Importance of Auditing and Audit Regulation

Question: Discuss about the Importance of Auditing and Audit Regulation. Answer: Introduction: The basis of Thomas Browns work, Pseudodoxia Epidemica or Vulgar Errors, was rooted in contradictory approach to the subject under study, i.e. both scientific as well as logical approach. This approach to critical analysis invited many criticisms for Browns work wherein scholars objected that scientific and logical experiences cannot be applied to approach a single subject. However, these two approaches for critical analysis aptly apply to the tenets of accounting and auditing. It is in their very nature that they follow both scientific and applied approach to the subject. Accounts can be considered both as an art and science. On one hand, accounting is defined as a system of recording financial transactions and to present the information in comprehensible manner to concerned readers (Tracy, 2011). On the other hand, it is considered as an art or behavioural knowledge of recording, classifying and summarizing financial data to attain certain objectives (Duska, Duska, and Ragatz, 2011). In a similar fashion, auditing is defined as a process of investigating the accounts and accounting information prepared by someone else and decide whether the accounts prepared or information provided is correct and fair or not (Loughran, 2010). Moreover, it involves choices and decision making based on certain standards but along with knowledge of standards, auditing al so requires reasoning skills and experiences (Dennis, 2013). This requires logic based skills and experiences to identify where the incorrect information may be given. While accounting and auditing are rule based implying that they are exact and leave no room for ambiguity, they are also principle based. These principles act as guidance and require logical reasoning, fairness and experience in their application (Dennis, 2013). Hence, an accountant/auditor is bound to make errors while practicing these subjects. In this context, vulgar error does not signify an error committed by vulgar, inferior or uneducated people. Here, it signifies an error in conduct or understanding committed by a well educated person who knows the implications of committing such errors (Kennedy and Boyd, 1870). The accountants and auditors commit errors when they try to frame the issues as one of desirable conformity to widespread norms. They change or force their analysis or judgement to meet the requirements of the clients (Duska, Duska, and Ragatz, 2011). Doing what is methodologically correct and doing what is expected are two different things that require practical know ledge and understanding of the accounting practices as well as the accountants or auditors applied understanding of the context in which the reports are being analyzed. Hence, the vulgar error is seen in behaviour of accountants and auditors that make the evaluation unreliable. Therefore, it can be concluded that an accounting as well as auditing, both are based of exact rules and reasoning. Hence, an accountant/auditor has to approach the subject in both scientific and logical manner and make decisions that are fair, keeping in view the welfare of the concerned stakeholders. Also, they have to keep in mind implications of errors, if any, made by them. Trust takes year to build, seconds to break, and forever to fix This quotation tells about the trust build up by the person in business, family or in friendship. It is the most valuable assets for the organizations.The most important thing for the organization is trust and honesty for the people working there. If the trust is broken down once then, it is difficult to fix or it takes years to build the trust again (Arens, Elder, and Beasley, 2012) So, everyone should take care about building the trust towards their work or for the successful career everyone should be trust worthy and honest towards the managers or the people working there. Moreover, time and effort is taken to build the trust on anyone but the trust can be broken in split of seconds of doing something wrong and it lets down the trust. Trust is the greatest asset for everyone as without trust no relation can work in the family, friends or in the business. The entrepreneurs who do the business in partnership they would likely do the business with the trust worthy person who is hones t towards dealing in the business. Auditors trust in relation to management relationship: Auditor is the person who checks the overall business records of the company. It is necessary to have trust worthy relationship between auditor and the client. There are three researches towards auditors trust on clients. The study examines the auditors develops trust on clients after working with the clients. Moreover, it can be identified that auditors have trust on the clients by the working experience with the clients (Atymtayeva et al., 2011). Developing trust in clients decision might affect the audit decisions. First study was done is to investigate whether the auditors trust on client affect the decision of the auditor. Lower level of trust of auditor on the client may develop the high level of risk for the management. The second research is to examine whether certified public accountants (CPAs) level of reasoning is affected by the decision to trust the management of clients and to trust them at a great extent. It shows that higher level of moral reasoning have less trust in the management of clients. The third research extends the result of the first research of examining whether the auditors trust and financial importance of clients is affected by the auditors decision of adopting clients method of recognizing sales (Dattin, 2014). These researches results the auditors need to develop trust in a clients management. Moreover, the auditor trust may affect the audit decisions of the management. There are certain ways to build trust-relationships instead of transactional relationships such as: firstly, credibility and it is about adopting technical and emotional aspects. The auditors should build trust relationships with each member in the business team by developing personal and professional credibility (Fraser, 2010). Secondly, reliability. Thirdly, intimacy has the direct impact on development, promotions and hiring and firing of business teams. Moreover, for the better development of the business the auditors should develop their trust on the team members. Martin Shkreli is an American entrepreneur and pharmaceutical executive. Martin Shkreli is the founder of hedge fund MSMB Capital