Running Head: Auditing & Assurance Services 1

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Auditing & Assurance Services

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Auditing & Assurance Services 2

Question 1:

Fair Value is the current value or price of an item. If analyzed specifically, the value of

an item at which an item can be sold and that value is fair to both the seller and the buyer. The

fair value consideration does not usually refers to the items sold under liquidation and is more

referred to the items which are sold in normal conditions. This concept becomes exceedingly

important when a accompany or an item is acquired, and thus the value of that item or firm is

analyzed in terms of its fair value so that it is fair for both the buyer and the seller. This is also

important in terms of valuation of the assets of the firms, which has to be reported and is material

for the firm. This affects the depreciation cost of the firm as well. Furthermore, the fair valuation

is also used for the valuation of the security or stock in an open market. (Zyla, 2012)

The measurement of the fair value of the firm has been presented in many ways through

various laws and principles. The measurement of the Fair value under the GAAP and IFRS

results in substantially converged value however; there are certain differences in the valuation

method under both principles. Like as per the GAAP principal, the recognition of the day one

gain or losses are more common, as compared to recording under the IFRS regulations. The IFRs

13 provides the regulation on the fair value measurement whereas the ASC 820 provides the

detail about the fair value measurement under GAAP principles. Moreover, the ASC 820 also

provides practical expedient to allow certain reporting entities in certain conditions, which come

under the ASC 946 definition to measure the fair value of certain investments at a NAV (Net

Asset Value), however, the IFRs, provides no such regulation for its reporting entities.

Furthermore, some of the disclosure requirements under the both principles differ too. (Pwc.com,

2015)
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Companies often relies on accountants which are from their audit firms to assist in the

reconciliation of their accounts and for the preparation of the adjustment journal entriesand even

for the making of their financial statements. In particular, small companies tends to use their

auditors accountant for their accounting purpose as they usually lack any professional accounting

mechanism. Moreover, the rliance on the audting firm also makes sence in this regard that the

firm would have lower accounting mistakes and will better conform with the reporting and

accounting principles.

However, this reliance of the mangement on their auditors puts the management under

the expectation that the auditors will work as a agent to their principal which are the shareholders

of the company. This prinicple agent relations hip leds the uaditors to look after the inteerest of

the shareholders of the company as the agent of the firm. However, as per their profession the

auditors are required to “independently” asses the financial statements and financial repoting

standards applied by the mnaagement with respect to the accounting standards. However, as

these financial statemenmts are being formulated by the audtior himself while he has been

working as an accountant for th company, this may lead to the merging of the borderline of the

roles of the auditor and accoutnant with respect to his profession and shareholder’s interests. (

Audit Quality Forum, 2006)

The auditor in this situation has to draw precisely the line between his role as an auditor

and as an accountant. Firstly, as an accountant he should perform all his duties as an accountant

and conform to the standards of reporting which should be conformed to. After this, he should be

fulfilling his duties as an auditor for the firm, without taking in consideration the management of

the linkages with the management of the firm. The blurred line in the roles is the area when

during audit, the auditor take ease on assessment of the accounting standards being used (as he
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thinks he has done it perfectly), and ignores the mistakes he may have done while reporting.

Therefore, the borderline would be to assess all the process of the internal controls, and

accounting standards and framework and conform to all the duties of the auditor without

considering the interest of the shareholders. (Pcaobus.org, 2016)

Question 2:

The auditors are dependent on the manager’s explanations. It is evident from the recent

research that the confidence of the managers depicted from their use of words like “I am

absolutely certain” and not “I suppose” leads the auditors to trust them more, and hence depends

upon them for the audit process which usually then leads to less reliable audit types and fewer

tests. It is evident that the auditors tend to be more reliant on the managers with higher

confidence. This is one of the traps in which the auditors usually fall in and which leads to the

fewer audit processes to be followed and conducted.

The auditors know that the management confidence should not be an influencing factor

for them; however, they are influenced. Moreover, it is evident that these attributes of the auditor

is more common in the area of the high-risk companies, where in depth and skeptical analysis is

impertinent. This is because of the reason that people perceives that the confidence goes along

with the competence of an individual. However, it may necessarily not be always true. This is

because of the reason that the auditors while knowing to disregard confidence of the

management, subconsciously considers it while working.

The research provides evidence about the swaying of the audit process because of the

influence of the management confidence on the auditors, which leads them to depend on their

explanations and conduct fewer audit processes. Therefore, it is showed that the manager’s
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confidence is one of the influencing factors that were at first undiscovered and is vital to be

ignored by the auditor for an in-depth and skeptical audit. (Aghazadeh & Joe, 2015)

Question 3:

From the beginning, the profession of auditing has been perceived as a self-regulatory

profession and hence has some key ethical rules to focus while practicing. The recent failures

and scandals of the corporations where the key role of the auditor is evident in many areas have

raised concerns about the suitability and validity of this profession’s self-regulatory attribute.

This is more evident specifically in the 21st century in which it is evident through the

management of the auditors of the risk management processes of the corporations, which are

highly complex. This has led to concerns about the quality of the audits and on the confidence on

the auditing profession. For this reason, many countries have been active in establishing

regulatory framework and bodies for recovering the confidence of the market on the auditing

profession and for the reason of reestablishing the quality of the Audit process.

