Running Head: Auditing and Assurance

Auditing and Assurance

NAME OF THE STUDENT

PROFESSOR

UNIVERSITY
 Auditing and Assurance 2

Table of Contents
Introduction ..................................................................................................................................... 3
Main body ....................................................................................................................................... 3
Balance score card by PWC............................................................................................................ 8
Conclusion ...................................................................................................................................... 9
References ..................................................................................................................................... 11
 Auditing and Assurance 3

Introduction

Audit for a business organization is always essential from different perspectives, as it not
only helps in determining effective financial plans and frameworks but also enables the
management to resolve issues related to fraud and financial fallacies. The objective of the study
is to focus on issues related to scandal in Enron in the year 2001 in order to critically analyze the
benefits as well as loopholes of the audit process in Australia. This study has assessed the
performance of the auditing process in a critical manner in light of the ethical standards and
quality. It also needs to progress with the analytical overuse of the quality issues In line with the
audit form conflicts interests, ethical concerns, necessity of employee experiences and the social
context of auditing model. Furthermore, it also needs to analyses and understands the benefits of
technology in the auditing process along with the contribution in the contemporary definition of
ethical codes in auditing. Eventually, this study analysis the balanced scorecard published by
PWC considering all the existing ethical standards of ASIC.

Main body

Issues

In 2001, when Enron scandals highlighted, raised many questions on the audit practices.
Audit becomes an important concept in the corporate sector. However, in the past years, the
quality of audit highly gets affected. There are many organizations which are facing issues
related to audit and its practice. There are many concerns associated with audit frauds. The main
issues related to the current auditing model. It makes depended employees on the organizations.
Due to such factors, the audit firms failed to perform their duties effectively. There is a number
of issues related to the audit. The main issue for the audit firm is maintained ethical practices and
provide quality in audit

Quality Issues

Quality is a major concern for many organizations. The Enron Company found guilty in
2001 for speculating accounting loopholes and made especial entries for hiding the poor
financial conditions of the company. The executive's committee also misleads Board of directors
& audit committee. The audit committee does not have technical knowledge so they could not
 Auditing and Assurance 4

raise the question on the special entries of the made by the company. The employees are unable
to find loopholes in the present practices. The similar quality issues also face by the many
Australian Companies in its audit practices. The Australian Securities and Investments
Commission will also increase the frequency of the audit inspections. In addition, the ASIC also
focus on publishing a broader range of quality measures. These quality Supplements help to
inspect the results of the audit company. Such steps have taken by the regulatory bodies so it can
prevent Australia from the Enron Style collapse.

Audit firm conflicts interest

The former ASIC chairman warned that escalating the conflicts of interest can lead the
collapse of the business. Due to the poor audit standards of “Big Four” can lead to a problem for
the business corporation. In order to improve the quality in the audit firm, the ASIC wants to set
special inquiry for the audit consulting firms (Ryan, 2019). The employees who joined the audit
firm like “KPMG, PWC, E&Y, and Deloitte” have less interest in the auditing firm. They want
to move into the consulting firm where big money can make as quickly as possible. In addition,
due to lesser competition in the market, audit quality also gets impacted. At the worldwide level,
there are generally four companies available “KPMG, PWC, E&Y and Deloitte” for conducting
the audit in larger corporations. So due to the less competition, the quality of audit can hamper.
In the current guidelines of the ASIC, the authority asked to audit companies to create a separate
unit for their audit practices.

Ethical issues of auditing

Another issue which impact of the audit quality is unethical practices. An organization
like Big four not also conducted audit but also sell other services. For example, KPMG
Company also provides tax consulting along with audit practices. Such type of engagement
questioned on the independency of the audit firm. The employee of the company does not raise
any further question of information received by them (Tadros & Mclory, 2019). The report is
presented and certified by the auditor on the basis of information obtained or provided by the
organization only. The audit company worked as advocated rather than inspectors. In addition,
the fees of the audit firm are also decided by the Client Company rather than independent bodies.
Due to such practices relationship between client and audit becomes employees and employers.
 Auditing and Assurance 5

Lack of employee’s experience

The lack of employee’s skill impacted on delivering high quality. For example in the
case of Enron, where audit committees failed to raise cross-questions on the executive
committee. The similar situation found in the many other audit firms where the company due to
technical knowledge and lack of experience failed to find the loopholes in the accounting
information. Due to these the debt and losses which create by the Enron did not disclose (Sikka,
Filling, & Liew, 2009). In addition, there are few audit companies available which provide the
services of effective auditing. In the present scenario, the big four are only organizations which
conduct an audit at the international level. It creates a monopoly in the market which impacts on
audit performance.

The Auditing model in a social context

The quality of the audit gets hamper by the policies and social interactions. The audit
model of the present days becomes more labor-intensive. For saving the cost of audit firms pay
burden on their juniors and sub juniors employees. In the competitive market, where the
organization performs its duties within time leads to many problems. Employees of audit firms
neglect certain areas and obtain information inadequately manner. Due to such social behavior
and factors, the audit firms failed to perform their duties effectively.

