Auditing Assignment:Prepare Auditing Procedures For Transactions & Balances

Question

Task: Prepare an auditing assignment addressing the following questions:

Question 1 - Week 1
You have recently graduated from your university course and start work with an audit firm. You meet an old school friend, Nayan, for dinner — you haven't seen each other for several years. Nayan is surprised that you are now working as an auditor because your childhood dream was to be a ballet dancer. Unfortunately, your knees were damaged in a fall, and you can no longer dance. The conversation turns to your work, and Nayan wants to know how you do your job. Nayan cannot understand why an audit is not a guarantee the company will succeed. Nayan also thinks that company managers will lie to you in order to protect themselves. As an auditor, you would have to assume that you cannot believe anything a company manager says to you.

Required:
(a) Write a letter to Nayan explaining the concept of reasonable assurance, and how reasonable assurance is determined. Explain why an auditor cannot offer absolute assurance.
(b) Explain in the letter to Nayan the concept of 'professional scepticism' and how it is not the same as assuming that managers are always trying to deceive auditors.

Question 2 - Week 3
Liona is the managing partner of Ross and Associates, a small audit firm. Liona's role includes managing the business affairs of the firm, and she is very worried about the amount of fees outstanding from audit clients. Broomers Pty Ltd, one of the client of Ross and Associates, has not paid its audit fees for two years despite numerous discussions between Liona, their audit partner Ball, and the management of Broomers Pty Ltd. Broomers Pty Ltd's management has promised the fees would have been paid before the audit report for this year has been published, Liona rang Ball this morning to ensure that the audit report was not issued because Broomers Pty Ltd had paid only 10 per cent of the outstanding account. She discovers that Ball is about to sign the audit report.

Required:
(a) Explain the ethical problem in this case. Why is it a problem?
(b) What can be done about it?

Question 3 - Week 4
One of the clients of MMM Chartered Accountants operates a restaurant. From January of the current year, the business has consistently paid its suppliers late, well in excess of the suppliers' normal credit terms. This has resulted in some suppliers requesting cash on delivery from the business. The auditor has reviewed the correspondence between the business and its bank and finds that the business has been experiencing cash flow problems for two years.

Required:
(a) Explain why determination of materiality is a matter of auditor judgment. Refer to both qualitative and quantitative materiality assessments.
(b) Explain whether (and, if so, how) the information provided impacts on the auditor's assessment of preliminary materiality.

Question 4 - Week 6
(a) What are the auditor's responsibilities for 'going concern assumptions’'?
(b) Maxim Stewart is the partner in charge of the audit for a new client, Southern Southerland (SS). The client engaged Maxim's audit firm in November 2017, in preparation for the 2018 audit. From 30 January 2018 onwards, SS has consistently paid its suppliers late, well in excess of the suppliers' agreed credit terms. This has resulted in some suppliers demanding cash on delivery from SS. Maxim is also aware from his review of correspondence between SS and its bank that the company has been experiencing cash flow problems since 2016.

Required: Identify any significant events or conditions that individually or collectively may cast significant doubt on SS's ability to continue as a going concern.

Question 5- Week 10
Jonas Worth is the engagement partner for the financial report audit of Caufield Ltd for the year ended 31 December, 20X7. The following material events or transactions have come to Wood's attention before he is scheduled to issue his report on 28 February, 20X8.
a) On 3 January, 20X8, Caufield Ltd received a shipment of raw materials from korea. The materials had been ordered in October 20X7, and shipped FOB shipping point in November 20X7.
b) On 15 January, 20X8, the company settled and paid a personal injury claim of a former employee as the result of an accident that occurred in March 20X0. The company had not previously recorded a liability for the claim.
c) On 25 January, 20X8, the company agreed to purchase for cash the outstanding shares of La Trobe Electrical Ltd. The acquisition is likely to double the sales volume of Caufield Ltd.
d) On 1 February, 20X8, a plant owned by Caufield Ltd was damaged by a flood, resulting in an uninsured loss of inventory. Required: For each of the above events or transactions, discuss audit procedures that should have brought the item to the auditor's attention, and indicate the treatment required in the financial report. Give reasons for your decision.

