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Audit exam

Business risk refers to anything that threatens the ability of a business to achieve its financial target (Fraser and Simkins, 2010). Examples of business risks include competition from other companies which makes the company lose potential opportunities, lack of experienced personnel and lack of adequate technology to market its products.

The main objective of external audit is to allow the auditor perform the audit on financial statement objectively and independently and then issue an opinion as to whether: The company financial statement of the business prepared by the management present the true and fair view of the company and whether the financial statements of the company are prepared in accordance to the set financial reporting standard (Braiotta and Ramamoorti, 2010). To achieve these objectives the external auditor should adhere to international financial reporting standards as well as the internal control systems of the company.

Non-n=statutory audit report refers to any audit done by a company but not legally required. The benefits of non-statutory audit include;

Flexibility in report

This type of audit is not limited to reporting of financial performance, instead, it covers all business operations. The non-statutory audit can help the management identify different challenges affecting the business hence enabling them to make prudent decisions. The non-statutory present a detailed report on company operation considering it is not limited to financial reporting.

Verification

The non-statutory audit helps the company verify its financial statement and other data before complete a deal. Verified information can, therefore, be used as the basis of negotiation.

Limitations

The cost involved in the audit is very high. Engagement of the non-statutory audit increases the cost involved in business operations.

Non-statutory audit results in the disruption of staff during the audit. Employees are required to support the external auditor through the provision of supporting documents as well as answering questions.

Confidentiality form one of the most important codes of ethic required by the accountant as well as the auditor.  Accountants have a professional obligation to protect the financial information of the company by avoiding unauthorized disclosure (Yassin and Nelson, 2012). Arnold breaches this code of ethics by disclosing company information to one of his relatives (third party) without the knowledge engagement partner.

IFAC’s code of ethics

 

Integrity

IFAC Code of ethics requires a professional accountant to be honest and straightforward in all business and professional relationships. Arnold should always observe integrity when performing all his duties in the company.

Objectivity

A professional accountant should not allow undue influence, conflict of interest or bias when making the business judgment. The accountant should observe objectivity when making all business or professional judgment.

Professionalism

As an accountant, Arnold is required to comply with the relevant regulations and laws to avoid actions that may discredit the accounting profession. A professional accountant should avoid engaging in activities, occupations or businesses that might impair the objectivity, integrity or the good reputation of the accounting profession.

Due care and professional competence

A professional accountant has the responsibility of maintaining professional skills and understanding at all levers to make sure an employer or business client receives professional services based on dynamic development in techniques, practices, and legislation.  A professional accountant is supposed to be diligent by acting in accordance with applicable professional and technical standards through the provision of professional services.

Categories of safeguards to ethical threats

To minimize ethical threat in accounting professional the safeguards categories include;

  1. Safeguards established by the regulation, legislation, and profession
  2. Safeguards in the work environment.

Threats to the independence of auditors

  • Self-interest threats
  • Self-review threats
  • Advocacy threats,
  • Familiarity threats

 

CPD refers to continuing professional development. CPD describes the learning activities accountancy professionals and accountants engage in to enhance and develop their potentials. CPD ensures that accountants enhance and maintain the understanding and skill they require to provide professional services to their clients, customers, and stakeholders. CPD ensures the accountant has the relevant and up to date knowledge and skills.

The matters to consider before accepting the engagement as auditors for Hugh Plc

Before accepting the engagement, an auditor should evaluate whether acceptance of the relationship would allow any risk to compliance with basic principles and standards. Potential threats to professional behavior and integrity may exist during the engagement. This means before engaging Hudg PLC the audit firm is required to investigate the business activities of the client to determine the presence of integrity questions associated with the client which would create unacceptable risk.

 

Identification of two (2) reasons why is it important to understand your client Hugh Plc

 

  • Investigation of the company activities is done so that to know your client’s due diligence procedures.
  • Understanding the client will help comply with anti-money laundering regulations.

 

Auditor’s responsibility with regards to the detection of fraud

  • Auditors are not responsible for error detection, however, they are responsible for ensuring their client has sound internal control and control environment that would detect and prevent fraud. Auditor responsibility concerning fraud is explained by ISA 240. The role of the auditor involves
  • Identification and assessment of the risk of material misstatement as a result of fraud.
  • The auditor has the responsibility of assessing and identifying the material misstatement of the company’s financial statement caused by fraud.
  • Give appropriate responses to fraud suspected or identified during the audit.
  • To obtain appropriate and sufficient audit evidence in relation to material misstatement risk due to fraud.

Duties of the directors of Hugh Plc in relation to governance

  • Provide continuity for the company
  • Support and review the performance of the executive
  • Appoint the Chief executive office

Rights of an auditor

 

The rights of an auditor include:

  • Right to access the company financial records
  • Right to receive financial record explanation from the staffs of the company
  • The right to receive general meets notice.
  • The right to claim remuneration.

