The Challenges Facing Contemporary Auditors

Question: Describe about the The Challenges Facing Contemporary Auditors. Answer: Introduction: Auditing refers to the systematic process of examining the affairs of an organization and which has legal and regulatory implications as well. The risks associated with an audit is dependent on the nature of business of the concerned organization. The current study is concerned with evaluating contemporary challenges faced by auditors today across the globe. The study seeks to understand the various risks associated with buying and selling of goods online. The study further highlights the ways in which auditors can detect frauds and misstatements in context of online businesses. Discussion: E-commerce refers to the purchasing selling of goods and transferring data or funds using an electronic network which is in general the internet. The type of business can be business-to-business (B2B) or business-to-customers (B2C) or Customers-to-Business (C2B). In this context, Askary et al. (2012) stated that e-commerce model of business has the lowest level of physical interaction between a seller and a buyer. However, the main benefit of e-commerce business is that its helps in eliminating geographical limitations. In other words, e-commerce business allows a company to reach out to a large number of customers which is not possible under traditional business model based on physical interactions. In addition to this, e-commerce business model increases the chances of sales for a company. However, the above benefits buying and selling online possess certain impacts on a business at both local and international level. As mentioned by Beck and Mauldin (2014), online buying and selling of goods lowers the strength of customer relationship with a concerned company. Put it differently, lack of visit to the online stores and meeting sales executives of the company somehow weakens the bond of relationship between a company and its customers. On the other hand, considering international business arena, cost benefit is one of the greatest benefit of e-commerce to expand current business of a firm (Bowling, 2014). In other words, setting up new offices, hiring new staffs and conducting business in a foreign market involves huge capital investment which further raises the risk associated with the concerned investment in the foreign market. However, e-commerce requires comparatively lower costs to establish business in a foreign country. This is mainly because of the fact that no physical offices or assets are required to be established in the foreign market. However, online buying and selling of goods over the internet also possess certain risks to business. In this context, Gunin-Paracini et al. (2014) stated that loss of transaction integrity is a key risk associated with doing business in e-commerce format. The loss of business integrity take higher form by inadequate audit trail either in electronic or paper form. On the other hand, security threats including virus attacks are yet another key risk to business under e-commerce format which could also result in loss of data or hacking of confidential information of the business and the customers as well. On the other hand, improper accounting policies in respect of certain expenditures in e-commerce business is a key risk to organizations engaged in buying and selling goods online (William et al. 2016). Capitalization of certain expenses like website development expenses, title transfer risk, wrong understanding of complicated contractual agreements, allowances related to warranties an d revenue recognition could lead to incorrect accounting treatment of transaction resulting in non-adherence to International Financial Regulatory Standards (IFRS). There are certain crucial factors to be considered while determining treatment of transactions in an e-commerce business. These are whether the organization is a principal or an entity and if only commission or gross sales are to be recognized. Treatment regarding free goods and discounts also need to be determined. As mentioned by Ihendinihu and Robert (2014), in case other companies are also giving advertisements in the website then on what basis would be the revenue allocated and determined. The above risks can further lead to misstatements and frauds under e-commerce business. Discount allowed account is a key area in respect of online business through which organizations can indulge in fraudulent activities to lower the profitability of an organization. In other words, an organization can show greater amount of discounts offered to customers than the actual discount amount to lower the revenue earned from sales and this further lowers the profit margin. This helps organizations to pay low amount to taxes to the government. On the other hand, in case a company wants to show higher revenues to impress shareholders then the same can be easily done by creating fake email IDs of customers and showing false sales transactions (Waldron, 2016). Lack of physical interaction is the main factor leading to easy manipulation of identity. Misstatement can also occur if an organization even being the principal represent itself as the agent and show false commission on the same. The i ntention behind such strategy is to benefit from tax exemptions due to agent identity and commission expense which also helps in increasing expenses on the profit or loss account and lower profit margin of the organization. The above risks can be addressed through several strategies. Development of adequate security system and audit control measures are the two key measures in this regard. Sound security system would help in reducing the threat of cybercrimes like hacking, identity theft, malware and others. On the other hand, stringent audit control systems could help in identifying frauds and misstatements committed by a company. Auditors while auditing business of an e-commerce nature need to take additional measures to detect failures, inaccuracies and problems in financial reporting to present an authentic opinion on the business of the company (Sanderson, 2013). Auditors need to verify the identity of the customers and suppliers prior to issuing audit statement (Sadgrove, 2016). In addition to this, auditors can obtain all terms of trade, credit terms, licensing and others from the management in respect of conducting the business. Bank account and payment gateways could provide vital insights on t he actual transactions, debit and credit of amounts in the business bank account. This could help the auditors in judging the authenticity of the transactions furnished by business owners. On the other hand, auditors also needs to obtain soft copies of website login details, online orders placed and web page visits of the customers. These are necessary to understand authenticity of sales transactions. In this context, Jang and Kim (2016) mentioned that fraudulent practices can be best managed by auditors by matching the movement of inventories with the sales figures furnished by an organization. Here, random audits can be done to check if the sales volume matches with the volume of goods issued from inventories. Physical verification of stock could be essential in this regard. Furthermore, the amount of website related expenditure need to be properly verified by the auditors to determine the correct treatment of such transactions. Conclusion: The current study revealed that buying and selling goods online offers various financial and non-financial benefits to businesses. However, e-commerce mode of business is also subject to various risks to the businesses using such models. The chances of frauds and misstatements are quite high in such business model. The study further indicated that data related to sales revenue, commission and discounts can be easily manipulated in case of online transactions. The auditors can however take certain initiatives to detect frauds and misstatements. The auditors need to verify the contact details and identity of the customers. In addition, auditors also need to verify inventory movement against the sales volume of companies. Reference List: Askary, S., Goodwin, D. and Lanis, R., 2012. Improvements in audit risks related to information technology frauds.International Journal of Enterprise Information Systems (IJEIS),8(2), pp.52-63. Beck, M.J. and Mauldin, E.G., 2014. Who's really in charge? Audit committee versus CFO power and audit fees.The Accounting Review,89(6), pp.2057-2085. Bowling, A., 2014.Research methods in health: investigating health and health services. McGraw-Hill Education (UK). Gunin-Paracini, H., Malsch, B. and Paill, A.M., 2014. Fear and risk in the audit process.Accounting, Organizations and Society,39(4), pp.264-288. Ihendinihu, J.U. and Robert, S.N., 2014. Role of Audit Education in Minimizing Audit Expectation Gap (AEG) in Nigeria.International Journal of Business and Management,9(2), p.203. Jang, J.Y. and Kim, C.N., 2016. An Analysis of the Effects of Knowledge Complementarities on the Performance of Information System Audit: A Perspective of the Resident Audit in the Project Office.Journal of the Korea society of IT services,15(1), pp.113-129. Sadgrove, K., 2016.The complete guide to business risk management. Routledge. Sanderson, I., 2013. Tools for IT governance assurance: using recent updates of ISACA's Information Systems Audit and Assurance Standards alongside COBIT 5 can help auditors evaluate their organization's information systems governance.Internal Auditor,70(5), pp.51-54. Waldron, M., 2016. The Future of Audit.CFA Institute Magazine,27(3), pp.55-55. William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and Assurance Services: A Systematic Approach.Auditing and Assurance Services: A Systematic Approach.