17(a). Benefits and criticisms of audits
Leading view
Users believe the value that auditors provide is directly related to their ability to be independent of management. Users have expressed concerns about current pressures on auditors' independence.
* The independence of auditors from management is clouded by their mutual business relationship [p. 18, 21]
* Pressure of maintaining a good business relationship with clients in a competitive environment could jeopardize auditors' independence [p. 6, 11- 12]
* Auditors may accept audit engagements at marginal profits to obtain more profitable consulting engagements [p. 13].
Users need audited financial information because it provides independent assurance of the reliability of amounts reported and disclosed in financial statements that are not otherwise verifiable by third-party users.
* Most users rely heavily on the fact that information used in their analysis has been verified by independent auditors [p. 1-2, 17, 19]
* Most users would be unwilling to lose the comfort of independence in the audit function [p. 9]. Independence gives users assurance that confirmation and verification procedures have been performed by knowledgeable individuals [p. 9-10 17, 19] that are not subject to management influence [p. 9]
* Auditors have access to financial information and other related data that is not available to third-party users of the financial statements [p. 1]
* Users rely on independent auditors to recommend needed improvements in the entity's control systems and to perform additional audit procedures in areas where material weaknesses are identified [p. 10, 17, 20]
* Auditor involvement in financial reporting provides a discipline for management to adhere to established accounting requirements [section 17(d), p. 6-7]
* The threat of litigation enhances the quality of the work performed by preparers of financial statements and their auditors, which, in turn, improves the reliability of the reported financial information [p. 10-11, 15-17, 20].
Users are concerned about the credibility of an entity's reported financial information.
* Criticisms of preparers that also have implications on auditing include:
* Users believe that preparers tend to disclose their company's performance in a manner that is most favorable to the company and, therefore, may not be indicative of actual results [section 1(a), p. 1-2, 12]
* Preparers are willing to provide additional information about the "down-sides" of their companies when they are given an incentive. For instance, more disclosures would be made in a prospectus used to raise capital for the entity [section 1(b), p. 78]
* Users believe that preparers have manipulated earnings in certain reporting periods by establishing reserves that could be used to adjust earnings in future periods [p. 12-14, 18, 21, section 1(c), p. 43; section 1(d), p. 5]
* Frequent write-downs of assets and re-occurring restructuring charges have led users to believe that asset values have been overstated in prior audited financial statements [p. 13, section 1(a), p. 50, 59], resulting in the loss of confidence in the integrity of such statements [p. 7, 13, 14, 18, 21]
* To minimize the impact of increased costs of services that may result from additional accounting requirements, users are concerned that preparers would reduce the involvement of independent accountants. That is, preparers would have auditors perform reviews instead of audits or compilations instead of reviews [p. 8, 15].
* Users' needs regarding areas of auditor improvement include:
* Auditors need to better detect uncollectible receivables and/or overvalued inventory [p. 18, 21]
* Auditors need to perform additional procedures to identify fraud or other errors in the financial statements [p. 18, 21]
* Auditors need to challenge assertions and representations made by management about estimates and assumptions used in preparing financial information [p. 5]
* In evaluating whether reported asset and liabilities are fairly stated, auditors need to consider issues on a broad scale, such as context of the company within its industry and the nature of the markets in which the company operates [p. 18, 21].
17(b). The scope of auditing
Leading view
Users need increased independent auditor involvement with regard to an entity's internal accounting controls.
* Reliability of the financial information provided to users would be improved if auditors were to comment on the adequacy of an entity's internal controls [p. 3]
* Users would like auditors to comment on the quality and effectiveness of an entity's system of internal controls [section 17(c), p. 22, 23, 25-27, 30]
* A critical aspect of an entity's accounting system relates to the control systems that are used to summarize and report transactions [p. 9].
Users need increased auditor involvement with regard to an entity's compliance with laws and regulations [section 17(c), p. 25].
Users do not need auditors to expand their audit scope to cover MD& A. MD& A should be prepared by individuals involved in operating the business.
* Involvement in MD& A is not an appropriate function of the auditor [p. 3] because auditors are not familiar with the nuances of the business [section 17(c), p. 8]. This information should be a discussion by management of the operations of the company [p. 5-6]
* Auditors involvement with MD& A may create a barrier that may result in management making less disclosures than currently made in MD& A [p. 15-17; section 17 (c), p. 20, 28].
Users do not believe the scope of the audit function should be expanded to require auditors to render an opinion on forecasted or projected information prepared by management.
