BENEFITS AND ENCUMBRANCES OF AUDITOR’S

INVOLVEMENT ON FORECASTED FINANCIAL STATEMENTS

Mary Denise S. Espejo

917-549-3421
deniseespejo2@yahoo.com

Princess Anne A. Pascua

906-902-4218
princessanne.pascua@yahoo.com

Maricon R. Pataueg
905-468-8080
pataueg.maricon@yahoo.com

Ria D. Quimson
906-310-2279
ria.quimson@gmail.com

Jane Dianne U. Santiago

910-811-6255
baozijaned18@gmail.com

Elvira D.R. Dacayo

edacayo@gmail.com

School of Accountancy and Business Management

Saint Louis University

Keywords:
Auditing, overview analysis, reassurance of information, management advisory services, external auditor,
consultancy, financial system, decision making

ABSTRACT: The audit function has evolved in response to a perceived need of individuals or groups in
society who seek information or reassurance about the conduct or performance of others in which they
have an acknowledged and legitimate interest. Due to auditor’s wide scope of knowledge they are able to
provide value added services to the management, which includes the forecasting of financial statements.
This matter gave rise to our study which focuses in determining whether the effect of auditor’s
involvement in the forecasted financial statement would be a benefit or encumbrance to the management.
Through the use of qualitative method of research design, we will gather and analyze information from
published journals, documents and articles that are relevant in discovering the benefits and
encumbrances of auditor’s involvement in forecasted financial statements and in coming up to our
conclusion in the future.

