Auditing and Professional Practice - Example

Auditing and Professional practice Students Name: Institutional Affiliation: Department Course: Date: Scenario One Audit Expectation Gap The pragmatic description of the audit expectation gap substantiates the gap that exist between the role of the auditor as understood by the auditor and the users of the audited financial statements. The concept substantiates a gap between what the auditor is doing and what the users expects the auditor to do subsequently creating an impression that the statutory objective of the audit has not met the expectations of the users. The problem of audit expectation gap has been brought to the fore by corporate failures across the globe with the examples from Enron, WorldCom and Global Crossing scandals. Auditing articulates an examination of the financial statements of an entity by an independent expert with the aim of attesting that the financial reports highlight a true and fair view of the entity for the period under review. The auditor contribution is to provide credibility to the financial information presented by the enterprise[Ade11]. Subsequently the information can be relied and used by the public to make various economic decisions under conditions of uncertainty and risks. The expectations for credible financial information from the auditors has immensely increased and is fueled by the demise of some corporations. The perspective has tended to undermine the public confidence in the profession in detecting and preventing corporate abuse. However, the detection of fraud and errors is not the primary responsibility of the auditors and the consumers are of the opinion that the auditor signature represent that all is well with the health of an entity, and there is no fraud or other malfeasance. Audit expectation gap has identified two components that are communication gap and performance gap. Communication gap Communication gap substantiates what the auditor think is their role and what the users of the financial statements perceive should be the role of the auditor. The communication gap is persistent partly because most users of the financial information cannot come to terms with the legally defined status of an audit. The communication gap include; i. The financial statements users expect that the auditor issues an unqualified opinion that assures them that fraud and illegal acts did not take place. ii. The users perceive that a duty of care exists on the auditor to anyone who relies upon the auditor opinion. iii. The users expect that the auditor should express an opinion on both the performance of the entity and the management. Performance gap The performance gap is presented where the public expectations are reasonable, but the performance of the auditor falls short in fulfilling the expectations. The performance gaps are brought by ethical failure that is articulated by the ethical framework under the principle of integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. The following methods can be used to bridge the audit expectation gap. They instruments include i. Peer review that involves a review every three years of the work of an accounting firm by another firm of comparable size[Gol12]. The main aim of the peer review is to provide a substantive assurance to the users that the firm has an effective quality control system that offers reasonable assurance that the auditors are in compliance with the statement of accounting standards. ii. Rotating the audit partners in charge of the audit engagement for five to seven consecutive years. iii. Strengthening of the mandatory continuing professional educational requirements of the professional accountancy bodies. iv. Conducting joint audits that subsequently promote the quality of the audit. Regarding the views of the audit partner, the suggestions articulated on the audit expectation gap is narrow the opinion given is invalid. Scenario Two Professional and ethical standards The standing, if not the very existence of the accountancy profession relies on the continuance of public confidence in the standard of its members and subsequently the professional ethics of the accountancy exist to serve and develop that confidence. The professional and ethical standards needed in by a practicing auditor like Erick and John includes the following; a. Integrity and objectivity. Integrity substantively ensures that the services that are provided are performed honestly and fairly[Are13]. Objectivity principle pragmatically imposes an obligation to the professional accountants to be fair, honest and free from bias and conflict of interest. b. Conflict of interest that pragmatically expresses that the professional accountant should be constantly alert to such situations that result in the conflict of interest. They may range from moderately trivial dilemma to extreme scenarios of corruption and fraudulent activities. c. Professional competence that is encapsulated by attaining specific education and training in relevant projects and the subsequent continuance of professional education and being aware of developments in the profession. d. Professional accountants are obliged to respect the confidentiality of information in respect to the affairs of the client obtained in the course of offering the professional services. The confidentiality will not be met only where specific authority is given to disclose the information or where a legal or professional duty arises. Professional accountants like Erick and John have the following responsibilities and obligations