...on the non-audit services that auditing firms can provide to their audit clients. (1) Discuss the benefits and disadvantages of auditors providing non-audit services to clients The objective of this assignment is to examine the benefits and disadvantages of auditors providing non-audit services to their clients. Further discussing in what ways the European Union proposals may prove beneficial and in what ways they may be disadvantageous. Auditing is considered an exceedingly complex process, maintaining a relevant and valuable insight to a company’s financial statements and its reports based on the conduct of their audits. (Gray, I. and Manson, S. 2011). An auditor’s priority is to provide assurance services through evaluating; providing the best financial or non-financial information to clients. (Europa.eu, 2015). Therefore this allows the clients to make the best informed decisions regarding their business. In the recent times, the appearance of professional service firms has resulted from a growing demand for specialist advice to help them achieve business advantage in the competitive market. In May 2014 the European commission published a directive, amending the Statutory Audit directive and a new Audit regulation. (Campa, D. and Donnelly, 2015). Non-audit services that are provided by auditors consist of management consultancy, tax advice and human resources consultancy. These services are aimed to increase the efficiency and effectiveness of an audit and the...
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...The Impact of Non-audit Services on Capital Markets Seunghan Nam Ph.D. Candidate Stern School of Business New York University New York, NY 10012 snam@stern.nyu.edu Preliminary Draft 7 January 2005 Abstract The framers of the Sarbanes–Oxley Act (SOA) presume that non-audit services lower the quality of financial statements, so they have prohibited auditors from offering most non-audit services. In addition, regulators believe that non-audit services (NAS) may cause the auditor to be perceived as “dependent” in appearance, thus increasing information risk, even if they have no impact on the quality of financial statements. I investigate two hypotheses using pre-SOA data. First, I ask whether the proportion of non-audit services fees to total fees has a positive or negative association with the ability of financial statements to predict a firm’s future cash flows, which can be considered a measure of the quality of the statements. Second, I ask whether the proportion has a negative or positive association with the cost of capital and the bid/ask spread, controlling for the predictive ability. The cost of capital and the bid/ask spread serve as proxies of information risk. Contrary to the proponents of prohibiting NAS, I find that the proportion of non-audit services fees to total fees has a positive association with the predictive ability. If we control for the quality of financial statements, non-audit services still have a negative association...
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...1990s and early 2000s, non-audit services revenue increased rapidly for all of these firms. Then, non-audit services revenue dropped significantly for the Big Four, due to the bankrupt of Enron and the adoption of the Sarbanes-Oxley Act of 2002 (SOX). From 2003 to 2007, in spite of the drop in non-audit service revenue, increases in assurance service revenue more than made up the difference, resulting in overall revenue increases for all of the firms. However, since 2008, non-audit services revenue has risen again for the Big Four. My individual paper aim is to present the facts and people’s concerns about the non-audit services’ effects on auditor’s independence. Definitions of Non-audit service and Independence Non–audit services generally refer to the services above and beyond the related audit services or services other than traditional CPA work. Scholars in their studies use different terms for some relevant issues, namely, “Management Advisory Service“(MAS) and “Management Consulting Service” (MCS). While there is no particular restriction for the scope or classification of non-audit service, diverse classification methods have been employed by the researchers (Schemer and Kiger, 1982; Pany and Rechkers, 1983). Purcell and Lifison (2003) defined non-audit services as traditional CPA works (including assurance, investment assurance, and commerce registration and accounting affairs, and so on), as well as, tax advisory service, management advisory service, finance and investment...
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...primary purpose of auditor is provided audit service to audit client. Auditor main duty is to offer independence verification of a company's record to make sure that all the information matches up to what was provided. The audit is an important part of the capital market framework as it not only reduces the cost of information exchange between managers and shareholders but also provides a signaling mechanism to the markets that the information which management is providing is reliable. Independence of auditor is important to external auditor’s role. An analysis of various parliamentary reports, statutes such as case law, journals and annual reports will provide a basis for considering the claim that audit independence is a central element to the external auditor's role. It can be seen through APB ethical standards govern issues relating to the integrity, objectivity and independence of auditor. The vital of auditors’ independence can be seen through in the case of Enron. The auditors who were Arthur Andersen received fees for audit and non audit services. Other than that, there were regular exchanges of employees within Enron and Arthur Andersen. Arthur Andersen did not report the fraud to the shareholder although they have made a report on the company’s account. It is because the fraud is committed by management, the auditor need to make sure that they were in management’s good books in order to obtain the contract of non audit service. However, the case of Enron has caused...
