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Audit Quality Essay On Australian Parliamentary Committee

Question

Task: It requires students to write a research essay on the recent Australian Parliamentary Joint Committee on Corporations and Financial services.

This is an independent research task, which broadly aligns to regulation of auditing, audit quality, auditor independence and meeting user expectations. It is expected that the interim report will form the basis of your submission but additional reading and the sourcing of information from newspaper articles and the internet is required.

The format of the assignment is to be in essay form (report style not required), sub-headings are encouraged, 12 font calibre or times new roman styles are recommended and use of the Harvard style of referencing is also required (please seek assistance from the librarian if necessary).

Part A – Background, impetus, rationale, momentum and support and/or resistance:

  • What is the purpose of audit quality for big business and discuss whether it been successful in Australia?
  • Describe what is the purpose of a Parliamentary Committee?
  • What were the motivations for the inquiry?
  • Was there any resistance to the Joint Parliamentary Committee? If so, who from and why?
  • How was the information collected?

Part B – Interim findings, revelations:

  • What have been the key findings of the Committee to date? Discuss any specific examples, which have been identified as having breached professional and ethical standards.
  • What conflicts of interest are apparent?
  • What threats to independence were discussed?
  • What is the auditors ‘duties in relation to a GPFR?
  • Has there been any evidence of systemic audit failure in Australia?

Part C – User expectations, scope of the audit, digital financial reports:

  • Who are the likely stakeholders for the Parliamentary report?
  • What are the roles of ASIC, AUASB, FRC, Treasury, Professional bodies?
  • What is your opinion on the findings to date?
  • What impacts and reforms are likely because of the Parliamentary Committee, including discussion of self-regulation etc. Will these reforms be positive / negative and who will they most likely impact?
  • How has the scope of the audit changed?
  • What changes have occurred in relation to the expectation gap?
  • What is the current status of digital reporting?

Answer

Introduction
The concept of audit planning explored in the proposed audit quality essay is a vital step in the process of audit that helps in tracing the risk linked to the business. As per Geoffrey et. al (2016) the audit process and analytical mechanism helps in risk assessment. The aim of the report is to conduct an independent research on the regulations of audit, audit quality, independence and meeting the expectation of the user. The audit quality essay discusses regarding the recent Australian Parliamentary Joint Committee on Corporations and Financial services.

For this purpose the audit quality essay is segregated into four parts. The introduction is followed by the back ground and the interim findings. It is then supported by the user expectation and lastly the global awareness.

Part A
Background, impetus, rationale, momentum and support and/or resistance:
The financial performance and status of an organization can be learnt from its financial statements. Investors often take important investments related decisions by looking at the financial statements of an organization. As per Kim (2013) a rational investor would always choose to invest in the stakes of a company that is financially strong as reflected from its financial statements. For attracting the investments from the investors, few companies often choose to manipulate their financial statements and hence, the reliability and authenticity of the financial statements gets compromised. To safeguard the interests of the investors, it is now mandatory for companies to procure independent third-party verification for ensuring the transparency, reliability, fairness, and credibility of their financial statements.

Purpose of audit quality for big business
This third-party verification of financial statements is required to be conducted by an independent auditor and both the auditor and the company must ensure that the audit quality is not compromised at any stage (Gay & Simnett 2018). The significance of audit quality is enormous for all types of businesses. The purpose of audit quality for big businesses is to ensure that their financial statements reflect the true and fair picture of their financial performance. Audit quality also ensures that there is full compliance to all statutory requirements. It helps in confirming the integrity and credibility of the financial statements of an organization and supports market confidence by guaranteeing financial stability (Gay & Simnett 2018).

Success in Australia
Even though audit quality has huge significance for investors yet the success of the same has failed to meet the expectations in Australia. As per the ASIC findings considered in the audit quality essay, audit quality in Australia is not up to the mark and the issues contributing to this failure need to identified, addressed, and resolved. The findings of the audit inspection program report for ASIC 2017-2018 stated that in 24 percent of 347 audit areas, the auditors were unable to gather reasonable assurance for confirming the fact that the financial reports of the companies were free from fraud and errors. Despite these findings, Australian audit experts claim that the audit quality in the country is great and getting better with time (Gay & Simnett 2018).

