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    The document discusses the role of statutory audits from several theoretical perspectives and whether the public truly understands the auditor's role. It describes stewardship theory, agency theory, and efficient market hypotheses as they relate to auditing. It notes there is an expectation gap between what the public thinks auditors do versus their actual role. The government plans to address issues raised in several reports to reform the audit market and profession through the new Auditing, Reporting and Governance Authority which will have expanded powers and a wider definition of public interest entities subject to stricter requirements. Mandatory joint audits for large companies and potential operational splits between audit and non-audit services were also proposed.

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    The document discusses the role of statutory audits from several theoretical perspectives and whether the public truly understands the auditor's role. It describes stewardship theory, agency theory, and efficient market hypotheses as they relate to auditing. It notes there is an expectation gap between what the public thinks auditors do versus their actual role. The government plans to address issues raised in several reports to reform the audit market and profession through the new Auditing, Reporting and Governance Authority which will have expanded powers and a wider definition of public interest entities subject to stricter requirements. Mandatory joint audits for large companies and potential operational splits between audit and non-audit services were also proposed.

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    auditing and accountability

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    The document discusses the role of statutory audits from several theoretical perspectives and whether the public truly understands the auditor's role. It describes stewardship theory, agency theory, and efficient market hypotheses as they relate to auditing. It notes there is an expectation gap between what the public thinks auditors do versus their actual role. The government plans to address issues raised in several reports to reform the audit market and profession through the new Auditing, Reporting and Governance Authority which will have expanded powers and a wider definition of public interest entities subject to stricter requirements. Mandatory joint audits for large companies and potential operational splits between audit and non-audit services were also proposed.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    21 views3 pages

    Pre 1 and 2

    Uploaded by

    HD MI
    The document discusses the role of statutory audits from several theoretical perspectives and whether the public truly understands the auditor's role. It describes stewardship theory, agency theory, and efficient market hypotheses as they relate to auditing. It notes there is an expectation gap between what the public thinks auditors do versus their actual role. The government plans to address issues raised in several reports to reform the audit market and profession through the new Auditing, Reporting and Governance Authority which will have expanded powers and a wider definition of public interest entities subject to stricter requirements. Mandatory joint audits for large companies and potential operational splits between audit and non-audit services were also proposed.

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    Q1: Critically discuss, from a theoretical perspective, the role played by statutory audit in

    today society. Do you believe that wider society understands the statutory auditor’s role?

    Stewardship theory states that managers will act as responsible custodians of the assets that are
    entrusted by the shareholders. Stewardship theorists assume that managers will act in the best
    interests of the company and, consequently the shareholders who own it. A steward is driven by
    self-actualization, growth and achievement without the impact of opportunism and self-interest.
    According to the stewardship hypothesis, the role of audit is to provide assurance that the
    financial statements reported by stewards (directors/managers) to the (shareholders) are properly
    prepared. The auditor, being independent of the company and the directors, represents the
    interests of the shareholders in reviewing the financial statements and reports to them on the
    stewardship role of the directors in his/her independent auditor’s report.

    The agency theory sets absentee owner as a principal and manager/director as an agent. The basic
    premise that individuals are self-serving includes in the agency theory. According to Jensen and
    Meckling (1976), as the position of agents between the principles existing information asymmetry,
    the agency relationship creates a potential conflict of interest. The risk of loss can be caused by the
    reckless behaviour of decision-makers (agents).
    Therefore, the auditor roles in agency theory are to represent the interests of the owners and to
    audit the financial statement to reduce information asymmetry and minimise agency risk and
    protect the interests of the principals.

    Efficient market hypotheses are introduced an information hypothesis assuming statutory


    audit provides reasonable assurance on the quality of financial information used for decision
    making. In an efficient capital market, the information is impounded into share price as investor
    making business decisions. However, due to shareholders pay implicitly on accounting
    information, the potential investors and other stakeholders are free-riders in the usage of the
    information.
    The role of audit attests the truth and fairness of the information and reinforce confidence and trust
    in financial reporting, which promote a well-ordered and active economy among all users who
    have a stake in the company. This introduces audit rationale into stakeholder theory, which states
    the purpose of a business is to create value for stakeholders not just shareholders. In stakeholder
    theory, all of these information users rely on audit process confirming independent scrutiny to
    make various business decisions.

    However, is the public perception of audit aligned to its designated function?

    there is an expectation gap between what the public believe the auditor’s role is or should be and
    what the role actually is. The recent ACCA publication divide the expectation gap into 3
    components ( the knowledge gap; the performance gap; the evolution gap).
    The Knowledge gap is the difference between what the public thinks auditors do and what
    auditors actually do. The performance gap is auditors do and not do what is required in auditing
    regulation. The evolution gap is the difference between what auditors is supposed to do if they
    actually follow the requirements of auditing standards and regulation and what the public wants
    auditors to do.
    So much of market and economic activity in society depends on perception. 75% UK public
    perceive auditors are not fulfilling their statutory duty. Therefore, it behoves the profession to
    educate the public about reasoned assurance and the true role of the auditor.

    Q2: Select five issues from the three reports and, with reference to the May 2022 government
    publication, critically discuss how the UK government plans to address these issues.
    1. Kingman Review (2018)

    Kingman was particularly concerned at the FRC’s closeness to the audit market and to the Big
    4 audit firms. Woolf (2017) states a significant number of the FRC’s board members and
    employees are former Big 4 employees. The close association could lead to actual or perceived
    bias and the potential regulatory capture.
    Therefore, the government approved the Kingman recommendation establishing ARGA
    (auditing reporting and governance authority) and the function of ARGA regulated in legislation.
    ARGA will have new powers to order companies to restate their accounts without having to apply
    to the courts.

    the definition of Public Interest Entity (PIE) adopted by the UK government in 2016 was too
    narrow. Therefore, the Government responded Kingman’s proposal that introduce a wider
    definition of PIE to include more larger private companies (750: 750 test). As a result of the new
    extended definition of PIE, more significant companies will be subject to a more rigorous audit
    and governance.

    2. CMA (competition and markets authority) report 2019:


    UK audit market shows a high concentration and low resilience feature. It may lead to poor
    quality audit. Therefore, a CMA proposal mandatory joint audits for FSTE 350 companies. CMA
    states a Big 4 firm was appointed auditor, it would have to be jointly with a challenger firm. The
    government approves the proposal but with the exemptions for the most complex audits because
    of challenger firms’ lower capacity. ARGA will decide the ratio work of a challenger firm
    including revenues, profit, assets or audit fees.

    The CMA recommended an operational split to address the issue of audit firms providing non-
    audit services to audit clients and thereby potentially infringing the audit firm’s independence and
    creating a conflict of interest. The government will legislate to allow ARGA to impose an
    operational split between the audit and non-audit operations of firms.

    3. The Bryon Review (2019):


    The Government has done little to address the point made by Brydon regarding the
    inappropriateness of the term ‘true and fair’. The Government will retain ‘true and fair’ as the
    standard for company financial reporting. True and fair is meant to be functionally identical to the
    alternative “present fairly, in all material respects”, so any change is likely to be of limited value
    in practice.

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