Auditing Case Study

Auditing has become quite a challenge in recent years due to all the fraud scandals that has been going on. Such is the case that government was required to intervene and created the Sarbanes-Oxley Act; one of most significant reforms related to public companies since 1934. Modern corporations aren’t ran by their sole proprietors anymore but by managers whose job is to protect their interest. Particularly this is one of the reasons why the demand of auditing arose due to the natural conflict of interest between the owner and the manager. Both of these individuals will naturally look out for their best interest and will forget about the other. The owner wishes to see his company grow while the manager wishes to grow his pockets; their interests

Hiring an auditor can have a positive impact on managers because the owner would be more trustworthy of their actions and in turn invest more capital into the business or raise their salary. The auditor’s job is to make sure the reports and information provided by management is in line with contracts and laws; they help reduce faulty and misleading information. Auditing is very important to a company because it is a way to effectively measure its internal controls. Internal controls are the checks and balances within the business that helps guide it towards a desired objective in an efficient manner, which protects its assets, detours fraud, and insures accuracy and transparency. Internal controls basically allow the business to know what is going on at all times. Good internal controls are necessary if regulatory agencies, investors, managers, and creditors are to make sound and informed decisions. Typically companies that wish to raise capital resort to selling bonds or stocks of the company to

Most of the provisions and powers of the PCAOB were well received specially coming from such auditing failures like Enron except the mandatory audit firm rotation. The audit firm rotation is a provision that requires a company to change auditors every certain amount of time in hopes to deter long-term relationships that could potentially interfere with an auditor’s independence. Common views of this specific clause believe that the costs related to this measure would exceed its benefits. Ultimately, there is no company alike; they may resemble one another but each is its own. The crucial goal of an audit is to gain a truly independent opinion for all those that rely on the financial statements. In order for an auditor to familiarize themselves with company a great deal of research must be done and this takes time. According to a survey done by General Accounting Office the average tenure of auditor that is believed to interfere and increase the risk of quality and independence is twenty-two year term.(GAO) With a mandatory rotation clause imposed auditors would have a very difficult time gaining the knowledge needed to attest to such a truly unbiased