 

Test of control refers to an audit test that seeks to test the effectiveness of the client’s internal control system. On the other hand, substantive procedure tests the reasonableness of the figures in the company’s financial statement.

DeficiencyControl
Linda the sales clerk is responsible for receiving customers’ orders, processing payment and raising sale invoices for hotel customers. This indicates a lack of duties segregation and could result in the risk of fraud as no one checks the work done by the clerk.The management should involve other personnel who will be involved in processing transactions in the hotel so that no employee performs all duties in the sale cycle. The work should be sprit to different sale ledger clerk so that one raises the order while the one process the customer payment.
Each customer has contracted price lower than the online. However, Linda manually edit the invoice before dispatching them. This could result in fraud by the sales ledger clerk.Since the hotel clients account for 40 percent of the revenue, the focus needs to be given to the sale system amendment so that each client confirms price before they are loaded hence the need for manual amendment.
The finance director is responsible for setting a credit limit in case of a new customer is signed up into the system.  However, this may be irrelevant since limits are too high while sales are too low or poor credit risk which may result in loss of revenue.The finance director should regularly review credit limits. Also, the finance director should update the credit limit based on the sales transaction level as well as credit risk.
Good dispatch notes and customer orders are issued with a number based on the customer account number. However, these numbers are not sequential. Without sequential numbers, it is difficult for the Clean-Vegan Co (CV) to identify missing orders as well as monitor whether all ae dispatched on time.

 

The company should ensure that sale orders numbered sequentially. Further regular review of orders should be performed to identify cases of missing orders.
Sales staff have the authority of making changes to customers’ master data files to record discounts allowed however the change made does not review. This may result in the risk of fraud from sales staff by overstating sales to charge higher discounts. This can lead to unauthorized discounts.The sales staff should be authorized to access the master data file as well as amending the sales discount allowed. Such an amendment should be restricted to senior officials. This can minimize fraud cases in the sales department.
Sale staff are also allowed to issue sale discounts to customers. This could result lead to revenue loss as the staff may award an unrealistic sales discount to meet the sales target.All sale discount issued to clients should be authorized b senior officials such as finance director or sales director. If it is impractical to do so the supervisor to the sales staff should issue a sales discount.
Available inventory does not appear in the system for the salesperson to check it when the customer is placing the order. Further Clean-Vegan Co (CV), the sales personnel is not sufficiently senior to be assigned the responsibility of amending the master file as this may raise the risk of fraudulent activities.Before finalization of the sale order by a salesperson, the inventory system should be reviewed to ensure accurate assessment of whether the goods ordered by the customer are available and if they are not available the customer should be notified. This can play an important role in promoting customer loyalty

Substantive procedure for revenue

Compare the overall revenue level achieved by the company against the previous year budget and then evaluate the presence of any significant variance.

Obtain the annual sale schedule. The sales schedule should be classified into two categories compromising of that of trade customers and hotel and then compare them with for the previous year. Discuss any unusual movement with the management.

The gross profit margin for the Clean-Vegan Co (CV) should be computed and then compared with the previous to evaluate the presence of any significant variation.

Obtain a sample of hotel customers’ sales invoices and then confirm that the sale prices of the contracted customers are correctly entered.

Select a sample of trade customers’ orders that placed online transactions to confirm whether the sales invoice and dispatch note agree. This should also be compared with the sales ledger to confirm revenue completeness.

  1. Explain the benefits of audit planning.

ISA 300 Planning an Audit of Financial Statements provides guidance to assist auditors in planning an audit. ISA 300 explains the benefits associated with adequate planning for the audit of the company’s financial statement. These benefits include;

Audit planning helps the auditor invest the appropriate concentration on the importance of the audit area.

Audit planning helps the auditor in the identification and resolving of the potential issues that may be encountered during the audit on a timely basis.

It assists in the recruitment of the engagement team to select the team with an appropriate level of competence and capabilities in responding to the risk as well as to conduct the audit property.

Audit planning helps the audit team to properly manage and organize the audit assignment so that it is conducted in an efficient and effective manner.

Assist in the coordination of responsibilities performed by the experts.

Facilitate the supervision and direction engagement team as well as a review of work performed.

Describe SIX (6) audit risks that may be identified in planning the audit of Spotless Co.

Spotless Co raw materials from suppliers in Asia and the raw material are in transit for up to three weeks. This means that at the end of the financial year the cut-off of inventory, payables, and purchases may not be accurate. The cut off testing should be performed to ensure the accuracy and completeness of inventories.

