Auditing Standards Executive Committee

Question: Discuss about the Auditing Standards Executive Committee. Answer: Introduction: IFRS Practice Statement -Application of Materiality to Financial Statements was drafted with the aim of assisting the management in determining what entails materiality when applying this concept to general purpose financial statements ('American Institute of Certified Public Accountants,' 2006). Ideally, information or data would be considered material if misstating or omitting it could influence the decisions of users to make about a particular reporting entity, that is, the perception of the users of that entity. For instance, if material information is misstated, the users of the financial statements may have a wrong impression about the company making them invest in the firm and thus realizing a financial loss in the future. This draft provided guidance on materiality characteristics, and application of the concept of materiality in deciding whether to present and disclose information. Besides, provided guidance on assessing whether omissions and misstatements are material (Aren s, Elder, Mark, 2012). This question of this research paper provides an analysis into these three areas as well as the recognition and measurement of materiality. Characteristics of Materiality According to IFRS, information is material if omitting or misstating it could change the perception or the decisions that the users of the financial statements make based on that financial information about the entity that is reporting the financial statements (Arens, Best, Shailer, Fiedler, Elder, Beasley, 2007). Ideally, the purpose of an audit is to enhance the confidence of users in the financial statements of an organization. The auditor, therefore, has to express an opinion on the true and fair view of the financial statements of the reporting entity stating whether in all material aspects the financial statements have been prepared in agreement with IFRS. The information would, therefore, be considered material if the magnitude of its misstatement or omission would make it probable that it would affect the judgment of a reasonable person that relies on that information. Materiality has four key features, namely: pervasiveness, relevance, reliability, and whether some informat ion has been omitted or misstated. Information is considered reliable if it assures the users of the financial statements that it is free from any biased or error and that it represents what it was supposed to represent. Apparently, if that information was not free from any error or biasedness and it was used by the users of the financial statements, then it would be regarded to be material (Boynton, Johnson, 2006). Information is relevant if it has a high capacity to influence the decisions of the users of the financial statements in that the information could help the users make predictions about the past, present and future events of the entity. The information will be considered pervasive if the benefits of the users of the financial statements using it outweigh the costs. Ideally, each user of the financial information will perceive the value attached to the quality information in a unique way (Cosserat, Rodda, 2009).Ultimately, a standard body such as the IFRS has to assess the information presented and disclosed to the public to ensure that it meets their needs. Besides, the body must be aware of the calculus of costs and benefits and make sure that the information presented and disclosed meets this calculus. To justify the need for a particular disclosure, the IFRS must ascertain that the benefits perceived to be derived from that disclosure exceed the costs associated with it. The last characteristic of materiality is to ensure that some information has been misstated, omitted, it contains error or biasedness. This calls for an auditor to perform an analysis on the financial statements of the reporting firm and as asc ertain whether any information has been misstated or omitted, that is, whether the financial statements presented portray an accurate and fair view of the financial reporting of the firm and does not mislead its users. Application of the Concept of Materiality when Making Decisions about Presentation and Disclosure of Information In preparing the financial statements, the management of the reporting entity ought to consider their objective. The main aim of firms is providing information that is useful to its users to enable them to assess the prospects of the company for its expected cash inflows in the future and to allow them to evaluate the stewardship of the resources of the entity. If a particular information that has been generated by the business affects the decisions of a user, then that information ought to be presented and disclosed in the financial statements. To apply this concept, one must also consider if the financial reporting is pervasive (Hayes, Wallage, Gortemaker, 2014). The information will be ubiquitous if the benefits of using it outweigh the accrued costs. This is a concept that can be used to apply the concept of materiality when making decisions about the presentation and disclosure of financial information. It would be useful in deciding whether to disclose in that any information that is perceived to be pervasive is material to the financial statements and therefore it should be tested for material misstatement to ascertain that it is free from any biasedness or error. Assessment of whether Omissions and Misstatements of Financial Information are Material In assessing the materiality of the financial statements, one must identify that the omissions and distortions could influence the economic decisions of the users of the financial statements. Judgments about whether the omissions and misstatements would be material to the financial statements are based on surrounding circumstances and are affected by the size and nature of the distortion (Ismail, Haron, Nasir Ibrahim, Mohd Isa, 2006). To identify whether the omission or misstatement is material, an auditor must assess the information needs of the users of the financial statements. For instance, an investor would be interested in the financial statements to ascertain whether the money that he lends to a business is being used for the right purpose as stated in their Memorandum of Association. The auditor's determination as to whether the omission or misstatement of financial information is material is dependent on his professional judgment. When an auditor understands this, he will b e able