prepared by the client and send to the outgoing auditor
An audit can be considered a highly important process during the course of the fiscal year of the company.
As a matter of fact, the audit process is supposed to be taken seriously by the organizations because of the high level of dependence it holds for other relevant stakeholders that are involved in the accounting process.
Therefore, organizations try to outsource their audit process to reputed teams of auditors who have a reputation for creating a positive outlook when it comes to different steps.
When it comes to auditors’ opinions, it can be seen that auditors are supposed to make sure that they execute the audit process in order to deliver the best possible results.
This requires them to adapt their professional integrity, along with professional skepticism, so that they can give an accurate opinion about the financial statements of the company.
In this regard, it is also important for them to realize how crucial it is for the auditor to be independent and execute the process in an effective manner.
There are numerous different reasons as to why auditor independence tends to be pivotal for the audit process, to say the least.
Why is Auditor Independence Important?
Over the course of the audit, which includes audit plans, and audit procedures, it is important for auditors to ensure that they approach the process with an inquisitive mind.
In this regard, it is important for them to stay open to possibilities of fraud, and improper reporting, that can deliver the required results.
Auditor independence tends to be an extremely important component across the audit process, because of the reason that it directly influences the judgment that is put forth by the auditor.
Auditor independence simply means the ability of the auditor to adopt an approach with integrity and objectivity within the audit process. This mainly requires the auditor to have the liberty to execute his work in a free and objective manner.
It gives him the ability to base his opinions without any biases, or external pressures. Hence, in the cases where the auditor is unable to adopt an independent approach towards the audit process, the opinion issued might not be valid, and cannot be relied upon.
Auditor independence allows the auditor to adopt an integral approach, and question anything and everything that he believes should be scrutinized within the company.
In this regard, it enables him to muster the courage to question the company, and the officials, in case something is missing in the financial statements, or something should be added on.
Additionally, there is no doubt to the fact that the Audit Report is supposed to be used by numerous stakeholders around the organization. It forms to be a very useful and concrete decision-making criterion by these stakeholders since it gives them confidence that the financial statements and other relevant information has been checked upon by the auditor.
This restores their confidence, and therefore, gives them a reason to invest in the company. In the case where the auditor independence has been compromised upon, and they are not able to give a free and fair view regarding the company, it results in investors losing their money.
Therefore, this causes them to suffer significant financial losses, because of the lack of independence of the auditor.
Therefore, in order to keep the interests of the shareholders and investors intact, it is quite important for auditors to maintain an independent approach. It also adds to their credibility and reputation in the future.
This is because in the case where they declare a clean report regarding a company, and the company then defaults, their credibility would be at stake because they had audited these financial statements in the first place.
Hence, it is vital for them to take this engagement seriously so that it does not cloud their judgment because of a lack of independence.
Auditor independence directly impacts the decision that is issued by the auditors. In the case where their judgment is impaired, they might not be able to give a free and a fair few, and therefore, this would result in bigger damage to the overall ecosystem, in the longer run.
Therefore, all steps should be taken by the engagement partners, as well as the auditors to ensure that there is no event that hampers the ability of the auditors to give a free and fair view regarding the financial statements of the company. In the case of an event where the auditor feels that their independence is at stake, they should ideally report it to their managers, so that relevant steps can be taken.
Over the course of years, the importance of audit has increased exponentially. Following issues and scandals of global nature, like Enron, there has been an escalating emphasis of audit divisions and making sure that it is conducted in order to ensure that the shareholder interests are protected within the company, at large.
Given the importance of audit processes in reinstating the credibility of the company, it is imperative that the audit process is conducted to keep customer interest and safety intact.
The Need for Audit for Big Corporate Houses
Corporate giants have considerable amount of financial transactions that take place over a fiscal year. From the perspective of a prospective shareholder, it is often overwhelming to expect these people to be able to understand and analyze all this information easily.
The first advantage of auditing big corporate houses is the fact that it helps the companies to have a deeper insight and overview pertaining to the business functionality.
As a matter of fact, it can be seen that audit helps companies to identify their internal situation, and how can it subsequently be improved in order to get better results over the course of time.
Hence, in this regard, it is quite important to ensure that companies are able to take this process in a serious manner because it helps them to identify certain cases and issues relating to key areas of improvement.
In the same manner, the audit can also be helpful for larger companies because it helps provide them with a detailed, and an additional perspective about the company, and how it is operating in order to extrapolate better results over the course of time.
Therefore, in this regard, it is quite important to realize the fact that audit helps to give insight to the companies regarding their internal working, and how they can tackle different issues relating to the audit process itself.
Therefore, this alternate view and consultation are part and parcel of the audit engagement, and hence, it helps the companies to learn and grow.
Audits can also help larger corporations work towards improving credit rating. In this aspect, it is quite important to realize the fact that audit tends to evaluate the company’s financial statements, in the context of ensuring that the financial statements are free from any material misstatements or errors.
