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The Various Attributes of Auditing About Financial Fraud
Introduction
Auditor is an independent examiner of financial expressions in an enterprise. Auditing, therefore, involves careful examination of a firms financial records to ascertain their accuracy. An auditor carefully studies the enterprises financial reports and summarizes their findings for the persons who have requested the audit. These are persons such as the shareholders, investors, or the companys management team. Auditors should be neutral and should have no interest in the affairs of the business enterprise. For an audit to be effective, interference from third parties and other stakeholders should be avoided. Such third parties should not be allowed to influence the work of the auditor (McKenna 2011)
An auditor should assure the stakeholders that the financial statements are free of errors and any form of manipulation. Auditing can be done on request from either the stakeholders or the shareholders. Auditing plays a vital role in ensuring accountability on the part of both the staff and the management of the business enterprise. It also seeks to identify possible errors and misstatements in the financial accounts (Garstone 2011). Auditors should be in a position to detect any fraud in the statements prepared by the business. They should try and analyze financial statements and their implications on the business and the investors. This is because fraud detection is a difficult task and calls for specialized expertise.
This paper focuses more on the state of affairs in the United Kingdom. The increasing rates of fraud in this country are alarming and have prompted the government to put in place measures to help and save the situation. Audit firms have been charged with the responsibility of scrutinizing the financial reports of public companies to try and detect any fraud (Stanford 2010). This goes a long way in protecting the interests of the shareholders and those who have invested in the company. The report tabled by the auditor to some extent determines the future of the company.
Financial Frauds and Auditing
Fraud is the misappropriation and manipulation of financial figures by an enterprise to make selfish gains. Reports from reliable studies have shown that companies lose up to five percent of their total revenues from fraud. This has forced governments and businesses to resort to measures aimed at protecting the interests of the shareholders in such companies. Most governments require that public companies prepare financial statements reflecting their general performance in the previous financial year (Cutting 2008). These statements are then carefully assessed by reputable auditing firms to shield shareholders from financial fraud by the companys management.
Auditing also seeks to establish a companys financial position and cash flow as well as evaluate the balance sheet to put into focus both the assets and liabilities of the company (Mautz & Sharaf 1961). The auditors seek to establish consistency in the financial statements and form an opinion on whether or not correct accounting procedures have been followed by the company. The auditors should also report on any legal violations by the company being investigated. Auditing can be either internal or external. Internal auditing occurs when the company requests for the audit while external auditing is initiated by a force external to the company like the government.
Roles of Auditors
An auditor is charged with the responsibility of scrutinizing a companys financial reports and forming an opinion about them. The auditor should systematically go about the process. This involves the use of a well-structured plan. Auditing should involve the evaluation of evidence. The auditor will thus scrutinize and assess the reliability of the documented evidence and seek to establish consistency in the statements. This is in an attempt to establish whether the records are genuine or not. The auditor also tries to establish the legality of economic activities and events in the company (Forester 2012). The government of the United Kingdom seeks to restore accountability and responsibility in the companies. This will encourage people to invest in these companies without fear of financial fraud.
The auditor is also charged with the responsibility of reporting their findings to the shareholders and the directors of the company. The auditor ascertains the legality of financial assumptions and criteria that have been established in the company and tests the physical evidence through inquiries and observations (Jefferson & Smith 2009). The report on the findings is then tabled before the board of directors and the shareholders during their annual general meetings. This seeks to assure the shareholders that their company is being properly run. The government of the United Kingdom has used this criterion over the years to discourage dishonest practices by the management of the companies.
Upon assessing the reports and evidence tabled by the company, the auditor then forms an opinion showing his or her take in the matter. The goals of an audit include presenting the results to the end-users, usually the government and the shareholders. This will involve stating whether the financial results are accurate (Baker 2005). The auditor clarifies whether the reports should be adopted or not. This keeps the management team on their toes to ensure that the information on their statements corresponds to the real financial status of the company. The United Kingdoms government has been able to save shareholders a lot of money that would otherwise have been misappropriated by the companys management.
The auditor should also check on possible violations of the companys laws and constitution. The provisions specified in the companys constitution should be followed in the letter to achieve the initial mandate that the company had been charged with (Bob 2009). Adhering to these laws will be beneficial to all stakeholders given that the regulations are arrived at through a consensus. As a result, the authorities in this country have been able to crack down on dishonest managers who may take advantage of their positions to defraud the investors.
The auditor should also make a statement of circumstance if he or she decides to quit the auditing process. This will ensure a smooth transition as the auditor exits and paves way for the next one. This seeks to notify the new auditor of the progress that has been made by the previous auditor. Any findings and conclusions made by the previous auditor should also be passed on (Dunn 1996). The United Kingdom has implemented these policies to keep the auditing process on track without disruptions that may slow the process.
Principles of Auditing
There are several principles that guide the auditing process. According to Kokenes (2009), integrity and honesty are two of the most important principles of auditing. The person conducting the audit should be in a position to disclose their findings to the interested parties without discrimination (Melbourne 2011). Auditors should be straightforward and should seek to report the truth of the matter and not what the interested parties want (Wallage 2009). The United Kingdom has sought the services of competent auditing firms to be able to establish the real financial situation of the companies. It is only through honesty that an audit can be effective.
Professionalism must also be maintained by the auditors. The auditor should act in a manner that promotes the competence of the profession (Smith 2008). The auditor should be an ambassador of the profession and exhibit its true spirit. The government of the United Kingdom has put in place strict measures to ensure that auditors act with utmost professionalism. Firms and individuals who do not comply with these measures are penalized which can even result in revoking their license to practice by the government.
