Overview of Auditing Standards
Ethical Standards (FRS, 2010) is issued by Auditing Practices Board. Its responsibilities are set up standards and guidance for auditing work. According to this standard, APB tries to enhance confidence on auditing process for public.
ESs includes five requirements that auditors must adhere to and its primary objective is to give ‘true and fair’ opinions on financial statement. The credibility of audit opinions depends on the integrity, objectivity and independence of the auditor. Accordingly, it requires the quality of audit more stringent, especially the independence of auditors’ assurance. ES2 illustrates the guidance on some ...view middle of the document...
ISAs request that auditor should base on their professional judgements and maintain professional scepticism throughout the process of audit. Moreover, these standards require that auditor should identify and assess risk of material misstatement based on the knowledge of audited firm and its environment, including internal control of the entity. Sufficient appropriate evidence is another essential aspect for auditing process, which is utilized by supporting auditor’s opinion on financial statements.
International Standards on Quality Control
ISQC (FRS, 2009) contains standards and guidance for audit firm’s system on quality control for audit procedure and other related services engagements.
These standards require firm to establish quality control system that contains policies as following elements: Audit firm should set up regulations to promote the recognition of the importance about audit quality in performing engagements. Managing board undertakes the ultimately responsible for quality control system. Secondly, the firm shall establish polices for whether accept or continue the relationship with clients. The firm should consider whether the client comply with integrity, ethical requirements and have sufficient resources in performing the engagement. Thirdly, this standard requests engagement performance complied with legal requirements. In addition, adequate documents should be retrievable for appropriate consultation on contentious matters. Fourthly, audit firm should verify personnel abide by ethical requirements and communicate independence requirements to employees. Fifthly, firm should have plenty personnel with capabilities and competence. Finally, the quality control system should be complied with in practice, relevant, adequate, and operating effectively.
It is realized that audit firm provide non-audit services for clients, which may lead to generate threats to the objectivity or impair independence of auditors. ES5 (FRS, 2010) provides guidance and requirements on this particular circumstance and gives examples of protections to reduce threats to an acceptable level. In some conditions where threats have materiality impact on independence or objectivity matters, auditor should either abandon non-audit service or exclude from audit engagement.
Since 1989, WorldCom, a communication corporation, has become the client of Andersen for 12 years and Andersen not only provided audit but non-audit service. WorldCom stated that its audit firm charged 16.8 million dollars in total on its payment statement, including 4.4 million for audit, 7.6 for taxation and other service fees about 4.8 million. The audit fee only has a quarter proportion of summation. For such a big corporation, Andersen only utilized 10 auditors, 15000 labour hours, 2 million dollars to accomplish annual audit. According to these figures, Andersen might reduce the procedure of substantial testing, which might lead to auditors neglect some potential...