This group report is prepared to identify the significant factors that contribute to the demand for assurance services and the independent audit in Australia. The independent audit in the form of an assurance service is extremely useful. However, the article also discusses the assurance beyond the financial statement analysis and auditing. The report presents the advantage of the assurance provided by the independent auditors by analysing the financial information and also assessing the processes and internal controls put in place by the business. The increasing length of the supply chain, complex operations and outsourcing have increased the need for assurance services. This report discusses how the assurance services are beneficial for the business organisations and the internal and external users of this information. The audits of the organisation provide reasonable assurance and add the value for all the stakeholders identified in this report. It enhances the accuracy of the information that becomes crucial for business decision making. It also enables the organisation to build trust and credibility. It can be stated that assurance is not only necessary for the organisations as a verification of their financial information but also for improving the quality of the information at large facilitating informed decision making and increased sustainability and profitability for the business in the long run.
With reference to the article titled Perspective – Assurance beyond the Financial Statements published in the Chartered Accountants Australia and New Zealand (CAANZ) in November 2015, this group report is prepared to identify the significant factors that contribute to the demand for assurance services and the independent audit in Australia (Szentirmay & Travers, 2015). The most significant factors contributing to this increase in demand are presented in this report along with an explanation of the four conditions that result in creating a need for independent audit reports. This report also covers the three hypotheses that are most commonly used for explaining the demand for an independent audit even in the absence of the regulatory mandate and this is followed by a stakeholder analysis for the independent audit process. The report also presents the likely benefits that are enjoyed by each of these identified stakeholders and the benefits of the auditing standards when they are effectively implemented by the organisations and the auditors. The independent audit in the form of an assurance service is extremely useful. However, the article also discusses the assurance beyond the financial statement analysis and auditing. The report presents the advantage of the assurance provided by the independent auditors by analysing the financial information and also assessing the processes and internal controls put in place by the business
Major factors giving rise to the demand for assurance services in Australia
The people responsible for the management and governance of the organisation are generally very different from the shareholders of the company. The shareholders want the information about the financial performance of the company from an independent and reliable source so that they can analyse and assess the organisational position in the market and also ensure that the people in charge of the governance and management are fulfilling their roles properly. Similarly, the other stakeholders of the organisation including their employees, creditors, potential investors, government, regulators and the community want to ensure that the financial information provided by the organisation is reliable and is reviewed by an external source. The assurance services enhance the reliability and credibility of the financial information presented by the organisation in the form of the financial report.
Assurance services provide the shareholders and the other stakeholders of the organisation information to carry out an assessment and make decisions associated with investment, divestment, contracting for lending with greater confidence and with greater consistency. In addition to this, the assurance services also carry out a rigorous analysis of the operations of the organisation that help in the prevention and detection of any irregularities in the accounting process. Assurance is important to increase the reliability of the financial reports and the general accounting system followed by the managers. Assurance services act as a moral check on the government system that continuously discourages the management and the employees from committee any frauds with incorrect or unreliable reporting of the financial performance. The banking organisations and the other interested stakeholders can rely on the financial statement presented by the organisations that are verified by the independent assurance services and they can also ensure that their funds can be recovered by judging the performance and the financial viability of the business (Chartered Accountants, 2019).
The owners of the organisation can get a clear picture of the financial performance and annual profit or loss of the business and the financial statement and information verified by the assurance service providers can also prove to be more reliable during the instances of arbitration and settle in any claims. In Australia, assurance services provide a mechanism that examines all the business processes and also carries out an evaluation of the ability of the organisation to comply with all the internal and external requirements. The absence of such assurance services reduces the reliability of the financial information. The assurance services also reduce the risk faced by the business organisation in the form of the risk of any misappropriation, fraud or information risk. Because of this, there is a lot of demand for assurance services in Australia and the process of insurance is vital for the business organisation and all its stakeholders (Grant & Ghandar, 2019).
The conditions creating a need for independent financial audit reports
There are four qualitative characteristics that establish the usefulness of the financial information as set out by the Australian Accounting Standards Board (AASB). The Framework presented by AASB for the preparation and presentation of the financial statement by the organisations also known as the Conceptual Framework is developed in correspondence with the International Accounting Standards Board (IASB). According to this framework, comparability, verifiability, timeliness and understandability the four qualitative characteristics that help in ensuring the relevance and usefulness of the financial information and also make sure that it is representationally faithful. The independent audit reports contribute to enhancing quality by enhancing these qualitative characteristics. Each of these qualitative characteristics serves as a condition that further enhances the need for the organisation to carry out independent financial audit (CAA, 2018).