management. He was born on 1st April, 1983 Brooklyn, New York. At the age of 17, he started his first internship at Cramer Berkowitz Company. During his time, he recommended short-selling of bio-tech stock on the assumption that the companys share price would drop. He launched Turing pharmaceuticals in February, 2015 as he was forced out of Retrophin (Reed, 2015). This business claimed in the treatment of diseases for which there is a limited option. Shkreli worked as an analyst for Intrepid Capital Management and UBS Wealth Management (Barua, Rama, and Sharma, 2010). Moreover, he focused to sign for audit at kalobios pharmaceuticals. Marcum also audited Retrophin including RTRX, the audit reports were not qualified or modified at any way. He was the CEO of the company. His criminal prosecution as he was arrested by the FBI after the indictment. He was charged with securities fraud in U.S. District Court for the eastern district of New York (Arens et al., 2010). The charges were filed after the investigation into his MSMB Capital Management and Retrophin. Martin Shkreli was called as a most hated man in America. Martin Shkreli brought up 1.2 million shares in November-announced of an agreement with effectively prevents in doing anything with shares he owns (Rick, 2016). Moreover, unethical face of Martin Shkreli, CEO of Turing Pharmaceuticals for raising the price for Daraprim, an ant parasitic used to treat HIV patients, he brought 60-year old drug from Imax Laboratories in August for $55 million. Mark Shkreli life can be understood as a reminder for need to regulate corporates as people tend to behave unethically to fulfil their personal interests at the cost of others. His story has many lessons for corporations, shareholders, accounting and auditing. It tells that the systems and structures of accounting, auditing and markets work in harmony and are capable of correcting each other once the scam is revealed. This is exactly what happened in case of Mark Shkreli and his company. It tells that in a market economy driven by consumer welfare, corporations, especially those operating in pharmaceutical industry; have to work for the welfare of the consumers. Those corporations and managements that adopt unethical practices to maximise profit thereby neglecting their social responsibilities have to face legal implications for their malpractices. Accounting and auditing tools have an important role to play in this as they help in identifying incorrect financial information provided to the concerned stakeholders. Accounting and auditing regulations force corporations to disclose financial information to ensure the ethicality and fairness of their operations that are conducted on the basis of investors money (Harris, 2014). Hence, these tools are important to regulate the corporations that cannot be trusted to serve the public interest or behave ethically on its own. This quotation is being discussed in context of auditor and auditing. However, the auditors must be prepared to adopt the people who are worth for the job. Here, the chopping down of tree refers to the outcomes the auditors are getting by auditing. Moreover, Sharpening of axe refers to the instruments they are using for auditing in the organization. Moreover, auditing refers to examining the financial situation of the company. For setting up standards of the company audit plays an important role. The auditors should keep focus on certain measures to be a successful auditor. Preparing to perform basic financial audit: Financial auditing is to ensure the financial information of the business is true and fair. For the small entrepreneurs the main focus is on the accuracy of all expenses and revenue of the company. Formal audit involves an examination of financial statements by the third party. Regarding to the small businesses the operations are performed by Indian revenue services (IRS) as there is concerning over proper reporting. Moreover, large corporations hires the external auditors to confirm whether the financial information is valid or not for the shareholders (Louwers et al.,2013). For improving the business and protecting from IRS audit the self-auditing of the business can be adopted. Reasons should be known by the auditor for the financial audit: There are several reasons to audit regularly the companys finances. For the systematic overview of the finances CPA is hired. Moreover, financial audit ensures information is valid or not in accordance with the accounting standards. Keeping record of financial policies of existing business: The information by the auditor should be stored safely and securely in an organized manner. All the information related to bank statements, cancelled checks should be stored if any issue arises can be resolved. The procedures for auditing include the enquiry of the management and other people to gain and understand the operations, financial reporting, and known fraud error (Morris and Thomas, 2011). They also evaluate and understand the internal control system. The auditors are engaged in viewing whether companys financial statements are fairly presented. There are certain responsibility of managers underlying foundation on which audits are conducted. They should prepare, plan before taking it into the practical. There are certain responsibilities of the auditor in the financial statements in accordance with reporting framework which includes design, implementation and maintenance that are free from fraud or error. The audit practices serves as an initial guide for conducting audit for internal accounting. It is the best way for accounting practices (Muhammed and Celestina, 2014). Moreover, the businesses should protect their assets and manage their accounts. Camera systems are beneficial for execution of internal controls of business. For comprehensive accounting records the businesses are required typically to follow the law for tax purposes. The main motive of auditor is to audit the financial business records of the business, or an organization. The above quotation is to clarify about maintaining records of the company by taking in view certain measures. References Arens, A., Best, P., Shailer, G., Fiedler, B., Elder, R. and Beasley, M. (2010). Auditing, assurance services and ethics in Australia: an integrated approach. US: Pearson Education Australia. Arens, A.A., Elder, R.J. and Beasley, M.S. (2012). Auditing and assurance services: an integrated approach. NY: Prentice Hall. Atymtayeva, L., Akzhalova, A., Kozhakhmet, K. and Naizabayeva, L. (2011). 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