|← Critical Thinking Assignment||About Employee →|
Auditing is performed by an auditor in an organization during a specified financial period that guides that organization. The main objective in requiring audit performance in an organization is to assess whether financial information provided by the organization conform to the Generally Accepted Accounting Principles (GAAP). Auditors are independent professionals in the field of Accounting and Auditing and an organization should ensure that their auditors have no other interests with the organization or its stakeholders. At the end of an auditing process an auditor is supposed to give an opinion based on the assessment done.
The auditor is supposed to make assertions and assurance in addition to the client's assertion. There is a difference between review and audit of financial information because of the level of assurance. An audit provides a high level of assurance on the financial statements compared to the review of financial statements. In addition, with an audit the auditor is required to provide a high level of evidence to support assurance of the report while the less evidence is required in a review. An audit is quite more comprehensive in scope than the reviews thus providing enough information required by the users of financial statements in making decisions.
The audit is prepared and conducted annually while the review is conducted quarterly or mostly when need be. Ernst & Whinney failure to conduct an audit and opt for a review therefore implied the above differences. It is clear that the review was not comprehensive to provide enough information about ZZZZ Best Company financial statements. It can be argued that Ernst & Whinney did want to get into deeper details of ZZZZ Best Company because of the many complications it was associated with (Knapp 2008).
While performing an audit, an auditor relies heavily on information provided by a third-party, that is, the client's representatives. Usually a third-party may be an internal auditor, senior accountant or any other employee of the organization. Management assertions will therefore help an auditor in carrying out the audit and form an opinion. The procedures provided in ZZZZ Best are used as audit evidence and should provide an auditor with reasonable assurance that financial statements are not materially misstated. Management assertions may be faced by limitations mainly caused by the client.
Beasley and Roger (1997) notes that limitations to the procedures for management assertion include: inability to quantify some information, dishonest among the third parties, use of much estimation in financial statements and exclusion of restoration sites that may be or would have been more appropriate to visit in regard to the audit. In addition, the visitation of restoration sites may have been biased. It is also difficult for an auditor to decide on which tests are appropriate or not to assess the risk associated with such information or procedures.
In auditing there is high audit risk associated with the possibility that an auditor's conclusion may be improper due to insufficient evidence, inadequate auditing, fraud or omissions. Audit risk is impacted by other factors such as time frame, systems to detect errors, an auditor's inability to assess records and complexity of the audit among others. Therefore, Congress George Greenspan report that one method used in the audit of the insurance restoration contracts was total verification that ZZZZ Best received payment could lead to improper audit conclusion due to all or any of the above factors.
An organization can choose to change an auditor, or the current auditor may choose to resign from offering audit services to a certain organization. The old auditor, predecessor and the new auditor, successor should communicate to each other. The purpose of the communication is to confirm the acceptance of engagement by the successor to the predecessor. The successor auditor is responsible for initiating communication orally or written. The successor auditor should obtain information about client's honesty, internal control and variance in accounting policies.
The successor auditor should enquire about the management honesty and reliability to provide relevant and true information, management illegal acts and other management concerns. The successor should know about the strengths and weaknesses of the internal control systems. The predecessor might have quarreled and disagreed with the management and thus it is essential for the successor auditor to know the reason behind the change of an auditor. Communication with the predecessor auditor may be done before or after the engagement of the successor auditor. It is more advisable for the successor to do it before so that he or she can make decisions as to whether to accept the engagement or not.
The improper signature by Ernst & Whinney limited the scope of ZZZZ Best audit because it shows that the auditor was not independent in carrying out the audit. The client may opt to disclose certain information from the auditor because such information may be untrue, may damage the image of the client or quite confidential for the client. Therefore, at these circumstances decisions on audit plan may be affected because the auditor has been blocked to access critical information useful for the audit (Knechel and Ballou 2007).
When an auditor is not independent because of client's involvement, the audit opinion will in addition be affected. This is because the auditor did not perform the audit as required and hence the opinion he could have given while independent is not the same as when influenced by the client. Professional standards do not provide for requirements regarding pre-audit but post year-end press releases. However, it is important for the clients to permit auditors to review the release before posting it in the press.