Use of technology to improve audit quality

Implementing and following up proper audit plan has always remained an issue for most
of the auditors until a few years back. Most of the audit outcomes are found witnessing
difficulties with the correction requirements due to a lack of focus in resolving the contact cities
followed by lack of realization about the efficient implementation of promised actions. Most of
the proposed actions used to be interrupted due to the circumstantial changes or massive lack of
resources in the follow-up process. This is the reason why most of the auditors and the business
organizations have initiated acknowledging technological aspirations and helps to determine
proper audit planning and the most efficient audit follow-up process. It has been observed that
the rapid technological advancements have improved the quality of the audit process until the
follow-up phase with the effective inclusion of Data Analytics, Artificial Intelligence or AI and
Robotic Process Automation.
 Auditing and Assurance 6

Technology has already established a strong presence in different business industries by

providing sincere audit implementation benefits. The acknowledgment of the effective audit
implementation process through technological aspirations has encouraged the auditors to rely on
an artificial intelligence system that helps in describing computer systems with less possibility of
errors. It has also enabled the business audit purposes to automatically generate codes for
accounting entries. Furthermore, the implementation of Technology in audit process also helps in
improving measures for fraud detection by enabling sophisticated machine based-learning
models (ey.com, 2019). In addition to it, technological aspirations through machine learning
tools also strongly encourage humans in analyzing large-scale contract details related to leases
and agreements in a shorter time span in comparison to the traditional processes of auditing.

The application of Artificial Intelligence tools in this process also helps the auditors to extract
large-scale information regarding the contracts by using pre-selected criteria in a more detailed
and analytical manner with higher levels of precision than the traditional human follow-up
process. It has been reported by the Public Company Accounting Oversight Board that the global
auditing firms are presently consuming about $5 billion every year to determine as much
possible flawless audit reports (Forbes, 2019). The Data Visualisation Technology enhances the
efficiency of audit processes based on a simple premise of graphical representation for the
reviewers to obtain and understand information with the help of bubble charts, heat maps,
interactive graphs, and images. The implementation of Robotic Process Automation in audit
allows the auditors to use software for the purpose of interpreting transactions, manipulating
data, and followed by automatic communication. This is the reason why this technology is
explicitly implemented and praised in tax and advisory services.

Issues of independency

The current audit model does not focus on creating independency of auditors. The
auditors are bound by the company for their fees and services. Due to such practice, there is a
relationship developed between the organization and its auditors (Sikka, P2009). In addition, the
auditors also help to corporate more making fake entries like in the case of Enron. Thus, it leads
to major issues of quality in the audit. If the independency of auditors is not free then it can lead
to many quality and trust issues for the company.
 Auditing and Assurance 7

Contribution Restructured Code of Ethics

This code of ethics helps to company for implementing accounting practices effectively.
The ethical code emphasis on leading transparency for accounting professionals. With the help of
the code of ethics, accounting practices become effective for a professional accountant (IFAC,
2019). The new conceptual framework help to the company to insure with five basic
fundamentals of the audit system i.e. integrity, objectivity, professional due care, confidentiality,
and professional behavior. Before making any type of engagements with the auditor the
company needs to ensure that all the five fundamentals need to be fulfilled. In addition, the client
company also needs to take effective action if it raises any doubt independency of auditors.
Following are the ways in which the code of ethics can provide better assistance.

 The environment in which the professional accountant operates faced a lot of issues and
threats. These threats can create a problem in fulfilling the fundamental principles of the
company. Therefore, the code of ethics helps to address this threat effectively. The code
assists to a professional accountant to meet their responsibility which can act in the
favored public (Jules, 2019).
 The second significant contribution is to focus on the obliged for professional behavior.
All the professional accountant also need to collect information by themselves. The
principle of objectivity imposes that all the information must collect bias and free form of
self-interest. The accountant does not require performing any action which can impact on
its professional behavior.
 The code also emphasis to perform all the action on the basis of their knowledge and
skills for making a sound judgment. For this, accountant professional need to maintained
continuous awareness and understanding of relevant technical knowledge (IESBA, 2019).
Due to lack of appropriate knowledge and information the accountant failed to rise cross-
question on the balance sheet.

In addition, the restructured code of ethics also involved the following points.

Strengthened PAIB Provisions

PAIBs, include small and medium-sized firms which play an important role in the
financial reporting supply chain and maintaining effective governance. Hence, it is in public
 Auditing and Assurance 8

interest for the implement the PAIBs provision in the codes. The revised changes make focus on
that while preparing the misleading information by firm or individuals than Pas need to
disassociate themselves from misleading information

Professional judgment

In relation to professional judgment, the code emphasis on evaluating the potential threats
that impact financial decisions. Therefore, the PAs need to consider that facts and information
which help to obtain understanding the services and interest of the relationship. The PAs
professional skills and expertise are enough for meeting the problems.

As mentioned in the above section there are different types of factors that impact on the
audit quality. The restructured of the code of ethics to have a significant impact on improve
audit quality. The new code of ethics helps to improve the quality of independent auditor in the
company. As mentioned in the above section how the audit company sells their additional
services to the client company and its impact on the firm independency. In the new restructured
code of ethics, the international; bodies separate develop a section for the independency of
auditors. Due to the new compliance and conceptual framework, the quality of the audit
improves.