to abide by high-quality standards because of the following reasons; Eric and John must have the confidence of not only the clients like ABC Pty Ltd but also the general public confidence. The general public confidence in this perspective arises because the company wants to be listed on the Australian Securities Exchange by coming June. The public would need the auditors to provide the confidence by issuing quality professional services that encourage high standards of performance and conduct. The judgment and behavior of John and Erick have an impact on the economic well-being of the community as a whole. Eric upon performing due diligence on the financial report of ABC Pty Ltd has found out they have various issues and writes a report to highlight these issues. However, John replaces the report by writing a brief summary and concluding that the internal control system are sound and reliable. John role as an independent auditor is under threat because the profession demands ethical standards and objectivity. Erick and John adherence to the professional ethics not only enhances the power of self-regulation but will also lessen the demand for regulation by the government[Thi13]. Erick achieves consistency by providing a true and fair view of ABC Pty Ltd financial reports, but John conduct brings down the consistency and high efficiency by the constraint that he imposes on Eric. The critical value-added that lies on the expectation that the services that Erick offers be based on integrity and objectivity and also to ensure that minimum standards of competency and credibility in the report are met. The conduct of John in changing the content of the report subsequently negates the concept of the critical value-added. Analysis to assist Erick in dealing with the matter with John Erick has done the due diligence that substantiates checking for issues that may have an impact on the way the general public interprets the financial statements. Eric highlights in the report that the internal controls are poor, and this means that the organization objectives in operational effectiveness and efficiency and the reliability of the financial reporting is deficient. The change of the report would greatly affect the integrity and objectivity of the report. Erick should clearly state this position to John, and furthermore the report will be relied upon by the general public, and such the report should present a true and fair view of the company. Erick should highlight to John if an untrue position on the company is advanced the repute, and their practice would be greatly affected and therefore they should offer a true and fair view. Erick should seek legal protection where John fails to heed to his work and should use the working papers as evidence of the due diligence conducted. Scenario Three Preliminary audit plan assessing internal control risk and the provision of preliminary judgment for detection risk Audit plan pragmatically substantiates the specific guidelines that should be followed when an auditor carries out an audit. The audit plan assists the auditor in obtaining sufficient appropriate evidence for the given circumstance that in this perspective is the assessment of the internal control for MTI. The auditor should be able to obtain a proper understanding of the accounting and internal control systems that are sufficiently enough to plan the audit and subsequently develop an audit approach that is effective[Por14]. Professional judgment should be pragmatically used by the auditor with an aim of assessing the audit risk and the design of the audit procedures with the aim of ensuring a reduction of the audit risk to low level that is acceptable. Audit risk describes the risk that the auditor gives an audit opinion that is inappropriate which is substantiated by financial statements that are materially misstated. The audit risk has three components that include inherent risk, control risk, and the detection risk. Inherent risk substantiates the vulnerability of the account balance or a given class of transactions to misstatements that are material in nature with the assumption there was an absence of related internal controls. Control risk articulate the risk that misstatement could arise in the account balance or class of transactions that are material in nature and would not be prevented or detected and subsequently corrected on time by the accounting and internal control systems. The detection risk pragmatically describes the risk that the substantive procedures performed by the auditor do not detect adequately a misstatement that is present in an account balance or a class of transaction that could be substantiated as material. While auditing the financial statement for MTI, the auditor will be concerned with the only those policies and procedures present in the accounting and internal control systems that are deemed to be relevant to the assertions of the financial statements. Understanding those relevant aspects of the accounting and internal control, the auditor can; i. Identify the types of potential misstatements that are material be present in the financial statements. ii. Consider those factors that could affect the risk of material misstatements. iii. Design the appropriate audit procedures. When an audit plan is being developed, the preliminary assessment of the control risk is considered by the auditor with the aim of determining the appropriate detection risk to consent for the assertions of the financial statements and subsequently determine the nature, timing and extent