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...Economic dependence Self review threat – non-audit services Exemptions Management threat - non-audit services Advocacy threat – non-audit services Partners joining an audited entity Disclosure requirements Effective date 1-4 5–6 7 - 11 12 – 14 15 - 19 20 – 23 24 – 26 27 Appendix: Illustrative disclosures ES - Provisions Available for Small Entities (Revised) PREFACE APB Ethical Standards apply in the audit of financial statements. They are read in the context of the Auditing Practices Board’s Statement “The Auditing Practices Board – Scope and Authority of Pronouncements (Revised)” which sets out the application and authority of APB Ethical Standards. The terms used in APB Ethical Standards are explained in the Glossary. 2 THE AUDITING PRACTICES BOARD ES - Provisions Available for Small Entities (Revised) INTRODUCTION 1 The APB issues Ethical Standards which set out the standards that auditors are required to comply with in order to discharge their responsibilities in respect of their integrity, objectivity and independence. The Ethical Standards 1 to 5 address such matters as: • How audit firms set policies and procedures to ensure that, in relation to each audit, the audit firm and all those who are in a position to influence the conduct and outcome of an audit act with integrity, objectivity and independence; • • • • Financial, business, employment and personal relationships; Long association with the audit engagement; Fees, remuneration and...
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...auditor in making investment judgement and increase the productivity of financial markets. Financial statements provided by the auditors are often reviewed as credible, unbiased opinion that truly reflects the company financial positions. There’s no doubt that auditor independence is the core of auditing profession when establishing its objectivity and integrity. Auditor independence, in particular, indicates the ability of an auditor to disregard any influence or control when conducting an opinion (AAA, 1973). Therefore, auditor must be, and must be seen to be independent of company management. Lack of independence causes audits to be considered to have little value (Johnstone, Sutton, & Warfield, 2001). This is further supported by Elliott and Jacobson (1998) that a particular interest may trigger a risk that could weaken the outcome of the audit which in turn impairs the auditor independence. Hence, independence is fundamental to the purpose served by auditors (Moore et al., 2002). This study is limited to only four variables as to keep the task manageable. Prior years, various studies are being carried out by scholars in examining the effect and significance of the concerns. For instance, Abu Bakar, Abdul Rahman, and Abdul Rashid (2005) studied the factors that influence auditor independence in Malaysian-owned commercial banks loan officer’s perceptions. Furthermore, Abu Bakar and Ahmad (2009)...
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...Guidance for audit committees Reviewing auditor independence November 2003 The Combined Code on Corporate Governance – July 2003 C.3 Audit Committee and Auditors Main Principle: The board should establish formal and transparent arrangements for considering how they should apply the financial reporting and internal control principles and for maintaining an appropriate relationship with the company’s auditors. Code provisions C.3.1 The board should establish an audit committee of at least three, or in the case of smaller companies two, members, who should all be independent non-executive directors. The board should satisfy itself that at least one member of the audit committee has recent and relevant financial experience. C.3.2 The main role and responsibilities of the audit committee should be set out in written terms of reference and should include: • to monitor the integrity of the financial statements of the company, and any formal announcements relating to the company’s financial performance, reviewing significant financial reporting judgements contained in them; • to review the company’s internal financial controls and, unless expressly addressed by a separate board risk committee composed of independent directors, or by the board itself, to review the company’s internal control and risk management systems; • to monitor and review the effectiveness of the company’s internal audit function; • to make recommendations to the board, for it to put to the shareholders...
