Financial, Environmental, and Efficiency Audit - Assignment Example

CASE 1 Financial report audit, environmental audit and efficiency audit A financial report audit aims at verification of the financial statements of a company with the view of giving an audit opinion. This opinion is on whether the financial statements were prepared in respect to the financial reporting framework. An environmental audit on the other hand is aimed at determining whether the practices and operations of an entity are in line with accepted standards, company’s procedures and regulatory requirement. Efficiency audit on the other hand aims at determining whether corporate plans are executed effectively. It compares planned performance and actual performance and gives reasons for the variance (Moroney, Campbell & Hamiliton, 2011). Reasonable vs. limited assurance Reasonable assurance is assurance expressed in positive form. Auditors in this case gather enough evidence so as to give a positive opinion in regards to truth and fairness of the assured information. Limited assurance on the other hand is assurance in positive form. Auditors in this case gather enough information so as to give a negative opinion in regards to the assured information(Moroney, Campbell & Hamiliton, 2011). . Advantages of auditing over reviewing When an investor or buyer like Chip wants to buy a business like that one of Ron, there is need to conduct a due diligence process so as to determine the quality of the earnings of the entity. This process involves analysis and verification of historical as well as forecasted profitability which is used to determine the preliminary buying price. Companies that conduct reviewing of their financial statements have more negative adjustments to their earnings as compared to companies that audit their reports. The process of auditing focuses on compliance with the current standards and good practices in regards to financial reporting and internal controls. The auditing process therefore ensures that the interim reports are very accurate and timely as opposed to reviewed reports Stakeholders including banks and investors are more comfortable with audited financial reports as opposed to reviewed reports. So should Chip want a bank loan or the purchased business, the bank will prefer to have an audited report. A good audit will provide Chip with good ideas which may help him improve the business once he has purchased it. An audit report as opposed to a reviewed report will help Chip gain more knowledge on the business as regards to internal controls, tax minimization, operational improvement as well as development of important financial reporting metrics which will help him improve the value of the business in future (Shaw,2011). Factors to consider when selecting an accounting firm for audit Overall capability of the accounting firm- Ron should consider the experience of the accounting firm in reporting in accordance to IFRS, number of professional staff and partners of the firm, the firm’s specialties which might be of advantage to the company. Proposed methodology- this include the risk assessment methods used by the firm, the number of hours allocated to the assignment, the reporting approach- management reports, interim reports, and their approach to review of the financial system. Understanding of assignment- familiarity with the financial reporting and control issues that are facing that firm and ability to identify critical risk that may affect the audit is an important factor to consider. Costs- the proposed fees and the relationship with number of hours as well as the other expenses should be considered (Fitzsimon,2005) CASE 2 Question 1 Audit engagement refers to the initial stage in the auditing process where the auditor clarifies his understanding of the audit scope and purpose as well as notifying the client that he has accepted the audit work. An audit firm should come up with procedures and policies designed to provide reasonable assurance that they will only accept appointment from those clients where they expect a continued relationship with such client. When accepting an appointment, an audit firm should follow the client acceptance procedure which includes; Full consideration of legal, practical, and ethical matters before accepting the appointment Communicate with the previous auditor the ethical clearance Evaluate the integrity of the client Ensure the audit firms independence is safe guarded Consider incidence of conflict of interest First the audit firm should obtain background information about the client so the he can be able to determining whether to accept the appointment by following the above mentioned procedures. From the case study, W&S partners obtained background information about Cloud 9 Pty Ltd (client) and several facts were discovered which will determine whether or not W&S partners will accept the appointment from Cloud 9 Pty Ltd. This question will discuss the impact of the facts discovered by the W&S partners on the client acceptance decision To start with, it was discovered that the finance Director of cloud 9 (client), is married to a distant relation of PS Nethercott, a partner in W&S Partners’ consulting department. This will have will threaten the independence of the auditor (W&S partners). An auditor is not only required to be independent but also appear to be independent. Independence is fundamental concept and refers to auditor’s status and outlook characterized by objectivity which enables the auditor to act without influence form interested parties. There are two types Auditors independence i.e. independence of mind which refers to the auditors state of mind that allows him/her to act without influence by interested parties and independence of appearance which refers to the auditors outlook or how the auditor is perceived or viewed by the users as being free from influence by interested parties. The fact that there is a family relationship between one of W&S partners and a director of cloud 9 brings about familiarity threat. Familiarity threat occurs where a close relationship exist or develop between a client and a member of the audit firm. This threat may cause the audit team to be more sensitive to the needs of the client and loses their objectivity. Therefore the family relationship between the director of cloud 9 and a partner of the audit firm will make the audit team to be viewed by the users of financial statements as not being free from influence by interested parties. The other issue that emerged from the background information collected by the W&S partners was that the consulting department at W&S partners has tendered for an IT installation project at Cloud and if the tender is successful, the fee would be twice the size of the audit fee. Ethical guideline sate that an auditor should not earn significant amount from a single client as this may compromise his/her independence as he/she may want to continue earning such large fee. In our case, the tender might compromise the auditor’s objectivity as the audit team will be reluctant to question items in the financial statement that will intimate that the client’s financial statement do not reflect true and fair view. Therefore, the audit team will issue a unqualified report so that they can please the client and this will increase the chances of the audit firm (department of IT) winning the tender. Moreover, the tender might bring about litigation threat which may compromise the independence of the auditor. The