Introduction
Financial auditors play a crucial role in verifying the financial statements of legal entities in order to give audit opinions. Audit opinions offer some assurance to stakeholders of business establishments that financial statements are prepared in a good manner that follows the standard financial reporting framework. The main goal of a financial audit is to offer an objective assessment of financial statements, which improves the authenticity and credibility of financial reports prepared by the top management of an organization.
This paper establishes that the auditor plays an important roles in offering the management of a firm with the true independent report about its going concerns issues. It also summarizes that the alternative requirements could be used to improve financial disclosures to users. Finally, the paper establishes that eliminating the going concern in auditing practices could impact users negatively. Therefore, the essential component of financial auditing should be retained.
The Auditor’s Current Role
Financial auditors are required to give independent assessments of financial statements of organizations (Bell & Griffin, 2012; Satava, Caldwell & Richards, 2006). The financial examination provided by an auditor is an essential tool that is used by the stakeholders of an organization to determine the overall credibility and performance of a legal entity. A going concern is a legal business entity that has an ability to operate without the fear of halting its operations due to bankruptcy.
If a business entity becomes bankrupt, then it can no longer maintain good relationships with its stakeholders and business creditors. As such, it is forced to stop its operations. The management of an organization could focus on making the business remain a going concern. The virtue of a going concern of an entity could be established by independent financial auditors who utilize their knowledge and skills to conduct assessments on financial statements, give independent reports (Satava et al., 2006).
The accounting framework hypothesizes that firms could continue to exist in the future provided that they work toward achieving their goals and commitments. Therefore, they could not be liquidated in the near future. Bell and Griffin (2012) argue that the auditor could demonstrate some information that makes a firm unable to satisfy its financial obligations without the need to sell its property or acquire debt via restructuring. The role of the auditor is to gin deep into the financial statements of an organization and look for the signs financial stability and/or instability.
The role of the auditor in reporting about the entity’s ability to continue as going concern could be impacted by the willingness of an organization to accept audit outcomes. The role could also be influenced by the experience and ability of the auditor in using financial figures to report accurately and make proper estimations. The auditor considers factors like loan defaults, negative financial results, and failure to secure credit from suppliers, among others. The analysis of the financial factors helps the auditor to decide whether or not there is the uncertainty of an entity to operate in the future as a going concern.
Current Requirements
The current requirements of PCAOB are meeting the needs of users of financial statements (Carmichael, 2004). Users of financial statements could be employees of a firm, the management, shareholders of other stakeholders. The PCAOB outlines requirements that should be met by the auditor when auditing financial statements of firms (Carmichael, 2004; Zeff, 2003). The auditing framework aims to protect the needs of users of financial statements that could result from such an audit. The requirements are meeting the needs of users by ensuring that the auditor’s responsibility is defined and specified in the auditing reports. This is an essential practice in auditing because business forecasting should be left to business analysts who may forecast the performance of firm based on the available financial records.
In fact, business analysts mainly utilize past financial records to forecast the future of a business establishment. It is not the responsibility of the auditor to predict the future business events of a company. The requirements also outline auditing procedures that should be adopted by the auditor. This aspect satisfies the needs of users by ensuring that they are aware of the standard auditing procedures being used. Considerations of events, conditions, and management plans are essential components of PCAOB that promote the level of auditing acceptance by users of a firm. For example, users could be interested in knowing the events, conditions, and management plans that contributed to some outcomes in financial auditing (Nagy & Cenker, 2007).
Alternative Requirements
Some alternatives to the current auditing requirements proposed by the PCAOB could be used to improve disclosures for users. Increasing the level of financial disclosures correlates with the level to which user needs are met within a firm (Zeff, 2003). First, the auditor could be given the freedom to use auditing procedures that could correlate with the size and requirements of an organization. For example, the auditor can utilize auditing procedures that are customized to reflect the needs of users in a particular company. Second, PCAOB should alter the requirements that are used determine whether or not an entity is a going concern. For instance, the firm could change the period of time that is required to assess the ability of a business to meet its financial requirements. Third, an alternative requirement could be adopted to specify the amount of money that an entity could pay its creditors without the need to sell its property.
Impact on Users
Meeting the going concern requirement is important in financial auditing. If the requirement is eliminated, then users could not be aware of the actual financial statements of firms. In fact, users could fear investing in a business because they could not be sure whether or not the firm is a going concern. If the users invest in a business that is not a going concern, then they could incur losses because such a firm could be declared bankrupt and put in receivership so that the receiving manager could sell the assets of the firm to pay creditors and shareholders of the firm. Eliminating the going concern requirement could also make users feel that the management is hiding them some crucial financial parameters that could be used to present an accurate examination of a firm (Carmichael, 2004).
Conclusion
The auditor plays an important role in establishing the truth and independent financial standing of a business organization. The auditor operates within the confines of the established framework of the auditing procedures to demonstrate whether or not a firm could operate independently and meet is financial requirements without disposing some of its assets. The auditor has a role to play in reporting actual findings with regard to going concern of a business. Such information is used by the management to plan in the future. Also, potential shareholders utilize the information when making decisions about investing in a company. Although the current requirements adopted by the PCAOB are aimed at meeting the needs of users, alternative approaches could be utilized to improve financial disclosures to users. Finally, eliminating the going concern would have negative impacts on users.
References
Bell, T. B., & Griffin, J. B. (2012). Commentary on auditing high-uncertainty fair value estimates. Auditing: A Journal of Practice & Theory, 31(1), 147-155.
Carmichael, D. R. (2004). The PCAOB and the social responsibility of the independent auditor. Accounting Horizons, 18(2), 127-133.
Nagy, A. L., & Cenker, W. J. (2007). Accounting firms cautiously maneuver in the new audit environment–a note. Managerial Auditing Journal, 22(2), 218-225.
Satava, D., Caldwell, C., & Richards, L. (2006). Ethics and the auditing culture: Rethinking the foundation of accounting and auditing. Journal of Business Ethics, 64(3), 271-284.
Zeff, S. A. (2003). How the US accounting profession got where it is today: Part II. Accounting Horizons, 17(4), 267-286.