Purpose of a Parliamentary Committee
The Parliamentary Committee is responsible for monitoring and reviewing activities of ASIC. On February 15, 2019, a report was issued by the Parliamentary Committee stating that even though the report issued by the ASIC reflects deterioration in the audit quality yet it cannot be confirmed from the figures provided by the latter and it can also be the other way round. Australian Parliamentary Joint Committee on Corporations and Financial Services is entrusted with the responsibility of investigating specific matters concerning policies, or government performance, or administration. The audit quality essay examines that the purpose of having a Parliamentary Committee is to offer individuals and organizations an equal opportunity to take part in policy-making and to put forth their views that can be presented in the public domain and even considered as a significant aspect of the decision-making function (Parliament of Australia 2020).

Motivations for the inquiry
The Parliamentary Joint Committee on Corporations and Financial Services was asked by the Senate to conduct an inquiry on audit quality in Australia. The Committee was asked to prepare and present a report based on the findings of their inquiry on audit quality in the country by March 1, 2020, which was later extended to September 1, 2020. The motivations for conducting this inquiry was to evaluate the effectiveness, level of competition, and relationship between consulting and auditing services, audit quality, performance and level of adequacy of standards, disciplinary, and regulatory bodies, appropriateness of regulation, legislation, and licensing, the role of audit in the identification and reporting of errors and frauds, ongoing changes in the scope and role of audit, potential for conflict of interests, and other related matters (Parliament of Australia 2020).

Resistance to the Joint Parliamentary Committee
The Joint Parliamentary Committee received a warning from Bill Edge, the Chairman of Financial Reporting Council of Australia, that if a company is found disregarding its audit function by manipulating it and paying the lowest possible audit fees then it must receive a poorer ranking for audit (Australian Government FRC 2019). The report presented by the Parliamentary Joint Committee stated various issues concerning audit quality in Australia and the potential for a rise in a conflict of interests to take place. 

Collection of the information
As per the investigation on audit quality essay, the information for this report was collected by conducting an in-depth inquiry within the big-four accounting firms by focussing on the maintenance of quality, and regulation of corporate audits and potential for conflict of interests. The performance of standards, disciplinary, standards, and other bodies was also analyzed for the inquiry. 

 Part B – Interim findings, revelations:
Key findings of the Committee
The key findings of the Parliamentary Joint Committee observed in the present context of audit quality essay state that the audit quality in the country is highly compromised. The Committee also realizes that the ongoing issues with audit quality are faced worldwide and not just in Australia. The findings suggest that the audit quality in Australia can be improved only by means of implementation of new and revised strategies. The report issued by the Parliamentary Joint Committee states that even though the big-four accounting firms are the pioneers of large company audit but at the same time they earn more revenues from services that are non-audit in nature. Glen Unicomb previously worked as a forensic investigator at ASIC also quoted in the report that the auditors working with the big four audit firms are at the risk of facing pressures from their seniors to approve financial statements for the sake of protecting advisory relationships (Grayston 2019). There are various examples where auditors are found to have breached professional and ethical standards. Most of these breaches have taken place due to lack of documentation, non-compliance engagements, related parties, etc. It is identified herein audit quality essay that there were several cases where no evidence has been found on the working paper of the auditor reflecting his understanding and risk assessment with respect to the clients’ related party transactions (Grayston 2019). In some cases, it was also observed that there has not been any single evidence confirming the fact that the auditor has tried to understand his client and the level of internal controls in the organization and it was also learned that most auditors are authorized representation letter are sourced after the audit report is issued.

Conflicts of interest
The readings used to prepare this audit quality essay illustrates that the audit industry has a very complicated structure as the auditing of major companies is handled by only a few audit firms and the operations of the top-four accounting firms are diversified in nature. This structure itself creates the potential for conflict of interests (Geoffrey et al 2016). One reason for an apparent conflict of interests could be the fact that the selection of auditors is done by the directors of a company while the investors who are the actual users of the audit report, based on which they construct important investment-related decisions have no inputs to provide when it comes to hiring and selecting of auditors (Geoffrey et al 2016). Another potential conflict of interest takes place when an audit company fears to lose further work with the client on account of unfavorable audits for the latter. This fear can pressurize the audit company to opt for unethical practices by issuing audit reports that do not reflect the true and fair view of the financial wellbeing of the client’s company.