Question 6 - Week 11
Consider each of the following independent situations which have come to your attention. In each of the following independent and material situations assume that the client is a reporting entity and that a general-purpose financial report has been prepared and audited:

Event 1: Part of Steel Limited's operations are in South America. Recent changes of government have made it impossible for you to verify the key accounts of inventory, fixed assets and cash and related income statement balances.

Event 2: The management of Surf Limited's has refused to disclose a few, director related transactions on the grounds of commercial confidentiality. The financial controller reminds you that no other errors have been found in the financial report and states that the transactions are immaterial and therefore irrelevant to the users of the financial report.

Event 3: The annual report of Ranger Limited includes a detailed graph showing revenue for the last 10 years. You note that there are some inconsistencies between the graph and the figures in the audited financial report. Management does not want to change the graph because it would involve increased printing costs.
Event 4: Upon review of the recent history of their specialised mining equipment Minco Limited changed the service lives for depreciation purposes on this equipment from five years to three years. This change resulted in a material amount of additional depreciation.
Required: For all the above separate circumstances, identify the type of audit opinion that should be issued and justify your response.

Answer

Auditing AssignmentAnswer 1
To Nayan,
The auditors are entitled to express their views on the quality of the reports that have been prepared by the client organization. It is generally noticed that in multinational companies, the volume of transactions is very great in numbers. Therefore it is not easy for the auditor to analyse each and every transaction. The auditors use various substantial and analytical procedures in order to analyse the reports of multinational companies. They generally collect sample transactions from a group of transactions and analyse them in order to determine the ethnicity of the financial reports. Any kind of material misstatement present in the sample transactions will be reported in the audit report but if any other transaction that has not been taken as a sample but is violating the principles will not be recorded in the statement. Hence, we cannot provide 100% assurance about the verity of the financial reports. The audit report can only convey a basic understanding of the financial statements. Any kind of material misstatements present in the financial reports will be stated in the audit report but 100% assurance cannot be provided to the users of the statements because of the innumerable transactions that have taken place (Cernusca&Balaciu 2015). Hence, the auditor can only provide reasonable assurance with the help of the audit report.

An auditor needs to possess the characteristics of professional scepticism while carrying out his duties. It has been clearly mentioned in the auditing standards that the auditor is not allowed to you have any kind of personal interests with the business of its client and also it should analyse the financial statements without any kind of inclination towards the company so that a true and fair view of the business can be portrayed in the audit report. The auditor should always provide a third-person view of the financial statements of the organization so that the external users of the reports can rely on the verity of the statements. The decisions of the external users of the audit report like the investors, stakeholders and other management personnel’s rely on the financial analysis of the auditor. It is not always necessary for the auditor to anticipate that the management is untrue in their jobs but it is always necessary for him to question their actions (Hay 2014). Hence, the auditor must generate a characteristic of professional scepticism while conducting the audit process so that any kind of material misstatement or irregularity in the internal control system of the organization can be conveyed to the external users of the statements.

Answer 2
It has been clearly stated in the auditing standard that any kind of outstanding or over helming audit fee is a threat to the independence of the report that is being prepared by the auditor. The auditors must provide unbiased opinions over the financial reports of the organization which can be used by the external users in order to take various decisions. If the audit report is not true in nature, it will affect the decisions of innumerable management personals and investors. The auditor can only provide an independent opinion over the financial statements if the client and auditor have entered into a mutual agreement where they are being paid accordingly for the job that is being completed by them. In this particular scenario, it can be observed that there was no such agreement that was being published by the auditor or the client company which makes the auditor guilty of professional conduct. Also, the auditor must approve the audit report otherwise it will portray professional conduct on his part. The auditor is also not qualified to sue the client for recovering the audit fees lawfully because of the negligence while making an agreement. The auditor should try and have a mutual discussion with its client in which it should agree to sign a written statement that mentions the date on which the full payment of the audit fees is going to be made. The written agreement will be very useful on the part of the auditor as it will not only help him to proceed legally but also entitles him to not approve the audit report until the full payment is being settled.

