Capitalizing Operating Leases on Credit Ratings

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Capitalizing Operating Leases


Discuss about the Capitalizing Operating Leases on Credit Ratings.


As such we do not find an appropriate definition of 'audit quality' but the fact that it includes a number of factors that are inter related such as the legal framework within which the professionals have to work, the obligation of applying ethical standards into professionalism, the professional skills and qualities of the auditors and their team, ASIC (Australian Securities and Investments Commission) 's activities and such other bodies playing a role in the audit review process. There are also other drivers of audit quality that relates to the processes and practices opted within the auditing firms such as the cultural framework, the quality of the audit processes that includes expertise knowledge and experience of the auditors and the methodology of audit opted by the firms (Eliskandarani, 2014).

Audit quality plays an important role for maintaining efficiency in the market environment:

  • An audit quality, being a reflection of an independent opinion by an auditor, instills confidence and trust in one's financial reports which is essential for an efficient market ;
  • The importance of qualitative audit is important for confidence in the market and prudential supervision as highlighted by the Basel Committee on Banking Supervision ;
  • According to FSB (Financial Stability Board), external auditor plays the most crucial role for instilling confidence in the market and contributing towards financial stability.

External auditors are bestowed with the responsibility of applying high qualitative auditing standards while executing their audit work so as to ensure about the appropriateness of the accounting standards in the financial statements of the reporting entities. This would ensure transparency, reliability and usefulness to the market environment which would in turn enhance the market confidence. Also, sound qualitative audits can help in building strong corporate governance, management of risk and internal controls at organizations, which would establish a stability in the financial and economic environment (Jensen & Meckling, 1976).

Capitalizing Operating Leases on Credit Ratings

The key drivers of audit quality as identified in Treasury's paper:

  • Australian audit regulation framework : The ASIC Act, 2001 and the Corporations Act and the statutory framework ; the FRC, the standard setters called Australian Accounting Standards Board (AASB) and the Auditing and Assurance Standards Board, Liquidators Disciplinary Board and the Companies Auditors.
  • Professional Accounting Boards: There are three Professional accounting boards called CPA Australia, The Institute of Chartered Accountants in Australia and the National Institute of Accountants. Also, Accounting Professional and Ethical Standards Board plays a role by specifying ethical standards required to be abided by every professional body.
  • The processes and arrangements of audit firm that defines their cultural framework, personal qualities of auditors and effectiveness of audit firm processes and practices such as well structured audit planning, quality control procedures, profesional skepticism while collecting audit evidence and documenting of relevant information, ethical norms in the professionalism, etc.
  • Audit reporting 's usefulness and reliability that addresses the users needs.
  • Factors, being outside the control of auditors, such as liability of an auditor, effective audit committee, corporate governance and supply of adequate auditors who are knowledgeable and experts in their field (Joubert, 2017).

The Treasury has considered a number of factors for assessing the audit quality:

  • ASIC audit inspection program: This program is in cooperation with the most appropriate standards and methodologies opted by various auditing bodies. ASIC plays an independent outsider role of a regulator along with its statutory powers. It evaluates the sufficiency and appropriateness of audit evidence, the use of work by experts and other auditors and the maintenance of professional skepticism attitude.
  • Stakeholder's Initiatives: Stakeholders undertook a number of activities that contributes in improving the quality of the audit reporting such as information sheet 196 issued by ASIC stating the role of audit committees and directors in supporting the audit quality (Knubley, 2010).
  • Review Processes : Such programs conducted by the three professional bodies of accounting plays an important role in enhancing audit quality and professional conduct in terms of ethics. Such review program is in line with the ASIC's inspection program.
  • Chartered Accountants ANZ Quality Review Program: This review program is designed to evaluate whether the Australian members holding a public practice certificate have implied appropriate practices of quality control and such other procedures.
  • IPA Quality Review Program: The IPA needs all the members possessing a public practice certificate to go through a public practice quality assurance review in every three to five years so as to evaluate whether professional standards and appropriate compliances are met with (Kusano, 2018).

What distinguish an external auditor from internal audit is his independent requirements. The audit industry's one of the most important requirement is independence because for the organizations and the overall industry, his opinion matters in terms of assurance and reliability and therefore, such an opinion has to be free from biasness and should be formed independently. The independence requirements are enforceable on legal grounds and should be in parallel with the norms and standards set by the following acts:

  • Part 2M and Section 307 of The Corporations Act ;
  • APES 110, that is, Code of Ethics for Professional Accountants ;
  • Auditing standard ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information ;
  • Auditing Standard ASQC 1 Quality Control for Firms that performs Audits and Reviews of Financial Reports and Other Financial Information and Other Assurance Engagements.

As stated in details regarding what audit quality is and how the professional and other regulatory bodies are working hard to enhance this audit quality, we see a direct relationship with auditor's independence and audit quality. In a sense, if the auditor isn't independent and is somewhere in the favor of the client, his opinion would be a biased one and such an act would be a fraud in the eyes of the law (Lyon, 2010). For conducting an effective qualitative audit, the auditor has certain responsibilities which are to be fulfilled while forming an opinion on the financial statements:

  • Whether the financial reports complies with the accounting standards and whether a true and fair view of the financial statements is obtained in terms of performance and position ;
  • Whether all the information, assistance and explanations have been provided to the auditor necessary for the audit conduct ;
  • Sufficient financial records are maintained by the entity during preparation and auditing of financial reports ;
  • Such other relevant matters to be considered according to relevant act and bodies.

