The Role Of The External Auditors And The History Of Auditing Accounting Essay

The first portion of the assignment will look at the function of the external hearers, and the history of scrutinizing will be briefly discussed. Then the 2nd portion will look at fraud, its definition, illustrations of fraud and the deductions of fraud.

Then eventually before reasoning the impact of International Auditing Standards on external hearers will be discussed.

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Harmonizing to Arens et Al. ( 2003 ) the hearer is responsible for planning and executing the audit to obtain sensible confidence about whether the fiscal statements are free of material misstatement, whether this is caused by mistake or fraud. They besides province that because of the nature of the audit grounds and the features of fraud, the hearer is able to obtain sensible but non absolute confidence that stuff misstatements are detected. The hearer has no duty to be after and execute the audit to obtain sensible confidence that misstatement, whether caused by mistakes or fraud, that are non material to the fiscal statements are detected. ( Arens et al. , 2003 )

Mclnnes and Stevenson ( 1997 ) stated that even though the jurisprudence does n’t place the sensing of fraud as the primary aim of the external audit, the general public perceive the external hearer as being the chief defense mechanism against corporate fraud.

Due to the nature of scrutinizing and its built-in restrictions, fraud is hard to observe for many grounds. First it can be committed by people who are familiar with accounting processs and can cover it up. Harmonizing to the APB ( 1995 ) hearers merely do non possess all the necessary accomplishments to observe fraud. Wells ( 1993 ) explains that there is a built in struggle since the hearers have to look into people who indirectly hired them, the upper direction. Monroe and Woodliff ( 1994 ) depict how the ability of the external hearer to observe fraud has come under increasing examination and hearers are under considerable force per unit area to accept legal duty for observing stuff fraud.

Glover et Al. ( 2006 ) propose that the external hearers rely on internal hearers to different extents depending upon undertaking subjectiveness. And they go on to propose that the external hearers are hesitating in some scenes to trust on internal hearers ‘ work. Gramling et Al. ( 2004 ) clear up that because trust on internal audit can impact nature, timing, and extent of the one-year audit plan, discretion should be utilised when finding if trust on internal audit work will increase the efficiency of the audit, yet non compromise quality.

Carcello et Al. ( 2005 ) suggest that internal hearers ‘ interaction with audit commissions has significantly increased since SOX. External hearers, on the other manus, are non able to implant themselves as profoundly within their clients ‘ day-to-day operations. External hearers besides have limited exposure to the client compared to internal hearers because their function is typically performed during merely a few months of the twelvemonth.

Smith et Al ( 2005 ) explain that in the Statement on Auditing Standards ( SAS ) No. 99 by AICPA, it is stated that “ because fraud is normally concealed, material misstatements due to fraud are hard to observe ” . This hints that hearers “ need to see events that indicate the being of incentives/pressures to commit fraud, chances to transport out the fraud or attitudes/rationalisations to warrant a deceitful action ” . These are referred to as fraud hazard factors and are identified in the fraud trigon.

Smith et Al ( 2005 ) besides suggest that because scrutinizing airss possible hazard factors for hearers, the appraisal of the hazards of mistakes and fraud are critical when be aftering an audit.

In doing hazard appraisals for fraud, hearers should maintain in head that fraud typically includes three features, which are identified as the “ fraud trigon: ”

The Fraud Triangle ( by Ilter, 2010 )

Montgomery, et Al. ( 2002 ) explains that three conditions are by and large present when fraud occurs, these are:

Incentive/Pressure: Pressures or inducements on direction to materially misstate the fiscal statements, Fraud Triangle

Opportunity: Fortunes that provide an chance to transport out material misstatement in the fiscal statements,

Attitude/Rationalisation: An attitude, character or set of ethical values that allows one or more persons to knowingly and deliberately perpetrate a dishonest act, or a state of affairs in which persons are able to rationalize perpetrating a dishonest act.

