Auditing is a staple of accounting practice that entails performing an objective examination and evaluation of a corporation’s financial statements to ascertain that the records are accurate and fair representation of the organization’s transactions. In other words, it is the process of ascertaining an individual or company’s financial records to determine the degree of compliance with generally accepted principles in addition to being congruent to regulatory requirements (Abbott et al., 2016). The Public Company Accounting Oversight Board (PCOAB) establishes, reviews and maintains accounting auditing standards for publicly listed corporations registered with Securities Exchange Commission (SEC). An audit exercise can be conducted either by an internal auditor who is an employee of an organization or an external auditor contracted by the company. Auditing in accounting is critical in eliminating exiting bias in a company’s financials. Auditing frequency varies as some corporations perform audits once a year while others undertake monthly audits. However, in some companies auditing is a legal and mandatory requirement to check intentional misstatements of financial information with an intent of committing fraud.
Importance as it relates to accounting profession and the business community
In the accounting profession and business community, auditing is important in monitoring integrity of a company systems. According to Leung et al., (2015) in accounting, auditing does not only examine the accuracy of a corporations’ financial statements but it also tests if the organization accounting systems are operating accordingly. The auditor tests the systems by examining the company’s internal controls or the measures instituted to curb or reduce accounting errors and fraud. Using the results from the accounting audit, an organization can implement the auditor’s recommended changes to make the company processes or systems immune to problems or reduce future potential errors. The auditor points potential loopholes in the organization internal controls which would pave way for employee to commit fraud and potentially not get noticed. The exercise benefits a company by protecting its finances from unscrupulous employees.
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Auditing is important in letting a company and business community know if financial goals are being met. Sirois et al., (2016) assert that organizations ought to strive to maintain their operating costs as low as possible while not compromising productivity. An accounting audit exercise assesses a corporation’s financial goals and objectives to determine if the company’s policies and practices are being executed as planned. In case of deviations, the auditors recommend suggestions and adjustments that a firm can institute into its policies and practices to create results that conform to the established objectives and goals.
Auditing in accounting is essential in building public trust and assurance. Through an external audit, the public gets assurance that invested resources in a publicly held corporation are being used as stated rather than being channeled to other unscrupulous ventures. Auditors ensures that the company’s financial paper work conforms to the financial statements. An ascertainment of compliance eliminates fraud possibility or the incompetent over-inflation of an organization’s stated fiscal success. During the exercise auditors verify the existence of internal control and procedures and check critical areas that require improvement. The auditors also test the effectiveness of a new technology and performance of the accounting systems. The auditors evaluate a firm’s financial data to ascertain that the company is remitting taxes properly and procedurally. Through the external audit, the business community members who have invested in the firm gain assurance that the organization is indulging in business activities that it represented at the time of making investment (Tysiac, 2017). The auditing practice gives a guarantee to the investors and creditors that a corporation is handling funds prudently. The auditing exercise therefore protects a business community and the public from committing their resources in companies that engage in embezzlement and corrupt business practices or outfits that defraud investors by falsely stating their financial records. The auditors can depict an organization’s true financial profile by digging into financial records and reviewing the financial statement. Auditing exercise is therefore imperative in fraud detection and prevention. Internal audit is an essential undertaking for companies in averting fraud cases. Recurring audit analysis and maintenance of rigorous internal control system averts and eliminates various forms of fraud and other accounting improprieties. Audit practitioners play a key role in modifying and designing internal control systems whose motive is to cushion a company from fraudulent incidences. A company that is known to have diligent and active audit system in place deters any vendor or employee attempting to defraud the organization.
Auditing in accounting is important in improving credit rating. Having periodic audit report promotes healthy relationship with stakeholders or financial institution that one undertakes business with to determine if the company is creditworthy. A credible credit rating benefits the business community as it implies that an organization can be issued affordable loans by financial institutions (Raphael, 2017). Auditing is also important in promoting accountability. An auditor’s report can be used to promote accountability among managers and employees. If employees know that a company is regularly audited, they will tend to focus on dependable accounting management.
Effects of Technology
Embracing technology in the future of auditing stands to play an increasingly role in the society by bringing forward human judgment enabled by technology. Analytics technology is a pivotal part towards future of auditing. The technology effect include allowing analysis of huge data set 24/7. Analytics will enable testing of complete data sets rather than doing it on sample basis thereby permitting the concept of continuous audit. The technology will enable auditors to test evidence on real time basis leading to prompt identification of abnormalities in a population. Audit analytics is expected to raise the quality bar by enabling data stratification and focus on testing complex and large data sets (icaew.com, n.d). The future of audit shifts towards predictive analytics where practitioners will be using analytics to predict events using simulation and modelling. The analytics capabilities will make audits precise and have increased relevance.
Artificial intelligence (AI) and machine learning will be critical in enabling autonomous audit decisions. AI is touted to drive efficiency and quality of audit output. The audit sector is exploring potential opportunities to harness AI capabilities. As Fornelli (2018) explains, the AI as an emerging technology stands to improve the way auditors work leading to efficient service delivery and enhanced insights into the audit process. The cognitive capabilities will enable auditors to evaluate a broader population set and focus their efforts on key items of interest while automating low judgment area of extraction. Artificial intelligence will disrupt mode of audits delivery leading to real transformation of audit profession.
Bock chain technology continues to impact various fields, audit being one of them. The concept of distributed ledgers will disrupt the conducting and recording of transactions in the future. Projections have been made of a possibility of triple entry accounting where recorded accounting transactions will be correspondingly posted onto a public Blockchain ( King , 2018). Blockchain will enable auditing to occur as smart contracts which would detect misstatement before they occur. Blockchain will make auditing real time hence bringing a new dimension into corporate reporting and transparency.
References
Abbott, L. J., Daugherty, B., Parker, S., & Peters, G. F. (2016). Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research, 54(1), 3-40.
Fornelli , F., (2018). The Future of the Audit: Dialogue with academics and students is critical
icaew.com (n.d). The Future of Audit: Technology, Source:www.icaew.com/technical/audit-and-assurance/faculty/the-future-of-audit/the-future-of-audit-technology
King , M. (2018). Where is the audit profession going?
Leung, P., Coram, P., Cooper, B. J., & Richardson, P. (2015). Modern auditing and assurance services. John Wiley & Sons.
Tysiac, K., (2017).How to enable audit innovation, Journal of Accountancy; https://www.journalofaccountancy.com/issues/2017/apr/audit-innovation.html
Raphael, J., (2017).Rethinking the audit, Journal of Accountancy; https://www.journalofaccountancy.com/issues/2017/apr/rethinking-the-audit.html
Sirois, L. P., Marmousez, S., & Simunic, D. A. (2016). Auditor size and audit quality revisited: The importance of audit technology. Comptabilité-Contrôle-Audit, 22(3), 111-144.
