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Auditing & Assurance Services 2
Question 1:
Fair Value is the current value or price of an item. If analyzed specifically, the value of
an item at which an item can be sold and that value is fair to both the seller and the buyer. The
fair value consideration does not usually refers to the items sold under liquidation and is more
referred to the items which are sold in normal conditions. This concept becomes exceedingly
important when a accompany or an item is acquired, and thus the value of that item or firm is
analyzed in terms of its fair value so that it is fair for both the buyer and the seller. This is also
important in terms of valuation of the assets of the firms, which has to be reported and is material
for the firm. This affects the depreciation cost of the firm as well. Furthermore, the fair valuation
is also used for the valuation of the security or stock in an open market. (Zyla, 2012)
The measurement of the fair value of the firm has been presented in many ways through
various laws and principles. The measurement of the Fair value under the GAAP and IFRS
results in substantially converged value however; there are certain differences in the valuation
method under both principles. Like as per the GAAP principal, the recognition of the day one
gain or losses are more common, as compared to recording under the IFRS regulations. The IFRs
13 provides the regulation on the fair value measurement whereas the ASC 820 provides the
detail about the fair value measurement under GAAP principles. Moreover, the ASC 820 also
provides practical expedient to allow certain reporting entities in certain conditions, which come
under the ASC 946 definition to measure the fair value of certain investments at a NAV (Net
Asset Value), however, the IFRs, provides no such regulation for its reporting entities.
Furthermore, some of the disclosure requirements under the both principles differ too. (Pwc.com,
2015)
Auditing & Assurance Services 3
Companies often relies on accountants which are from their audit firms to assist in the
reconciliation of their accounts and for the preparation of the adjustment journal entriesand even
for the making of their financial statements. In particular, small companies tends to use their
auditors accountant for their accounting purpose as they usually lack any professional accounting
mechanism. Moreover, the rliance on the audting firm also makes sence in this regard that the
firm would have lower accounting mistakes and will better conform with the reporting and
accounting principles.
However, this reliance of the mangement on their auditors puts the management under
the expectation that the auditors will work as a agent to their principal which are the shareholders
of the company. This prinicple agent relations hip leds the uaditors to look after the inteerest of
the shareholders of the company as the agent of the firm. However, as per their profession the
auditors are required to “independently” asses the financial statements and financial repoting
standards applied by the mnaagement with respect to the accounting standards. However, as
these financial statemenmts are being formulated by the audtior himself while he has been
working as an accountant for th company, this may lead to the merging of the borderline of the
roles of the auditor and accoutnant with respect to his profession and shareholder’s interests. (
The auditor in this situation has to draw precisely the line between his role as an auditor
and as an accountant. Firstly, as an accountant he should perform all his duties as an accountant
and conform to the standards of reporting which should be conformed to. After this, he should be
fulfilling his duties as an auditor for the firm, without taking in consideration the management of
the linkages with the management of the firm. The blurred line in the roles is the area when
during audit, the auditor take ease on assessment of the accounting standards being used (as he
Auditing & Assurance Services 4
thinks he has done it perfectly), and ignores the mistakes he may have done while reporting.
Therefore, the borderline would be to assess all the process of the internal controls, and
accounting standards and framework and conform to all the duties of the auditor without
Question 2:
The auditors are dependent on the manager’s explanations. It is evident from the recent
research that the confidence of the managers depicted from their use of words like “I am
absolutely certain” and not “I suppose” leads the auditors to trust them more, and hence depends
upon them for the audit process which usually then leads to less reliable audit types and fewer
tests. It is evident that the auditors tend to be more reliant on the managers with higher
confidence. This is one of the traps in which the auditors usually fall in and which leads to the
The auditors know that the management confidence should not be an influencing factor
for them; however, they are influenced. Moreover, it is evident that these attributes of the auditor
is more common in the area of the high-risk companies, where in depth and skeptical analysis is
impertinent. This is because of the reason that people perceives that the confidence goes along
with the competence of an individual. However, it may necessarily not be always true. This is
because of the reason that the auditors while knowing to disregard confidence of the
The research provides evidence about the swaying of the audit process because of the
influence of the management confidence on the auditors, which leads them to depend on their
explanations and conduct fewer audit processes. Therefore, it is showed that the manager’s
Auditing & Assurance Services 5
confidence is one of the influencing factors that were at first undiscovered and is vital to be
ignored by the auditor for an in-depth and skeptical audit. (Aghazadeh & Joe, 2015)
Question 3:
From the beginning, the profession of auditing has been perceived as a self-regulatory
profession and hence has some key ethical rules to focus while practicing. The recent failures
and scandals of the corporations where the key role of the auditor is evident in many areas have
raised concerns about the suitability and validity of this profession’s self-regulatory attribute.
This is more evident specifically in the 21st century in which it is evident through the
management of the auditors of the risk management processes of the corporations, which are
highly complex. This has led to concerns about the quality of the audits and on the confidence on
the auditing profession. For this reason, many countries have been active in establishing
regulatory framework and bodies for recovering the confidence of the market on the auditing
profession and for the reason of reestablishing the quality of the Audit process.