Understanding and sing the likelihood of fraud in the context of these three conditions will heighten the rating of information about fraud ( Montgomery, et al. , 2002 ) . This will supply the hearer with more professional agnosticism when measuring fraud hazard. Hearers are advised to see the client ‘s receptivity to fraud, irrespective of the hearer ‘s past experience with the client or anterior appraisals about direction ‘s honestness and unity ( Heim, 2002 ) .


The demand for both external and internal auditing is sourced in the demand to hold some agencies of independent confirmation to cut down record-keeping mistakes, plus embezzlement, and fraud within concern and non-business administrations.

“ The beginning of auditing goes back to times barely less distant than that of

accountingaˆ¦ … … Whenever the progress of civilization brought about the necessity of one adult male being intrusted to some extent with the belongings of another, the advisability of some sort of cheque upon the fidelity of the former would go evident. ” ( Mautz & A ; Sharaf, 1961 )

The intent of an external audit has been viewed as a public service since the 1800s ( Langenderfer, 1987 ) . This function was further confirmed during the 1930s when the US Securities and Exchange Commission was formed to supervise the trading procedure after the clang of 1929. Wallace ( 1987 ) and Watts and Zimmerman ( 1986 ) have described the hearer as an economic agent who serves as a proctor and a signifier of insurance for investors and regulators. In other words, harmonizing to bureau theory, hearers play a cardinal function in the relationship between proprietors and their representatives – both the board of managers and direction.

Wallace and Parker ( 1991 ) point out that by 1948, fraud and mistake detaction was ranked as a lesser audit aim. They besides describe how the audit focal point has changed, they province that “ because auditing has moved off from the audit of individuals to the audit of fiscal statements, it does non seek to observe corruptness but to impart credibleness to fiscal statements ” . ( Wallace and Parker, 1991 )

Harmonizing to Lee ( 1986 ) , the chief grounds for the alteration in the audit aims include the increased consciousness of the demands of capital market participants for independently verified studies and the increased credence by company direction of its duty for the bar and sensing of fraud and mistake

Fraud ( Definition and illustrations )


Fraud can be described as a offense of obtaining money or some other benefit by calculated misrepresentation. In scrutinizing, fraud occurs when a misstatement is made and there is both the cognition of its falseness and the purpose to lead on. Vanasco ( 1998 ) explained that fraud includes knowing misrepresentation of abnormalities and illegal Acts of the Apostless. Alleyne and Howard ( 2005 ) suggested that fraud included knowing misrepresentation, rip offing and stealing.

There are two types of fraud in auditing, viz. embezzlement of assets ( defalcation ) and direction fraud ( Arens et al. , 2008 ) . Embezzlement of assets, normally termed as employee fraud, is characterised by assets being stolen from the company ( Albrecht and Romney, 1986 ) . Management fraud – the 2nd type of fraud – is basically deceitful fiscal coverage or misapplication of accounting rules.

Palshikar ( 2002 ) describes how fraud is amongst the most serious corporate jobs and challenges in today ‘s concern environment. He besides goes on to propose that fraud is a dominant white neckband offense in today ‘s concern environment, and that amongst many concerns and authorities administrations, fiscal services experience different sorts of fraud.

Examples of Fraud

There are many illustrations of fraud across the universe, such as WorldCom, Enron, Satyam, Xerox and Waste direction.

But for the intent of this assignment I will merely concentrate on WorldCom. One of the largest frauds in corporate history, $ 11 billion. ( Teather, 2005 )

Trouble began at WorldCom when they failed to run into the gross outlooks communicated earlier to the investing community. In 2004, the CFO pleaded guilty stating that he and the CEO met refering the job. The CEO refused to run into with the investing community to denote the deficit. Rather, the CFO said he was instructed by the CEO to repair the job.

Allegations are that the CEO was keenly cognizant of the likely impact on portion monetary value and was more concerned about $ 400 million he had personally borrowed from WorldCom secured by WorldCom stock ( Padgett, 2002 ) .