Threats to independence
The Parliamentary Joint Committee also highlighted few facts concerning threats to the independence of auditors. An auditor can face four types of threats to independence as discussed in this section of audit quality essay - familiarity threat, self-interest threat, intimidation threat, and self-review threat. Familiarity threat is when the auditor and the client have known each other for a long time or they are relatives or close friends while self-interest threat is when the auditor has a large amount pending from the client’s end or a direct financial interest via shares (Parliament of Australia 2020). Intimidation threat to independence is one where the auditor faces replacement pressure from the client in case he portrays the latter’s real state of affairs in his audit reports while self-review threat takes place when the auditor solely performs book-keeping and audit services for the company.

Auditors ‘duties in relation to a GPFR
The auditors must not get influenced by the threats that come their way and must always abide by ethical norms in their practices. An auditor must ensure that he is delegating all his duties in relation to a GPFR ethically and must ensure that he is preparing an ethical audit report for the company based on its financial statements, not scared of forming an adverse opinion where necessary, making inquiries on his part as and wherever required, complying with all the auditing standards and requirements, identifying and reporting frauds and errors in the financial statements, adhering by the code of professional conduct and by the code of ethics, and offering assistance to the fellow officers in case of an investigation (Geoffrey et al 2016). 

Evidence of systemic audit failure in Australia
The audit industry claims that an ethical, professional, and sincere approach is used in conducting audit functions in Australia yet there has been various evidence that confirms systemic audit failure in the country. ASIC inspection reports confirm the fact that there has been a systemic audit failure in Australia (ASIC 2020). It was found herein audit quality essay that there has not been any evidence in the audit reports that the auditors have performed necessary procedures to procure a reasonable assurance that the financial statements of the client are free from any sort of material misstatements caused as a result of frauds and errors. Breaches in compliance with respect to audit engagements like SMSF compliance audit, trust account audit, etc were also detected. 

Part C – User expectations, scope of the audit, digital financial reports:
Stakeholders for the Parliamentary report
According to the investigation carried on the case scenario of audit quality essay, the stakeholders for the Parliamentary report are the Australian Securities and Investment Commission (ASIC), Auditing and Assurance Standards Board (AUASB), Financial Reporting Council (FRC), Treasury, and CADB (Companies Auditors Disciplinary Board). Treasuries, standards, legislation, and professional bodies are regulatory frameworks that govern the overall audit function in Australia. Statutory bodies like ASIC, AUASB, FRC, Treasury, and Professional bodies are levied with the responsibility of developing necessary standards for meeting the reporting requirements (Parliament of Australia 2020).

Roles of ASIC, AUASB, FRC, Treasury, Professional bodies
The role of ASIC is to assess the level of compliance with the independent statutory requirements and for taking necessary action wherever appropriate (ASIC 2020). ASIC is also levied with the responsibility for conducting and even canceling the registration of the auditors while the role of FRC is to monitor and confirm the efficiency of the country’s financial reporting framework. It is also responsible for offering strategic advice to the government and ASIC on matters pertaining to audit quality in the country. Furthermore, the AUASB is responsible for developing, issuing, and maintaining Australian Accounting Standards under Section 334 and Section 336 of the Corporations Act. CADB acts as an independent, disciplinary, and administrative body for the auditors that are registered by the Australian Securities and Investments Commission under the Corporations Act. The role of CADB is to impose a sanction on such auditors that have failed to ensure compliance with the requirements mentioned in the Corporations Act.

Findings
The findings obtained from the overall analysis done within the audit quality essay depicts that Audit quality in Australia fails to meet the expectations despite the regular monitoring of the professional and statutory bodies. Issues concerning audio quality in the country have raised questions on not just the financial statements of the organizations but also the integrity of the auditing profession. On one hand, there is a constant rise in the negative findings for all the audit firms (including the big-four audit firms) while on the other hand there is a significant drop in the key audit areas too. As per the statistics considered in the context of audit quality essay, it is quite clear that the audit quality in Australia is continuously declining in every eighteen months. Despite all the failures in the audit function in Australia, the Parliamentary Committee suggests considering reforms like self-regulation (KMPG 2020). 

Impacts and reforms
The success of international reforms is probable but it should also be noted that these reforms might not work out for Australia since the regulatory framework with respect to auditing culture in the country does not seem to be homogenous with other nations (KMPG 2020). Even though there will always be support as well as criticism for each and every policy options but this does not mean that international reforms will work best in improving the quality of audit in Australia. 

