Auditing and Assurance in Australia Business Breach Contract

Question: Discuss about the Auditing and Assurance in Australia for Business Breach Contract. Answer: Overview The relationship between the clients and the auditors considered to be contractual (Basu, 2012). Clients or customers can sue the auditors, if they are unable to fulfill the tasks, as per the agreement. The clients seek for solutions in case of the breach of contract that result to damages, which might be raised due to the violation of contracts. In the similar context, the accountant can also be sued by customers on the basis of the tort law, which indicates the wrong doing of a person to another person such as damaging property or reputation. However, the customers can only sue the accountant and the auditor, if they have conducted any fraud or negligence. In addition to this, the accountants can also be charged by the third parties on the ground of fraud cases (Florida Gulf Coast University, 2003). The concept of auditors liability has gained a substantial space in the economic and accountant domain within past few years in both national and international level. The auditors have to maintain a good audit practicing by ensuring ethical considerations and presence of transparency (Moberg, 2009). The purpose of the paper is to conduct an in-depth analysis on the possible liabilities faced by the auditors, as an effect of the global financial crisis. Auditing Liabilities in Australia The auditors liabilities have made a significant rise in regards to the changing obligations of auditors and have been subjected to various laws, including common and contract law. There are several audit governing entities, comprising of ICCA (Institute of chartered Accountants in Australia) and CPA Australia, which control the actions of the auditors with the help of certain guidelines or standards. Auditing is also controlled by the ASIC (Australian Securities and Investments Commission) due to the fact that the auditors in Australia are more exposed to the liabilities, as compared to the other countries (Nguyen and Rajapakse, 2009). Auditing and Financial Crisis The objective of financial auditing is to understand and evaluate the financial statements of companies. After the evaluation of all the financial activities, the auditors provide opinions about the current position of the company along with its future potential in the domain. In addition to this, auditors are also liable for providing suggestions to the company based on the auditing results so that the management can initiate accordingly. However, in this case the company has choices whether it will take measures based on the auditors recommendations or acquire external consultant. It is not necessary for the auditors to provide suggestions on the situation, as they only concentrate on examining the activities or operations of a company on the basis of all the available information. In the recent decades, there are several organisations that are unable to satisfy the requirements or follow the standard of auditing as well as include unethical activities for which the government or t he entire domain can face huge downturn. In this regard, the financial crisis of can be considered to be an ideal example for economic downturn, which resulted towards rapid shift the domain. The steps taken by financial institutions governments can only concentrate on overcoming the situation in long run rather it should focus on short run perspective in terms of the clients and the customers to regain their trust. Through these actions the financial system might be able to satisfy the needs by increasing transparency within work environment of the companies (Todea and Stanciu, 2009). Auditing prior to the financial crisis was never considered to be an important concept. In this regard, it is observed that Singapore is one of many countries, which has implemented auditing to enhance the performance of the companies, by engaging shareholders and controller of the companies in the auditing process. The assessment of the auditing process by the House of Lords Economic Affairs Committee has enhanced the concept of auditing within company practices, which led to the use of audit assessment to different offices such as Office of Fair Trading (EYGM Limited, 2011). After the financial crisis, the Public Company Accounting Oversight Board in the US proposed to initiate changes in the Auditors Report Model, in order to prevent financial crisis in future. The ACCA strongly believed on the changes made in audit assessment process to add value in the business as well as in the overall economy (The Association of Chartered Certified Accountants, 2011). The US financial crisis w as the first incident occurred in the year of 2008, which spread its impact across the world. According to the view presented by Pal (2010), the 2008 financial crisis is considered to be the reason for the great recession of 1923-1933, which was later also known as the Great Depression. The effects of the global financial crisis on auditing have led to huge shift in the practices of the profession (Public Company Accounting Oversight Board, 2016). The companies rarely use the audit assessment in an annual basis, as they only implement the processing after enforced by the law. Having single accounting language is considered to be the major concern of the financial crisis (Pal, 2010). The most important characteristic of the financial crisis has been originated by the financialization of economy in the West, including the US economy, which was responsible for creating large credits and risks. This was a result for improper and narrow mechanisms. The key sources of the US capitalism were banks, insurance companies and hedge funds, which faced loss around US $2.8 trillion. During the situation, the US government closed 