Introduction
It is well known that any kind of external supervision cannot replace rigorous self-evaluation in any profession. However, the need for supervision and monitoring is universally recognised. The role of an auditor is very critical from an external verification and supervision point of view. This role has changed quite dramatically over a period of time, during which the expectations from the auditor have increased exponentially. Numerous studies have shown that there are considerable differences between what the public expects from an audit and what the auditing profession believes that the auditor should do. The expectation gap resulting from this is a major source of concern for the audit profession since the greater the gap in expectations, the lower is the credibility and prestige associated with audit. It is an issue for the public at large, because the proper functioning of a market economy depends heavily on confidence in the audited financial statements. The role of the statutory auditor should consider the needs and the expectations of the users to the extent that they are reasonable, as well as his ability to respond to those needs and expectations.
In the backdrop of the above, an auditor faces several dilemmas in practising his profession and conducting the audit process primarily because of the complexities of the business transactions, regulatory requirements, nature of his job, and the varying expectations of the stakeholders. This article summarises some of those dilemmas, for better understanding of the ground level issues relating to the audit profession and the dynamics surrounding the same.
Profession Vs Business
In simple terms, business generally involves an activity relating to purchase and sale of goods with an objective of earning profit, whereas a profession renders specialised services for a reward called a fee.
Whether a Chartered Accountant when acting in his capacity as an auditor is performing the role of a professional or like any other service provider selling his service or as a businessman? The border line between the two is very thin and many times, an auditor has to balance the same carefully. Whilst, in a competitive environment, he has to necessarily carry out his job in a manner which makes commercial sense for him, and he should never forget the fact that audit is statutorily required in order to serve the interests of the general public and various other stakeholders.
The role of the statutory auditor has recently been the subject of serious debates worldwide. In view of the number of major financial failures, questions have been raised concerning the function of the statutory audit and the independence of the auditor. In recent years, concern has been expressed about the threats which have developed to the auditor’s independence. Several surveys have reported that companies were increasingly prepared to challenge their auditors, to shop for opinions, to seek legal advice on their auditors’ views and to change auditors. Some reports concluded that, given the competitive pressures, it would be idealistic to assume that all auditors are at all times unmindful of the risk of losing business. Criticism has been voiced that the professionalism of the audit function has diminished, in favour of a more “business-like” and “accommodative” attitude.
In view of these perceptions, there is a compelling need for the auditor to keep in mind the core principles of a profession, which should never be compromised at any cost inspite of business compulsions.
Propriety Focus Vs. Accounting Focus
What is the role of an auditor regarding propriety matters? Is he responsible for matters of impropriety? Can he take a blind view on such matters? Performing audits with a propriety focus poses serious challenges in carrying out the audits especially of private entities. Whilst the expectations from the regulators and other stakeholders could demand comfort from the auditors on propriety aspects as well, meeting such expectations totally through the audit process for private entities is usually a big challenge. Identification of acts of impropriety also poses challenges to the auditor in view of the subjectivities involved.
However, the auditor should perform the required procedures in accordance with the auditing standards, to ensure that there is no cause of concern relating to propriety aspects within the defined boundary and if there are any propriety issues, the same need to be reported to those in charge of governance.
Fraud Specialist Vs. Financial Accountant
Until recently, the standard quote on the role of the auditor was to say that an auditor’s prime role is not to prevent or detect fraud, which is, in any event, impossible. Regulatory bodies in many countries have issued auditing guidelines related to the statutory auditor’s responsibility in relation to fraud, other irregularities and errors. In India, Auditing Standard SA 240 – “The Auditor’s Responsibilities relating to fraud in an audit of the financial statements” specify the responsibilities of the auditor.
It is a known fact that the management of an entity has the primary responsibility for the prevention and detection of fraud, other irregularities and errors which is seen as part of the management’s stewardship role. The auditor’s responsibility is to plan, perform and evaluate his audit work so as to have a reasonable expectation of detecting material misstatements in the accounts, whether they are caused by fraud, other irregularities or errors.
If a fraud is identified in an entity post audit completion, the first and the foremost important question raised by everyone is the role of the auditor and the effectiveness of his audit. Inspite of such allegations, the fact remains that the auditor is not an investigating specialist challenging and suspecting each and every transaction, which would change the entire purpose of the audit and the true nature of the profession. However, in view of the peculiarity of the role played by him, an auditor has to be cognizant of this aspect and he needs to perform procedures to ensure that there are no significant frauds impacting the true and fair view of the financial statements.
Representation to the Auditor Vs. Information to the Reader of the Financial Statements
While executing the audit, an auditor many times faces a situation where he has to rely on the representations made by the auditee/management. At times, such representations have far reaching implications on the financial statements. One has to remember that, whilst obtaining representations from the auditee/management is a required audit procedure, it does not absolve the auditor from his responsibilities.
A typical dilemma that could arise during the audit process, is the extent of disclosures that are required to be made in the financial statements or in the audit report, regarding such representations having a material impact on the financial statements. Careful evaluation needs to be made as regards the representations made by the auditee/management on significant matters, having a material impact as to whether such representations are part of the audit documentation or the same should be made available to any reader of the financial statements by way of an appropriate disclosure in the financial statement or in the audit report. For example, if a provision is made for an item based on a technical evaluation, which is very significant to the financial statements, the need for disclosing that fact along with the basis, rationale and significant assumptions driving such provisions etc., need to be evaluated by the auditor.