Over a five-year period, comptroller ‘s at WorldCom consistently altered records, frequently after the books were closed, to run into analyst ‘s outlooks. Harmonizing to the WorldCom indictment, CEO Ebbers, CFO Sullivan and others created a procedure called ”close the spread ” which identified improper accounting accommodations and so instructed staff to transport out the uses. Initially militias were used to absorb disbursals. When the militias ran out a assortment of accounting frauds were used to heighten grosss and lessening disbursals. Unlike Enron, this did non affect use of complex accounting regulations, but instead a straight-forward capitalization of disbursals.

Accounting directors were given publicities, rises, and made to experience responsible for the likely prostration of the stock monetary value if they did non pull strings the books ( Pulliam, 2003 ) .

The WorldCom corporate civilization encouraged unethical behavior both by appealing to persons ‘ sense of advancing the greatest common good for the workers, stockholders, and community and by raising frights of losing their occupations if they did non follow with petitions to distort records.

WorldCom staff knew it was incorrect and went along with the strategies anyhow ( Pulliam, 2003 ) .

Again, an person, Cynthia Cooper, blew the whistling to the audit commission and started the ensuing revelation of the deceitful fiscal patterns ( Ripley, 2002 ) .

Following WorldCom ‘s failure and dirts, surveies have demonstrated that Bernard

Ebbers and Scott Sullivan, the CEO and CFO of the administration at that clip, had created an organizational political orientation, or civilization, in which leaders and directors were non to be doubted or questioned ( Scharff 2005 ) .

Rezaee ( 2002 ) determines how ‘CRIME ‘ can be used to explicate fiscal statement fraud. Below is a theoretical account of ‘CRIME ‘ :

Beginning: Rezaee ( 2002 )

Cooks, in most of the instances, are the people who participate in fiscal statement fraud, these can be senior direction such as the Chief Executive Officer ( CEO ) or Chief Fiscal Officer ( CFO ) .

Recipes are deceitful strategies, which the direction of the companies have used for their cookery. These can be Improper Related-Party Gross saless Minutess, Illegitimate Gross saless Transactions or Side Agreements. ( Rezaee, 2002 )

Incentives are the typical grounds and motives why companies and their cooks have engaged in fiscal statement fraud. These can run from the company confronting economic force per unit area to accomplish marks, show steady growing and better public presentation to maintain investors happy, the hearers seeking to retain their top clients and executives fillips tied to company public presentation. ( Rezaee, 2002 ) .

Monitoring- responsible corporate administration and the presence of equal and effectual internal control systems are the most of import factors in forestalling and observing fiscal statement fraud. This can include friendly dealingss between the CEO and the proprietor of the company or the board. ( Rezaee, 2002 ) .

Rezaee ( 2002 ) besides stated that “ external hearers have a important function in supervising the company. But the external hearers ‘ ability to observe fraud is slightly limited to the extent of internal control system of the company.

End Results- fiscal statement fraud ever has effects, even if it is non detected. ( Rezaee, 2002 ) .

Deductions of Fraud

Since the prostration of some big houses, including WorldCom, Enron and others, many considerations were brought up, including:

The ordinance of auditors- self-regulation and peer reappraisals merely non plenty. ( Enron, 2002 )

Elimination struggles of involvements in accounting houses ( Enron, 2002 )

Compulsory rotary motion of auditors- most companies had been utilizing the same hearers since their constitution, for illustration Enron was audited by Andersen since its constitution in 1983. ( Enron, 2002 )

Taking these considerations into history in 2002, Sarbanes-Oxley Act was established in the US to present major alterations to the ordinance of corporate administration and fiscal pattern. This statute law impacts corporate administration of public companies, impacting their officers and managers, their Audited account Committees, their relationships with their comptrollers and the audit map itself. The act states that the lead audit or coordinating spouse and the reviewing spouse must revolve off the audit every five old ages.

Brody et Al ( 2005 ) clarified that the Sarbanes-Oxley Act was put in topographic point by the US to assist recover public assurance and to forestall future dirt. The ultimate end was to better the quality of external audits. The Sarbanes-Oxley Act has redefined the function of both hearers and corporate executives.