Introduction

Page 1
In the 20th century, with the growth of corporate
activity, the accounting field has increased
significantly and has seen many developments
in theory and methods. The main causes of
changes in accounting methods have been more
complex tax laws and regulations and the need
to keep uniform accounts for possible
government or public inspection.
According to Leung, et al (2004) auditor
involvement with forecasted data has been
discussed over the past decade by various groups
within the profession. It is found that auditing
has evolved through a number of stages. In the
mid 1800’s to early 1900’s, the audit practice
was considered as “traditional conformance role
of auditing”. Today, auditors are expected not
only to enhance the credibility of the financial
statement, but also to provide value-added
services. Nevertheless, following extensive
reform in various countries as a result of the
collapse of big corporations, it is probable that
the role of auditors will congregate. It is evident
that the paradigm about auditing has shifted
over the years and it is likely to continue
shifting in the future.
Siegel and Sorensen’s study (as cited in
Mohammad & Augustine, 2012) mentioned that
with the presence of globalization that is an
increase in competition, advancement of
technology and pressure to get information
much sooner. Management accounting now
plays bigger roles in organization. Management
accountant is not only playing the role of
information provider but also participating in
decision making or at least to help managers to
make better decisions. (Cooper & Dart, 2009).
Management Accounting
Edwards, Boyns & Anderson’s study (as cited in
Ovunda, 2015) states that some associate the
beginning of management accounting to the
requirement for information to optimize
economic resources during the Industrial
Revolution in the United Kingdom. As well as
Chandler, Johnson & Kaplan has suggested that
the reason the development of management
accounting was attributable to the creation of
large corporations that internalized transactions,
which were previously priced by the market. The
main focus of management accountants has
always been improving organizations’
performance and profitability. According to
Devie, Tarigan and Kunto (2008) management
accountant is intended satisfy top level
management need and to motivate in achieving
Page 2
organization’s objectives. Kaplan and Atkinson
(1998) also stated that management accountants
are no longer mere scorekeepers of past
performance but become value adding members
of management teams. Management accountants
today is metamorphosing from bean counters
into financial and strategic managers.
The industrial engineer studies methods of
performing work, suggests improvements,
designs and installs work systems, and evaluates
results. Internal auditors do utilize some of the
analytical techniques belonging to industrial
engineers, but do not focus on them. Further,
internal auditors do not design and install
systems.
Background of Auditing
The practice of auditing did not become firmly
established until the advent of the industrial
revolution during the period 1840s-1920s in the
UK (Gill & Cosserat, 1996, Ricchiute, 1989).
Large factories and machine-based production
were established. In view of this environment, it
was apparent that the growing number of small
investors was in dire need of protection (Porter,
et al, 2005). Hence, the time was ripe for the
profession of auditing to emerge (Brown, 1962).
In response to the socio-developments in the UK
during this period, the Joint Stock Companies
Act was passed in 1844. The Act provided the
appointment of auditors to check the accounts of
the company. According to Porter, et al (2005)
the accountant particularly in the early years of
this period, was normally the company manager
and his duties were to ensure proper use of the
funds entrusted to him. Brown (1962) claimed
that the auditors during this period were
required to perform complete checking of
transactions and the preparation of correct
accounts and financial statements.
In the years of recovery following the 1930’s
The Great Depression: Wall Street Crash
investment in business entities grew rapidly. The
need for auditing services grew, corporations
realized that they could no longer rely solely on
external auditors from public accounting firms.
The separation of the ownership and
management functions became more evident. It
can be witnessed that the shift of the focus of an
audit function from preventing and detecting
fraud and error towards assessing the truth and
fairness of the companies’ financial statements
began at this period. Consulting industry was
triggered by the Glass Steagall Banking Act of
1933 was driven by demand for advice on
finance, strategy, and organization. In the Great
Depression the effort to understand and correct
the worldwide economic disaster led to the
development of a vastly greater compilation of
statistics as well as the evolution of techniques
needed to analyze them. Business organizations
manifested more concern with anticipating the
future, and a number of highly successful
consulting firms emerged to provide forecasting
help for governments and businesses.
Accounting and auditing are related professions,
indeed accountants and auditors usually hold the
same qualifications. An accountant is a
practitioner of accountancy. Accounting involves
maintaining and recording of the financial
transactions of a company. Accountants ensure
that there is proper record keeping within the
organization. The main goal of accounting is to
provide the company with clear, comprehensive
and reliable information on the operations of the
company for decision making. This information
in presented in the form of an income statement,
balance sheet, statement of changes in equity
and cash flow statement.
Essentially, auditing starts where accounting
ends. Auditors use the financial reports in the
evaluation, verification and review of the
accounts books of the company. Auditors do an
independent appraisal of the strength of the
internal control system and compliance of the
books of accounts to Generally Accepted
Accounting Principles and international
accounting standards. They also check on non-
financial issues like risk analysis.
Accountants provide financial management and
other information necessary for effective
decision making in the company. By contrast,
auditors are not involved in the management of
the company and clearly state in their report that
the financial statements are the responsibility of
the directors of the company. After the end of
the financial year, accountants produce the
financial statements. After the audit, auditors
issue an opinion on whether the financial
statements present a true and fair picture of
activities of the company. Auditors can also
claim to have failed to reach an opinion on the
accounts due to lack of sufficient information.
Internal auditors and external auditors both
audit, but have different objectives. Internal
auditors generally consider operations a whole
relative to objectives. External auditors focus
primarily on financial systems that have a
Page 3
direct, significant effect on the amounts reported
in financial statements. Internal auditors
consider even small amounts of fraud, waste,
and abuse as symptoms of underlying issues.
The external auditor considers just what
materially affects the financial statements since
that is the nature of their engagement. Sawyer's
Internal Auditing summarizes the differences in
the following way.
Management controls over financial activities
have been greatly strengthened throughout the
years. The same cannot always be said of
controls elsewhere in the enterprise.
Embezzlement can hurt a corporation; the poor
management of resources can bankrupt it.
Therein lies the basic difference between
external auditing and modern internal auditing;
the first is narrowly focused and the second is
comprehensive in scope. True, the external
auditor performs services for management and
submits letters to management, which
recommend improvement in systems and
controls. By and large, however, these are
financially oriented. Also, the external auditor's
occasional sally into nonfinancial operations
may not benefit from the same depth of
understanding as does the resident internal
auditor, who is intimately familiar with the
organization's systems, people, and objectives.
Financial forecast is a prospective financial
statements that present, to the best of the
responsible party's knowledge and belief, an
entity's expected financial position, results of
operations, and cash flows. A financial forecast
is based on the responsible party's assumptions
reflecting the conditions it expects to exist and
the course of action it expects to take. A
financial forecast maybe be expressed in specific
monetary amounts as a single point estimate of
forecasted results or as a range, where the
responsible party selects key assumptions to
form a range within which it reasonably expects,
to the best to its knowledge and belief, the item
or items subject to the assumptions to actually
fall. When a forecast contains a range, the range
is not selected in a biased or misleading manner,
for example, arranged in which one and is
significantly less expected than the other
This gave rise to our study which aimed to
investigate the effects of an auditor’s
involvement in forecasted financial statement
whether beneficial or not. We focused on the
benefits and encumbrances with these specific
problems:
1. To determine the benefits of auditor’s
involvement in a forecasted financial statement.
2. To determine the encumbrances
auditor’s involvement in a forecasted financial
statement.
The significance of this study was to help people
understand about auditors being involved in
forecasted financial statement which includes:
(1) history and definition of auditing (2)
development of consultancy services (3) how
auditors affect in decision-making of the
management.
Method
Qualitative field research is about in-depth
understanding of specific individuals, rather
than studying the general characteristics of a
large number of individuals across specific
variables. According to Christine Griffin,
qualitative research includes an increase degree
of flexibility in the research design, the ability to
avoid a reliance on the researcher’s
predetermined assumptions, and the ability to
focus on the meanings of key issues for
participants, especially any contradictions or
inconsistencies in their perspective. Qualitative
research can enable one to tackle sensitive issues
to appreciate the wider social context of people’s
experiences and to make connections across
different areas of participants’ lives. In our
research, we use the case study type of
qualitative research because it the most suitable
research design for us to deepen our
understanding about the effect of auditor’s
involvement in forecasted financial statements.
Through multiple types of data sources
including journals, documents and reports the
researchers are able to gather data that are
appropriate in the determination of our
aforementioned specific problem. Therefore,
there was no population included in this study.
Results/Findings
The lack of planning and control of cash
resources is the reason often given for the failure
of many small businesses. By seeking good
financial forecasting, businesses can help reduce
this business risk.
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Page 4
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MGMT ACCTG
AUDITING
COMPARE THE ACCTG. AND AUDITING
INTERNAL, EXTERNAL
FORECASTED