The compatibility of the information enables the understanding and identification of the similarities and differences between the various items that are included in the presentation of the financial information of the company. It allows the organisations to compare their financial report and performance with the performance of a competitor or any other organisation across the world.
The condition of verifiability of the financial information indicates that different observers and examiners can verify that the information that is presented in the form of the financial report is a faithful representation of the economic phenomena that it is aiming to represent. The independent audit reports ensure that the financial information presented by the organisation can be verified by any internal or external stakeholder of the organisation.
Most of the organisations in Australia share the report of their financial performance on an annual basis. The independent auditors make sure that the information is shared on a timely basis and before the stakeholders need to carry out the decision making that requires the presented information (Chartered Accountants Australia and New Zealand, 2019).
It is important that information presented by the organisations in the form of the financial report can be understood by anyone having a reasonable interest and knowledge about the economic activities of the business organisation and any person who is willing to carry out a diligent analysis of the performance and the information presented in the report. This is the condition of understandability that is safeguarded by the external auditors by presenting a standard format for the development of the financial report and ensuring the organisations prescribe to it.
Hypothesis supporting the demand for auditing
The independent audits conducted by the organisations are not only a regulatory mandate but also because of the inherent need of the organisation to verify and validate the accounting and financial information presented by it. There are three distinct theories that present the reasons that support the need of the independent financial audit even in the absence of a regulatory mandate. This section of the report discusses three hypotheses in detail (Gay & Simnett, 2010).
There is a problem of inherent information asymmetry in the organisation because of the separation between the ownership of the organisation and the control of its day to day functions. The owners of the organisation are not in possession of the internal information which gives rise to the agency problem. An agency problem is a result of a contract where there is more than one person engaged and there is another person carrying out some service on behalf of the first person. This results in the delegation of the authority and decision making power to the agent. The owners of the organisation provide the managers with the responsibility of running the organisation. However, the managers have limited incentives as compared to the owner of the company. The basis of the agency theory is that every party apps to maximize their self-interest in the process. The logical conclusion drawn from the agency problem is that the owners of the organisation try to protect themselves while assuming that the managers of the organisation acting in their self-interest. These actions may result in reducing the remuneration for the managers of the company reducing the demand for the shares of the organisation. These actions by the owners can prove to be problematic for the managers. Therefore, the managers of the organisation present the financial reports to the shareholders of the company for the elevation of the concerns that they have towards the organisational operations (CA ANZ , 2019).
The agency relationship between the owners of the organisation and the managers along with the external auditors is presented through the figure above. The external independent audit of this financial information will be required to address the risk of the managers presenting bias information to the shareholders. In this case, the independent audit services a monitoring activity managing the agency problem and enhancing the value of the firm.
Another hypothesis supporting the demand for independent auditing even in the absence of the regulatory mandate is the informational hypothesis. The external audit helps in improving the quality of information presented in the form of the financial results of the company. This improvement in quality contributes to reducing the risk, improving the decision making and increasing the profits for the organisation in the long run. The investors of the organisation demand information about financial performance as it facilitates decision making and also enables them to assess the risks and returns of the investment made by them. This address and increased estimation risk. Quality financial information of the organisation also increases the quality of internal decision making by detecting the errors at an early stage and keeping the employees motivated making them exercise more question when preparing the financial reports (AUASB, 2019).
The insurance hypothesis presented for supporting the demand auditing addresses the expectations of the investors of the company and the regulators. The auditors of the organisations were historically considered to be the organisation that will continue to stand even after the organisation itself collapses. Therefore, the investors of the organisation perceived external auditing as an excellent option for making a claim for funds in such a case for recovering their losses. The insurance in the form of the independent audit also benefits the regulators who can ensure that they are not criticized. Audit by the independent entities can insulate the regulator from any criticism and the blame for non-abidance by the organisation can be shifted to the auditors. However, this hypothesis is not as relevant in Australia at present because of the significant changes in the legal environment of the country (Gay & Simnett, 2010). Most of the responsibility of fair reporting practices lies with the organisation. However, the organisation and industry decorators are able to take advantage in the situation of a corporate collapse by transferring the oversight responsibilities to the independent auditor.