As a consequence of deceitful activities happening in Enron, WorldCom and other companies, the Sarbanes-Oxley Act of 2002 has required that internal controls be reviewed and that equal fraud sensing and bar systems be implemented ( Albrecht et al. , 2009 ) . This suggests that fraud sensing must be high on the hearers ‘ docket.

In 1988, SAS No. 53, The Auditor ‘s Responsibility to Detect and Report Mistakes and

Abnormalities, was introduced and held the hearer responsible for observing mistakes and abnormalities that materially impacted on the fiscal statements. However, Moyes and Hasan ( 1996 ) argued that negligible attending was given to the hearers ‘ makings, peculiar organizational factors and audit processs that could be really of import in the sensing of deceitful fiscal coverage.

Then SAS No. 82 Consideration of Fraud in a Financial Statement Audit was implemented in 1997, and stated that the hearer is “ .to program and execute the audit to obtain sensible confidence about whether the fiscal statements are free of material misstatement, whether caused by mistake or fraud ” ( ASB, 1997 ) . SAS No. 82 provided counsel on how the hearer should accomplish this by looking at countries and classs of heightened hazard of fraud, how the hearer should react, the rating of audit trial consequences as they relate to the hazard of fraud, and the communicating about fraud to direction, the audit commission and others.

Gramling et Al. ( 2004 ) suggest that trust on internal audit has taken on increased importance in today ‘s auditing environment, since internal and external hearers have become more aligned and developed deeper relationships since the transition of SOX.

Moyes and Hasan ( 1996 ) concluded that the grade of fraud sensing was non dependent on the type of hearer, since both internal and external hearers have equal abilities to observe fraud. Moyes and Hasan ( 1996 ) besides found that organizational success in observing fraud was significantly enhanced in scrutinizing houses with old experience in fraud sensing than scrutinizing houses with no such history. It was besides found that hearers who were certified as certified public comptrollers ( CPAs ) were more likely to observe fraud than hearers who were non-CPAs. Moyes and Hasan ( 1996 ) argued that this enfranchisement may connote a greater degree of professional competency in fraud sensing.

Impact of International Auditing Standards on external hearers

There are different International Auditing Standards, these are issued by the IFAC- International Federation of Accountants and the IAASB- International Auditing and Assurance Standards Board. ( Vanstraelen et al, 2009 )

The chief function of International Auditing Standards is to supply a common land and guidelines for good pattern. These international criterions on scrutinizing purpose to accomplish uniformity and purpose to bring forth a degree of assurance in the audit.

There are many benefits of developing and implementing international criterions on auditing, the major 1 is the that there will be no difference in the intent of an audit, beginnings of auditing criterions, legal liability, ethical criterions or the duty for the sensing of fraud.

A standardised audit will do give the reader of audit studies more assurance in the hearer ‘s sentiment, it will do the comparing of audited international fiscal statements easier. The standardized audit can besides advance inducements to develop and broaden the set of international auditing criterions.

On the other manus there are some issues with international criterions on auditing, chief 1s include the demand to see local Torahs, this can be controversial because the local criterions will travel off from the common criterion scene. This can take to some states holding higher criterions of ordinance than others.


The Sarbanes-Oxley Act broadens and deepens countenances and punishments for unethical direction behavior. The Sarbanes-Oxley Act besides calls for much greater focal point on internal controls by senior direction. Internal control systems, including IT controls, can assist cut down the chance for fraudulent or unethical behaviors but can non extinguish it in a universe where about 50 per centum of big corporations still use spreadsheets in some facet of fiscal coverage ( Hackett Group, 2004 ) .

I think that the international criterions on scrutinizing did non hold much impact on scrutinizing in the beginning. But now in recent times it has been found that it has had a great impact on scrutinizing, particularly external hearers and can be proved in the manner in which it has shifted its criterions to more up-to-date versions due to major frauds across the universe. This now helps better the manner auditing is performed, it helps hearers execute their audit in a professional mode and gives them stricter guidelines.


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