It is generally recognized that the aim of external audit company is to evaluate whether the management of the company exercises its functions in accordance with their job responsibilities, as outlined in the articles of incorporation of the company and whether any financial or other deviation from the declared policies of the company is taking place. Another important goal of an external audit is to ascertain whether the financial statements issued by the company entirely correspond to the real states of affairs and whether intentional misstatement of the facts has taken place.
The importance of external audit is becoming increasingly important for domestically registered, as well as for transnational business entities. The findings of the independent audit reports may be a sufficient ground to bring criminal charges against the top management of the company, if serious administrative misdeeds or financial crimes are detected. The US Bureau of Statistics evinces that the vast amount of all white-collar crimes committed in the private sector are revealed and subsequently solved on the basis of the audit reports, which expose that the embezzlement, corruption, corporate raid take place, although specific techniques are employed by the malefactors to masque disguise it, using legal and auditing schemes. The stakeholders of the auditing procedures are usually less prepared and skilled legally and financially to detect with the naked eye that their rights and privileges as stakeholders or other interested parties have been violated.
The aim of this paper is to outline the purposes of external audit of the company, the recent evolutionary changes made to the process of external audit report compilation and the form of an audit report, the criticism and the proposed alternative solutions, the reaction of the shareholders and future trends of the audit reporting.
The Goals of External Audit
External audit of a company is conducted by the independent research agencies, which are neither financially nor otherwise interested in the findings of the auditing procedure. The main goal of the external audit of the company is to find out whether the top-management of the company really complied with the financial statements issued by the firm. The intentional data distortion of these documents suggests that the rights of the shareholders (or other stakeholders) have been deliberately violated by the management or other company officials. The second goal of the audit is to find out whether a business entity fully observes the mandatory requirement imposed by the tax, environmental and other state authorities. Significant deviations from the compulsory legal principles serve as a ground for criminal charges.
Recent Changes in the Form and Contents of an Audit Report
Upon the completion of an audit procedure, the auditors compose a document titled the auditor’s report. Depending on the nature of the report, it can be unqualified or qualified reports, adverse opinion and disclaimer of an opinion (when the report cannot be completed due to specific circumstances of a case). In order to promote unanimity, integrity and unified perception and understanding of auditing reports, International Auditing and Assurance Standards Board in cooperation with the executive committees of the International Standards of Auditing organization elaborate international standards which are followed by the practicing auditors in different jurisdictions, although the legal peculiarities of the country where they practice are taken into consideration.
The Proposed Changes
Considering the remarks and the imperfections of the existing standards of audit reporting, the following changes were proposed to be introduced in 2011 in order to enhance the form of the typical audit report.
- Closer integration to domestic environment
Audit reports are designed to be universally recognized by the targeted stakeholder group in all countries. However, numerous complaints and remarks have been received from the state authorities, in which the respective authorities highly recommend to adapt those reports to the domestic legislation of the countries, where the auditee is being independently tested (Arens, 1991). Provided that this measure is successfully implemented, the audit reports composed by the auditors will ultimately become legally enforceable in the domestic environment and government law enforcement authorities will be capable of enforcing it, upon request of the stakeholders.
- Tend to Clear Transparency
Although it is clear that the primary aim of audit reporting is to inform the stakeholders about both the positive and the negative financial processes happening within the company, it shall be often taken into consideration that the audit report is completed by the professionals; its wording may very often seem to be difficult to understand by the laymen. Specific auditing vocabulary and wording is admonished to be separately construed or replaced with ordinary language in order to ensure that non-professionals may understand it as well. Besides, it is strongly advised to issue a separate statement in the event the stakeholders are not capable of reading and understanding the report, explaining and clarifying the peculiarities of the report.
- Tend to Closer Cooperation with the Public Sector
The wording of the audit reports is proposed to be changed in the way, so that the respective state agencies may become capable of utilizing the report (Collbert, 1995). Another section of this novelty is the option that the state agencies themselves can become subjects to audit testing and subsequent reporting. In this the peculiarities of those agencies shall be taken into account by the auditors. To illustrate, specific information related to the activity of those agencies shall not be disclosed under any circumstances.
- Tend to Simplification of Navigation of Report Auditing
The concurrently applied structure of the audit report is ubiquitously considered as one of the most complicated documents. Sometimes, section which is particularly important for a specific target reader of the report can be hardly found with ease. Therefore, it has been proposed to simplify the navigation techniques, in particular, to make the table of contents of the report more detailed, to add subsections, sections and new chapters of the report and to simplify the wording, so that the ultimate readers may easily understand what the topic of each section is.
Another aim of the proposed improvements is to economize the time utilized by the stakeholders to read the reports and to simplify the process in general.
- Applicability to All Business Entities
With regard to the ever-growing scopes of international business in general and international trade in particular, it is becoming clear that various types of business do exist internationally, encapsulated into the different legal forms (Ward, 1980). Limited liability companies, public and private joint stock companies, joint partnerships and other forms of commercial unions vary from jurisdiction to jurisdiction. Previously, different standards of reporting were applied to different types of commercial entities, whilst nowadays it is advised to apply a unified report form with unified sections for any type of business (Mautz, 1984).
- The Exposure of Financial Responsibilities of the Management
Before the changes have been proposed for incorporation, upon the completion of an audit report, it was not clear whether the rights and the privileges of the stakeholders were somehow violated or abused by the management, or whether any form of defalcation did take place. It happened due to the fact that neither financial, nor other responsibilities of the top-management were outlined in detail. Provided that the advocated changes are incorporated, it will be evident momentarily for the stakeholders whether the fiduciary duty of the management has been transgressed in any form.
The Alternatives, Criticism and Perception
In the light of the proposed changes, the one option does seem to be available to the critics of them – to substantiate the abolishment of these provisions and to employ the standards of reporting which has been utilized previously. Another possible solution is to divide the private and public sector of audit reporting and to elaborate on different standards for the both sectors, hereby introducing the policy of specialization.
It is expected, that the stakeholders will in general positively appraise the proposed changes. Evidently, the proposed alterations to the form of an audit report will result in a simplification of a business intercourse between the targeted stakeholders group and the audited executive bodies of the company.
In the forthcoming future, the process and the formulation of an audit report is likely to be more simplified and further specialization is likely to take place. Besides, it can be anticipated as more intensified legal intervention of the state (Rittenberg, 1997). In other words, the techniques and the forms of audit reporting are likely to be controlled by the state authorities, in particular fiscal.
Conclusions and Recommendations
Having recapitulated the main points of the proposed changes to the form of a typical external audit report, it can be inferred the changes are generally positive in their nature. The result of the audit report form is a closer integration to the domestic legislation of the auditees, while at the same time universally recognized international standards are observed. The rights and the privileges of the stakeholders can be defined as protected.
As far as the recommendations are concerned, it can be suggested that the simplification and integrative processes to be further proceeded by the IAASB.