There has been evident research, which has been conducted to oversee the failure of the
auditing processes and the auditors in the 21st century. The research has provided evidence about
the fact that the auditing has not completely failed in the 21st century, but it needs a joint
approach from the audit and business community to raise the quality of the auditing by defining
and retaining the equilibrium between the statutory directive and the self-regulation
phenomenon.
Although the research provides evidence about the gap in the expectation and actual
performance of the auditing when they fail to perform what is expected from them in minimum.
These failures and the expectation gaps is evident from the resulting scandals of the corporation
Auditing & Assurance Services 6
like Enron, Satyam, ZZZ Best Company, Lehman Brother, WorldCom, and the Merill Lynch.
The research article has examined the possible causes of the audit failures. It explains that the
audit failures usually take place because of any serious misjudgment or error from the auditor. It
is evident from the crumple of the Enron in which the auditor Arthur Anderson was seriously
engaged in the accounting treatment and structuring of the special purpose entities for hiding the
giant losses. This was because of the reason that the audit company do not wanted to advice the
firm Enron for adjusting its entries in the right way because of it do not wanted to lose it’s such a
big client to another of its competitor firm. Another reason can be that the Auditor fails in
carrying out its audit work with due care, as it is evident in the case of the Belgrave Finance
limited. Another reason, which is pointed out, is that the auditor is not independent because of
the long personal familiarity and relationship between the auditor and their client, seen in the
case for the AMRE vs. PwC. Furthermore, the reason also is seen as the relax regulatory
This therefore shows that the auditing in the 21st century has not completely failed can
regain its confidence by maintaining the equilibrium between the self-regulation and the
Question 4
is not observed in other areas of regulations in the business. These codes have evolved from
codes of Cadbury in 1992. In this approach, most of the U.K codes are covered. In this code,
there are 50 provisions. These provisions cover that what directors and board should do. There is
no requirement for complying with these 50 provisions. Companies cannot do after providing
Auditing & Assurance Services 7
explanation. Comply-or-explain do not mean that there is no requirement. It states that provision
alteration should be justified by companies. This approach is also used in coordination with other
approaches.
Any departure by the company from these provisions does not mean that they breached the law.
Companies can provide explanation that how they can improve their governance practices. These
codes are designed for promoting good governance practices. These codes provide innovative
ideas to the companies. Purpose of these codes is to decide by the market that whether these are
essential for companies or not. A company may deviate from the requirement. There are many
advantages of these codes for the companies. These codes provide options of selection for the
companies. Therefore, it is not always essential that these codes should be applied to every
company.
It is essential to provide explanation of good corporate governance and its principles in the
company. These codes are formed to promote good governance and structure of the companies.
These codes are made for the benefit of companies as well as shareholders and society. For
making work the comply or explain regulation, people need to trust the companies in terms of
their commitment to good governance and consequently the companies need to trust that their
explanations will be considered. The “comply or work” is thus workable where there is mutual
agreement and trust. This framework here provides the solutions that are formulated between the
companies and their shareholders without any regulatory framework needed. In this scenario, the
success is dependent on the institutional arrangements and the shared beliefs. Its example is that
if a company does not complies with a certain principle or regulation then it needs to provide
explanation then how that adopted regulation of rule of compliance is beneficial for their
reporting and is valuable to the interest of the company and the shareholders.
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The institutions responsible for the regulation should be very sure about the credulity of the
alternative used in place of the regulation and to the legal enforcement of the compliance. The
shareholders in this case play the role of the stewardship to the regulatory institutions and the
companies. The regulatory institutions have to make sure that the companies have adopted the
right for the company and fulfill the thresholds for the achieving of the shareholders interest and
business objectives. There are also doubts raised about the compliance of the “comply or
explain” framework. It arises where the framework lacks in providing innovation, productivity
and transparency. The framework if not provides the shareholder interest and limits the company
in achieving of the company’s objectives than any other alternative or regulatory intervention
References:
Audit Quality Forum. (2006). Agency theory and the role of audit. Retrieved May 16, 2016, from
Icaew.com:
https://www.icaew.com/~/media/corporate/files/technical/audit%20and%20assurance/aud
it%20quality/audit%20quality%20forum/agency%20theory%20and%20the%20role%20o
f%20audit.ashx
Aghazadeh, S., & Joe, J. R. (2015, September 22). How Management's Expressions of
Confidence Influence Auditors’ Testing. Social science research Netwrok .
Financial reporting Council UK. (2012). Comply or Explain. Retrieved May 11, 2016, from
Financial reporting Council UK: https://www.frc.org.uk/Our-
Work/Publications/Corporate-Governance/Comply-or-Explain-20th-Anniversary-of-the-
UK-Corpo.aspx
Islam, M. (2013). Auditing in the 21st Century: Has Self-regulation Failed? Journal of Modern
Accounting and Auditing , 9 (8), 1059-1069.
Pcaobus.org. (2016, March 13). Responsibilities and Functions of the Independent Auditor.
Retrieved May 16, 2016, from http://pcaobus.org/Standards/Auditing/Pages/AU110.aspx
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Pwc.com. (2015). Fair value measurements. Retrieved May 16, 2016, from Pwc.com:
http://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc-fair-value-
measurement-2015.pdf
Zyla, M. L. (2012). Fair Value Measurement: Practical Guidance and Implementation. John
Wiley & Sons.