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The Future of Audit

The Future of Audit: Keeping Capital Markets Efficient OPEN ACCESS

Keith A. Houghton
Christine Jubb
Michael Kend
Juliana Ng
Copyright Date: 2009
Published by: ANU Press
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  • Book Info
    The Future of Audit
    Book Description:

    At a time when increased independence requirements for auditors, legal backing for auditing standards, and increased audit documentation requirements have occurred, this book examines key issues in the market for audit services in Australia. It investigates issues including: the understandability of audit and the state of the audit expectations gap; auditors' business acumen and industry expertise; the auditors' use of materiality; whether or not the increasingly prescriptive nature of auditing is creating a distraction from the 'real' audit task and stifling auditors' judgement; whether or not CLERP 9 reforms involving audit partner rotation and restrictions on non-audit service provision are efficient and effective and reactions to the increasing scrutiny of auditors and audit firms by regulators. With its thorough coverage of contemporary issues, this book intersperses the authors' summaries, interpretations and recommendations with the perceptions, expressed in their own words in order to faithfully convey their candid assessments, of users of audit reports, purchasers and suppliers of the audit product, auditing standard setters and regulators of the audit market.

    eISBN: 978-1-921666-51-3
    Subjects: Finance
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Table of Contents

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  1. Division A
    • This monograph is the culmination of an extensive project examining the value and future of audit in Australia. The objective of this study is to provide policy advice to key stakeholders in the market for audit services on the current challenges and future opportunities in that market. This advice is informed and enriched by a comprehensive survey of major stakeholder groups in the capital market of their concerns about and expectations of the market for audit services in Australia. The data form the backdrop against which the future directions of the Australian market for audit services are shaped to ensure...

    • This study uses multiple methods to derive data in order to extract the richness of the experience of those whose working lives are connected in some way with the market for audit services and the audit product. Surveys, focus group interviews and face-to-face interviews are the methodologies employed to gather the data that are then analysed using various techniques—quantitative and qualitative.

      To reflect as wide a range of opinions as possible, this project sought the participation of representatives of key stakeholder groups from the supply and demand sides of the market for audit services, encompassing: users of audit reports...

  2. Division B
    • Major challenges in relation to understanding the role of audit and the audit process continue to exist for stakeholders in the audit process judging by some of the observations made in response to the survey and interviews conducted as part of this project. These issues are inextricably linked with the audit expectations gap and include the following.

      Is it possible to communicate effectively with stakeholders of differential levels of so phistication and knowledge about financial reports and about the audit process and the existing single public outcome—the audit report?

      To what extent has the increasing complexity of financial statements...

    • 4 COMMUNICATION (pp. 85-138)

      Responses to the proposition that either auditors or management should be charged with the responsibility to disclose incremental information about the audit process and/or the audit opinion are mixed, within and across categories of stakeholders. Key issues include:

      is there value in further disclosure in the audit process and/or outcome that is subject to regulatory requirement

      if either auditors or management provides additional disclosures in the context of audit, what would be the most appropriate content and location

      if such disclosures are to be provided by either management or auditors, what mechanisms could be used to monitor the disclosures to...

    • The contribution to the audit expectations gap of the issue of the level of understanding of the concept of materiality in an auditing context might be one of the most important findings from this study. The issue presents many challenges for the profession and for regulators, including:

      how can the role of auditor judgment surrounding the auditors’ use of materiality in the conduct of the audit be best explained

      what are the mechanisms used for auditors to determine the level of materiality (tolerable error) and when and to whom is this information communicated

      can information about materiality be articulated effectively...

  3. Division C
    • All stakeholders to a greater or lesser extent recognise the importance to audit quality of a supplier having business acumen and client and industry-specific knowledge. Some of the key issues for the profession around development and maintenance of these knowledge bases include:

      does industry expertise add value to the provision of auditing services

      to what extent do industry categorisations remain valid between different sized levels of market capitalisation

      does auditor industry specialisation add to potential conflicts in terms of independence

      to what extent does specialisation in a specific accounting standard(s) overlap and/or conflict with auditor industry specialisation

      how is it...

    • The issue of attracting and retaining staff within the public accounting profession raises some serious challenges for the profession, including:

      is the common perception that the number of accounting major graduates available for recruitment is falling factually based or a myth

      what is the position for recruitment of international students who graduate with an accounting qualification

      do high university entrance scores for some commerce and business degree courses mean that recruits to the profession are not suited to it

      are there further alternative entry pathways to the auditing and accounting professions

      are there better ways of developing personal attributes, including...

    • The audit firm business model and its association with staff retention present some challenging issues for the audit profession going forward. The challenges raised by interviewees included:

      to what extent is an increasingly regulated auditing profession and prescriptive audit task hindering the retention of staff

      how best can the nature of the work and the workload model within the auditing profession be adapted to enhance continuing variety and challenge

      what adaptations, if any, are necessary to retain generation Y within the profession

      how can the work/life balance be enhanced within the profession

      if the lure of partnership is losing its...

