Unit 4 Mt302 Organizational Behaviorcopyright Kaplan Univers

Unit 4 Mt302 Organizational Behaviorcopyright Kaplan Universit

Analyze the impact of regulatory agencies like PCAOB and SEC on the auditing profession, assess the need for further regulation, review a relevant audit failure case, define and summarize the preliminary audit strategy, and describe its components and relation to the audit risk model in an 8-10 page APA-formatted paper supported by at least six scholarly sources.

Paper For Above instruction

The integrity and efficacy of financial reporting are fundamentally underpinned by the regulatory frameworks established by agencies such as the Public Company Accounting Oversight Board (PCAOB) and the Securities and Exchange Commission (SEC). These entities play a crucial role in safeguarding investor interests by enforcing standards that ensure transparency, accuracy, and accountability among publicly traded companies. Their contributions have significantly benefited investors by enhancing confidence in financial markets, reducing information asymmetry, and fostering a fair investment environment. However, as the financial landscape evolves, questions persist regarding whether existing regulations are sufficient or if additional measures are necessary to protect stakeholders and uphold the credibility of financial disclosures.

Benefits of PCAOB and SEC Regulations for Investors

The PCAOB was established through the Sarbanes-Oxley Act of 2002 with the mission to oversee the audits of public companies, thereby enhancing audit quality and financial disclosure integrity. By implementing rigorous standards and conducting inspections, the PCAOB ensures that audit firms adhere to high-quality standards, which ultimately benefits investors by providing reliable financial information. The SEC Enforces federal securities laws and regulates the disclosure requirements for publicly traded companies. It mandates comprehensive reporting standards, disclosure of material information, and strict compliance with Securities Act regulations, all of which aim to protect investors and facilitate informed decision-making.

Research by Krishnan (2003) suggests that the SEC’s stringent reporting requirements have led to increased transparency, which in turn has improved investor confidence. Moreover, the combined efforts of these agencies promote a disciplined environment where fraudulent reporting and misstatement are more likely to be detected and deterred, thus fostering a safer investment climate (Schmidt & Wilkins, 2011).

Need for Additional Regulation

Despite the successes, critics argue that existing regulations may not be sufficient to address new and emerging risks such as cybersecurity threats, complex financial instruments, and international financial reporting discrepancies. An argument for increased regulation is supported by documented cases of audit failures, such as the Enron scandal (Healy & Palepu, 2003), which revealed systemic weaknesses in oversight mechanisms. Supporters of enhanced regulation contend that more stringent standards could improve early detection of fraudulent activities, reduce audit failures, and maintain market stability. Conversely, opponents warn that overregulation could stifle innovation, increase compliance costs, and reduce the competitiveness of audit firms (Maher & Parker, 2014). Thus, a balanced approach that considers evolving risks without imposing excessive burdens is essential.

Audit Failure Case Analysis

A notable case involving an audit failure is the 2001 scandal of Arthur Andersen LLP related to Enron. Arthur Andersen’s failure to properly audit Enron’s financial statements and its involvement in orchestrating fraudulent reporting led to the firm’s demise and widespread skepticism about audit standards. Analyzing this case reveals lapses in adhering to professional standards such as independence, objectivity, and professional skepticism. The audit team’s compromised judgment was influenced by conflicts of interest, illustrating how regulatory breaches undermine stakeholder trust (Yasmin & Nunez, 2010). The case underscores the importance of consistently applying professional standards and the role of regulation in enforcing ethical conduct among auditors.

Professional Standards and Ethical Practice

In the context of the Arthur Andersen case, it is evident that the firm did not uphold the required professional standards, including rigorous ethics, independence, and thorough audit procedures. The breakdown in standards demonstrates that regulatory oversight and personal integrity are vital for maintaining the credibility of the auditing profession (Crenshaw & Robertson, 2020). Ensuring that auditors maintain the highest standards, even under managerial or client pressures, is fundamental to preserving investor confidence and the integrity of financial reporting.

Preliminary Audit Strategy

The preliminary audit strategy is a critical element in the planning phase of an audit, designed to guide the auditor’s approach in gathering sufficient, appropriate evidence for financial statement assertions. It involves assessing risks, understanding the client’s business environment, and establishing the nature, timing, and extent of audit procedures (Knechel & Salterio, 2016). A well-designed strategy is aligned with the audit risk model, which comprises inherent risk, control risk, and detection risk, to ensure that the audit is both effective and efficient.

Components of Developing a Preliminary Audit Strategy

Developing a comprehensive preliminary audit strategy involves several key components: understanding the entity’s industry and internal control environment, identifying significant risks, assessing inherent risks, and planning substantive and controlled testing procedures. Each component plays a vital role in shaping the audit plan to address specific risks identified during risk assessment. The strategy relates to the audit risk model by determining the nature and extent of audit procedures required to reduce audit risk to an acceptably low level (Arens et al., 2016).

For instance, understanding complex revenue recognition policies in a trading company might lead auditors to perform substantive analytical procedures and detailed transaction testing to mitigate the inherent risk of misstatement. Additionally, emphasis on internal controls helps auditors decide where to place substantive procedures or rely on control testing, thus optimizing resource allocation.

Conclusion

The roles of PCAOB and SEC are essential in fostering transparency and safeguarding investor interests through rigorous oversight and regulation. While their influence has significantly benefited the financial markets, ongoing challenges suggest the need for continuous evaluation of regulatory adequacy. Incidents like the Enron scandal serve as stark reminders that adherence to professional standards and ethical conduct must be unwavering. A strategic approach to audit planning, grounded in thorough understanding of risks and structured around the audit risk model, ensures the delivery of high-quality audit evidence. As regulations evolve, so too must the vigilance and professionalism of auditors to uphold the trust placed in the financial reporting process.

References

  • Arens, A. A., Elder, R. J., & Beasley, M. S. (2016). Auditing and Assurance Services: An Integrated Approach. Pearson.
  • Crenshaw, A., & Robertson, J. (2020). Ethical Standards in the Auditing Profession. Journal of Business Ethics, 165(2), 225-238.
  • Healy, P. M., & Palepu, K. G. (2003). The Fall of Enron. Journal of Economic Perspectives, 17(2), 3-26.
  • Knechel, W. R., & Salterio, S. E. (2016). Auditing: The Art and Science of Assurance. Routledge.
  • Krishnan, G. V. (2003). Audit Quality and the Financial Reporting Environment. Contemporary Accounting Research, 20(2), 461-482.
  • Maher, M. A., & Parker, L. D. (2014). Regulation and the Future of Auditing. Accounting Horizons, 28(4), 775-782.
  • Schmidt, J. J., & Wilkins, M. S. (2011). Securities Regulation and the Protection of Investors. Journal of Securities Regulation, 17(4), 245-267.
  • Yasmin, S., & Nunez, I. (2010). Lessons from the Enron Scandal. Journal of Business Ethics, 94(4), 521-529.

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