Issues in Contemporary Auditing - Essay Example

? Issues In Contemporary Auditing Part A. Engagement Letter Audit engagement letter provides assistance in avoiding any confusion related to the engagement which might occur in the process of auditing. The engagement letter includes the documentation and confirmation of the auditor’s acceptance with regards to the appointment. It also involves auditor’s responsibility towards the client. An engagement letter describes the lawful relationship or an engagement between an ‘audit firm’ along with its clients. The engagement letter involves within it the terms and the conditions of the engagement, which mainly addresses the opportunity of the particular engagement and the details of the compensation complying with the firm. To The Audit Committee, The purpose of this letter is to invite the company i.e. KAZAKHMYS to involve in a relationship with our audit firm. It has been observed that the company KAZAKHMYS acts according to the rules and the regulations mentioned in Companies Act 1985. The company is one of the renowned natural resources group. The company wants our audit firm to do statutory audit and stock audit for their company. In relation to this, the company KAZAKHMYS needs to provide access to its accounting records as well as all the information which are needed to prepare the financial statements. The company must also provide access to the concerned persons who are required for gathering information with regard to the preparation of financial report within the organisation. In the context of this engagement relationship the auditor needs to follow certain statutory duties to ensure a long-term and healthy relationship between the concerned parties. Statutory audit scrutinises the books of accounts. The company has maintained transparency in their books of financial statement to reflect the company status to their stakeholders and shareholders. It follows books of accounts according to the standard mentioned in International Standard on Auditing (ISA). They have not limited themselves to ISA only rather they have taken into an account the workings of international auditing standards which is accredited under The International Auditing and Assurance Standards Board (IAASB). The company wants us to prepare a proper framework for upholding the books of accounts. KAZAKHMYS’ financial reports comply with the governance reporting. The investors relate with the information to judge the performance of the company. The scope of the audit for the company relates to the preparation along with presentation of the ‘accounting estimates’ according to the standards of ISA. Besides the financial report, a separate letter concerning with internal control systems and material weakness in the field of accounting would be provided to the company. Arrangements concerning to the availability of internal auditors and secondary auditors have been done by the company. The company has worked previously with the auditors with respect to ‘analytical procedures’. Our auditing firm will be highly obliged if you can look into said matter and in due course establish a long-term relationship with KAZAKHMYS. Sincerely, Manager Loughran and Shrives Chartered Accountants B. Ethical Issues Leaflet Ethics in relation to auditing states that quality auditing involves intensive scrutiny of organisation’s control systems with respect to quality. The various fields upon which an auditor’s ethical competencies or independence are judged are impartiality or integrity, consulting, a lack of compliance with the set standards, a lack of education in ethics along with denying access to premises and intimidation. In the context of impartiality, auditors who scrutinise the management of quality control can be bargained in relation to their powerful economic ties. Consulting explains that if an auditor is working for a firm which is into the services of non-auditing to a company, and quality control practices of that company are audited, quality of the audit can be bargained. This aspect also refers to auditor’s objectivity which implies that an auditor needs to remain unbiased. Lack of compliance with set standards i.e. maintaining professional competence within the auditing firm affects the quality of the auditing. Awareness in relation to the ethical standards is important for the parties involved in the audit. This facilitates the auditors to maintain cooperation with the management. In certain companies, the entree to the premises has been denied to hide the unethical practices and reduced quality control. In this scenario, the audit is considered to be incomplete. Companies having immense political power and bargaining capability at times can influence the decisions of the auditor, in such circumstances, adherence to ethical guidelines is utmost important. Auditors must perform professional objectivity with the aim of congregating, evaluating as well as communicating information in relation to the process and the activities that are being examined. In accordance with the process of auditing, the auditors must follow the standard of fairness and ethical conduct. They must endeavour to achieve their work with attentiveness and honesty. It is the responsibility of the auditors to avoid conflicts of interests as well as not to perform two successive audit checks for the same company. In keeping with this particular context, it is the responsibility of the auditors to keep the information confidential which they have received during the audit process. The information received must not be used for any special interest or benefit. During the process of audit, it is necessary for the auditors to follow the code of ethics. Violations of any of the rules in accordance with ethics will be considered serious and will be resulting in swift interference by the company. The code of ethics illustrates the principle norms and expectations which govern the individuals as well as the organisation in accordance with internal auditing. Integrity comprises the core value with regard to ethics. In order to sustain confidence of the client, it is necessary for the auditors to be above distrust and reproach. In order to attain the proper financial statement, auditors need to exercise supervision of audit and the related reports with professional care. In order to make a proper evaluation of the process with regard to the preparation of financial statements, it is important for the auditors to develop and improve their skills on a regular basis. Turnbull Report Letter The Turnbull Report comprises a set of guidelines that is re-evaluated by the companies in relation to the system of risk management and internal control. It has developed a formalisation of the processes involved in management decisions in most of the companies. In accordance with this report, it can be observed that it helps the internal auditor to derive information regarding internal control and risk assessment. Risk management in the recent years has become a necessity for the aspect of corporate governance. The process involved within the risk management