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Audit Two Question - Edited
Audit Two Question - Edited
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pg. 1
Contents
Question no 1..................................................................................................................................................................3
Ans:.............................................................................................................................................................................3
Auditor responsibility for Fraud:................................................................................................................................3
Fraud may be divided into two categories:.............................................................................................................4
Question 2.......................................................................................................................................................................6
Ans:.............................................................................................................................................................................6
Development concerning the gap and deb
it..................................................................................................................................................................................6
Examples of unmet expectations................................................................................................................................6
the discrepancy in audit expectations.........................................................................................................................7
References:......................................................................................................................................................................9
Appendix...................................................................................................................................................................10
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Question no 1
Critically discuss the argument for and against the auditor’s responsibility for fraud
and illegal acts in the UK context. Debate the recommendations of the Brydon
Ans:
Auditor responsibility for Fraud:
Whether the misrepresentation is the consequence of fraud or an honest error, an auditor's role is
to ensure that Brydon's financial statements are accurate. Professional skepticism must be
maintained throughout the audit to gain an acceptable level of confidence. In cases where the
auditor has reason to suspect that a document is not genuine or that its provisions have been
altered, the auditor is required to carry out more research (Brown, T., Majors, T. M., & Picher,
M. E. 2020).
Procedures:
Identify any potential material misstatements
Respond to any potential material misstatements that have been identified.
Keeping up a healthy dose of professional skepticism
Obtain Sufficient and Appropriate Evidence
Communicate the Material Misstatement to Management
Obtain Sufficient and Appropriate Evidence
To be effective, the auditor must be alert to the possibility that such illegal activity has occurred
and ready to investigate. To determine if an unlawful act has taken place, the auditor should use
audit techniques that are expressly designed to determine if there is any evidence of illegal
conduct that might have a major impact on the financial statements. In the case that illegal acts
are detected, such disclosures must be made.
Auditor responsibility:
The financial statements must be always free of substantial misstatements. Accountants'
responsibilities in identifying mistakes or fraud are not well defined in accounting standards.
Since fraud is usually perpetrated by management, the auditor should constantly take extra
precautions to uncover it. Auditors are all responsible for ensuring that all financial statements
pg. 3
are free of major misstatements due to error or fraud throughout the audit process (Dennis, I.
2010).
The auditor must investigate any unlawful activity that has an impact on financial reporting, just
like any other activity that results in mistakes or fraud. If there is no impact on the financial
accounts, the auditor doesn't need to be concerned about unlawful actions unless there is strong
proof of their existence.
The auditor needs to evaluate if the major misrepresentation is resulting from fraud or error.
Some things are identified by materiality, such matters are significant for the fair reporting of
financial statements. The auditor should exercise professional skepticism, critical analysis, and a
questioning mind when doing his or her duties. The auditor must concentrate on unlawful
conduct that has a direct impact on the financial statements of Brydon. Indirect unlawful conduct
must be reported. It might lead to fines and penalties if it is made public Auditors are obligated
to expressly analyze the risk of substantial misrepresentation of the financial statements due to
fraud in every audit. The auditor's evaluation is a continuous process throughout the audit. A
financial audit auditor's evaluation of substantial fraud is outlined in AS no. 82, which gives
further operational guidelines to auditors. The auditor should submit the problem to the
appropriate level of management if the misstatement is not substantial to the financial statements.
Any fraud that has a significant impact on the financial statements should be brought to the
attention of senior management, who can help guide the auditor's inquiry. Make a note of the
impact on the financial statements and provide a copy of the findings to the committee. The
client should also seek legal advice (Coram, P. J., & Wang, L. 2021).
Failing to recognize that fraud is a crime is a grave mistake. To assess if fraud has happened is
not an auditor's job. That is the job of the legal system in a country. Both fraud and inaccuracy
may have a significant influence on the accuracy of financial reporting (Dennis, I. 2010).
pg. 4
professional skepticism. There is a possibility that a significant misrepresentation might be made
owing to fraud if the auditor had previous knowledge of a client's honesty and integrity. When
doing an audit, auditors must follow international auditing standards to ensure that the financial
statements are free of material misstatements. Audit protocols must be developed by the auditor
to detect fraud and error-related misstatements. To ensure that the financial statements are free of
fraud or mistake, the auditor looks for sufficient audit proof that the fraud or error has not
occurred or, if it has, that the fraud's results have been represented in the financial statements and
the error has been repaired. The auditor's role in determining the reporting and disclosure
requirements for such events is based on the concept of materiality (Ivanovic, T., & Ivanovic, B.
2019).
pg. 5
Question 2
Describe the audit expectations gap in the UK and globally, discuss recent
developments concerning this gap and debate the recommendations of the Brydon
Report for 2019 to deal with this gap.
Ans:
Development concerning the gap and debit:
An independent auditor (safeguards for auditor independence) and clear communication
(knowledge of audit reports) are all necessary components for a sound financial system.
Considering these issues, it is obvious that the fundamental ideas of an audit are misinterpreted.
A financial audit's primary goal is to verify the accuracy of Brydon's financial statements and
related accounting records. Many nations throughout the world, however, have come to doubt the
credibility of external auditors due to a discrepancy between the function of an auditor and what
the consumers of the audited financial statement expect the auditors to do, as indicated by
widespread critiques and lawsuits. Some of these critiques appear to stem from a societal
misunderstanding of the external auditor's essential role (i.e., an expectation gap) The auditors
are often blamed for a firm's demise because of the public's notion that auditors have a duty and
responsibility to report on the financial health of a Brydon. As a result, the study's goal is to
determine if there is a difference between auditors' expectations and those of the audited
accounts, as well as to give recommendations on how to bridge the gap (Widodo & Hariri,
2021).