22 banks, among which Lehman Brothers was one (Sikka, 2009). The US government has initiated several implications to mitigate the amount of loss and downturn by stabilizing the economy. In this regard, the auditing standards of the UK can be considered to be the most suitable practice, which are aligned with the international standards of auditing. Thus, the companies of the UK can have knowledge on their capabilities and financial abilities in the international prospect and encourage to continue with the business operations in overcoming the crisis situation. Maintenance of proper audit proceedings includes collecting relevant data and facts, which would assist the auditors in making adjustments and disclosure of auditing reports (Sikka, 2009). The global market has experienced several financial crises among which the effects of financial crisis in the year 2007-08 led the companies bankrupt and one of the companies that suffered as huge loss was the Lehman Brothers. Improper maintenance of the financial statement is considered to be the key factor for the company to be bankrupt. The audit assessment performed by the company in the month of January and July stated that the financial condition was comparatively higher, which in August started to declined and the company faced financial issues and ultimately led to bankrupt (US Securities Exchange Commission, 2008). The global crisis has led to several questions regarding auditing practices and its effectiveness in mitigating such crises in future. It is believed that the auditors hired from outside added credibility in the process of auditing and to the financial statements, whereas, auditors to have inside knowledge would provide the company excess information. This is cons idered to be one of the reasons for the rise of financial crisis. Thus, it is evident that inadequate process of auditing made the market unrest and forced the companies to face such a haphazard situation (Ferguson, 2008). The preparation of auditing reports largely focuses on the regulatory policies due to which they also hesitant to qualify the bank account in a fear that they would hamper the financial position of a company. Therefore, it is observed that one of the major reasons for the failure of banking system is the ignorance of auditors, which created panic and loss to the depositors as well as the customers. The financial capitalism is considered to be a keystone for leading banking system to crash in the Latin America (Ferguson, 2008). In spite of being conscious about the practice relating to the Repo 105, the auditors of the Ernst and Young and Lehman Brothers could implement the auditing practice in the organization framework, which would help to overcome financial downturn and regain lost position in the market (Chen and Zhang, 2012). Potential Liabilities Misstatement of Auditing Considering the scenario of the financial crisis of 2008 in the US, auditors hired by the companies had an essential role and were criticized by people for not anticipating the probable risks as well as for providing misstatements for some of the biggest companies. The companies implement the audit risk model in order to avoid risks or uncertainties related to the audit proceedings to control the risks (Cahan, and Zhang, 2006). The financial crisis of 2008 illustrated problems associated with auditing and accounting of the financial statements, which clearly indicate the significance of adopting change within the process and implement measures to avoid the same. Thus, the inabilities of auditors to maintain proper auditing process are considered as one of the key reasons for the rise of the financial crisis (Chen and Zhang, 2012). Assessment of Auditing The development of new rules, regulations and financial instruments are complicated in determining the prices and risks taken by the investors. Assessment of these risks in a proper way helps the company to have control on the financial systems. Another potential risk is the performance of review model investment portfolio and reorganization of methods in preventing the risks that affect the company. The auditors, while assessing the audit process, should be responsible for the activities such as audit engagement. Auditors need to sign the letter of engagement, which mention the terms and conditions and type of tasks that will be performed on the basis of accounting standards (American Institute of CPAs, 2016). Apart from this, the auditors are also responsible for formulating the objectives or goals and the frameworks. In this regard, the auditors must identify the nature and procedures of auditing, which should maintain professional skepticism related to frauds and errors. It can help in detecting any kind of misstatements that is obscured by the employee in-charge of the company such as the top level management. The detection of frauds and errors should be rectified in accordance with the International Standards of Auditing. In this context, it can be affirmed that the most essential responsibility of an auditor is to share their opinion with respect to the facts and figures of the financial statements reflecting the actual information (Todea and Stanciu, 2009). Inadequate Involvement Lack involvement of auditors is the primary cause for inadequate understanding of risks, bad lending and fault in the credit system. Accounting firms are the key aspects of the global crisis, thus led to formulating the new accounting principles. The new accounting principles concentrate more on the negligence of time and certain key issues relating to the relationship between auditors and the company they work for. It also focuses on the subjects such as procedures that were used by the companies to prevent issues such as valuation of the assets, errors and misstatements (Rapoport, 2010). Considering the situation of