provides a defence in favour of the organisation within this changing environment. A company’s internal system plays an important role in managing the risks that are important in accomplishing the business objective. Internal control of an organisation facilitates the effectiveness and the efficiency of the operations. Maintenance of proper accounting records forms the basic element of internal control. It facilitates the organisation to ensure that it is not exposed to the unnecessary avoidable risk. Turnbull report helps in maintaining sound business practices whereby the internal control system is entrenched within the process of business. A company's purposes, its internal administration and the atmosphere in which its functions are continuously developing, and therefore these aspects result in the generation of risks that are changing on a continuous basis. A comprehensive system of internal control thus depends upon a thorough and a regular evaluation of the risks in accordance with its nature and extent to which the corporation is exposed. Since profits act as a reward for effective risk-taking in the organisation, the drive of internal control is to aid control and manage the risk appropriately rather than eliminating it. Directors within the organisation are responsible for its system of internal control. It is their responsibilities to set suitable policies on internal control and pursue regular assurance which will enable the directors to ensure that the system is functioning effectively. In this context, it is the responsibility of the directors to further ensure about the effectiveness and the management of the internal control system which has been approved by them. It is the obligation of the management to implement organisational policies on risk and as well as control. In satisfying its responsibilities, the organisation or the management should identify and estimate the risks. To The Audit Committee, It is observed that KAZAKHMYS follows the Turnbull report guidelines within the organisational operations. Turnbull guidance reflects the practices of business in relation to the areas of risk management and internal control. The Turnbull report had fortified formalisation process in many of the companies. The relationship between the internal audit and risk management influences the effectiveness of the financial report. Thus, it is important that the findings and the recommendations of the internal audit is taken into account by the external auditor. KAZAKHMYS also follows the strategy in relation to the efficacy of the internal financial reporting and internal control. The reports with regards to the effectiveness of the internal control are reviewed and are included in the company’s annual report and accounting books. The findings and the recommendations of the internal auditor, external auditors and other parties with respect to internal control and risk management are reviewed. The competence and the security of the company’s provisions with respect to employee grievances are reviewed. The basic two key internal controls followed by the company are reviewing the group strategies, as well as adequacy as well as effectiveness with regards to risk. Reviewing of the findings and recommendations made by the internal auditor of the entity also comes under the measures of internal control. We require the same procedures to be followed during the audit. Sincerely, Manager Loughran and Shrives Chartered Accountants Part 2 Audit Planning Memorandum Introduction KAZAKHMYS operates in the segments of mining and concentrating, smelting and refining. The company also operates coal-fired along with heating plants which produce power that is need for copper production. KAZAKHMYS also provides certain support services, comprising construction companies, transport infrastructure and engineering teams. One of the vital issues related to the company includes the aspect of financial planning. The company’s balance sheet does not entirely comply with the international accounting standards. The improper planning with regards to financial statements has affected the company. Furthermore, credit crunch is a business situation or a critical issue due to which it becomes difficult for the companies to sustain. The crucial issue faced by the auditor during credit crunch is related to the decision and finding in relation to the sustainability of the organisation. The aspect of credit crunch imposes an influence over the decisions of the auditor. According to ISA 570, it provides standards and guidance with respect to auditor’s responsibility in relation to the preparation of financial statements. The letters with respect to the engagement with an auditing firm relates to the necessity of a new auditor for the company. Audit Approach The related audit approaches that the audit partners must kept in mind are the rules and the regulations that the company follows. The Turnbull report has to be followed by the auditors to know the company’s internal control along with risk management. Vouching approach which is also referred as substantive or direct verification approach is one of the traditional approaches, which was used extensively before risk-based audit approach was established. In the context of vouching approach accounting process starts from inspection, monitoring the monetary effect of transaction and recording of the classified transaction. The application of the vouching approach is flawed as it utilises large amount of resources to fulfil the auditing process effectively. This process at times can affect the cost-benefit for audit firms. Thereafter, came into existence International Auditing Standards (IASs) that stress upon the comprehension of the entity as well as the environment prevailing within. It involved a system of internal control within it which helps the auditors to understand the risk involved in the material misstatements. In this context, it also facilitates the auditor to design effective audit procedures for the entity. The factors related to materiality and internal control effects the decision of an auditor. The scope of auditing is to review the procedures and information to recognise the fraudulent practices if they are being executed. The auditors’ consider materiality as a matter of judgment on the basis of the profession. The judgment of the auditor is influenced by their perception in accordance with the needs of the users of the financial statement. The apparent need of the end users has been recognised within the discussion of materiality in ‘Financial Accounting Standard Board’ statement of ‘Financial Accounting Concepts’. In the context of auditing, materiality identifies the matters that are important for fair and true exhibition of financial statements. Materiality helps the audit firm in assessing the internal control and risk management of the company. The company must present information to evaluate the procedures effectively mentioned in Generally Accepted Accounting Principles (GAAP). Initial Risk Assessment and Audit Approach Risks Audit Approach Financial Reporting