Spotless Co has incurred $1.6 million expenditure in developing a new range of cleaning products to be launched to the market in July 2020. The expenditures are categorized as research and development. This cost has been capitalized. According to IAS 38 intangible assets, research and development should be recorded in profit and loss account as an expense while development costs are capitalized as intangible assets.  Incorrect classification of research and development expenses may result in an understatement of expenses and overstatement of assets.  The auditor should request for the annual break down for research and development cost and discusses their classification with the accountant.

Further, the senior management bonus is pegged on the financial year asset value. This may result in the risk of overstatement of the asset by the management so as to increase their bonus.

Further in May 2019, the company invested in $1.0 million in a complex piece of plant and machinery. This cost includes the training cost, installation, and purchase price. According to IAS 16 property, plant and equipment, the asset cost includes the cost of purchase and those costs directly attributable to purchase. Train costs are therefore not part of the plant and machinery. Capitalizing the training cost may result in overstating profits.

According to the finance director of Spotless Co receivable allowance is unnecessary and excessive hence he has not provided for them in the financial year but has credited the opening balance in the income statement. This may result in overstating of thee receivable allowance.

In line with ISA 220 Quality Control for an Audit of Financial Statements, the audit senior’s responsibilities in relation to supervising and reviewing the audit junior’s work during the audit of Spotless Co include;

Review the work done by the junior auditor to confirm whether they perform their work in accordance with the internal auditing standards.

Review the company’s financial statement as well as the junior auditor report relating to the operations of the company.

Address significant mater that arises from audit engagement, considering modification of the planned approach based on the significance of the matters to the financial statement.

Ensure that the junior auditors are competent enough and they do not engage in activities that undermine the reputation of the audit firm.

Discuss with the junior auditors matters that arise during the audit engagement as well as quality control review.

Military research project

The expenditure for research represents 10.8 percent of the profit the financial year therefore the amount is material to the company financial statement.

Capon & Co is not able to get sufficient appropriate audit evidence in relation to the research expenses.  Based on the limitation in traduced by the management, the auditor will not be able to form the conclusion of the classification, accuracy, completeness or occurrence of the expenses associated with the company.

ISA 705 (Revised)modification to the independent auditor report opinion requires that in case of audit scope limitation is imposed by the management, then it is necessary for the auditor to request for the removal of such limitation.  If the request is not granted the auditor should report the matter to those charged with the responsibility of corporate governance,  highlighting the impact of the matter and its implication on the opinion of the auditor.

Further, since there is the possibility of this matter arising again in the future, the auditor is supposed to insist that the compound implication of the mater and the possibility that it would result in the material cost in case a disclaimer opinion is issued. The auditor should also communicate to the management that under 1SA 210 on Term of Audit Engagement the auditor may refuse to accept future audit engagement if the management continues limiting the scope of the auditor work and this may result in auditor issuing a disclaimer opinion.

Based on the current situation it is advisable to issue a modified opinion. Given that the value of the claimed cost, there is a possibility of the matter being considered material, however, the matter is not pervasive to the company financial statement and hence the auditor should issue a qualified opinion. The auditor should include a paragraph explaining the matter that causes the modification of the report.

Fire

Based on the audit procedure done the matter has been sufficiently addressed in the financial statement. Therefore there are no relevant misstatements to this mater and hence modification is not required in the audit opinion.

However, the accident resulted in the temporary suspension of the business operation which significantly affected the financial year performance.

Generally, the related decrease in sales and the costs linked to the renovation contributed to a reduction in profits. This is the reason behind the trend of the current year’s results.
Capon & Co still operate under certain limitation, hence the matter will continue affecting the company performance in the future. This present major challenge which will continue affecting the company financial performance.

The discloser by the management in relation to this matter is fundamental to the user of the financial statement and it is important to have the emphasis of matter paragraph by Meds Co, as explained in ISA 706 (Revised) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report.

The emphasis of matter paragraph should be included in a separate paragraph of the auditor of the auditor’s report. An appropriate heading should be included with the words ’emphasis of matter’.

The appropriate title for the paragraph may be ‘Emphasis of matter – effects of a fire.’ How the paragraph is placed depending on the judgment of the auditor in terms of the nature and significance of the matter being explained. Based on the situation of this mater the paragraph should be placed immediately after the qualified opinion paragraph.

It is important to reference the emphasized matter clearly including a full description of where the matter is found on the company financial statement. It is also very important to make it clear that the paragraph the audit opinion modification is not based on this matter.

 

 

 

 

 

 

 

 

 

 

Reference

Braiotta Jr, L., Gazaway, R.T., Colson, R. and Ramamoorthy, S., 2010. The audit committee handbook. John Wiley & Sons.

Fraser, J. and Simkins, B. eds., 2010. Enterprise risk management: Today’s leading research and best practices for tomorrow’s executives (Vol. 3). John Wiley & Sons.

Yassin, F.M. and Nelson, S.P., 2012. Audit committee and internal audit: implications on audit quality. International Journal of Economics, Management, and Accounting20(2).

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