Therefore, in the case where the report is positive in the firm’s favor, it can be seen that it results in investors and creditors feeling satisfied before investing in the company.
It is categorized as a low risk profile, and that turns out to be an automatic plus for the company.
The process of audit and assurance helps the company to increase their credibility and trust worthiness in the general public too. As a matter of fact, this is something that contributes towards the growth of the company, in the sense that it establishes a much needed credibility and reliability of the company.
Lastly, it can be determined that audit helps the company to decide properly regarding how they can manage their job descriptions in order to ensure that there is a higher accountability for all the people involved.
As a matter of fact, this is something that is highly important for the company because of the reason that it helps them to point out where the error exists so that it can be rectified in the highest priority.
Hence, audit for big corporations is like an oversight or an overview that there is nothing questionable going on within the company.
As a matter of fact, this greatly helps the companies to establish themselves as advocators of transparency, accountability, as well as assurance that the financial statements have been prepared in a proper manner.
Therefore, there is no doubt to the fact that corporations in the modern-day and age need to be more vigilant about their practices, since they greatly impact the outcome, at large, on the society, at large.
Hence, it is imperative that they consider the audit process as a very crucial step that can help them with building their credibility and maintaining their reputation in the industry.
Regardless of the fact that this is something that most companies need to take care of, because of compliance-related issues, yet it has advantages over and beyond compliance risk.
It is a very viable and useful tool for risk assessment and can help the company figure out existing errors so that they are able to prevent substantial losses from happening in the future.
Audit Evidence can be regarded as an increasingly important tool within the audit process, primarily because of the reason that it really impacts the outcome of the audit process, in terms of the report that is generated.
Therefore, it is of tantamount importance to ensure that these features are properly covered and drafted by the auditors in order to provide their conclusion that is backed by proper analysis and conclusion.
Why is Audit Evidence Considered Important?
Audit evidence can be considered as an increasingly important tool because of the reason that it is basically all the information that is gathered by the auditor in order to reach a conclusive opinion pertaining to organizations’ financial statements in addition to the internal control environment.
Audit evidence can also be considered critical because it is formed as a basis of evidence for banks and other investors pertaining to the existing viability of the organization.
Investors and other bankers are supposed to rely on auditor’s opinion it is not practical or feasible for them to scrutinize all the financial statements all at once to arrive at a given conclusion.
Therefore, it is increasingly rudimentary for them to use auditors’ statements in order to evaluate their decision and the way forward.
Audit evidence can broadly be categorized into two broad parts. They include internal sources of audit evidence and eternal sources of audit evidence.
Speaking of internal sources of audit evidence, it can be seen that they include the company’s documented processes, policy documents, accounting records, invoices, system logs, and reports.
In the same manner, it can further be seen that external sources of audit evidence cannot always include information from banks and other various external sources.
With both the given types of audit, it can be seen that it contributes positively towards the audit process, essentially because of the reason that it helps the auditors to create a designed and designated approach that can help them to execute the process, so that they are able to reliable comment on the different parameters in the financial statements.
In the same manner, it can also be seen that audit evidence is something that forms the backing of the auditor so that all the claims can be backed up with proper evidence.
The importance of audit evidence can further be gauged by the fact that it tends to help people walk through the process, in terms of enabling them to create a proper trajectory, so that the plan can be executed in a proper manner.
Furthermore, it can also be seen that it helps the auditors gauge truthfulness of the system, within which these transactions are carried out.
Audit Evidence is considered an integral part of the audit process, because it helps them to realize how different metrics within the scope of audit are duly fulfilled.
This includes audit assertions including appropriateness, completeness, accuracy, and completeness. It is highly important to ensure that these assertions are completed during the audit process so that all the aspects are covered, and there is no ambiguity regarding assertions being fulfilled or not.
Hence, audit evidence can be regarded as a part of the audit process that can help auditors to complete the audit in a faster, accurate, and a much-organized manner.
In the case of high-risk audits, the importance of audit evidence also increases proportionately because it helps them to conduct the audit in a proper manner.
An audit can be considered as one of the most intriguing highlights within an organizations’ fiscal year. As a matter of fact, it can further be seen that there are numerous different steps and techniques that can be utilized in order to approach this process.
Given the overall high-level dependency that exists pertaining to the audit report issued by the auditor, it can be seen that the process is quite an important one, primarily because of the reason that there are numerous strings attached to the audit process.
Not only it directly impacts stakeholders and shareholders, but it also helps the company by figuring out their strengths that need to be worked on in this regard.
Therefore, the importance of audit evidence mainly lies in the realms of ensuring that there is substantial information on which subsequent decisions can be based on when it comes to audit evidence.
In this regard, it is imperative that the audit report that is issued properly reflects groundwork that is covered during the audit process, so that the possibility of unprecedented outcomes can be minimized to a maximum.