Auditor Independence and Audit Quality

Questions: 1.The International Accounting Standards Board (IASB) recently issued Exposure Draft IFRS Practice Statement Application of Materiality to Financial Statements to 2.Provide guidance to assist management when applying the concept of materiality to general purpose financial statements? 2.Two main issues for auditors going forward concern Big Data and End-to-End Software Integration? 3.From transformative technology to complex regulation to unprecedented geopolitical risk, an increasing tide of disruptive trends are demanding substantive change to the global role of audit committees? Answers: 1. Application of Materiality to Financial Statements AASB 1031 defines the term Material, it states that omission or misstatement of items which could by individually or by collectively can influence the economic decision of the users of financial statements, and it depends on the size and nature of the statement which was either omitted during preparation of financial statement or was misstated (Altiero, Kang Peecher, 2013). This standard prescribes the changes to be made in the financial statements which were omitted or misstated at the time of its preparation. Figure 1 : Method of Analyzing Materiality (Source: Cameron, 2014) Features of Materiality Dependency: It can directly correlateto the volume and nature of the business. If the volume of business is large, then there is apossibility that the financial statement may be materially misstated and vice versa. This part generally takes care of the application of the concept of materiality for the financial statements. Vital Tool for making adecision: Preparation of Financial Statements requires some decision, and these decisions are assisted through materiality concept. It helps the users of financial information to take better decisions and to best of their interest. It improves the value of information (EcclesKrzus, 2014). This standard ensures and facilitates both internal and external users of an organisation. Safeguards Complete and Fair Statements: Application of this standard ensures that statements which were necessary to be included in the financial statements have been included or havent been omitted. Provides Guidance: It guides the accountants on theacceptable limit of errors and omissions in the Financial Statements. There is always a minimal risk which is always there in the financial statements (Singh Peters, 2015). A material misstatement or omission can lead the investor to take a wrong decision or not in best of his interest. The manner in which concept of materiality is applied in financial statements The concept of materiality is majorly applied while taking adecision relating to operations of various divisions of theorganisation. The determining factor for ascertaining the applicability of materiality is the amount and nature of therelative item. In case the adjustment exists after the determination of carrying theamount of item, materiality concept is applied in accordance with the amount. The value of the item plays apivotal role in ascertaining the nature of adjustment or correction. Sometimes, situations arise in which concept of materiality is applied in accordance with the nature of theitem (EcclesKrzus, 2014). The same is done in thecase when limited resources are available for allocation to various stakeholders because in this kind of situation materiality is applied in accordance with the nature of theparticular item. Another situation, in which concept is applied in thesame manner is when management has to take adecision relating to operating activities of the organisa tion. Applicability of materiality regarding a particular item can be determined by comparing with: Class of liability or asset to which the particular item relates. The amount which is provided in Profit and Loss Account and Balance Sheet of the entity. Figure 2 : Steps in applying materiality in audit (Source : Eilifsen Messier 2014) Evaluation of materiality in Financial Statements AASB 1031 specifies the provisions relating to material and immaterial information. As per the standard, an amount greater or equal to ten percent of thesuitable base can presume to be material. However, in case if an amount is less or equal to five percent of thesuitable base than the same is considered as immaterial. The concept of materiality specifies the amount relating to an individual item as well as acumulative item to the extent to which error is acceptable. The amount of accuracy required for theascertainment of theapproximate amount is also specified in AASB 1031. The decision regarding the materiality is taken by auditor after evaluating the nature and amount of particular item. 2. Main issue for auditors Big Data A companys massive unstructured and machine-generateddata can be said as big data. This type of data also includes the external information available outside business boundaries. Big data is a vital transformation in the process through which audit of a company is undertaken. Appropriate assessment of financial accounts, fraud and audit risk has been made enabled byBig dataand analytics for the auditor. Successful incorporation of big data and analytics into audit is faced with avariety ofobstaclewhich acts asbarriers for the same (Vera-Baqueroet.al.,2015). One of the major concerns for auditors in theintegration of big data is data capturing. Many companies refuse to provide their provisional data since they are concerned towards the protection and security of data. Procurement of sub-ledger information of major business processes is required for embracing Big Data as it is necessary for thevarious business purpose. Thereby, the difficulty in extraction of data and the amount of dat a to be processed is increased. Various aspects of business procedures and activities related to audit are affected by the impact of Big Data. Internal risk management and governance of dataneed to be inquired by the audit department. Validation of available sources enables the auditors to make suitable conclusions from the available data. Conventional audit techniques were obsolete to ascertain contemporary business inconsistencies andpotential risks. In situations where the data to be processed is large and the time frame is limited, conventional techniques fail to resolve the issues. Thus Big