  4. Division D
    • The issue of auditor independence has many facets. This study focuses principally on two key facets: auditor-provided non-audit services and audit partner rotation. Auditor-provided non-audit services is one of the most debated aspects in the maintenance of auditor independence. Audit partner rotation is tied inextricably to the continuity of audit teams and client and industry knowledge dealt with in Chapter 6. Challenges for the profession and regulators in these areas include:

      are the majority of participants in the market for audit services aware of changes to the auditor independence requirements as a result of the CLERP 9 and related reforms...

  5. Division E
    • This study explored in depth the impacts created by the regulatory reforms of the audit function put in place in the period after the corporate collapses of the early part of this decade. Some of the issues surrounding these impacts include:

      what are the costs and benefits of legal backing for auditing standards

      have the reforms after the corporate collapses earlier this decade reduced the likelihood of unexpected future collapses have these reforms improved the general public’s confidence in the capital market

      have these reforms enhanced the credibility of financial statements

      have these reforms enhanced audit quality

      have these reforms...

    • The regulatory reforms to the auditing regime of earlier this decade were pervasive, once the revised, legally backed auditing standards were included. This chapter explores the impact of the changes in terms of the auditors’ work conduct.

      Is the increasingly prescriptive nature of auditing a distraction to the auditor?

      To what extent, if any, has the increasingly prescriptive nature of auditing, including increased documentation, resulted in a checklist mentality that is to the detriment of auditors’ judgment and the quality outcome of the audit? Given the additional audit procedures now required, do audit budgets give less scope to: a) understand...

    • The operationalisation of the changes to the regulatory regime in the early part of this decade gave rise to many comments from the participants in this study. From their comments, the key issues that arise include:

      have the approach and operational aspects of regulators’ oversight of auditors and the audit process been effective

      is communication with the profession by regulators adequate have ASIC’s inspections of auditors been conducted effectively

      how have ASIC inspections been received by auditors

      how adequate is the resourcing of the regulators

      how can the expertise of regulators be enhanced

      should the Big Four and non-Big Four...

  6. Division F
    • 13 COMPETITION (pp. 545-576)

      The issue of competition within the market for audit services raises important issues for the profession, including:

      is the level of competition in the market for audit services optimal in terms of its association with the quality of services provided

      does the disparity in size between the third and fourth of the Big Four and also between the largest of the mid-tier and the smallest of the Big Four matter

      is it feasible to expect enhanced competition to come from growth in the mid-tiers that could bring any of them to a level comparable with the fourth in size of...

  7. Division G
    • While the issue of differential auditing is one that intermittently elevates in profile, at the time of the interviews, it was prominent. The key issues around this topic include:

      if there are to be differential auditing standards, what is the best basis for differentiation—listed– unlisted, small–large, public–private or some other distinction even within these sectors

      to what extent, if any, would the move from private to public company be discouraged if it involved also moving to a higher level of auditing standards

      how would those dealing with listed and unlisted companies in terms of, for instance, credit...

    • 15 INTERNAL AUDIT (pp. 595-610)

      The issue of the external auditor’s reliance on internal audit and whether that had changed from the past and to what extent the capital market valued internal audit was raised with stakeholders. While this was a second-order issue in terms of the future of audit, responses raised the following issues:

      how frequent is the presence of an internal audit function in organisations

      what benefits can an internal audit function provide to an organisation

      can the market assess the value of internal audit

      does the market value internal audit

      do boards of directors and/or audit committees value internal audit?

      is the...

    • Provision of assurance on various types of non-financial information has long been mooted as a potential growth area for public accounting firms. This chapter examines this issue in the context of questions about the demand for, willingness to supply and regulation of specific types of non-financial information and the assurances provided for it. The generic challenges surrounding these types of reports and assurance on them include:

      is there a demand for assurance provision of non-financial information

      given the range of types of non-financial information, is there a preference for assurance to be provided on some types ahead of other types...

    • One of the issues that the auditing profession has grappled with for some time is the notion of differential levels of audit assurance. The auditing standards have settled on one level of assurance for audit (that is, reasonable assurance), with the other level for assurance being a review (not an audit—that is, limited assurance). This chapter examines stakeholders’ responses to the proposition that audit engagements could result in either higher or lower levels of assurance than is ‘reasonable’. In doing this, the key issues around audit, as opposed to review, include:

      could there be circumstances in which auditors might...

  8. Division H
    • A market values no product or service unless the underlying characteristics and contributions made by the product or service are known to that market. Markets act efficiently and will price goods and services according to the value that the buyers in the market see exhibited by the product or service. The price paid for the product or service will be the intersection of the price demanded by the suppliers and the price the purchasers are prepared to pay.

      Goods that are seen as ‘compliance’ goods are invariably subject to price minimisation by purchasers. Typically, a compliance good is one that...