There are various threats to auditor's independence which can impair the independence of an auditor and such impairment might result in great earnings for the management but lower audit quality.

  • Auditor Client Relationship: Since the auditor is serving his client, it is probable that the auditor might develop an attachment for the client and their relationship might lengthen which would in turn develop a close relationship between the auditor and the client. As a result, the auditor might work in the favor of his client and this would result in reduced audit quality and objectives of the auditing standards.
  • Non-audit services : Such services are  provided by the auditor along with his audit services. However, an auditor is required to provide such services within limitations so that it doesn't compromise with the independence requirements. Such non audit services include bookkeeping, advisory & consultancy services, taxation matters, investment & banking assistance and such other related services. The reason of this being a threat is that it might divert an auditor from his primary duty and this in turn would put the stakeholder’s interests at a risk. The fears with such services are that these services serves as an extra source of income for the auditor and this would make him dependent on the client financially. Also, this would create a pressure on him to stand by the management as losing such a client would lead to losing of his business. Such fears might impair his independent nature and therefore, audit quality would be compromised.

There are other threats too having an impact on the auditor's independence but what is expected from the auditor's is his loyalty towards his profession and that he would be acting in his professional capacity all the time because audit quality cannot be compromised at any cost.

The difference between the expectations of the public from an audit and the objective of the audit accepted by the audit profession is called audit expectation gap. The auditing industry believes that the increment in criticisms and litigations against the auditing work contributes to the widening of this gap. For the auditing industry, expectation gap is critical in nature because the more is the unfulfilment of the public expectations, the less is the credibility and reliability possessing a threat to the reputation of the audit industry as well as decreasing the potential for earnings. Expectation gap is non fulfillment of expectations of public which in simple terms means the reports aren't as reliable and trustable as thought by the stakeholders and thus, the quality of the audit report is harmed. The wider is the expectation gap, the more issues in relation with qualitative audit report arise. This expectation gap isn't a problem from only one side but a matter of both the parties.

The responsibilities of the auditor regarding detection of fraud and going concern concept are the two common areas having a direct impact on the auditor's expectation gap. For a qualitative audit to trace the fraud and error, it ia important for all the parties involved to act professionally and apply appropriate and sufficient auditing and accounting standards such as auditors, management, directors, policy setters and employees. However, we should also not overlook the auditor's limitations such as management doesn't unwillingness to allow scrutinizing of all the company's transactions and therefore, in such a case, the auditor has to opt other indirect ways to trace whether the fraud has occurred or not. This is one of the main reason to consider an auditor's opinion as an assurance and not a guarantee as fraud might still take place which remains untraceable during the audit work. And in that case, what is being assured of is that the auditor has independently played his role and has expressed his opinion accordingly. Hence, where the stakeholders assumes that it is the auditor who is suppose to detect fraud and when such an auditor fails to identify it, the auditors are assumed to be biased or at fault. Thus, this is why expectation gap arises.

The treasury believed that the expectation gap might also arise out of inadequacy of the standard audit reporting already existing. The US Treasury Committee has made an initiative to the PCOAB to set up a standard so as to bring improvements in the auditor's standard reporting model. Further, the Committee has also asked PCOAB and the SEC to make clarifications in the auditor's independent report about his role regarding detection of fraud under present standards of auditing.

We should understand that an audit report, being a standard document, is the means by which an auditor communicates with the intended users of a company's financial reports and that is why, securities regulators should consider such reports carefully to determine whether sufficient and appropriate information is provided to the stakeholders and whether it's formation and contents signifies audit quality.


Coming to the nutshell, the global scenario demands reliability and transparency in terms of quality and quantity. Whether the defect is from the company's management or from the stakeholders perception or from the auditing & accounting industry, the ultimate goal is to be achieved and the quality should be made the topmost priority of every professional associated with the preparation, presentation and examination of financial statements (Nwanji, 2016).


Eliskandarani, E. (2014). Approaches to reducing carbon dioxide emissions in the built environment: Low carbon cities. International Journal of Sustainable Built Environment .

Jensen, M., & Meckling, W. (1976). Theory of the firm:Managerial behaviour, agency cost and ownership structure. Journal of Financial Economics , 305-360.

Joubert, M. (2017). Implications of the New Accounting Standard for Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. The Journal of New Business Ideas & Trends , 14-15.

Knubley, R. (2010). Proposed Chnages to Lease Accounting. Journal of Property Investment & Finance .

Kusano, M. (2018). Effect of capitalizing operating leases on credit ratings. Journal of International Accounting, Auditing and Taxation .

Lyon, J. (2010). Accounting for Leases: Telling it how it is. Journal of Property Investment & Finance .

Nwanji, T. (2016). Retrieved from is a name in assignment writing services that students trust. We offer our assignment writing services for a wide variety of assignment  including essays, dissertations, case studies and more. Students can place their order with us anytime as we function 24x7, and get their copies at unbeatable prices. We guarantee that all of our solutions are plagiarism-free.

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