Risks and consequences facing audit practices when acquiring audit engagements

Risks and consequences facing audit practices when acquiring audit engagements

Audit cost and audit fees

In the past couple of years, audit costs have risen considerably. These factors are due, for instance, to the drastic increase of the employee wages, occupational health benefits, higher technical expenses as well as the consequence (addressed in the earlier chapter) of evolving auditing methodologies and new accounting rules. Kana claims it encourages auditors to conduct additional work without payment, which would impact the company’s ability to attract those customers in the longer run. But audit costs were so radically condensed by influences like bidding and market competitiveness that businesses were required to think of behaviours of minimizing the period consumed or employed on audits. Effectiveness is one thing. Auditors have been under strain to incorporate the job costs into their fees. Many firms engaged in the ongoing strong-profile accounting irregularities had their papers produced by companies which were easily checked by peers.

Staffing, training and transformation
Substantial shortages of trainee and trained workers are present in audit firms in South Africa like their counterparts in overseas countries. South African audit companies face the additional difficulty of change and priorities. As a result, the number of staff in internal audit companies and, mainly, the recruitment and retention of black faculty and accounts is large. This lack of auditors has led to higher wage costs, as well as to audit charges and audit payments.

For the last period, the qualifications criteria for auditors have also changed considerably. Audit workers today are faced by many new problems and must be recruited in methods which exceed conventional accounting and auditing processes to solve these. These include, but are not limited to, computer skills, interaction and appearance skills and expert and company morals. All of these things include expenses, influence the recruiting, mentoring and recruitment of staff of the company and eventually have an effect on the audit payment.

Auditor individuality and the delivery of non-audit services
The distribution of multi-audit products to audit companies by auditors has a significant effect on the integrity of accountants and the productivity of their companies. Classically, these semi-audit facilities are very lucrative and sought after, with the consequence that prior auditors have been inclined to yield to leadership demands on exterior audit concerns to maintain audit involvement and therefore deliver very lucrative non-audit services. The numerous rules and guidelines released since Enron, as well as the various business management codes, now all contain specific guidelines which either forbid or strictly regulate the anti-audit facilities extracted by auditors to their audit clients.

The audit anticipation gap and auditor litigation

The audit anticipation gap, which is a variance in opinion or knowledge between the respondents in the accounting method as to what the manager’s roles and tasks concerning the fiscal reports, as compared with those of the auditor, continues to exist and presents a very tangible danger to the auditors. Due to the different corporate environment, new rules and regulations and the always-increasing incidence of fraud, auditors are sometimes blamed for failing to detect fraud, error or anti-compliance with legislation and laws–duties that lie with leadership. Such misinterpretations not only lead in a lack of trust in the auditing industry but also often results in complaints toward audit companies, leading to a loss of legal costs and efficient resources and resources for auditors in the judicial phase.

Audit procedures to reduce risks in audit practices

Substantive procedures

Rigorous techniques are used to identify inaccurate factual statements at the appropriate level of the claim, which includes checks of descriptions of transaction types, account balances, declarations which harsh investigative techniques. The auditor will prepare and enforce detailed processes to be attentive to the risk evaluation of information misstatement. Irrespective of the possibility of material exaggeration identified, the auditor will devise and execute complicated procedures for all applicable statements relating to each material category of payments, the balance of accounts and reporting. This accounts for the fact that the risk management of the auditor is presumptuous and may not be reasonably accurate to classify all dangers of extrinsic evidence. Furthermore, there are fundamental drawbacks to internal management, like management AU § 318.47 Conducting Audit Procedures in Reply to Identified Risks 1793 override, and even successful internal controls usually minimize but do not remove, the possibility of extrinsic evidence. The specific procedures of the auditor should comprise the subsequent audit procedures relevant to the investigation process of the monetary statements.

• The acceptance of the financial statements, including accompanying notes, of the fundamental financial statements.
• The examination of physical journal entries and other changes made throughout the preparation of the financial reports. The precise landscape of the inspector’s review of journal entries and other modifications depends on the type and difficulty of the corporate monetary system of the entity and the risks involved in extrinsic evidence.

Where the auditor has established, in compliance with paragraph.110 of section 314, that the probability of the liquidated damages clause is evaluated by the auditor, where the auditor has decided, following paragraph.110 of section 314, that the threat of extrinsic evidence assessed at the appropriate level of claim is a severe peril, the auditor will conduct detailed procedures that are sensitive to that danger. For instance, if the auditor determines that leadership is underneath burden to reach earnings targets, there could be a danger that organization may inflate profits by inappropriately acknowledging profits-related revenues on terms that prevent the identification of income or the billing of sales until shipment. In these situations, the auditor can, for example, the development of external written verification applications not only to verify unpaid amounts but also to confirm the specifics of the purchase contracts, such as the date, the rights of return and the conditions of distribution (Gunn, 2019). In particular, the auditor may find it helpful to complement these relevant written verifications with the entity’s non-financial civilian contractors’ inquiries about any adjustments in sales contracts and terms of delivery.  Where the solution to significant risks consists only of practical protocols, the audit procedures necessary to tackle these considerable risks include only detailed tests or a mixture of comprehensive checks and reasonable investigative procedures. The auditor will recognize the guidelines given in paragraphs on the nature, effectiveness and scope of the substantive procedures for significant risks. To obtain adequate acceptable audit data, the specific methods relevant to significant risks are most frequently intended to provide audit data with better quality.

Recommendations of audit procedures

Many companies have assessed the implementation of comprehensive auditing to meet regulatory compliance evaluation criteria. Although providing an effective integrated quality control system leads to the evaluation of internal controls and the overall demand for a higher legal and organizational level, extra benefits in the form of better business efficiency may be equally significant. Supporting administrative structures, such as the audit report and quarterly reporting procedures, were sufficient for tracking the implementation of the specific recommendations within the accepted timeframes for adoption. Quarterly information on’ open’ guidelines, i.e. where enforcement is not complete, can be strengthened by providing specific details on risk assessment by business areas awaiting execution. Similarly, documentation on the recommendations before their application could be increased by indicating that the summary statements cover the appropriate steps taken to enforce the judgments fully. The ANAO has requested these things.

• There are also ways to improve the activities of the audit committee and post-committee about tracking the implementation of the suggestions (Bratten, 2020). In specific, it would be helpful to establish guidelines, in the appointment with the Sub-Committee, trying to set out when a customer service delegate should be asked to come to a gathering of the Sub-Committee or the Audit Committee to address cancellations in implementation.
• To improve the degree of protection given to the Sub-Committee on Audit and Honesty, the ANAO suggests that the Department.
• Include the Sub-Committee with specific details on risk assessment for administrative activities awaiting the adoption of the Open Quality Audit Guidelines classified as high or medium-priority.
• Verify that the Overview of Compliance Actions given to the Sub-Committee discusses all appropriate steps taken to enforce the Suggestion fully.

References

Bratten, B., Causholli, M., & Sulcaj, V. (2020). Overseeing the external audit function: Evidence from audit committees’ reported activities. Available at SSRN 3314334.

Cohen, M., & Rozario, A. (2019). Exploring the Use of Robotic Process Automation (RPA) in Substantive Audit Procedures. The CPA Journal, 89(7), 49-53.

Gunn, J. L., Li, C., Liao, L., Yang, J., & Zhou, S. (2019). Audit Firms’ Corporate Social Responsibility Activities and Auditor Reputation.