The Significance of Auditing in the UK Economy: A Comprehensive Overview

AUDITING

Introduction and brief history of audit

In a general manner, an audit can be defined as a systematic and independent investigation of books, accounts, statutory records, vouchers and documents of a firm. It is mainly done in order to ascertain the truth and fairness regarding financial and non-financial statements disclosure (Silveira and et,al., 2010). Moreover, auditing can be described as an unbiased inspection and evaluation of the firm’s financial statement. This examination can be done either internally that is through employees of the company or externally where outside firm carries out such investigation.

It is significant to note that the capital market of UK economy is efficient and effective and therefore, transparency in the economy is essential to built confidence in the corporate framework (Rhodes and et.al., 2016). Further, this can happen due to the contribution of providing informative and reliable reports to this commitment. This generally involves the implementation international accounting standards as well as the international standards on auditing. Therefore, auditing is considered vital to UK economy.

The concept of auditing is as old as accounting because it was used during the ancient period. Basically, the term audit has been derived from the Latin word ‘audit’ and its meaning is to hear. During earlier days, when businessman detects any error, some people were hired for hearing verbal evidence of transactions (Bédard, Chtourou and Courteau, 2014). Therefore, the term audit was evolved. In the 18th century after the industrial revolution, auditing got evolved and grew rapidly, and since then the objective of the auditing got shifted from detecting fraud and errors to the ascertainment of trueness and fairness of the accounts.

The importance of audit work and regulatory framework in relation to audit

The objective of the audit is to examine the trueness and fairness of the financial statement of the organisation. Thus, through this economy can build the confidence in the firm. This ultimately helps in raising the shares of the company. Apart from this, auditing contains many benefits for the organisation as well as for its stakeholders (Cook, Woodall and Frerk, 2011). Some of the importance of the audit work have been described as below:

• Audit work helps in the detection of errors and fraud in the financial statement of the company. This will help the company to identify the fraud is happening in the organisation, and this way the error committed to making the financial would be identified. Therefore, making the profit and loss statement and balance sheet of the company pure and error free (Samar, 2010). Moreover, the UK economy can be raised if the companies have to error free financial statements.
• Moreover, if the audit of the accounts and books are done then it ultimately raises the morale of the employees because they would have certainty that organisation would not get insolvent and their job is safe. This will enhance the productivity of the employees because of their high morale and confidence in the company (Prawitt, Smith and Wood, 2009).
• Audit of the financial statement is important because it helps in achieving business objectives. The reason is that if the financial position of the firm goes in a smoother way, then the organisation can focus on their corporate objectives. Further, the working also goes on in a better manner as government interference become lesser due to the fair presentation of financial statements.
• Furthermore, audit work is necessary for the company because without this; the organisation cannot detect the material misstatement in the financial report of the firm. Moreover, without internal audit control, an organisation cannot make reliable financial reports for every business transaction (Messier Jr and et.al., 2011). Along with that, audit work helps in the allocation of resources and through this firm could identify their profitable product line as well.

Furthermore, audit work is necessary for the company because without this; the organisation cannot detect the material misstatement in the financial report of the firm. Moreover, without internal audit control, an organisation cannot make reliable financial reports for every business transaction (Messier Jr and et.al., 2011). Along with that, audit work helps in the allocation of resources and through this firm could identify their profitable product line as well.

The regulatory framework of the audit work is defined under the international auditing standards. From past many decades, auditing standards are getting updated. Recently in 2016 auditing standards have been laid down. The International Standard on Auditing (UK) (ISAs (UK)) includes the objectives for the auditors togetherly with the requirements and the related application and other explanatory materials (Unegbu and Kida, 2011). This standard became effective from the commencement of year 17th June 2016. Furthermore, the regulatory frameworks also describe various framework under which the organisation has to carry out its audit work. Some of the regulations have been described below:

• Code of Ethics: It is important for the auditor to use the code of ethics while carrying out their auditing work. For this aspect, they have to remain unbiased and must detect error or fraud without concerning about the company’s reputation. Furthermore, the auditors must be patient while carrying out this work in order to accomplish the work in an effective manner. Moreover, it is the ethics of the auditing work that auditor must maintain secrecy about the financial statement of the organisation (Porter, Simon and Hatherly, 2014). Therefore, the regulatory framework of a code of Ethics describes that auditors should carry out it's working by remaining under this code.
• Corporate Governance: This describes that company must conduct its auditing work by keeping in mind the interest of directors and shareholders. It is because the owners and managers of the organisation are different. Therefore, their interest must be considered while carrying out audit work (Lin and et,al., 2011). Furthermore, the organisation is also required to take care about their other stakeholders during the examination of their accounts and books

Thus, it is important for the company in the UK to carry out the auditing in a defined framework by the regulations so as to avoid legal actions.

The roles and responsibility of auditors and of directors

It is known that auditors and accountant are altogether different. However, in earlier days, companies rely upon their accountant to carry out their auditing work. Whereas, from last decade focus on auditor has come about and through this various roles and responsibility of auditors have been evolved as per the requirement (Bédard, Chtourou and Courteau, 2014). This is also clear that there are two types of auditors where one is an internal auditor who is the employee of a particular organisation, and the other is the external auditor who can either be an independent individual or can be the auditing firm. Some of the roles and responsibilities of external auditor is described below:

• They provide opinion on financial statements because they provide clear information and assurance about the material misstatement and prepare the financial statement as per the accounting framework. Furthermore, external auditors never fix the problems and issues arising in the company, but they can provide the best advice about the financial statements which is a base for solving problems (Silveira and et,al., 2010).
• Further, the role of the auditor is to understand the entire entity and its environment. In order to analyse the company’s financial position, the auditor has to examine the initial risk assessment of the firm. To carry out this function, they perform the role of understanding the entity and its environment. Moreover, they also perform the role of obtaining enough evidence in order to form an opinion for the company. In order to make the opinion about the financial statement, the auditors collect all the evidence which they examine during their audit work.
• Moreover, their duty is to collect and analyse data in order to detect deficient controls, duplicated efforts, fraud and non-compliance with laws (Porter, Simon and Hatherly, 2014). Along with that, they also have the responsibility of reporting to the management about the asset utilisation and audit result and also they recommend various changes in operation and financial activities. Moreover, their roles and responsibility are to prepare detailed reports about the findings of the audit.

These were the roles and responsibility of auditor, and in the same way, the director also performs some of the roles and responsibility in the company. A director is a person who has all the authorities of the company to carry out the working of an organisation. Some of the roles and responsibilities of director in relation to auditing have been discussed below:

• It is the duty of the director to act within the powers and does not carry out their function beyond their position. Furthermore, the director need to perform the function in order to promote the success of the company (Samar, 2010).
• Moreover, the director has to keep good accounting records so that accounts can be prepared in the true and fair manner and that represents company’s financial position.
• Furthermore, the responsibility of a director is to submit accurate accounts of the organisation and file them on a proper time with Companies House. Along with that, the director must submit corporation tax return and timely pay the due tax liability (Cook, Woodall and Frerk, 2011).
• It is the main duty of the director to trade with other businesses insolvent manner and ensure the firm about the ability to meet the financial liabilities.

Limitation of audit work and responsibility of audit regarding detection of fraud and error

Audit work is done by examining books and accounts in order to detect fraud and errors in the financial statements of the company. Through this, an organisation can identify the misstatement of the material and other evidence through which fraud and error are done. In this manner, financial statements of the company will be represented in a fair manner (Messier Jr and et.al., 2011). However, an audit cannot be considered completely good as there are still some limitations of this work, and they have been discussed as follows:

• There are various inherent limitations of audit work where auditors can only offer reasonable assurance rather than absolute assurance about the truth and fairness of the financial statements. One is the usage of professional judgement where using judgement the auditor identifies the audit risk, select the appropriate auditing procedures and interpret the audit evidence (Unegbu and Kida, 2011). It is inevitable that an auditor at times misjudges the situation which ultimately causes the auditor to look over misstatement in the financial statement.
• Secondly, auditor uses the sampling method which limits the number of transactions and balances selected for audit testing for performing the audit work in an efficient and cost-effective manner. However, the result derived from this may not represent the entire population. Therefore, it is a limitation that audit work may not detect a material misstatement in the profit and loss and balance sheet of the company.
• There is a risk of fraud by the company because by their very nature, fraud can be concealed by the perpetrators and this ultimately pose a very high risk where auditors may not be able to detect the errors (Rhodes and et.al., 2016). Along with that, auditors face strict time constraint because in a limited time they have to provide opinion on a financial statement. Auditors prioritise the essential task for the effective performance of the audit. However, in some cases, the auditor may fail in considering the important matter while finalising the audit report.
• Moreover, the evidence collected during the audit work cannot always be conclusive. It is because, the confirmation of debtors in not conclusive evidence whether all the amount will be collected or not (Limitations of Audit of Financial Statements, 2013). Therefore, it can be said that evidence is not conclusive in fact, they are persuasive. Furthermore, it is not easy to detect some fraud which is deeply laid such as false explanation, forgery, etc.

Along with these limitations, the auditor has the responsibilities during the detection of fraud and error in the audit work. The auditor has a responsibility of planning and performing the audit of obtaining reasonable assurance regarding the fairness of financial statement (Lin and et,al., 2011). Further, they also require assuring whether these statements are free from material misstatement or they are caused by error and fraud. Due to the human tendency and very nature of auditor, they are unable to give absolute assurance about the material misstatement rather they give reasonable assurance regarding the same. Moreover, the auditor the responsibility of planning and performing the audit for obtaining reasonable assurance about the misstatement whether it is caused due to errors and fraud (Silveira and et,al., 2010).

From the above report, it can be concluded that audit is important to identify the fraud and errors in the financial statement in order to carry out smooth working in an organisation. Furthermore, there are several roles and responsibilities of an auditor which should be carried out by them within the regulatory framework.

REFERENCES

Books and Journals

• Silveira, P. and et,al., 2010. On the design of compliance governance dashboards for effective compliance and audit management. In Service-Oriented Computing. ICSOC/ServiceWave 2009 Workshops. pp. 208-217.
• Rhodes, M. and et.al., 2016. Teaching evidence-based medicine to undergraduate medical students: a course integrating ethics, audit, management and clinical epidemiology. Medical teacher. 28(4). pp.313-317.
• Bédard, J., Chtourou, S. M. and Courteau, L., 2014. The effect of audit committee expertise, independence, and activity on aggressive earnings management. Auditing: A Journal of Practice & Theory. 23(2). pp.13-35.
• Cook, T. M., Woodall, N. and Frerk, C., 2011. Fourth National Audit Project. Major complications of airway management in the UK: results of the Fourth National Audit Project of the Royal College of Anaesthetists and the Difficult Airway Society. Part 1: anaesthesia. Br J Anaesth. 106(5). pp.617-631.
• Samar, V., 2010 Oracle International Corporation. Audit management system for networks. U.S. Patent 7,779,113.
• Prawitt, D. F., Smith, J. L. and Wood, D. A., 2009. Internal audit quality and earnings management. The Accounting Review. 84(4). pp.1255-1280.
• Messier Jr, W. F. and et.al., 2011. The effect of using the internal audit function as a management training ground on the external auditor's reliance decision. The Accounting Review. 86(6). pp.2131-2154.
• Unegbu, A. O. and Kida, M. I., 2011. Effectiveness of internal audit as instrument of improving public Sector management. Journal of emerging trends in economics and management sciences. 2(4). pp.304-309.
• Porter, B., Simon, J. and Hatherly, D., 2014. Principles of external auditing. John Wiley & Sons.
• Lin, S. and et,al., 2011. The role of the internal audit function in the disclosure of material weaknesses. The Accounting Review. 86(1). pp.287-323.

Online

• Limitations of Audit of Financial Statements. 2013. [Online]. Available through . [Accessed on 23 Nov. 16].