client may threaten the audit firm by not awarding them the tender if they issue a qualified report. To safeguard its independence, the audit firm should withdraw its tender and concentrate on the audit. The third issue that came up was that 30 per cent o f the audit staff at W&S partners have purchased coud9’s products in the past. Assuming that they buy the products from retailers, the independence of the audit team from W&S partners is not compromised since there is not familiarity threat. By four members of the IT department at W&S partners having shares in retailers that sell Cloud 9’s product brings about self interest threats. Self interest threat arises where the auditor develops financial interest in the client entity such as owning share and earning excess. If the four staff are involved in the audit, this will compromise the independence of the audit team as the will be reluctant to question items that can show that the accounts of cloud 9 do not reflect are true and view because if a qualified report is issued this will affect the retailers that sells Cloud 9’s product where they own share and they wouldn’t want that. Therefore since this threatens the independence of the audit firm and also this is against the ethical guidelines of W&S partners, the four members of the IT department at W&S partners before the Audit firm agrees to audit Cloud 9. 4 The last issue relates to client integrity issues which W&S partners must evaluate before accepting the client (cloud 9). W&S partners should fully investigate these allegations against Cloud 9 because if what is alleged is true, W&S partners should not accept the client. Question 2 Legal/Statutory matters Ensure that W&S partners is legally registered to act as a Cloud 9 auditor Ensure that W&S partners are professionally qualified to be legally accepted as Cloud 9 auditor Ensure that W&S partners are eligible to practice and are not disqualified in any way Ensure that W&S partners appointment was conducted in accordance to provision of the Cloud 9 company’s Act Consider the legal framework governing the entity and implications it may has on W&S partners Ethical/Professional Matters’ Ensure that W&S partners are qualified and competent to act as Cloud 9’s auditor Assess the risk level associated with the client Consider the degree of cooperation expected from the client Communicate with the previous auditor in establishing any ethical issues Consider any possibilities of conflict of interest Practical matters Consider W&S partners’ staff availability i.e. the staff are available to undertake the audit in Cloud 9 Check if W&S partners have necessary resources to undertake the audit Consider W&S partners ability to meet Cloud 9 deadline Consider the ability to obtain all information and explanations required for the audit Consider engagement economy Consider the geographical location of subsidiaries, braches, or factories of Cloud 9 Question 3 AUDITOR LETTERHEAD 7/31/13 Could 9 Dear Sirs/Madam The purpose of this letter is to set out the basis on which we are to act as auditor of Cloud 9 as well as the responsibilities of Cloud 9 and of ourselves Responsibilities of Cloud 9 and the Auditor The company is responsible for preparing and maintaining proper books of accounts and the other kind of financial records in accordance with the accounting standards as well as the company’s Act The company is responsible for ensuring that the company’s managers give us full co-operation to facilitate our audit work and make available to us Cloud 9’s books of accounts and other documents when required We have a statutory responsibility to express an opinion in the audit report if; a) Proper books have being maintained by Cloud 9 b) Whether sound accounting policies have been applied in preparation of financial statements of Cloud 9 c) Whether accounts agree with the books of entry d) Whether all information and explanations considered necessary for the audit have been received from the staff of Cloud 9 e) The account examined reflect the true and fair view of the company position as at the balance sheet date as well as whether the income statement, cash flow statement and statement of financial position of presented comply with the Cloud 9’s company Act Scope of Audit Our audit will be undertaken in accordance with the Australian Auditing standards and will incorporate such tests of transactions as well as the ownership, existence and valuation of liabilities and assets as we consider necessary. To start with, we shall first obtain an insight of the internal controls systems and accounting systems so as to determine their adequacy for the preparation of the company’s accounts as well as to determine whether proper books of accounts have been maintained by Cloud 9. The accounting system of your company will determine the extent and nature of our procedures, if after assessing your accounting system and wish to place reliance on them; the internal control systems might cover any aspect of your company’s operations which we consider appropriate. However, it’s important to note that our audit is not designed to identify weaknesses of your company’s system but if such weaknesses come to our notice during the auditing system, we shall bring it to your attention. As part of our audit procedures, the company’s mangers as well as the staff may be requested to provide written confirmation of certain oral representation on matters having a material effect on the accounts that have being received by the auditor from the company’s staff during the course of the audit. In order help us with the examination of your company’s account, we shall request assess of all statements and documents, including operating and financial review, annual budget, Cloud 9’s report and the chairman’s statement, which may be issued with the account. The responsibly for detection and prevention, errors, and non-compliance with regulations or law as well as safeguarding the assets of Cloud 9 rests with the company. However, we shall design our audit with an expectation of detecting material misstatement in the books of accounts (including those resulting from fraud, error or non-compliance with law or regulations) Fees The audit fees that will charge your company will be computed on the basis of the time spend on your affairs by our staff as well as the level of skills and responsibilities involved. We can also agree on a fixed the audit fees before commencement of audit. Unless otherwise agreed, we expect our audit fee to be paid in intervals during the course of the audit and will be due on presentation Agreement of terms This letter will remain effective for other subsequent audit appointment until replaces due to changes arising in audit scope once it has been agreed. Moreover, we request you to confirm to us in writing that you have agreed on these terms by singing and returning the enclosed copy of this letter and also inform us if you don’t agree or understand our term of engagement Yours faithfully, W&S Partners References Moroney R., Campbell F. & Hamiliton J(2011). Auditing, A practical approach. 1st edition. TSP: Singapore Shaw G. D. (2011) Reviewed Financial Statements vs. Audited. Retrieved on 31st July 2013 from http://www.dgccpa.com/2011/10/reviewed-financial-statements-vs-audited/ Fitzsimon J (2005) Selection Criteria for External Auditors. Retrieved on 31st July 2013 from http://www.cgiar.org/www-archive/www.cgiar.org/pdf/iau/gpn_Selection_Criteria_for_External_Auditors_Feb2008.pdf Read More