Scope of the audit changed
These international reforms can turn out to be positive or even negative and therefore, it is suggested that these reforms to the regulation of audit in Australia must only be implemented when there is reasonable evidence that confirms its effectiveness. Failure to collect reasonable evidence and still implementing international reforms can put an added stress on the audit quality in Australia (Cernusca and Balaciu 2015).

Changes have occurred in relation to the expectation gap 
The structure of the Parliamentary report comprises five chapters- Chapter 1, 2, 3, 4, and 5. Chapter 5 of the report considered to prepare this audit quality essay is concerned with the scope of the audit and how it has changed over a period of years. The earlier audit was limited to only big entities and nowadays, every other company seeks to get its financial statements audited from time to time. The changes in the scope of audit have also been of huge help in addressing and bridging the expectation gaps of the stakeholders (Matthew 2015). The continuous development of various professional standards has been a game-changer in fulfilling the expectations gap by successfully being able to detect frauds and errors in the financials of an organization.

What is the current status of digital reporting in regards with the case scenario of audit quality essay?
The current status of digital reporting in Australia seems quite challenging as there is a difficulty in accessing information for various types of users that includes regulators, professional bodies, and standard setters. DFR is not yet fully implemented in Australia but still few Australian companies are required to use the same in some of the other contexts. It is now mandatory for Australian companies that have their securities enlisted on the US securities exchange to lodging digital financial reporting with the US SEC. It was observed by the stakeholders that even though the companies were able to lodge DVRs with the Australian Securities and Investment Commission (ASIC) since the year 2010 yet there have not been any DFRs lodged to date. The most probable reason behind not lodging DFRs with ASIC could be the fact that the analysts have not yet updated their systems for using DFRs as there are no entities that generate the DFRs.

Likely stakeholders for the Parliamentary report 
From this article explored in the segments of audit quality essay, it is now very clear that the audit quality in Australia faces enormous challenges. This is probably due to the fact that the Australian audit industry lacks a code of ethics and professionalism too. However, these challenges in audit quality are presently faced worldwide and are not just confined to Australia. The only difference is the fact that the ethics and levels of professionalism vary from country to country. Ever since the 2007-09 financial crisis has taken place, the regulators in Europe and the U.S. are exploring various ways through which the quality of audit can be enhanced. Regulators across the globe are trying their level best to improve audit quality worldwide. It was also observed in some cases as discussed herein audit quality essay that the principal auditors’ U.S. affiliate failed to meet the objectives of the role of the audit function performed by him in his audit. Another example of audit quality discrepancy was found in the case of an Indian company “Satyam”. The auditors of Satyam failed to conduct basic audit function in order to verify the cash reported by the company. Satyam reported a total of cash and bank balance as $1.1 billion while in reality; these balances were lesser than $100 million (Manoharan 2011).

The Committee has raised various issues with respect to audit quality in Australia. These audit quality issues exposed by the Committee are commonly faced worldwide. Most of the audit-related issues exposed by the Committee are as a result of presumptions or incomplete information. This is also why the Committee is seen to put a lot of stress upon the essence of segregating the issues that are impacting audit quality from those that are arising out of perceptions. It was found that not less than 24 percent of the 347 key audit areas indicated the fact that the auditors whether intentionally or unintentionally have failed to gather reasonable assurance in order to confirm the reliability and credibility of the financial statements of the organizations (National Audit Group 2020). The audit quality worldwide faces four types of threats- self-interest threats, familiarity threats, self-review threats, and intimidation threats (Narayanaswamy 2019). These threats mentioned in this segment of audit quality essay have a huge tendency to impact the audit function of an organization and thus, the outcomes of the same are faced by the investors worldwide. These threats compel the auditors to undertake unethical and unprofessional practices and dodge the financial reports of the companies. 

