Auditing and Assurance Liabilities Services

Question: Discuss about the Auditing and Assurance Liabilities Services. Answer: Introduction: New York audit generals Andrew Cuomo alleged the EY, one of the big four audit firm for its role in Lehman Brothers. They alleged the firm because Lehman Brothers are involves in accounting fraud but E Y gives clean chit to these frauds by signing the audit opinions. After the case of Lehman Brothers it is showed that there are many loopholes in the audit system of these big four companies and such cases highlighted that weakness. In case of Lehman Brothers, peoples have different opinions regarding the accountability of EY. some said that EY must be held responsible for the fraud committed by the company, and some said that audit firms are not responsible for the fraud committed by the companies (Coenen, 2010). Merely sign the financial statements of the company by follow the accounting policies is not the only job of the auditors. Examine the accuracy of the transactions is also the duty of the auditor because investors trust the financial statements of the companies and rely on these statements for any matter. After the case of Lehman Brothers, steps are taken to increase the accountability of the auditors. International Accounting Standards are developed and adopted by the stock exchanges at global level (Pal, n.d.). Different countries adopt International Financial Reporting Standards in their system. In this report, first we discuss the roles and responsibilities of auditors and after that potential liab ility of the auditor after the global crises. Audit and Assurance: Shareholders and other stakeholders of the company such as creditors, employees, governments and communities need an accurate source of information on basis of which they analyses the performance of the company and their management. Audit of the financial statements increase the accuracy and credibility of the information mention in the financial statements of the company. Assurance is an expression of a conclusion which enhances the confidence of the investor in the material information provided in the document. Auditors report is also an assurance by the audit firm or auditor that investors can take their decisions on basis of the information mention in financial statements of the company. There are different levels of assurance which includes: Reasonable Assurance- In these auditors takes the complete responsibility regarding the financial statements. Limited Assurance- in this auditor passes the responsibility of information on the management of the company. No Assurance- Auditor does not take any responsibility. In case of audit of financial statements by the auditor, a reasonable assurance is given by the auditor in which auditor mention his opinion in the report whether financial statements of the company shows true and fair picture of the company or not, and financial statements are according to the accounting standards. Reasonable assurance is not absolute assurance. Auditor cannot give absolute assurance for financial statements of the company because: It is not practically possible for the auditor to cross check the every transaction of the company. Financial statements of the company involve estimate amounts and they cannot be calculated exactly, because such amounts can be varied in future (CPA Australia, 2014). Role and Responsibility of Auditor: It is a well known fact that auditors are there to protect the interest of investors and other stakeholders in the company. Shareholders are depending on the companys auditor and auditors also own duty of care towards the shareholders of the company. Shareholder relies on the information provided in the financial statements of the company and it is the duty of the auditor that they confirm the accuracy of those financial statements. In this report we study about the role of auditors in the financial crises. Usually it is considered that important reasons behind financial crises are auditing and accounting. There are many points which analyse the contribution of auditing and accounting in financial crises: Not following the principles of accounting. Auditors used fair value accounting instead of cost based accounting method. Auditors sign the incorrect audit reports. Audit reports contain the misleading financial statements. Lack of transparency in audit procedure. Auditors are there to express an opinion on the financial statements of the company, whether the statements are presenting the true and fair view of the company or not. Auditor enhances the investors confidence in the financial market. For checking the accuracy of financial statements auditor collect the evidences, make several tests and compares the documents of the company. Auditing procedure includes following points: Make management enquiry and investigate the procedure followed by the management for preparing the financial statements of the company. Evaluate the internal procedure of the company. Check the variations in balances of accounts. Count the inventory and verify it. Confirm the transactions of accounts. There are some acts which auditor should avoid: Auditors are not completely responsible for any material defect in the financial statements. Cannot make changes to the documents without the approval of management of the company. Report to the management of the company (Gelman, Rosenberg Freedman, n.d.). Liability of Auditors after Financial Crises: Before understanding the liability of auditors in crises, it is essential to understand the term crises. crises can be understand as an event of economic, social or political difficulties faced by the society for some particular time. At the time of economic crises transactions on the stock exchanges are drop down and there is an extreme effect on the market conditions. It is necessary that strategies are framed to restore the trust of investors in the companies. It is necessary that principles are developed for the international financial system which enhance the transparency in the transactions, improve the provisions relating to securities account, regulate the market in a proper way and increase the coordination in the institutions which deals in financial conditions at global level. After the financial crises at global level, auditors are also held accountable for their performance. International Standard of Accounting 200 defines the objective and principles which regulates the audit of financial statements of the company. Audit of financial statement is done, so that auditor can express his views and give his expert comments on the preparation of financial statements and material information contained by those financial statements. Professional and legal standards must be followed while conducting the audit (Todea Stanciu, 2009). IFAC standards mainly focus on the quality of the work. It is the duty of the audit firm or individual that they provide a quality to their client. Quality work can be done by way of financial audit, by following these steps: Check and verify all the sections which are important for audit of financial statements. Mention date and sign on all the documents. Amount of profit or loss must be analyzed by the auditor to ensure accuracy of transactions. Auditors cannot prevent the companies from taking wrong moves, but they ensure the investors and other stakeholders that those moves are disclosed in their report. New rules for accounting state the connection between the company and the auditor of the company and also the process to identify the fraud and errors in the financial statements of the company. It is also the responsibility of the auditor that they make sure whether the companies have effective internal control system