As a result, there is an audit expectation gap in the public's view of what auditing involves. For
example, there may be a disparity between the public's perception of auditor performance and the
reality in some cases. People's expectations don't match reality. As a result of this mismatch, the
auditing process is viewed with skepticism. Businesses often hope that the auditing process will
reveal any inconsistencies or dishonesty in their financial accounts. Audits aren't usually the best
way to go about this because they have their own set of constraints. As a result, a business owner
may be dissatisfied with the audit's scope or comprehensiveness (Widodo & Hariri, 2021).
pg. 6
Examples of expectation gaps can be seen in a variety of contexts, including A "knowledge gap"
which refers to circumstances when the audited entity does not grasp what is going on during an
audit and does not know the customary rules and processes. Auditors face a "performance gap,"
which is a discrepancy between what the public expects of them and what auditing standards
require of them. As a result of a misunderstood view of an auditor's legal duty for discovering
fraudulent activities (Iwanowicz, T., & Iwanowicz, B. 2019).
LIABILITY GAP.
Although the audit quality is the primary emphasis of some of the gaps, others are based on a
misinterpretation of the commonly recognized auditing standards (GAAS). It's critical to
approach each of these scenarios with a fresh set of eyes.
Recognizing the auditor's responsibilities:
GAAS is a set of guidelines and criteria that auditors must follow. These have a few restrictions.
To illustrate, an auditor can evaluate a selection of transactions rather than all financial records
by use of sampling. As a result, it raises the potential that the audited firm's whole financial
picture isn't being examined. During an audit, an auditor will frequently rely on their own
experience and professional judgment in addition to the available data. They may be accurate in
their evaluation, but this evidence may not be decisive (Coram, P. J., & Wang, L. 2021).
The auditing expectation gap can be attributed in part to these restrictions. In most
circumstances, audits will not identify all errors in financial accounts since no audit is
completely flawless. A lot can go wrong here. In the event of a financial loss, investors may sue
the auditor. However, audited financial statements aren't always completely free of
responsibility.
pg. 7
expected is to be open and honest with everyone involved in the process. Audits are less likely to
uncover fraud because of the sophisticated measures taken to conceal it, and management fraud
is more difficult to identify because of the managerial power to falsify data (Dewing, I. P., &
Russell, P. O. 2002).
All the attention being paid to the difference between what people expect and what they get is
off-putting to me. It's either an audit that is reinforcing the proper level of trust in Brydon or it
isn't. Better31 audits conducted by experts under a clearer structure are what's needed (Widodo
& Hariri, 2021).
It has been suggested that an improved audit report would be beneficial to all users. as part of the
audit quality process. Internal and external users are the primary beneficiaries of audits. Any
day-to-to-day invoices, financial statements, ledgers, reports, and physical verification
(inventory) are examined by an auditor or an audit team as part of the auditing process. As a
result, quality audits to assist the management to improve their performance and run a legally
compliant firm. It is a regulatory agency that sets criteria for quality audits, and those standards
must be met by the auditor, as well as other regulatory obligations The auditor's independence in
audit quality has a twofold influence: it may be good for quality audit, or it may damage the
standards of quality audit if the auditor becomes more familiar with the Client (Coram, P. J., &
Wang, L. 2021).
This discrepancy between public expectations and what the audit profession acknowledges as an
audit goal is known as the "audit expectation gap". There is a direct correlation between
auditing's public image, financial reward possibilities, and public trust in auditors' work, all of
which are adversely affected by a widening of the audit expectation gap. According to Brydon,
who cites PwC's future of audit study, investors want more information on fraud risks, and a
"significant majority of investors favor broadening the scope of audit" to include fraud detection.
pg. 8
References:
Brown, T., Majors, T. M., & Peecher, M. E. (2020). Evidence on how different interventions
affect juror assessment of auditor legal culpability and responsibility for damages after
auditor failure to detect fraud. Accounting, Organizations and Society, 87, 101172.
Coram, P. J., & Wang, L. (2021). The effect of disclosing key audit matters and accounting
standard precision on the audit expectation gap. International Journal of Auditing, 25(2),
270-282.
Dennis, I. (2010). What do you expect? A reconfiguration of the audit expectations gap.
International journal of auditing, 14(2), 130-146.
Dewing, I. P., & Russell, P. O. (2002). UK fund managers, audit regulation and the new
accountancy foundation: towards a narrowing of the audit expectations gap? Managerial
Auditing Journal.
DeZoort, F. T., & Harrison, P. D. (2018). Understanding auditors’ sense of responsibility for
detecting fraud within organizations. Journal of Business Ethics, 149(4), 857-874.
Iwanowicz, T., & Iwanowicz, B. (2019). ISA 701 and materiality disclosure as methods to
minimize the audit expectation gap. Journal of Risk and Financial Management, 12(4),
161.
Olojede, P., Erin, O., Asiriuwa, O., & Usman, M. (2020). Audit expectation gap: an empirical
analysis. Future Business Journal, 6(1), 1-12.
Rustiarini, N. W., Yuesti, A., & Gama, A. W. S. (2020). The public accounting profession and
fraud detection responsibility. Journal of Financial Crime.
Salehi, M. (2011). Audit expectation gap: Concept, nature, and trace. African Journal of
Business Management, 5(21), 8376-8392.
Widodo, N. H., & Chariri, A. (2021). THE RELATIONSHIP BETWEEN AUDIT
PROCEDURES, AUDITORY EXPERIENCE, AND AUDITORS’ RESPONSIBILITY
FOR FRAUD DETECTION. Diponegoro Journal of Accounting, 10(1).
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Appendix
pg. 10