Data has significantly improved the procedures of auditing thereby improving internal control. Continuous monitoring is no longer an intricate task (Griffith, 2015). End to End software integration This technique refers to completing an entire life cycle of theaudit. These mechanisms include assessment of risks, formulation of standard plans related to audit and preparation of audit report. A major issue faced by the auditor of any company is receiving information regarding initiating and completion of theparticular function. This enhances the risk of poor conclusions being drawn in the lack of data. An integrated framework of assurance must be developed by theauditor to understand, review and assess, and finally reassure the developed program. Efficient assessment of the changed program should be undertaken by the auditor. As per the study of Patterson (2013), this assists in aligning the key risk areas in the business; therefore relevant obstacles can be resolved. Getting involved in the method of anend to end integration of software adds value in the whole process audit process. However, the same is core issue that is faced by the auditor as they are not able to ascertain the method through which they can get evolved in it. According to Glover, Prawitt Messier (2014),continuous analysing of audit life cycle is an efficient way of resolving the specified issue. The problem can also be resolved by establishing anapproach to risk driven assurance in program delivery. The following steps must be pursued by the auditor for reassuringthat the opinion provided is reliable and accurate for the organisation: Getting involved in the process from the prior stages and understanding the risk management strategy program. Examining the existing level of assurance and source for the development of three lines of model can serve this purpose. Development of integrated rolling plan should be done for assurance. Reporting framework must be fully accepted. Program for maintaining and integrating assurance plan must be developed. 3. Nature of disruptive risks The recent changes that are being faced by the companies have bought in strategic risks to them. The change has further impelled on auditors to take into account such trends to meet the organisational purpose and meet the high expectations from their roles. With the unprecedented move of change, it has created an obligation on audit committees to constantly remain in flux and vigilant about the prevailing amendments within the environment. The risks are likely to create disruptions affecting the manner in which companies frame their financial strategies and operations (Unegbuand Kida, 2011). The concept of disruption has widened and has a substantial effect on the audit committees. The disruptions are identified therein and the way in which audit committee perceive them and manage such trends help in meeting the expectation of the organisation as well as stakeholders. The onus on auditors has been increased, and the measures it can take to outweigh the evolving risks are as follows: Figure 3: Risk Based Quality Audit (Source: Ghafran O'Sullivan, 2013) Technological Risks: The technological disruptions are often seen as one of the challenging force for the audit committee agenda. It is important that the auditors keep an adequate knowledge of technology and the committee conveys the experience about the effect of change. According to Miller Skinner (2015), one of the most prevalent risks identified within the technology is Cyber Security Risk as with gaining advances the cyber-attacks have become a growing concern for the auditors. Earlier only the retail and financial organisation were at cyber risk due to loss of information by credit cards, but in todaysscenario, the personal information is frequently being targeted in a much boarder range (Nicol?escu, 2013). Common challenges that are faced in cyber risk are data protection, auditing by third parties, social engineering, and compliance procedure during remediation and cyber insurance. It is the most critical task to measure the effectiveness and framework of the security contr ols. The auditors need to assure that it is competent to identify, track and manage the cyber risk. Technological risk involved in audit : Cyber Attacks Big Data Data Privacy Cloud Computing Security Controls Economic Risks: Considering the large entrepreneurs it is a complicated task to look into the global emerging markets and economic viability of risks. Companies that are closely affected by the universal change being of volatile nature like the fluctuation in oil prices as it creates corporate and operational disruptions for the organisation. According to Tepalagul Lin (2015), auditors are required to understand the scenario diligently and should decide on what should be done to move forward. Turning the dynamics into a qualitative result is something what organisation expects from the auditors. Evolution of corporate reporting system: With the recent trends and development in the corporate has facilitated in bring changes within the reporting system. With a wide range of risk revealed it is important to assure that the audit committee covering all the expected issues and opportunities within the financial reports conveys reliable information (MurrayShaikh, 2015). Auditors are affected by this trend as the base of knowledge has been enhanced, and it is seen imperative for them to stay abreast of the information served to them in a coherent manner. Furthermore, a CRD (Corporate Report Dialogue) has also been framed to kerb the risk. Regulatory Intricacies: With the growing regulatory framework a rise in intricacies has been seen which has led to disruptions for the audit committees. The International regulatory standards like IFRS has instigated upon the auditors to acknowledge such standards to advance the quality of auditing and not stay behind in the league of such changes (Zaman, M.Sarens, 2013). It is important that auditors need to develop their efficiencies in its tradition form of work and gain the skill to combat such risks. References Books and Journal Ghafran, C. O'Sullivan, N. (2013). The governance role of audit committees: reviewing a decade of evidence.International Journal of Management Reviews.15(4). 381-407. Miller, G. S. 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