* Many auditors do not have the industry expertise that would enable them to express an opinion about forecasts prepared by management [p. 4]
* A forecast does not relate to historical information; therefore, the reasonableness of a forecast should be the responsibility of the analyst and not the auditor [p. 5-8]
* Auditor involvement with forecasted information would impair independence [p. 6, 8].
Users did not express a need for auditor involvement in other sections of the annual report including:
* description of business [p. 19- 20]
* listing of properties [p. 19-20]
* discussion of legal proceedings [p. 19- 20]
* president's letter [p. 19-20].
Alternative view
Users believe that auditors should be involved in opining on historical financial information included in MD& A.
* Some users would obtain additional comfort and faith in MD& A disclosures if auditors were required to audit factual financial information presented in the discussion [p. 6, 15, 18, 20].
17(c). Audit reports
Leading view
Users believe that auditors should provide additional commentary in areas that would assist them in evaluating the quality of a company's earnings. Users want auditors to provide qualitative comments in the following areas:
* audit scope and findings
* the entity's accounting and reporting practices in relation to other alternative accounting methods
* reasonabless of significant assumptions and estimates used by management in the preparation of its financial statements
* risks associated with realizing recorded assets
* adequacy of the entity's internal control systems
* compliance with laws and regulations.
* Users rely on a standard audit report as a benchmark but believe that auditors should be allowed more flexibility in providing additional qualitative commentary that would be used for analysis purposes [p. 2, 11, 15, 17, 21- 22, 28-31]
* By adding flexibility to their reporting, auditors would be allowed to provide users with an early warning about risks that may seriously impact the operations of the entity [p. 11]
* Auditor commentary should focus on the role of estimates in the financial statements and the sensitivity of these estimates to change [p. 3, 7, 14]. Auditor commentary on a company's significant estimates and internal controls would allow users to better assess the quality of earnings and to make their own estimates [p. 4, 6-7, 21, 23]
* Auditor commentary would have a greater impact if it were presented separately from the standard audit opinion and not included in a note to the financial statements [p. 4-5, 14]
* Today's reporting does not indicate the level of auditor involvement and related views with regard to critical or highly subjective areas (i.e. accounts receivable, inventories) [p. 14-16]. In this regard, auditors' reports should be expanded to discuss the scope and results of the auditors' work [p. 21, 29]
* Auditor reporting on an entity's compliance with laws and regulations would be considered helpful by users [p. 25]
* To be able to reach their own conclusions, users want the underlying assumptions used in the preparation of financial statements [p. 13-14, 17].
Alternative view A
Users do not need auditors to provide additional commentary with regard to procedures performed and related findings.
* Users are concerned that supplementary comments would become boilerplate and, therefore, add no value to current auditor reporting [p. 4, 16-18, 21-22]
* A standard report, including any modification thereto, allows users to easily identify if an unusual matter or concern exists. Including supplementary comments may reduce users ability to assess if the auditor has any major concerns with the reporting entity [p. 10, 23, 29, 31].
Alternative view B
Users believe that auditors should report on historical financial information included in MD& A.
* By implication with the alternative view expressed by users in section 17(b).
17(d). Frequency of auditing
Leading view
Audits should be performed annually.
* Most users believe that annual audits are essential [p. 2-3] to provide users with periodic assurance that management is being disciplined to present financial information that is in compliance with GAAP [p. 6- 7]
* Current competition in credit markets is such that if a substitute for annual auditing were sanctioned, creditors would find it difficult to require borrowers to incur the costs of annual audits [p. 8]
* Longer time periods between audits would make understanding an entity's business more difficult for users [p. 6-7] and may even increase an entity's cost of capital [p. 4]
* Current reporting alternatives are not adequate to provide disclosures and assurances investors need annually [p. 6, 8].
17(e). Reviews
Leading view
Creditors accept reviewed financial statements (as defined under SSARS) from customers when risk is within an acceptance range but would like independent accountants to provide additional assurance on assets used as the company's borrowing base or that secure the borrowings.
* In many situations, creditors accept reviewed financial statements [p. 1-3] and supplement these statements with their own examinations and verifications [p. 2-3]
* Some creditors will require independent accountants to perform certain agreed-upon procedures when additional assurance is considered necessary [p. 3].
Creditors have expressed concern about the quality of some reviewed financial statements.
* The quality of reviewed financial statements varies drastically. Some creditors have received reviewed statements without footnote disclosures [p. 1], whereas others have received reviewed statements that are of a better quality than audited financial statements [p. 3].