Stakeholders and shareholders decision depend upon the level of transparency of the financial statements of the company. The financial statements or the financial reporting of any company plays an essential role in positioning the company in front of the investors and the stakeholders. The disclosure of the relevant information must be accounted during the preparation of the financial reporting or financial statement. The information relevant to the details must be incorporated within the disclosure statement along with the address of the registered office. Further relation with the information must include the details of the different methods and investments which have helped the company in achieving success and growth. In accordance with this information, the position of the company can be ascertained in the financial market. It further relates to the investment plan done by the investors. The continuous reviewing of the annual reports on the basis of quarterly and half yearly provides a better quality to the financial statements and the financial reports. The auditor must check the disclosure statements in accordance with the provisions made within the International Financial Reporting Standards. The procedures that are relevant during the auditing process with respect to the disclosure of the statements must be followed by the auditor to detect the compliance of the accounting procedures to that of International Financial Reporting Standards. Operational Risks The operational risk of the company involves the facets of business interruption, involvement in a new project and other business operations. The power supply, being the main source of energy to perform the operations that are mainly related to the mining, is an intensive resource. The disruption of this resource will influence the profits of the company. Involvement in new project requires a lump sum investment. Improper planning and procedures will affect the company’s revenue. The responsibility of the auditor is to review the details of the information with respect to the involvement in a new project. The legal factors, financial factors as well as the other factors must be reviewed by the auditor for accurate conclusion. The decision or the information revealed by the auditor lay an impact over the financial statement of the company. Internal Audit It is the responsibility of the internal auditor to execute internal control measures and risk assessment measures. The loopholes in the proper flow of information reflect improper financial statement. The information in accordance with internal control and risk assessment is not clear in terms of presented report of the organization. The gap within the flow of the relevant information results in the improper financial reports which will reflect wrong information. The information related to the internal control and risk assessment must be provided to the external auditor. The external auditor must review the reports and the results produced by the internal auditor to detect loopholes that might occur due to the biased decisions of the internal auditor. Financial Risks The financial risk involves the liquidity risk of the company. The existence of a company depends upon the finance department. The liabilities of the company and improper investment as well as the management of the revenue results in the company’s liquidity. The auditor would look through the previous financial statements and the financial report to have a brief knowledge about the company’s profits or losses. It further would help the auditor to reveal the information related with the investments and the liquidity risk. Human Capital Risk The human capital risk involves the risk factor related with the laborers working within the company. KAZAKHMYS, being a mining company, holds high risk factor in terms of health and safety of the workers working within the organisation. The audit committee or the auditor must look through the precaution measures and the remedial measures with regard to the workforce. The effectiveness of the health and accidental measures must be comprehended by the auditor. Segmental Reporting There are majorly five operating segments that are being followed by the KAZAKHMYS. In the context of mining and concentrating, the company operates nearly 16 underground mines and open pit mines. The integrated approach of this company has helped the company to achieve success and has developed itself as one of the world’s most supple and cheapest copper producers. The smelting and refining department operates successfully as the annual copper content of the firm is around 99.99%. The company manages four power stations which supply 20% of the power to the company itself. Ekibastuz GRES-1 is the biggest power station of Kazakhstan whose 50% is owned by KAZAKHMYS. The company also owns its individual rail networks as well as road networks. The company transports the raw materials through its own rail network. It has merged by virtue of joint ventures with the suppliers in its own region to acquire secure reliable supplies. The other operations into which the company is involved comprise delivering of copper products for use to the customers. In order to identify the activities performed in these divers segment, the auditors of the company mainly monitor the integrity of the annual financial statement. They also scrutinise the efficiency of the findings of the internal auditors of the company. The information related to the operating departments of the company must flow smoothly and accurately to evaluate the auditing procedures effectively that result in the accuracy of the financial statement. Related Party Transactions International Standard on Auditing comprises the auditor’s roles and responsibilities related to the client’s audit of the financial statement. The article ISA 550 is based upon an entity or a person that has significant influence on direct terms or indirectly over the reporting company. ISA 550 diagnoses that transactions between the related parties can accelerate high risk of misstatements with regards to materials. This particular article emphasises mainly on maintaining a professional disbelief during the planning and execution of audit work on related parties. ISA 240 comprises the responsibilities of the auditor’s in relation to fraudulent practices with regards to audit of the financial statements. The auditor’s responsibilities comprise these two articles while auditing the financial statements of the company. The information related to internal control and risk management facilitates the auditor in planning and preparing the financial statement. Bibliography KAZAKHMYS. (2013). Facts & figures. Retrieved from http://www.kazakhmys.com/en/ KAZAKHMYS. (2013). Audit committee. Retrieved from http://www.kazakhmys.com/en/investors_media/audit_committee Page, M. & Spira, L. F. (2013). Control and Risk Management Executive Summary. Retrieved from http://icas.org.uk/home/technical-and-research/research-centre/research-publications/the-turnbull-report--internal-control-and-risk-management--executive-summary/ Read More