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Introduction
Non-Audit Service and How It is Different from Traditional Audit will be evaluated in this report. Audit refers to the financial statement audit of a company which is directed to evaluate and review the financial statement (Stoel, Havelka, and Merhout, 2012). Audit ensures that the financial records are fair and accurate furthermore all transactions are recorded fairly. Non-audit services refers to the audit which is not about reviewing and evaluating financial statement of an organization (IGI Global, 2022). In this article, the dissimilarities of non-audit services from traditional audit services, has been analysed. The advantages and disadvantages of non-audit services from the perspectives of both clients and auditors have been evaluated. The justifications of rationales of using non-audit services and which non-audit service should be banned has been also evaluated in the report.
Non-Audit Services
Non-audit service and its dissimilarities to traditional audit:
Non-audit services refer to the services which is not related to reviewing and evaluating financial statement of the audit client; such non-audit services are provided by qualified public accountant in the time of an audit of an organization (Habib, 2012). For instance, qualified public accountant may review on the management of human resource function of an organization which will be considered as a non-audit service because managing HR is the concern of HRM department. Bookkeeping, financial information system, actuarial services legal expert services etcetera falls in the category of non-audit services. Non-audit services assist companies to have the advantage of economies of scale.
Firstly, audit services refers to the services of reviewing and evaluating financial statement of an organization by a qualified accountant of audit firm (Stoel, Havelka, and Merhout, 2012). Companies review their financial statement by the accountants who help them to find out the lacking or gap of the statement. Whilst, the services which are not audit work and done by qualified accountant of audit firm are non-audit services. Non-audit services find out the lacking in their processes of a company.
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Secondly, audit services involve responsibility of auditors to identify fairness and truth of financial statements of the client’s company (Axelsen, Green, and Ridley, 2017). Therefore, auditors become capable of assessing the risks of the business and companies can take significant steps to minimize the risks to ensure their growth. On the other hand, in non-audit services the auditors do not identify the fairness and truth of the company’s financial statement (Popescu, and Popescu, 2018). Therefore, companies cannot identify the risks which are attacking their business.
Thirdly, traditional audit is greatly accepted by the regulatory bodies and business communities of a country (Abdelhamid & Co, 2020). Whilst, no-audit service may not be accepted by regulatory bodies and business communities because it allows auditors to interfere in a business’s internal processes, which may create conflict between internal auditors and non-service auditors (Habib, 2012).
Advantages and Disadvantages of Non-audit Services from the Perspective of both auditor and clients
The advantages of non-audit services for clients:
When companies purchase traditional audit and non-audit services from same audit firm, they get discount from the audit firm (Braşoveanu, Dobre, and Brad, 2014). As a result, audit expenses of the client’s company decreases and they can invest the saved amount in other potential processes.
Clients become capable of knowing the lacking of their internal auditors of by allowing non-audit because the auditors conduct audit in all departments of an organization (Braşoveanu, Dobre, and Brad, 2014). As a result, clients become informed about the problems of their internal departments and can prevent the problems by taking right steps.
Disadvantages of non-audit services for clients:
When clients allow non-audit within their organization, it may create conflict between internal auditors and hired auditors (Cohen et al., 2014). Non-audit may bring out different statement than internal auditors of the company which will make internal auditors annoyed and both of the auditors may engage in conflict while providing the truth of their statement.
Non-audit may conduct biased audit to provide favourable result in order to make clients happy (Cohen et al., 2014). Auditors conduct biased audit to keep their clients satisfied and hold on the clients toward their services. As a result, clients cannot identify the problems they are facing in their business which may harm their outcome.
The advantages of non-audit services for auditors:
Non-audit services allow auditors to conduct audit in all departments of an organization such as: accounting department, human resource department, law department and others. As a result, auditors become capable of enhancing their knowledge and they can conduct audit more effectively (Badolato, Donelson, and Ege, 2014).
Financial Reporting Council (FRC) assess non-audit services; therefore auditors get consultancy and advice from FRC and it helps them to develop their abilities according to the advice and consultancy (Badolato, Donelson, and Ege, 2014). As a result, auditors can do their stuffs more efficiently.
Disadvantages of non-audit services for auditors:
Auditors face difficulties while accessing information about client’s organization (Sharma, and Iselin, 2012). It is tough to access in depth information about a company which is required to provide final statement and auditors cannot get enough information because they are outsider of client’s organization.
Auditors have to conduct audit secretly which is a great because many non-audit service is not allowed (Sharma, and Iselin, 2012). If auditors are caught while conducting non-audit services, they may get penalty by regulatory bodies.
Justifications of Rationales of Provision of Non-audit Services
The justifications about the provision of non-audit service is ethical:
Non-audit services offer consultancy services to client’s organization which plays great role in fostering their business growth (Gaynor et al., 2016). The services provide consultancy on the areas of: human resource, financial investments, management and other areas of an organization that helps organizations to find out the internal problems of the areas. For instance, companies can identify the appropriateness of the financial investments they made through non-audit services. As a result, companies will be capable to deciding that they should invest in the project more or stop investing. It seems that non-audit services help organizations to ensure better execution.
Non-audit conducts audit within different areas of an organization that helps them to detect frauds within the organization (Abbott et al., 2016). There are many frauds within an organization who work for personal interest and create problems in the execution of the business. For instance, an employee of account department can show transaction of huge amount in order to steal money while making the transaction. Non-audit will assess the transaction records and they will find out the fraud employee; therefore company will be able to take steps against the frauds. And other employees will not have courage to do these types of fraud after seeing the steps against the fraud.
When companies allow auditors to provide both traditional audit service and non-audit service, it reduces the costs of organizations (ŠTANGOVÁ, and VÍGHOVÁ, 2014). Auditors utilize their cumulative audit knowledge and conduct audits effectively in lower costs and companies can become cost efficient by reducing audit costs. By being cost-efficient, clients will be capable of providing services to their customers within lower costs which will increase their sales. As a result, the company will be able to strengthen its position among competitors by providing lower cost services and products.
Some non-audit services should be banned:
Non-audit services should banned from providing recruitment services to companies because the firms may appoint employees of their choice who is not compatible with the organizational culture of the company (Bożek, and Emerling, 2016). Therefore, the employees will not be capable of giving better performance. As a result, the organization will not be capable of attaining its organizational objectives. Besides that, audit firm may have make any conspiracy against the client firm with the help of the employees they have recruited for the company. It seems that non-audit should not be permitted to recruit employees.
Interfere in decision making of management is the other service of non-audit that should be banned because the auditors may encourage the client organization to make wrong decision (Prawitt, Sharp, and Wood, 2012). Because of the wrong decision of auditors, clients’ companies may suffer; therefore companies should not allow this service of non-audit. For instance, auditors may have less experience in finance but they will provide investment plan for the company. As a result, company will implement the investment plan and will face loss from the project.
Conclusion
Non-audit services provides consultancy in the areas of an organization such as: human resource, law department and others that helps companies to make better decisions. It also identifies the internal problems of an organization that may create obstacles in the way of their success; therefore companies can take initiatives to prevent the problems. This service helps companies to recognize the frauds and organization have and organizations can take steps to handle them. As a result, companies can ensure better operations. Non-audit services also reduces the costs of clients because they get discounts when auditors conduct both traditional and non-audit. Therefore, companies can reduce their operational costs and increase profit by controlling the costs.