Answer 3
Materiality in the audit report can be defined as the relevance of the nature of the magnitude of the transactions that have been reported in the financial reports of the client organization. The Audit process can be defined as the procedure of analysing each and every transaction carried out by the organization in accordance with certain principles and Standards (Niemi&Sundgren 2015). The client organization needs to provide an independent environment to the auditor for carrying out the audit process. The materiality of the audit report is very subjective and contextual because it is different for every industry and business. The auditor should have professional knowledge about the structure of the industry in which the business of its client lies. The nature and the quality of transactions are also very important to determine the materiality of the audit reports. For example, an error of $10 might not be significant for an organization but if there are multiple errors of $10 in the financial statement then it will affect the overall financial figures and will further make the report vulnerable. Hence, it is one of the most important tasks of the auditor to provide a material correct judgment over the financial reports of the organization.

The financial statements and the ratios of the organization state that the business has faced various irregularities in the past two years in terms of cash flows (Matthew 2015). The irregularity in the business has also restricted the creditors to sell goods on credit. The organization needs to maintain a consistent cash flow pattern so that it can fulfil the debt obligations in the future. The auditor should clearly mention this relevant information in the auditor report so that it can be assessed by the external users of the financial statements. All the material correct statement should be presented in the audit report only after year analysis of the past conduct and in-depth analysis of the nature of business. The irregularity in the cash flow statements has also made it compulsory for the auditor to determine the materiality of the transactions in which the business has indulged. Therefore, it can be stated that this information impacts the decision of the auditor in relation to preliminary materiality and further this can't be skipped because of its relation to the going concern concept.

Answer 4
Part a
The going concern concept of the organization states that the organization should try and make plans without any plan of closing the business in the near future. The auditor needs to assume that the business is going to be a Going Concern entity and further make the evaluation processes in accordance with it (Geoffrey et al 2016). This will help the businesses to regain their confidence while getting into new projects. Each and every piece of information that is being mentioned in the audit report should be properly analysed so that the stakeholders can use the information for making correct decisions. Any kind of threat to the Going Concern assumption should also be properly evaluated. If there is any problem noticed in the going concern concept of the entity, a downfall will be noticed in the figures of sales, huge overdrafts, misguided projects with insufficient funding, etc. Hence, the auditor should analyse the transactions and clearly verify if they are a question on the going concern concept or not.

Part b
Due to the prevailing cash issues encountered by SS, it is failing to repay its suppliers and the auditor must consider this aspect while conducting the audit. The reason being is the materiality of such transaction that can endanger the relevance of other transactions too, thereby affecting the going concern assumption of the entire entity on a whole. Hence, the auditor must investigate other associated transactions to find out the cause behind such cash issues and ascertain whether the current income is sufficient to repay all outstanding dues. Nevertheless, a single event of late payment to suppliers may not be considered relevant but a combination of more than one such event cannot be disregarded by the auditor. Further, it must be noted that if an entity has proper working capital requirements, it will never encounter any cash issues and if this issue persists, then there might be some grave issue that demands investigation of the entity’s internal control policies. Thus, the auditor can consider all such factors in order to determine the effectiveness of the going concern assumption of the entity and must use his skills to connect all dots in order to arrive at a conclusion whether the going concern assumption of the entity is at risk or not.

Answer to 5

Answer to 6

References
Cernusca, L &Balaciu, D.E 2015, ‘The Perception of the Accounting Students on the Image of the Accountant and the Accounting Profession’, Journal of Economics and Business Research, vol. 21, no. 1, pp. 7-24.

Gay, G &Simnet, R. 2015, Auditing and Assurance Services, McGraw Hill
Geoffrey D. B, Joleen K, K. Kelli S&David A. W 2016, Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External

Auditors. Auditing assignmentAccounting Horizons vol. 30, no. 1, pp. 143-156
Hay, D 2014, ‘Auditing, international auditing and the international journal of auditing: Editorial’, International Journal of Auditing, vol. 18, no.1.
Matthew, S. E 2015, Does Internal Audit Function Quality Deter Management Misconduct?. The Accounting Review vol. 90, no. 2, pp. 495-527
Niemi, L &Sundgren, S 2012, ‘Are modified audit opinions related to the availability of credit? Evidence from Finnish SMEs. European Accounting Review vol. 21, no. 4, p. 767-796