Audit and Corporte Gorvernment Assignment

AUDIT AND CORPORTE GORVERNMENT ASSIGNMENT

Student number: 13032328

Word count: 1038

In the financial reporting process, the auditors have an important duty to provide a true and fair view base on their independent opinion about the financial statement for the shareholders. Therefore, professional scepticism (PS) has a very important role in the audit. According to the ISAs, PS is an attitude that always includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence (IAASB, 2010).

In terms of an attitude, IASSB stated in their report that PS is basically a mindset. It is a key factor for the auditor when they consider the data of the company and in form the conclusions. Besides, auditor independence as well as the ethical principles has strongly connection with PS, which help to improve auditor's action (IAASB, 2010). Therefore, the companies which are lack of audit independence need to significantly improve. For example, in the annual audit inspection reports in 2009/2010, the FRC stated that Big Four lack of professional scepticism and failure to meet ethical standards. Indeed, when there are two audits of Deloitte, KPMG and one audit of PwC need to have a significantly improvement, Ernst & Young had no major transgressions (Accountingweb, 2010).

In terms of being alert with several issues of Ps, the auditors must be aware with the audit evidences that contradicts to other audit evidences; or be alert with the information that need to consider about its reliability. Moreover, PS includes being alert to possible fraud case and several situations that necessary to perform addition audit procedures which required by the ISAs.

In terms of critical assessment of audit evidence, the auditor is required to assess both the support data and corroborates management's assertions (IAASB, 2010).

In the reality, there are many cases that indicate the lack of scepticism by Big Four and make the significant consequences. In addition the examples about the significantly improve needed above, in case of the Lehman Brothers’s collapse, people have tendency to blame the auditors when something go wrong. In particular, Steve indicated in his report that ‘Repo 105; transactions was designed in attempts to cover up the bank’s loses and overtime $25bn in capital was basically supporting $700bn of assets which had associated liabilities, what it lead to is the result in an exceptionally high gearing ratio. Therefore, the big question for Ernst & Young is that is professional scepticism applied by their auditors when they assess this case? (Steve, 2010).

Therefore, it is very important to determine the factors that create disincentives for auditors to apply an appropriate degree of PS and the audit firm need suitable solutions to promote and enhance PS in their staff.

Management attitudes are one of the key factors which have effect on the professional scepticism of the auditors. For example, aggressive management reaction will help the auditors have positive attitude when they assess an audit and easily apply PS. In contrast, management resistance or lack of support from management might lead to lack of applying PS. Moreover, PS is difficult to apply if the auditors are lack of skills (soft skill) and experience. Indeed, the technical skill is usually priority than the soft skill, inexperience of staff or low salaries might be the components that effect more concern for internal auditors than their scepticism (Jackie, 2010).