A few years ago, accounting fraud scandals by Enron Corp. and WorldCom Inc. happened in the USA. The accounting scandals shed a new light on audits so auditing restrictions were reinforced by Sarbanes-Oxley Act in 2002 in the USA, as Barnes and Barnes (2012) pointed out. The stricter regulations of auditing parallel around the world. In the aftermath, non-profit organisations were also pressured to impose similar level of regulations to for-profit entities. Underlying understanding of auditing will be useful to have a view on these kind of economic and social issues. Auditing can vary depending on accounting standards, and accounting standards can be different depending on the types of organisations and nations. Thus, in order to understand auditing, this essay will describe accounting standards and audit procedures in the private sector and the public sector in New Zealand.
It is presumed that accounting began to emerge in 6000 years BC. However, double accounting, which is the principal of today’s accounting, had not been introduced until Venetian merchants obtained business skills from Arab in the 9th century. The merchants handed the business secret down for generations (Mukhametzyanov, Nugaev & Muhametzyanova, 2017). Contrary to accounting, which began out of the merchants’ individual necessity, auditing began out of collective necessity. With the advent of the Industrial Revolution, there has been a wide range of stakeholders around company and the stakeholders have wanted to evaluate if the company’s financial report was trustworthy (Barnes & Barnes, 2012). That has been the audit’s role.
Most companies must comply with any kinds of accounting standards, but not all. For example, sole traders and partnership do not need to comply with accounting standards because the owners and the people operating the entities are generally one (Smart, Awan & Baxter, 2017). However, companies established in accordance with Companies Act 1993 must keep proper accounting, otherwise the CEO of the company or the company will be punished. Accounting standards for company are categorised as Tier 1 and Tier 2 according to the External Reporting Board (henceforth XRB). XRB is responsible for developing and issuing accounting and auditing standards in New Zealand. If a for-profit entity meets the criteria, it shall follow Tier 1 based on International Financial Reporting Standards (henceforth IFRS). Alternatively, it shall follow Tier 2 based on NZ IFRS Reduced Disclosure Regime (henceforth RDR). The criteria for Tier 1 are whether the company has public accountability or total expenses over $30 million. For instance, if an entity has debt or equity instruments are traded in a public market, the entity has public accountability (External Reporting Board, 2015).
On the other side, the public sector can be also required to keep accounting. The public sector includes public benefit entities which are responsible for service outputs achieved and service inputs consumed, such as government departments, local bodies, hospitals, state owned enterprises and so forth. When they provide service outputs like the construction of roads, they are simultaneously in charge of the use of the inputs like the assets or cash. Additionally, not-for-profit entities such as charities are included in the public sector (Smart, Awan & Baxter, 2017). Therefore, these kind of entities have to apply proper accounting standards, which are divided into four tiers. If a public benefit entity meets the criteria mentioned in the private area, it has to comply with Tier 1 listed in Appendix C except for RDR. Unless a public benefit entity meets the criteria, it can apply Tier 2 listed in Appendix C including RDR so it would mean relatively less burden. Besides, the public benefit entity that has total expenses less than or equal to $2 million and a not-for-profit entity can apply Tier 3 listed in Appendix D which is easier to follow than Tier 1, 2. Specifically for too small-size public entities, very simple accounting standard which is called Appendix E is allowed. Appendix E opts for cash accounting instead of accrual accounting which is considered a prerequisite for accounting (External Reporting Board, 2015).
No matter what they are, both private and public sector are generally required to be audited. Most companies, in particular all listed companies must appoint independent auditors so that their financial reports can be verified. Although a company has not issued securities to the public, a company which has total assets exceeding $60 million or total revenue exceeding $30 million has to be audited by Financial Reporting Act 2013. Even if a company does not have any duty in audit with the law, it is likely to opt for the audit because the financial report audited stands for credibility as to the use of information. Turning to the procedure of auditing, it consists of four steps. The first step is planning for audit in which the audit risk and the scope of the audit are determined via understanding of the auditee. Next, interim audit is required to examine the auditee’s internal control activities that prevent and filter errors or fraud. Over time, auditing begins in earnest after producing financial report by the auditee. Auditors inspect documents and interview people in charge to obtain evidence that shows reliabilities of the financial report. Finally, auditors give their opinion by issuing audit report (Newton, 2013). If auditors can guarantee that the financial report does not have any misstatements, ‘Unqualified opinion’ should be given. If there is a limitation or a disagreement, however, ‘Qualified opinion’ should be given in the audit report (Van Peursem, Pratt & Cordery, 2011).
Auditing in the public sector in New Zealand contrasts with auditing in the private sector because it is interestingly responsible for Audit New Zealand. The reason is supposedly that public entities serve all New Zealanders so it is very important to spend public expenditure fairly and appropriately, while it is more important to record the use of the expenses for private entities. The Auditor-General, which is an officer of parliament, appoints auditors from accounting firms and orders them to audit public entities by the Auditor-General’s Auditing Standard. The standard is based on the Ethical and Professional Standard in New Zealand Institute of Chartered Accountants and additional standards that are unique to the public area. By this standard, auditors appointed carry out audits. The procedures are consistent with private sector auditing but it should be added looking into sensitive expenditure which is likely to be appropriated (Audit New Zealand, 2015; Controller and Auditor-General, 2017).
In conclusion, this essay presented the broad-brush history of accounting and auditing and also described the similarities and the differences between the private sector and public sector in terms of accounting standards and auditing procedures. The accounting scandals obviously were disgraceful events for accountants and auditors but the fact that it triggered the stricter restrictions in this realm is worthy of welcome because it will certainly lead to transparency of economy and society.
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References:
Audit New Zealand. (2015). Public sector auditing. Retrieved from https://www.auditnz.govt.nz/public-sector-auditing
Barnes, N. D. ndbarnes@ymail. com., & Barnes, N. R. . ndbarnes@ymail. com. (2012). Driving Quality Improvement Through Audits. Information Management Journal, 46(1), 40–43. Retrieved from http://ezproxy.wintec.ac.nz/login?url=http://search.ebscohost.com/login.aspxdirect=true&db=eue&AN=75899221&site=eds-live&scope=site
Controller and Auditor-General. (2017). About the Controller and Auditor-General. Retrieved from https://oag.govt.nz/about-us/about-cag
External Reporting Board. (2015). External Reporting Board Standard A1 Application of the Accounting Standards Framework. Retrieved from https://www.xrb.govt.nz/accounting-standards/for-profit-entities/
Mukhametzyanov, R., Nugaev, F., & Muhametzyanova, L. (2017). History of Accounting Development. Journal of History Culture and Art Research, 6(4), 1227-1236. doi:http://dx.doi.org/10.7596/taksad.v6i4.1163
Newton, H. (2013). Auditing. Research Starters: Business (Online Edition). Retrieved from http://ezproxy.wintec.ac.nz/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=ers&AN=89163538&site=eds-live&scope=site
Smart, M. J., Awan, N., & Baxter, R. (2017). Financial accounting : a New Zealand perspective. Auckland, New Zealand : Edify, 2017.
Van Peursem, K., Pratt, M. J., & Cordery, C. (2011). Auditing : theory and practice in New Zealand. Auckland, N.Z. : Pearson, 2011.
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