Balance scorecard by PWC

The audit is considered to be a critical component playing important roles within a well-
functioning capital market. It helps a business organization to focus on the measures of audit
quality beyond the organizational individual ASIC audit inspection results including restatement
rate, internal inspection findings, and financial statement adjustments. The balanced scorecard
published by the management of PWC has reflected many factors contributing towards the
quality audit process along with the opportunities of development in the issue related to audit
quality debate. The audit quality balanced scorecard of PWC has been prepared with multiple
factors including ASIC audit inspection findings, global audit inspection of PWC, non-audit
services and independence, restatements, and adjustments.

The factors of ASIC audit inspection findings reveal the most recent report determining
that 12% of the total area of audit under ASIC had been reviewed properly in most of the PWC
 Auditing and Assurance 9

files. Most of the files were free from material misstatement comparing 24% of the form across
the entire industry and 20% of the largest Australian business firms. like any other Australian
public listed companies, PWC Australia was not there to get a rating as non-compliant as per
PWC guidelines and the standards of auditing between the years of 2016 and 2018 (pwc.com.au,
2019). It led them to get involved with inappropriate opinion and lack of improvement in audit
performance and documentation process. These findings encourage them to form quality
improvement planning as key measurement. The factors of non-audit services and independence
in the PWC solely aligned the Corporations Act that prohibits the intervention of external
auditors to provide varied services and performance for the clients. The factors of these
statements referred to a situation, where internal inspectors of PWC OR ASIC identified the
audit findings of the public companies between the years 2016-2018. It did not indicate the
relevance of financial statements to restate the market. It large compared with the 4% of the
average of the entire industry on the basis of the financial reporting surveillance program of
ASIC dedicated to public companies. The factors of adjustments in the balanced scorecard
published by PWC referred to the required adjustments or disclosure enhancements and
clarifications that a business organization may need once they publish their financial statements.
It has been identified as one of the major parts of the quality audit process that eventually
allowed the management of PWC to identify six average adjustments to their financial
statements in the year 2008.

Conclusion

In conclusion, auditing plays a pivotal role in the financial planning and structure for any
business organization, with the help of which they can overcome any fraudulent attitude of
financial issues in the long run. With the prior assessment of the case study of Enron, this study
has shed light on the quality concerns related to the auditing process Along with the necessity of
maintaining financial standards and ethical codes of an industry. Several factors starting from the
lack of quality standards maintenance and lack of employee experience until the social context in
the process of auditing has been discussed in this study elaborative manner. In this regard,
technological intervention has also been suggested considering the present requirements auditing
and concerns of the business organizations to emphasize on the issues of independence and the
requirement of technological contribution in redefining the ethical codes. Eventually, the
 Auditing and Assurance 10

assessment of quality audit in the balanced scorecard of PWC in this context let this study to a
better understanding of the factors required for effective auditing process and follow-up.
 Auditing and Assurance 11

References

Forbes. (2019). How Advanced Technologies May Improve Audit Quality. Retrieved from
https://www.forbes.com/sites/insights-kpmg/2019/03/04/how-advanced-technologies-
may-improve-audit-quality/#340e260e56320

How artificial intelligence will transform the audit. (2019). Retrieved 16 September 2019, from
https://www.ey.com/en_gl/assurance/how-artificial-intelligence-will-transform-the-audit

IESBA . (2019). Revised Code of Ethics 16 September 2019, from: https://www.ifac.org/global-

knowledge-gateway/ethics/discussion/how-new-ethics-code-will-affect-your-standards

IFAC (2019). Revised Code of Ethics - Completed. Retrieved 16 September 2019, from:
https://www.ethicsboard.org/projects/revised-code-ethics-completed

Jules, D. (2019). The International Code of Ethics for Professional Accountants: Key Areas of
Focus for SMEs and SMPs Retrieved 16 September 2019, from:
https://www.ifac.org/global-knowledge-gateway/ethics/discussion/international-code-
ethics-professional-accountants-key

PwC releases Australia’s first balanced scorecard on audit quality. (2019). Retrieved from
https://www.pwc.com.au/press-room/2019/pwc-releases-balanced-scorecard.html

Ryan, P (2019). Audit firms' conflicts of interest could spark Enron-style corporate collapse,
former ASIC boss warns. Retrieved 16 September 2019, from:
https://www.abc.net.au/news/2019-08-06/audit-firm-failures-could-spark-enron-style-
collapse-medcraft/11388164

Sikka, P. (2009). Financial crisis and the silence of the auditors. Accounting, Organizations and
Society, Vol. 34(6-7), pp. 868-873.

Sikka, P., Filling, S.,Liew, P. (2009) "The audit crunch: reforming auditing", Managerial
Auditing Journal, Vol. 24 No.2, pp.135 – 155.
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Tadros , E & Mclory, T. (2019). ASIC to name and shame big four consulting firms over audit
quality.Retrieved 16 September 2019, from: https://www.afr.com/politics/federal/asic-to-
name-and-shame-big-four-consulting-firms-over-audit-quality-20190806-p52efr