to check the accuracy of financial statements or not (Rapoport, 2010). Lehman Brothers case is an example of the manipulation of the financial statements through which company can get the results of their choice. Actual responsibility of fraud and error is of management, but auditors are also held responsible at some extent because main aim of audit process is to identify the material fraud in the company. The main objective of the auditor is to determine whether information provided in the financial statements of the company reflect the true and fair view of the companys performance or not. There are situations when wrong information is supported by the evidence, which disabled the auditing procedure in detecting the material fraud in the company (Collings, 2010; Norris, 2011). There are two types of liability on auditors of the company: Criminal Liability- criminal penalties are applicable on auditor when auditor breaches the provisions or rules of government. It is applicable on the transactions occurred between the state and auditor. Auditors are also bound by the laws govern in the country in which auditor operates. Under this law auditors can be charged for fraud and matters related to insider trading. Auditors are bound by the provisions of the law which govern the companies in their state, such as appointment and removal of auditor, etc. Civil Law- It is applicable on the transactions occurred between the organizations and auditor. In this auditor is responsible towards the company and frauds committed by the company. Auditor is answerable to the clients and investors of the company because on the basis of auditors report they make their decision. Shareholders can sue the auditors of the company if they are not fulfilling their duties and hiding the defaults of the company. It is important to be noted that auditors are liable only in those cases when they are not fulfilling their duties with due care and diligence, or they breach their duties towards the investors of the company. Therefore, auditors are liable to face penalties if they are not fulfilling their duties with care and diligence (ACCA, n.d.). Global accounting standards are adopted by many countries for reducing these liabilities and enhance the confidence of investors in financial market. Many institutions develop the auditing and accounting principles to solve this problem. Now a days audit environment is changing very rapidly and it is necessary that we develop the principles which are acceptable and effective at global level. IAASB is also responding to these changes, following are the brief about the IAASB and steps taken by IAASB: The International Auditing and Assurance Standards Board (IAASB) is a body which set up the international standards of auditing, quality check, review and other matters related to auditing for public benefit. IAASB mainly focus on enhancing the investors confidence in the profession of auditing. IAASB develop the international standards for auditing, which was accepted at global level. IAASB strategy is based on these three terms: IAASB frames strategy to support the financial stability at global level. IAASB frame strategy which focus on quality check, audit principles and other related matters at global level. IAASB ensures the adoption and implementation of these standards at global level (IFAC, n.d.). Steps taken by IAASB to the changing environment of audit which enhance the value of audit: Audit quality- the main focus of IAASB while developing the principles is on quality of work provided by the auditors of the company. For increasing the quality of audit it is necessary that organizations give importance to various factors such as standards, principles, education and training. Auditors Report- IAASB increases the accountability of auditors by make changes in auditors report. ISA 701, Communicating Key Audit Matters in the Independent Auditors Report. According to this now auditors are liable to mention those matters in the report, which are important for the purpose of audit of financial statements of the company. ISA 701 does not specify the matters, but require mentioning those matters which are important in eyes of auditors (IFAC, n.d.). Auditors are not completely responsible for any material fraud in the company. Auditors are responsible only in that case when they are not fulfilling their duties with care and diligence. In this paper we discuss the liability of the auditors at the time of financial crises. Conclusion: This report contains the roles, responsibilities and liabilities of auditors after global financial crises. . It is the duty of the auditor that he assesses the whole risk and mentions that risk and key points in his report. After the case of Lehman Brothers it is showed that there are many loopholes in the audit system of these big four companies and such cases highlighted that weakness. In case of Lehman Brothers, peoples have different opinions regarding the accountability of EY. Audit of the financial statements increase the accuracy and credibility of the information mention in the financial statements of the company. Auditors report is also an assurance by the audit firm or auditor that investors can take their decisions on basis of the information mention in financial statements of the company. In case of audit of financial statements by the auditor, a reasonable assurance is given by the auditor. At the time of economic crises transactions on the stock exchanges are drop down and there is an extreme effect on the market conditions. After the financial crises at global level, auditors are also held accountable for their performance. Auditors cannot prevent the companies from taking wrong moves, but they ensure the investors and other stakeholders that those moves are disclosed in their report. New rules for accounting state the connection between the company and the auditor of the company and also the process to identify the fraud and errors in the financial statements of the company. The International Auditing and Assurance Standards Board (IAASB) is a body which set up the international standards of auditing, quality check, review and other matters related to auditing for public benefit. In last we can conclude that auditors are not wholly responsible for the fraud and errors in the company, only if they execute their duties with care and diligence. References: ACCA, (2015).Auditor Liability. [Online] Available at: https://www.accaglobal.com/in/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/auditor-liability.html. [Accessed on 16TH September 2016]. Coenen, T. (2010). Fraud Files: Is Ernst Young to Blame in Lehman Bros. Fraud?.Journal, [online]. 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The Changing Audit Environment. Available at: https://www.ifac.org/news-events/2013-12/changing-audit-environment. [Accessed on 16TH September 2016]. Norris, F. (2011). Lehman Case Hints at Need to Stiffen Audit Rules. Journal, [online]. Available at: https://www.nytimes.com/2011/07/29/business/in-lehman-case-a-hint-that-audit-rules-are-lacking-floyd-norris.html?_r=0. [Accessed on 16TH September 2016]. Pal, T. (2010). The Impact of the Economic Crisis On Auditing.Journal, [online]. Available at: https://www.matarka.hu/koz/ISSN_1588-6735/GTK_vol_8_no_1_2010_eng/ISSN_1588-6735_GTK_vol_8_no1_2010_eng_131-142.pdf. [Accessed on 16TH September 2016]. Rapoport, M. (2010). Role of Auditors in Crisis Gets Look. Journal, [online]. Available at: https://www.wsj.com/articles/SB10001424052748703814804576036094165907626. [Accessed on 16TH September 2016]. Todea, N. and Stanciu, C. L. (2009). Auditor Liability in Period Of Financial Crisis.Journal, [online]. 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