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...demise of Enron. Anyone could see, he said, the company was ripe for fraud given that it paid its auditor, Andersen, for audit services. This issue made it clear to Beattie that the audit industry would never be the same. In late February, governance activists urged shareholders of Sage, a UK-based software company, to vote against the re-appointment of auditor PricewaterhouseCoopers after it received roughly equal fees for audit and non-audit services in 2007. Though the resolution passed at the AGM, a sizeable 12% of the votes were either cast against PwC's appointment or withheld. Surveys by CFO Europe earlier this year, the companies are decreasing the share of fees paid to auditors for non-audit services. Nonetheless, companies in certain countries and industries consistently pay their auditors more for non-audit services, according to a new report from Company Reporting, a research firm. However, Tony Bromell, head of accountancy markets and ethics of the Institute of Chartered Accountants in England and Wales, thinks that shareholders will increasingly see the audit/non-audit fee split as a "red herring." A disproportionately large fee for audit services can compromise auditors just as much as a modest overall fee with a significant non-audit share, Bromell says. "Independence is not an end in itself. But if independence is key to audit quality, Beattie laments that it's "desperately difficult" to determine the factors that contribute to it. Currently at the...
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...Auditor Independence and Non-Audit Services: A Literature Review Vivien Beattie University of Stirling and Stella Fearnley University of Portsmouth TABLE OF CONTENTS Page List of tables and list of figures About the authors v vi List of abbreviations vii Executive summary ix Part 1 Auditor independence 1 Introduction 1 1.1 1 1.2 The ‘problem’ of non-audit services (NAS) 1 1.3 The current UK regulatory and professional environment 2 1.4 Motivation for this study 3 1.5 2 The role of audit in regulating capital markets Structure of report 3 Auditor independence 4 2.1 Introduction 4 2.2 Definitions of auditor independence 4 2.3 Economic models of auditor independence not including NAS 5 2.4 Models of auditor pricing and independence in the presence of NAS 5 2.5 2.6 Economic power models of auditor independence Moral psychology, ethical reasoning and independence 8 8 2.7 Broader based studies into auditor decision making 9 2.8 Summary and comments 11 Part 2 Current regulatory frameworks 3 Auditor independence and NAS: analysis of current regulatory frameworks 3.1 Introduction 13 13 3.2 Regulation of auditor independence 13 3.3 Independence in professional and legal regulatory frameworks 13 3.4 3.5 Independence and NAS Overall economic dependence 19 22 3.6 Small companies 22 ...
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...Discuss the Need for Outsourcing the Internal Audit Function in A Company Traditional internal audit function is defined as an independent appraisal activity to review internal control activities in companies. Dezoort (2001) implies that with the extension of business activities, the internal audit function has evolved from the traditional supervision to value adding which includes a wider scale of audit-related work so as to maximize the value of a business company. This focus on adding value to the corporation through a variety of internal audit services has raised concerns about the ability of in-house auditors to perform the wider-scale audit function in a more professional and cost-saving manner (Chapman and Anderson, 2002). Due to fierce market competitions and overcapacities, company managements set out to downsize company staff and put the focus on its profit-producing business, tending to outsource (referred to the practice that one accounting firm provides audit-related services for a business organization) internal audit function to engage external specialists to present a highly cost-saving and professional performance. Although some evidence suggests that there are many limitations of outsourced activities, this essay asserts that outsourced internal audit function plays an essential role in the development process of a corporation and there is a need to outsource that function. In consequence, these positive effects on companies will be described principally...
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...PRE-REQUISITE : AUDITING AND ASSURANCE I _____________________________________________________________________ 1. SYNOPSIS This is a continuation of Audit and Assurance 1. It intends to strengthen and enhance the students’ understanding in auditing. Among the topics that will be discussed are code of ethics, auditors’ liability and in-depth explanations on analytical procedures, computer assisted audit techniques, audit sampling, materiality and audit risk, group audit and current issues facing the auditing profession. This course will justify other activities than financial statement audit that can be performed by a public accountant like performance/operational audit, internal audit and compliance audit. 2. COURSE OBJECTIVES This course intends the student: 1. To comprehend applicable regulations, legal responsibilities and ethical standards and current issues facing the audit profession. 2. To appreciate the concepts of internal control system and the use of computer assisted audit techniques in auditing a computerised environment. 3. To understand and apply audit risk, materiality, and statistical and non statistical audit sampling techniques. 4. To be familiar with related issues in audit completion, group audit, internal audit and related audit services and other services that can be provided by the public accounting firms. 3. LEARNING OUTCOMES Upon completion of the course, students will be able to: 1. Explain...