Confidentiality should also be maintained by auditors. As an act of professionalism, the auditors must keep the information about their clients and also information acquired in the course of their service confidential (Morlan 2009). Information should only be let out at the right time and also to the right individuals and authorities. The United Kingdom has encouraged confidentiality to ensure that the whole auditing process is helpful and produces the expected outcomes. This also ensures that potentially damaging information does not fall into the wrong hands (Muehlhausen 2008).
Objectivity should also be maintained when conducting an audit. This means that the auditors should be professional in their undertaking and should be fair. The auditor should desist from biases or from favoring any party involved (Kokenes 2009). Auditing involves scrutinizing financial reports and forming an opinion about them after careful consideration (Perker 2008). In the United Kingdom, auditing firms have always been encouraged to be fair in their undertaking to prevent fraud and penalize those perpetuating it.
Auditing should also conform to technical standards. Such professional services should be offered in line with the relevant professional and technical standards. This implies that an auditor should follow all the guidelines governing their practice. The United Kingdom government has emphasized that auditing firms should follow both professional and technical standards in their practice (Knight 2000). This goes a long way in preventing possible crisis and legal battles that would be damaging to both the auditing firm and the company whose statements are being audited.
Auditing should also be done in line with accounting principles. Professional ethics should also be maintained while conducting an audit. The principles have been put in place to ensure accountability among the auditing community (Melbourne 2011). The auditors should be able to own up to their work and defend themselves in case problems arise (Cohen 2006). The United Kingdom has always encouraged auditors to point out any cases of fraud or misrepresentation of information to avoid being caught up in a crisis as a result of concealing the truth.
Factors Influencing the Development of Auditing Policies
Auditing can be influenced by many factors. To start with auditing can be a result of a government directive on all companies. Increasing rates of fraud have prompted many governments to move in to try and reverse the situation (Hughes 2009). The turn of events has not been any different in the United Kingdom. The government has initiated policies that require public companies to be audited every financial year to cushion the shareholders from risks such as financial fraud. Information emanating from these audit reports is scrutinized and appropriate measures are put in place.
It may also be a companys policy that auditing is carried out to verify the financial statements accuracy and authenticity. This may come as a directive from the shareholders or the directors (Garstone 2011). It is important to note that the directors are also concerned with the running of the public companies since they are the major shareholders. In the United Kingdom, companies have resorted to auditing their financial statements to cushion themselves from fraudulent management practices.
Complaints arising from shareholders can also lead to the initiation of the auditing process (Muehlhausen 2008). Shareholders can report the company to the authorities based on suspicions of possible fraudulent activities (Jones 1996). Since the shareholders are the actual owners of the company, their concerns must be looked into. United Kingdom companies have not been spared either (Johnson 1996). Shareholders who are dissatisfied with the running of the company may initiate the auditing of financial reports and statements.
Professional Skills and Competencies Required of an Accountant
For one to conduct an audit, they must be adequately trained. The auditors should have the expertise to conduct a detailed investigation of the firms financial statements. This training should include relevant bookkeeping procedures. Auditors should also have the skills and ability to detect errors and inconsistencies in financial reports. This enables them to easily identify instances of fraud (Lindberg & Beck 2004). The United Kingdom has put in place measures to ensure that auditors are well trained. This has mostly been facilitated through the establishment of reputable schools to offer the courses.
The auditor should also be able to act or operate professionally. This includes upholding values such as independence. The auditor should be able to resist any internal or external influence (Stanford 2010). They should put into consideration all pieces of evidence that may be required. They should also be able to identify instances where fraud has occurred. The United Kingdom has been at the forefront in trying to advocate for professionalism.
It is however important to note that incompetent auditors may collude with dishonest officials in the companies to conceal cases of fraud (Johnson 1994). This means that despite the tight measures being put in place to try and reduce cases of fraud, financial mismanagement is still prevalent in companies. The auditors may also collude with the shareholders to portray the management in a bad light. In the United Kingdom, such cases have become common thus inhibiting the fight against financial fraud.
Independent Approaches by Auditors
The term auditors independence can be used to describe situations where parties involved in the audit do not interfere with the process (Cohen 2006). It also involves the auditors ability to overcome temptations to collude with any party which may alter the outcome of the audit. The objective of the auditor is to ensure that the financial reports and statements presented by the company are accurate. This enables the auditor to be fair in his or her opinion.
An auditor should be given the chance to select their strategies while conducting an audit. Real independence is important in auditing rather than perceived independence (Jones 1996). Auditors should seek the truth even when put in compromising positions by the directors, shareholders, or even the management. The United Kingdoms government has put in place laws that seek to protect auditors from manipulation by the interested parties.
Auditors independence is however a tricky issue since the auditor may feel intimidated by their clients (Perker 2008). They might face the risk of losing their jobs. The auditors may also face threats that may cripple their judgment. The United Kingdoms government has put such issues into consideration in trying to protect the plight of auditors.
Conclusion
In this paper, the researcher looked at various attributes of auditing about financial fraud. The researcher took as their case study financial auditing in the United Kingdom. The paper found that auditing is one of the most effective measures to reduce fraud in companies. It is also a fact beyond doubt that auditors play a major role in the success of a company and the countrys economy at large (Stanford 2010). The United Kingdoms government uses auditing to help and stop fraud in companies.
It is also important to note that auditing is faced with numerous challenges. It is very difficult to detect financial fraud since it is committed by persons who are also accounting experts (Lozano 2006). Governments around the world should follow the example of the United Kingdom to empower and also shield auditors from harassment to make them execute their duties without fear of intimidation.
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