The assurance services of the organisation required the maintenance of professional relationships with the four most significant stakeholder groups. The stakeholder analysis includes the identification of significant stakeholders. The section of the report presents the most important stakeholder groups for the assurance services of the organisation and likely benefits of these services for each of them. The five most important stakeholder groups for the organisation providing assurance services are presented in the chart below.
The shareholders of the organisation benefit the most from the assurance provided by the external parties. Because of this, the independent auditor’s report is addressed to the members or the shareholders of the company. The audited information about the performance of the company provides the shareholders with the assurance of the proper discharge of stewardship responsibility of the management. The shareholders are the owners of the organisation and they wish to get reliable updates about the performance of the company that are verified by the assurance services.
Board of directors
It is the responsibility of the board of directors of an organisation to make sure that the organisation is operating in a way that is in the best interests of the shareholders of the company. The organisations in Australia are encouraged to have a board comprising of the executive and non-executive directors. With the organisation having non-executive directors on the board, it is the responsibility of the outside members to serve as an intermediary creating a link between the management and the auditors and having an oversight on the auditing process along with the financial reporting (Szentirmay & Travers, 2015). The assurance services enabled the board of directors to discharge their duties properly and increases the credibility of their reporting.
The audit committee holds the responsibility of extending support to the board of directors to ensure good corporate governance. The audit committee of the organisation also serves as an effective mechanism that helps in carrying out the communication between the management and the auditors. The assurance service providers help the audit committee in fulfilling this responsibility and facilitate the maintenance of a professional environment.
The assurance providers of the organisation often hold a close relationship with the internal auditors. Both the internal and external auditors together maintain the control environment for the entity. The assurance service providers evaluate and examine the adequacy of the internal control structure developed by the internal auditors and also as the work carried out by them. Therefore, the work carried out by the internal auditors of a business compliment the independent audit conducted by the assurance service.
Any individual who is a part of the planning, coordination and control of the organizational operations and transactions is a part of the management. The management of the organisation provides the assurance service providers with the necessary information and therefore there is a relationship of mutual respect and trust built between these two parties. Although the independent auditors need to approach the assertions made by the management with professional skepticism, the management of the organisation benefits from the assurance services as they provide additional validity and quality assurance to their approach of management and reporting (Szentirmay & Travers, 2015).
Benefits of effective auditing standards
The role of an auditor in Australia is currently guided through the Australian auditing standards. Effective auditing standards improve the efficiency of the audit and they dictate how the auditors and auditing organisation needs to structure its practice and go about fulfilling the designated responsibilities. The professional and regulatory bodies of Australia have established the ethical standards, standard establishing the independence of the auditor, quality control standards, reporting standards and standards that govern the audit performance. There are numerous stakeholders that are interested in finding out the outcomes of an audit. The organisational management, customers, employees, board members and other internal and external stakeholders of the organisation have their individual interest in this process. With the growing diversity in the environment, the nature of order demand is also becoming increasingly fluid. Effective auditing standards ensure that the auditing firm is able to provide reasonable assurance conserving the financial information that they have evaluated. The auditing standards make sure that the auditing firms expose all the significant risks faced by the organisation while also ensuring that the organisation does not have to bear the cost of excess auditing. Both these boundary conditions are balanced with the help of effective auditing standards (AUASB, 2019).
Auditing standards set out for the practitioners provide substance for getting absorbable outcome from the process of the audit. It also provides certainty associated with the penalties for any inappropriate audit conducted by them or negligence in the audit process. Effective auditing standards proved to be an incentive for the auditor and also ensure that the auditing organisation is not only acting in self-interest but also playing an important role of verifying the information presented by the company. Therefore, auditing standards are central to effective management, auditing and information presentation for the organisations and they also make the risk management process more robust. These standards are fundamental to the successful conduction of the audit for taking care of the interests of all the stakeholders (IAASB, 2019).
The business organisations all over the world are operating in an environment that is interconnected, dynamic and highly demanding. The increasing length of the supply chain, complex operations and outsourcing have increased the need for assurance services. This report has discussed how the assurance services are beneficial for the business organisations and the internal and external users of this information. The audits of the organisation provide reasonable assurance and add the value for all the stakeholders identified in this report. It enhances the accuracy of the information that becomes crucial for business decision making. It also enables the organisation to build trust and credibility. In conclusion, it can be stated that assurance is not only necessary for the organisations as a verification of their financial information but also for improving the quality of the information at large facilitating informed decision making and increased sustainability and profitability for the business in the long run.