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...competition in the audit market of proposals to permit auditors to limit their liability by way of negotiated caps. The current liability position 1.2 At present auditors may not limit their liability for fault due to negligence or incompetence in audit work. Alongside regulation and reputation, liability acts as a discipline on audit quality in a context where shareholders and other third parties rely on information from an audit which is paid for by the company being audited. We are not aware of evidence suggesting that the courts in the UK have made, or are liable to make, excessive damages awards against auditors. Professional indemnity insurance is available, and LLP status – the chosen corporate form of many audit businesses – exists to protect partners' personal assets. The competition arguments 1.3 It has been argued that a cap on auditors' liability would however be procompetitive because it would lead to: • • • 1.4 a reduction in the barriers to entry and growth facing smaller audit firms the maintenance of competition between larger audit firms, including for non-audit work, and less risk of collapse of one of the Big Four. On the basis of the evidence available to us, however, none of these arguments appears compelling. First, the current liability position is a minor barrier to entry in comparison to reputation, third party perceptions, economies of scale, global networks, regulation, and various other impediments to the entry and growth of smaller audit firms. The...
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...requiring IFRS (including the European Union), and with multi-national companies ever growing, students will need to know and understand the international Financial Reporting Standards. The SEC appears to transition to the international standards. It might be objective to have a single set of high quality globally accepted accounting standards. • Part Two: 3. What is Sarbanes-Oxley? It is a United States federal law enacted on July 30, 2002 in response to a number of scandals that includes Enron, and World Com. 4. What is the Public Company Accounting Oversight Board? The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. The PCAOB also oversees the audits of brokers and dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection. 5. Select two requirements provided for in Sarbanes-Oxley; describe (IN YOU OWN WORDS) the impact of the items you selected on the accounting profession. Your response should be about one page, single spaced. In July of 2002, Congress passed the Sarbanes-Oxley Act (SOX) in response to a wave of corporate governance scandals. The legislation was designed to increase the oversight and regulation of the accounting profession. By strengthening corporate...
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...situations which would tend to weaken objectivity or create personal preconceived notions (Porter and Simon et al., 1996). Audit improves the trustworthiness of the financial statements giving it sensible assertion from an independent source that the financial statements is true and fair in agreement with accounting standards (Olagunju, 2011, pp.85-86). The next section of this essay provides detailed information on how value is added to the financial statement when the auditors’ audit with independence whilst appraising how the accounting profession has or is reacting to auditor independence. While the last section will evaluate the risks or threats to independence and explain ways of mitigating identified risks. Value of Independent Auditing on Financial Statements The significance of audit services will be impaired when independence is absent (Sweeney, 1992); therefore, an uncompromised independence gives a better quality audit to the financial statements (Baber et al., 1995). In addition, if an auditor is independent, the motivation to do a better audit is not undermined as the auditor will report misstatements (Pike, 2003). Stewart (1994) in Porter and Simon et al., (1996), likened independence to the “corner stone of auditing”. This means if the auditors are not independent of parties and other factors; it may affect their view on the audit report making the audit function have no value (Porter and Simon et al., 1996). An independent auditor adds value to the financial statement...
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...Auditing Standards Ethical 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 particular circumstances, which may generate threats to the independence and objectivity of auditors. ES3 states that senior positions have collaborated with audit engagement for a continuous period should be rotating. ES4 explains that there is no relationship between audit opinion and audit fees or other remuneration. ES5 shows that audit firm should consider whether non-audit service have significant effect on the threats to the auditor’s objectivity or independence. International Standards on Auditing ISA (FRS, 2009) copes with independent auditor’s overall responsibilities when implementing auditing process. These professional standards establish objectives of independent auditors together with explain the scope and nature of auditing process, which is designed to enable auditors to achieve the objectives...
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