The study examined herein audit quality essay signifies that the issues faced in the audit quality in Australia are serious and if these must be rectified as soon as possible. Australia must come up with appropriate mechanisms and controls that can help the same in enhancing the level of audit quality in the country. There are various ways in which the quality of audit in Australia can be improved to a significant extent. Various stakeholders have suggested ASIC improve its audit inspection approach (Parker 2019). They suggested that ASIC must adopt a system by which it can grade its audit inspection findings on a severity basis. Standards like the adoption of balanced financial reporting and publication of the company’s inspection reports can also do wonders in improving the audit quality in the country. ASIC must also ensure that the audit function is delegated ethically and professionally in the country. ASIC must also conduct regular checks from time to time to confirm that the quality of the audit function is not compromised by the professionals under any threats received from the clients (Parker 2019). The use of DFRs is also suggested and supported by the big-four audit firms. EU has made it mandatory since January 2020, for all the companies that are enlisted on the European exchanges to use DFRs. The research on audit quality essay mentions that Australian companies that are enlisted on the US stock exchange are also required to use DFRs now. Limiting the tenure of the audit function through mandatory partner/ firm rotation, setting the fees for audit, appointing regulators, limiting the provisions related to non-audit services, etc are few other ways through which the quality of audit can also be improved in Australia (National Audit Group 2020).

Conclusion
The above discussion done within this audit quality essay concludes that the investors make important investment decisions based on the information reflected from the financials of a company. The authenticity and reliability of the financial statements of an organization can be confirmed by the auditors. The roles and responsibilities of auditors are very crucial in not just allowing the investors in making well-informed decisions but also for the well-being and sustenance of an organization. Despite the significance of the audit function, it is quite evident that the audit quality is continuously deteriorating worldwide and this is not due to the threats faced by the auditors but due to lack of ethics and professionalism bestowed in them. Therefore, the countries must carefully review the audit quality and must take appropriate measures in successfully improving the same in the nearing time.

References
ASIC 2020, ASIC audit inspections, Available from: https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/auditors/asic-audit-inspections/ audit quality essay [Accessed 11 April 2020]

AUASB 2019, Australian Auditing Standards. Available from: https://www.auasb.gov.au/Pronouncements/Australian-Auditing-Standards.aspx [Accessed 11 April 2020]

Australian Government FRC 2019, Auditor disciplinary processes: review, Available from: https://treasury.gov.au/sites/default/files/2019-04/p2019-t374191-review.pdf [Accessed 11 April 2020]

Cernusca, L and Balaciu, D.E 2015, The Perception of the Accounting Students on the Image of the Accountant and the Accounting Profession. audit quality essay Journal of Economics and Business Research, 21(1), 7-24. doi: 10.1515/sues-2016-0010

Gay, G., & Simnett, R 2018, Auditing and Assurance Service in Australia, McGraw-Hill Education (Australia) 

Geoffrey D. B, Joleen K, K. Kelli S. and David A. W 2016, Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons, 30(1), pp. 143-156. Available from https://doi.org/10.2308/acch-51309 [Accessed 11 April 2020]

Grayston, C 2019, Audit quality: is it time for a different approach? audit quality essay Available from: https://www.intheblack.com/articles/2019/02/01/audit-quality-time-for-new-approach [Accessed 11 April 2020]

Kim, S 2013, Accounting quality, corporate acquisition, and financing decisions, The University of North Carolina

KMPG 2020, Regulatory Audit, Available from: https://home.kpmg/au/en/home/services/audit/regulatory-audit.html audit quality essay [Accessed 11 April 2020]

Manoharan, T.N 2011, Financial Statement Fraud and Corporate Governance. The George Washington University.

Matthew, S. E 2015, Does Internal Audit Function Quality Deter Management Misconduct?. The Accounting Review 90(2), 495-527.

Narayanaswamy, R 2019, The Effect of Mandatory Audit Firm Rotation on Audit Quality, Audit Fees and Audit Market Concentration: Evidence from India, Available from: https://www.iimb.ac.in/sites/default/files/2019-03/WP%20No.%20582.pdf audit quality essay [Accessed 11 April 2020]

National Audit Group 2020, Latest News On Audit Inquiry – 8 Key Recommendations, Available from: https://www.audits.com.au/2020/03/02/latest-news-on-audit-enquiry-8-key-recommendations/

Parker, D 2019, Seeing audit quality in Australia in a new light. Available from: https://www.intheblack.com/articles/2019/10/01/seeing-audit-quality-in-australia-in-a-new-light [Accessed 11 April 2020]

Parliament of Australia 2020, Parliamentary Joint Committee on Corporations and Financial Services, audit quality essay Available from: https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services [Accessed 11 April 2020]

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