ethics in audit

8/6/2019 Ethics in Audit

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Defining Audit The Institute of Chartered Accountants of India (ICAI) has

defined audit as, "...The independent examination of anyentity, whether profit oriented or not and irrespective of itssize or legal form, when such an examination is conductedwith a view to expressing an opinion thereon. Auditing isthe process by which a competent independent personobjectively obtains and evaluates evidence regardingassertions about an economic activity or event for thepurpose of forming an opinion about and reporting on thedegree to which the assertion conforms to an identical setof standards.


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There are three types of auditors:Internal Auditors

Internal auditors are employed by the organization forwhich they perform audits. Their responsibilities vary and

may include financial statement audits, compliance auditsand operational audits. They may assist the externalauditors in completing the financial statement audit orperform audits for use by management within the entity.

An organization may have a small or very large internalaudit staff. They cannot be independent as long as theemployeremployee relationship exists.


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There are three types of auditors:Internal Auditors

Internal auditors are employed by the organization forwhich they perform audits. Their responsibilities vary and

may include financial statement audits, compliance auditsand operational audits. They may assist the externalauditors in completing the financial statement audit orperform audits for use by management within the entity.

An organization may have a small or very large internalaudit staff. They cannot be independent as long as theemployeremployee relationship exists.


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Independent auditors are usually referred to as CPA(Certified Public Accountants) firms. The opinion of an

independent auditor about financial statements makesthe statements more credible to such users asinvestors, bankers, labour unions, governmentagencies and the general public.

Independent Auditors


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Government auditors work in various local, state and federalor Central government agencies performing financial,

compliance and operational audits. Local and stategovernments, for example, employ auditors to verify thatbusinesses collect and remit sales taxes and excise dutiesas required by law.

Government Auditors


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The duties of an auditor are defined under section 227 (1A) ofthe Companies Act 1956.

It says that an auditor can enquire

1. whether loans and advances made by the company on thebasis of security have been properly secured ;

2. whether transactions of the company which are represented

merely by book entries are not prejudicial to the interests ofthe company ;

DUTIES OF AN AUDITOR


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3. where the company is not an investment company withinthe meaning of Section 372 or a banking company, whetherso much of the assets of the company as consist of shares,debentures and other securities have been sold at a priceless than that at which they were purchased by thecompany ;

4. whether loans and advances made by the company have

been shown as deposits ; and5. whether personal expenses have been charged to revenue

account.

DUTIES OF AN AUDITOR (contd.)


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As per the Standard Auditing Practices (2), the auditor

Is responsible for forming and expressing his opinion on the

financial statements. He assesses the reliability andsufficiency of the information contained in the underlyingaccounting records and other source data by making astudy and evaluation of accounting systems and internalcontrols.

Determines whether the relevant information is properlydisclosed in the financial statements by comparing thefinancial statements with the underlying accounting recordsand other source data to see whether they properly

summarize the transactions and events recorded.

RESPONSIBILITIES OF AUDITORS


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Has to ensure that his work involves exercise of judgment,as for example, in deciding the extent of audit procedures

and in assessing the reasonableness of the judgments andestimates made by the management in preparing thefinancial statements.

Is not expected to perform duties which fall outside thescope of his competence. For example, the professionalskill required of an auditor does not include that of atechnical expert for determining physical condition ofcertain assets.

RESPONSIBILITIES OF AUDITORS (contd.)


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The Enron debacle

In May 2001, Arthur Andersen connived with its client,

Sunbeam Corporation for financial fraud and fudging ofaccounts.

In June 2001, an American Superior Court fined ArthurAndersen towards damages to shareholders for certifyingfalse statements of accounts of Waste Management Inc.Three of Arthur Andersen's partners were fined between $30,000-50,000 each and banned from auditing work for35years.

AUDIT FAILURES LEADINGTO CORPORATE SCAMS


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Deloitte & Touche also landed in trouble in 2002 for applying avaluation model for fast-food franchisees, which misled bankersinto extending credit to unworthy clients and incurring a colossal

bad debt of $ 10 billion.

In 1999, another reputed US based accounting firm, Ernst &Young paid $ 335 million to a client to settle a lawsuit related toaccounting problems.

Another American auditing firm, KPMG attracted censure fromSEC for engaging in improper professional practice. Whileserving as an audit firm for Short Term Investment Trust, it alsomade substantial investments in it. Its money-market account,opened in May 2000 with an initial deposit of $ 25 million,constituted 15 of the fund's net assets at one point of time.

AUDIT FAILURES LEADINGTO CORPORATE SCAMS(Contd.)


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Sarbanes Oxley Act (SOX) was passed by the US

Congress in 2002 with an aim to protecting investors fromthe fraudulent accounting practices of corporations.

Establishment of Public Company Accounting OversightBoard (PCAOB)

THE US LAWGOVERNING AUDITORSRESPONSIBILITIES


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Till date, four committees played a vital role in framing theresponsibilities of the auditors and the audit committees:the R.D. Joshi Committee, the Kumar Mangalam BirlaCommittee, the Naryana Murthy Committee and the NareshChandra Committee. All these committees'recommendations focused mainly on the following aspectsof auditing: Formation of the audit committee, theirresponsibilities, rotation of auditors, prohibition of non auditservices and the transparency of financial statement.

INDIAN ATTEMPTS TO PREVENT FRADULUENTAUDITING PRACTICES


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An audit committee is a committee made up of independentdirectors. It is responsible for the appointment, fixing of fees

and oversight of the work of independent auditors. Thecommittee is also responsible for establishing andreviewing the procedures for the receipt, treatment ofaccounts, internal control and audit complaints

Audit Committee


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The it ittee, r i t the f re- enti ned f rittees, should review the following infor tion.

inancial statementsanddraft audit reports, including

uarterl /half- earl information; anagement discussionandanal sisof financial conditionsand the resultsofoperations;

eport relating tocompliancewith lawsand riskmanagement ;

anagement letters/lettersof internal control weakness issuedstatutor and internal auditors; and

ecordsof relatedpay transactions.

Audit Committee (contd.)


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These committees have also recommended the mandatory

rotation of lead audit partner and partner reviewing auditevery five years.

Audit Partner Rotation


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Auditors are prohibited from providing non-audit servicesconcurrently with audit review services. Non-audit services

include book-keeping, financial and information systemdesign, internal audit, HRD services, investment advice,investment banking services, legal advice, appraisal,valuation and actuarial services.

Prohibition of Non-Audit Services


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Full disclosures of accounts and decisions of managementinvolving the funds of the company to all its stakeholders is

a desiderata of good corporate culture. The R.D. JoshiCommittee has suggested the imposition of responsibilityon auditors to check and, report diversion, under utilizationor misappropriation of funds by companies. The NareshChandra Committee has recommended that the auditors

should disclose implications of contingent liabilities so thatthe investors and shareholders have a clear picture ofthese liabilities.

Disclosures


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Under section 539 of the Companies Act 1956, if an auditoris found to be involved in unethical practices, he will be

punishable with imprisonment for a term which may extendto seven years and shall also be liable to a fine.

Under Section 21 of the Chartered Accountants Act, it issaid that the auditor will be prevented from exercising hisduty and his license will be cancelled by ICAI.

Penalties

ethics in audit

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