of the substantive procedures for such assertions. The preliminary audit plan assessing internal control risk is expressed by The preliminary assessment of the control risk that articulates the process of evaluating the effectiveness of the MTI accounting and internal control systems in the prevention or detection and correction of the material misstatement[Rit11]. There is always some existence of control risk because of the inherent limitations of any accounting and internal control systems. After an understanding of the accounting and control risk systems is obtained by the auditor, a preliminary assessment of the control risk is made by the auditor at the assertion level for each material account balance or a class of transactions. The control risk is ordinarily assessed by the auditor at a high level for some or all assertions where the accounting and internal control systems for MTI is not effective or when the evaluation of the effectiveness of the accounting and internal control systems for MTI is not efficient. The auditor is not expected to place any reliance on the internal control basing it solely on the preliminary assessment of control risk. Tests of control should be carried out to obtain assurance that is reasonable in that the controls on which they rely on were functioning both properly and throughout the period. The documentation of understanding and the assessment of the control risk The auditor should substantively document in the audit working papers the understanding that is obtained from the accounting and internal control systems of MTI and the assessment of the control risk. When the assessment of the control risk is less than high, the basis for the conclusions should also be documented. Different techniques may be put into use to document information that relates to the accounting and internal control systems. The auditor uses their judgment to select a particular technique. The common techniques that are used alone or in combination include narrative descriptions, questionnaires, checklists and flow charts. The size and the complexity and the accounting and internal control systems of MTI influence the form and extent of the documentation. The more complex the accounting and internal control systems for MTI accentuates the more the extensive the procedures and documentation will be for the auditor. Test of control Tests of control are carried out to obtain audit evidence precisely on the effectiveness of design of accounting and internal control systems that is whether they are designed to prevent or detect and subsequently correct the misstatements and the effectiveness of the operation of the internal controls during the period. Some procedures that are carried out to obtain the pragmatic understanding of the accounting and internal control systems may not be precisely planned as tests of control but may substantively provide audit evidence on the effectiveness of the design and operations of the internal controls that are relevant to certain assertions and subsequently serve as tests of control. The auditor for example in obtaining the understanding of the accounting and internal control systems for the purchase of inventory MTI, the auditor obtains evidence by inspecting the purchase orders to ensure they have been properly authorized by the purchasing supervisor with the consent of Isabel and where it is for larger purchases the consent should be from George[Hay14]. The audit evidence on the effectiveness of purchase of inventory is carried out through inspection of the documents that support the transactions, enquiry and observation of the internal control that leave no audit trail and the re-performance of the internal controls on purchase of inventory. Where there is a lower assessment of the control risk, the auditor should obtain more support on the accounting and internal control systems that are suitably designed and operated effectively. For a computer information system environment that is presented in the case of MTI, the objectives of the tests of control do not vary from that of a manual environment though some audit procedures may change. The use of techniques such as file interrogation tools and audit test data is appropriate where there is an absence of evidence that documents the performance of the internal controls that have been programmed into the computerized accounting system. Based on the results obtained from the tests of control the prerogative on evaluation lies with the auditor on determining whether of the internal controls are designed and operated as contemplated on the preliminary assessment of control risk. Quality and timeliness of the audit evidence Some audit evidence that are obtained by the auditor is more reliable than others. Observation provides a more reliable audit evidence than making enquiries. The auditor obtains the audit evidence on segregation of duties by observing Tiffany as she works together with the tool and die machinists and the shop supervisors rather than making enquiries from Tiffany as she carries out her duties. The auditor should subsequently consider whether the internal controls were in use during the period. Where substantially varying controls were used at different times during the period, the auditor should consider each control separately. The auditor may decide to perform the tests of control during the interim visit in advance of the end of the period. The auditor, however, should not rely on the results of the interim visit without considering the need to obtain additional