Auditing is the process of evaluating the financial statements of a business. Audits of financial statements are required by the law for the purpose of presenting the true and fair view of a business financial position (Arrington et al 1985, pp. 1-2). Different audit procedures are found for different countries. The paper describes two types of audits, statutory audits and forensic accounting investigation. These two audits are different in different ways as described in the paper.
Traditionally, audits were mainly associated with gaining information about financial systems and the financial records of a company or a business. The historical role of the audit of financial reports The historical role of audit is to add credibility to the organizations management. The financial statements are fairly represented in relation to the organizations position and performance to the interested parties. The audit of financial statements ensures that the possibility of a material misstatement is reduced.
Financial reports are expected to be fairly presented and in conformity with generally accepted accounting principles. According to Aranya et al (1975, pp. 854-856) the audit of financial statements ensure that the business adheres to legal statutes where the reports are necessary for investment, financing and tax purposes. The audit provides an audit report which has an unqualified or qualified opinion on the audit of the financial statements as to its fairness and accuracy. It is a legal requirement that audit reports are included in the financial statements of a business.
Generally, audit of financial statements are performed to express an audit opinion as to whether the financial statements prepared by the business to the public present fairly the business financial position cash flows and results of operations for the year under audit. The auditor is required to produce a report at the end of the audit on matters that are arising from the audit. The audit provides information concerning the quality of internal controls in place, accounting issues and matters relating to compliance with the applicable laws (Antle et al 1991, p.
33). Changes and the reasons for them in the scope, conduct and nature of audits of financial reports The use of unsatisfactory standards The legal regulation on audits provides unsatisfactory basis of audits. The change of using accounting principles and auditing standards is necessary to provide force to the effect of fundamental changes in the statutory audits. In legal implications the need for true and fair financial statements should be accommodated in the business but there is no sustainable derogation available to allow that.
There are legal problems that arise when codifying auditing standards in law. There is need of recognizing both accounting standards and auditing standards when performing an audit (Soltani 2007, p. 668). The end of true and fair view audits The accounting Standards used in auditing acknowledges the use of the words true and fair view. There is ambiguity in the explanation of this the true and fair view. In auditing, the use of auditing standards is applied in the process of audit when applying the true and fair view. How these standards are applied is what matters to the financial statements.
According to the standards, the auditor is only required to provide a reasonable assurance that the accounts are presented fairly, in material aspects and with GAAP and IFRS standards. The true and fair view in the companies Act does not apply here. Antle et al (1991, p. 34) denotes that the auditing standards take into consideration the reasonable assurance of technical compliance and the process driven methodology behind it fall far short of the Companies Act requirement. Hence the law requires recognizing the opinion given by the auditor.
The auditor should give an opinion on whether accounts give a true and fair view of the state of affairs of the business and its profit and loss, as well as addressing the other Companies Act requirements. The auditor should make an effort to recognize things that are hidden from their immediate view. This will ensure that the true and fair view of financial statements is reported. Making the audit expectation gap a reality The accounting and auditing standards provide guidelines that the audit of financial statements should be separate from any legal interference.
Auditors are found to be interfered with by the regulation given by the companies Act. Professional standards on auditing clearly define the purpose of audit as an independent practice where the auditor is required to give an opinion on the financial statements. The law has interfered with the auditors’ responsibility in the sense that the law requires the audit to contain any increasing limitation and mitigation statements that reduce the scope of the auditors’ responsibility. The auditor should only give reliable intelligence to the public.
Transferring audit responsibility and liability to the non-executive directors Accounting and auditing standards give guidelines that directors should not interfere with the work of the auditors. The standards state clearly the role of auditors and their reliance and exposure to risk and liability. Directors should not look at the entries in any of the company’s books of records or verify any calculations of the company’s accountants in preparing the financial reports or of the auditor himself. They should only rely on the judgment, information and advice from the auditor (Caramanis et al 2008, p 137).