There has been evident research, which has been conducted to oversee the failure of the

auditing processes and the auditors in the 21st century. The research has provided evidence about

the fact that the auditing has not completely failed in the 21st century, but it needs a joint

approach from the audit and business community to raise the quality of the auditing by defining

and retaining the equilibrium between the statutory directive and the self-regulation

phenomenon.

Although the research provides evidence about the gap in the expectation and actual

performance of the auditing when they fail to perform what is expected from them in minimum.

These failures and the expectation gaps is evident from the resulting scandals of the corporation
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like Enron, Satyam, ZZZ Best Company, Lehman Brother, WorldCom, and the Merill Lynch.

The research article has examined the possible causes of the audit failures. It explains that the

audit failures usually take place because of any serious misjudgment or error from the auditor. It

is evident from the crumple of the Enron in which the auditor Arthur Anderson was seriously

engaged in the accounting treatment and structuring of the special purpose entities for hiding the

giant losses. This was because of the reason that the audit company do not wanted to advice the

firm Enron for adjusting its entries in the right way because of it do not wanted to lose it’s such a

big client to another of its competitor firm. Another reason can be that the Auditor fails in

carrying out its audit work with due care, as it is evident in the case of the Belgrave Finance

limited. Another reason, which is pointed out, is that the auditor is not independent because of

the long personal familiarity and relationship between the auditor and their client, seen in the

case for the AMRE vs. PwC. Furthermore, the reason also is seen as the relax regulatory

environment, or from the lack of the skeptical analysis of the auditors.

This therefore shows that the auditing in the 21st century has not completely failed can

regain its confidence by maintaining the equilibrium between the self-regulation and the

statutory directive. (Islam, 2013)

Question 4

In EU, Corporate Governance rules applied based on comply-or-explain. This regulation

is not observed in other areas of regulations in the business. These codes have evolved from

codes of Cadbury in 1992. In this approach, most of the U.K codes are covered. In this code,

there are 50 provisions. These provisions cover that what directors and board should do. There is

no requirement for complying with these 50 provisions. Companies cannot do after providing
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explanation. Comply-or-explain do not mean that there is no requirement. It states that provision

alteration should be justified by companies. This approach is also used in coordination with other

approaches.

Any departure by the company from these provisions does not mean that they breached the law.

Companies can provide explanation that how they can improve their governance practices. These

codes are designed for promoting good governance practices. These codes provide innovative

ideas to the companies. Purpose of these codes is to decide by the market that whether these are

essential for companies or not. A company may deviate from the requirement. There are many

advantages of these codes for the companies. These codes provide options of selection for the

companies. Therefore, it is not always essential that these codes should be applied to every

company.

It is essential to provide explanation of good corporate governance and its principles in the

company. These codes are formed to promote good governance and structure of the companies.

These codes are made for the benefit of companies as well as shareholders and society. For

making work the comply or explain regulation, people need to trust the companies in terms of

their commitment to good governance and consequently the companies need to trust that their

explanations will be considered. The “comply or work” is thus workable where there is mutual

agreement and trust. This framework here provides the solutions that are formulated between the

companies and their shareholders without any regulatory framework needed. In this scenario, the

success is dependent on the institutional arrangements and the shared beliefs. Its example is that

if a company does not complies with a certain principle or regulation then it needs to provide

explanation then how that adopted regulation of rule of compliance is beneficial for their

reporting and is valuable to the interest of the company and the shareholders.
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The institutions responsible for the regulation should be very sure about the credulity of the

alternative used in place of the regulation and to the legal enforcement of the compliance. The

shareholders in this case play the role of the stewardship to the regulatory institutions and the

companies. The regulatory institutions have to make sure that the companies have adopted the

right for the company and fulfill the thresholds for the achieving of the shareholders interest and

business objectives. There are also doubts raised about the compliance of the “comply or

explain” framework. It arises where the framework lacks in providing innovation, productivity

and transparency. The framework if not provides the shareholder interest and limits the company

in achieving of the company’s objectives than any other alternative or regulatory intervention

would be needed. (Financial reporting Council UK, 2012)

References:

Audit Quality Forum. (2006). Agency theory and the role of audit. Retrieved May 16, 2016, from
Icaew.com:
https://www.icaew.com/~/media/corporate/files/technical/audit%20and%20assurance/aud
it%20quality/audit%20quality%20forum/agency%20theory%20and%20the%20role%20o
f%20audit.ashx

Aghazadeh, S., & Joe, J. R. (2015, September 22). How Management's Expressions of
Confidence Influence Auditors’ Testing. Social science research Netwrok .

Financial reporting Council UK. (2012). Comply or Explain. Retrieved May 11, 2016, from
Financial reporting Council UK: https://www.frc.org.uk/Our-
Work/Publications/Corporate-Governance/Comply-or-Explain-20th-Anniversary-of-the-
UK-Corpo.aspx

Islam, M. (2013). Auditing in the 21st Century: Has Self-regulation Failed? Journal of Modern
Accounting and Auditing , 9 (8), 1059-1069.

Pcaobus.org. (2016, March 13). Responsibilities and Functions of the Independent Auditor.
Retrieved May 16, 2016, from http://pcaobus.org/Standards/Auditing/Pages/AU110.aspx
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Pwc.com. (2015). Fair value measurements. Retrieved May 16, 2016, from Pwc.com:
http://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc-fair-value-
measurement-2015.pdf

Zyla, M. L. (2012). Fair Value Measurement: Practical Guidance and Implementation. John
Wiley & Sons.