evidence that relate to the remainder of the period. While coming up with the appropriate audit evidence to substantiate a conclusion about the control risk, the auditor should take into account the audit evidence that was obtained from previous audits. The audit in MTI is a continuing engagement done by Thomas Smith, who is a senior accountant with Dalen & Jay, CPAs. As such, the auditor is aware of accounting and internal control systems through the work that had been carried out previously and will seek to update the knowledge that was gained and subsequently consider further the audit evidence for any changes in control. Final assessment of the control risk Before the audit is concluded basing it on the results of the audit evidence obtained by the auditor, the auditor should deliberate on whether the assessment of the control risks is substantively confirmed. Where there is an absence of confirmation of the assessed level of risk, the auditor normally should make specific enquiries with the aim of considering its implication and also consider the need to extend their planned audit evidence collection. Preliminary judgment about detection risk The detection risk level relates directly to the substantive procedures from the auditor. The control risk assessment of the auditor that also encapsulates the inherent risk assessment influences substantively the timing and the extent of the substantive procedures that are carried out to lessen the detection risk and also the audit risk to a low level that is acceptable. Detection risk is always present even if the auditor did a 100% examination of the account balance because audit evidence is articulated as persuasive rather than conclusive. The auditor should take into account the assessed levels of inherent risks and control risks in defining the nature, timing and the magnitude of the substantive procedures that is required to reduce the audit risk to a level that is acceptable. There exist an inverse relationship between the detection risk and the collective level of the inherent and control risk[Low11]. The perspective heightens a situation where the inherent and control risks are high the detection risk that is acceptable need to be low to reduce the audit risk at a low level that is acceptable. Where the inherent and control risks are articulated as low, a higher detection risk is acceptable by the auditor and subsequently reduce the audit risk to a low level that is acceptable. Explanation of particular substantive procedures that could be conducted for the WIP inventory Substantive procedure pragmatically describes the process, step or test that substantively creates a conclusive evidence pertaining to the five audit assertions that include completeness, existence, disclosure, rights or valuation of the assets and accounts of the financial statement of MTI. Enough documentation must be collected for an asset or account to qualify for the substantive procedure. The perspective is of importance so that another competent auditor could carry out the same procedure on the same document and subsequently make the same conclusion. The substantive procedure that could be conducted for the WIP inventory for MTI includes i. Prior to attending the inventory count, the auditor discusses with George and Tiffany, who are the managers of MTI on how the percentage completions are attributed to the WIP. In this case, the auditor discusses with the management the system that tracks which operations have been completed and subsequently reports the percentage complete based on the last operation that have been fully completed for all parts. ii. During the count, the auditor should observe the procedures that are carried out by the MTI purchasing staff in assessing the level of WIP and pragmatically consider the reasonableness of the assumption that are being used. As such the level of the WIP is based upon the figures in the costing system. iii. The auditor should agree for the sample that the percentage completions that have assessed during the count are in agreement with MTI policies that had been communicated prior the count of the WIP inventory. iv. The auditor discusses with George and Tiffany on the basis of the standard cost that are applied to the percentage completion of the WIP inventory and how these standard costs applied to the percentage of completion are reviewed and updated. The standard costs applied are the labor center rates based on the standard rates developed by George and Tiffany and the material cost that is based on the quotes from the suppliers plus a Thomasup. v. The auditor should review the level if variance that exist between the standard costs and the actual cost and subsequently discuss this with George and Tiffany on how these variances are treated. vi. The auditor should obtain a breakdown of the standard costs and subsequently agree a sample of the standard costs to the actual invoices and payroll records to assess their reasonableness vii. The auditor then cast the schedule of the total WIP inventory and subsequently agree to the monthly financial statement of MTI. viii. The auditor agrees the sample of the WIP inventory that has been assessed during the count to the WIP spreadsheet, and the auditor agree the percentage completion is accurate and subsequently recalculates the inventory valuation. Bibliography Ade11: , (Adeyemi, 2011), Gol12: , (Gold, 2012), Are13: , (Arens, 2013), Thi13: , (Thibodeau, 2013), Por14: , (Porter, 2014), Rit11: , (Rittenberg, 2011), Hay14: , (Hayes, 2014), Low11: , (Lowe, 2011), Read More