to assess what omission or misstatement is material. Recognition and Measurement Finally, the IFRS Practice Statement states that the IFRS recognition and measurement requirements need to be applied to ascertain that the omission or misstatement of the financial information is material to the financial statements (Porter, Simon, Hatherly, 2014). This would call for the auditor recognizing the material misstatement in his report and the extent to which it affects the users. An auditor is mainly concerned about two issues, namely: Big Data' and End-to-End Software Integration.' Big data describes an extensive portfolio of a firm that contains unstructured and machine-generated data. The point is that big data will have an impact on risk management, which is an area of primary concern to auditors (Rennings, Ziegler, Ankele, Hoffmann, 2006). Ideally, big data and analytics have the potential of enabling auditors to identify errors, fraud, financial reporting, and business risks and to deliver a more consistent audit. The first issue concerning big data is data capture. Many companies strive to invest in protecting their data. This is a matter since it makes it hard for auditors to obtain client's approval on the data. Moreover, auditors encounter companies with different accounting systems and embracing big data would mean extracting the sub-ledger information and thus familiarizing themselves with the various accounting systems used. This, therefore, inc reases the complexity of data extraction. Using data analytics to obtain audit evidence may be difficult, as auditors are required to find a balance between their personal judgment and the results of the analytics. They, therefore, have to consider substantive analytical procedures, validation of the data for analytics purposes, and defining of the audit evidence, which is time-consuming, and thus a primary issue. Another problem that is inherent to auditors is End-to-End Software Integration. End to end software integration in auditing perspective entails ensuring that the user interfaces meet their needs and ensure that there is a smooth flow of information from the company to the user (Rittenberg, Johnstone, Gramling, 2010). Ideally, a perfect end-to-end software integration allows customers limitless capabilities, communication, and dynamic change of business logics. End to end software integration may be an issue to auditors since the audit approach that they use, whether auditing through the computer or auditing around the computer, may leave some loopholes unattended. End to end software integration contains transmission of big data and performing an audit of that big data may be time-consuming. This is because the auditors may be required to have an understanding of the different accounting systems used by the firm and thus retrieve sub-ledger information, which may be complicated for those auditors who are not conversant with the various accounting systems. Ultimately, the audit firms may be necessitated to train their staff on the different accounting systems used by companies thus leading to wastage of time and resources. For the audit committees, time has never been more challenging. Cybersecurity and other technological disruptions, economic volatility, a political and regulatory risk that affect today's corporate boards including oversight of risk have filtered down to the audit committee. The disruptive trends context, in this case, looks at the technological risk, political and economic risk, the evolution of financial reporting, and the increasing complexity of the regulatory landscape (KPMG.com, 2016). Technical Risk The technological risk is a major concern for the audit committees such as the cyber security risk. With the advancement of cyber attacks, cyber security remains a major oversight for the audit committees (Rittenberg, Johnstone, Gramling, 2010). Ideally, they are more concerned with challenges such as data protection, social engineering, auditing of third parties, cyber insurance, and remediation procedures. Political and Economic Risk Second, the political, and economic risk is also a major disruptive trend for the audit committees. With the fall in the prices of oil, a weak dollar, and an increase in political uncertainty around the globe, exercising an oversight on the political and economic risk has to become a priority (Wang, Chow, Wang, Ren, Lou, 2013). It is a disruptive trend since as companies seek to enter the emerging markets, they have to balance between the exposure to bad and good risks given the current economic challenges. For instance, in some industries such as the oil and gas sector, the fundamental question of disruption and risk such as corporate survival and operational problems becomes a more pressing issue. The audit committees, therefore, have to narrow down their agenda to the going concern level that can enable these companies to sustain in the worse economic period. Evolution of Financial Reporting The development of financial reporting is a third disruptive trend that the audit committees need to include in their agenda. With the ongoing changes in the corporate world, companies are mandated to ensure strategic reporting (Wang, Wang, Ren, Lou, 2010). Here, the board of directors is required to discuss the main trends and factors that are likely to affect future development, financial position, and performance of their company. Ideally, the board is required to use financial and non-financial metrics such as the balanced scorecard and the Strategic Performance Measurement System (SPMS) to highlight the trends and factors (Zadek, Evans, Pruzan, 2013). This is a disruptive trend since it requires the audit committees to ensure that companies present and disclose Key Performance Indicators (KPIs) in their annual reports. The Increasing Complexity of the Regulatory Landscape Lastly, the increasing complexity of the regulatory landscape has proved to have a disruptive trend or effect of companies as well as their audit committees (William Jr, Glover, Prawitt, 2016). The main aim of this increasing complexity of regulations is to prevent the occurrence of another global financial crisis like the one that occurred in 2008. Some emerging regulatory issues include aligning of classification and measurement of financial instruments with risk management, recognition of revenue from contracts, accounting for leases, re-classifying of insurance contracts, anti-money laundering, and privacy legislations (Yang, Jia, 2013). 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