financial crisis, the regulators and the auditors of the bank were found guilty for violating the auditing standards and not performing their duties (Jones, 2011). The common standard of the audit processing involves an individual with sufficient technical experience have the ability to audit for a company. Positive attitude should be maintained by all the auditors in order to control errors within the procedure. Apart from this, the auditors should have control on the internal matters, which needs to achieve the objectives. The standards of the reporting should state the presentation of financial statements under the accounting principles of auditing. The report should also include expression of an opinion related to the financial statements or should have an assertion regarding the opinion (Cabral, 2014). Failures to Risk Auditing is to be believed to have a plan in order to overcome the risks associated with banking and other financial institutions by including risk model logarithms, which helps in understanding the causes for failure. Errors made by the managers are to be reported directly to the board, as the result of inadequate management can lead to high risks within the company. It is therefore suggested by Stulz (2009) that there are several types of risks such as failure of risks model, which refers to failure in using appropriate risk metrics to mitigate possible risks. This failure can also occur due to errors measurement of risks that are already known but fails to act. The risks can also arise due to inadequate communication between the auditors and the top level managements (Stulz, 2009). The auditors should be careful regarding the accounts related to financial statements, which are influenced by the estimates that are taken by the management. The making of these estimates is considered as a responsibility of the management and are often more vulnerable to the material misstatements as compared to other financial statements. The Auditing accounting estimates require auditors to verify all the essential estimates, which have been developed to provide more reasonable assurance. In addition, it should be ensured that the estimates are adequately performed a well as disclosed (Cabral, 2014). Misstatement in Prospectus According to the view presented in the Companies Act 2013, Section 35, when an individual subscribes a company for securities related to any kind of omission that might be misleading or suffered for any loss, then the individual will refer as promoter of the company. In this regard, the primary objective or the responsibility of auditors is to provide their opinion regarding the actual accounts or outcome of the auditing. A professional auditor should be guilty in case of providing wrong information or data to the clients or encourage them to act unethically. The auditors have full right to access the information on the company activities to find whether the client has initiated any fraud or unlawful acts. The responsibility of the professional auditors in such cases would be highly dependent on the actual conditions or the circumstances. The nature of audit services should majorly concentrates on both company as well as individual perspectives to know whether an individual is lookin g after the income tax procedures or representing the unreliable information (ICAI, 2014). Requirements for Auditing Concerning the determination of the required estimates, auditors need to develop risk model to validate the overall risk associated with the business. In order to evaluate the fairness of estimating the accounts, the auditors can use three basic approaches. This includes, reviewing, processing test management and developing the estimates, which involve assessing the rationality of the actions taken by the management. The auditors should also independently expand an estimated amount in comparison to the estimates made by the management. The auditors should also review subsequent proceedings or the transaction related to the estimate. This includes actual payment of amount estimated at the end of the year. In regards to the financial crisis, it is essential to know about whether to implement separate or the additional substantive proceedings among the financial institutions and banking systems. This practice will help the auditors to test the efficiency of internal controls on the mode l to calculate the risks (Cabral, 2014). Recommendations Based on the evaluation, it is further recommended to the company and the auditors that they need to follow quality audit processing by following the international standards in order to avoid future financial crisis. The auditor can also focus on meeting the needs of the market, which enabled the auditors to enhance their role in reducing the financial crisis. In addition, adequate proceedings of audit within the company will also enable to build trust among the company and other stakeholders, thus by gapping the issues prevailing in the company. Proper maintenance of the financial statements will help in sustaining the financial systems and companies to be bankrupt as well. Summary It is apparent that several corporate houses have been a victim of global financial crisis, based on which it is stated that the audit profession in Australia as well as in across the world have faced difficulties for the auditing procedures. Auditing is one of the most essential activities in an organization. It can be said that sometimes the financial crisis can be seen as an opportunity, which can be used in correcting certain parts of the financial institution that led to the crisis situation. The role of auditors in this context is the most essential factor to provide accurate reporting so that the company does not suffer loss or go bankrupt as in case of the Lehman brothers. 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