Issues in Contemporary Auditing - Essay Example

? Issues in Contemporary Auditing Part1 A. Engagement Letter Engagement letter is primarily considered as a legal relationship between a business organisation and its clients. The organizations might entail investment banking, consultancy or accountancy firms. Contextually, in terms of both auditors and clients, this letter primarily depicts the terms and the provisions of the engagement where the purpose of the engagement and the terms of the compensation for the auditors are appropriately mentioned. The purpose of this letter is to establish an engagement relationship amid Hammerson plc, a FTSE listed company and Loughran and Shrives Chartered Accountants, who would act as an auditor for the company. This letter is also prepared on the basis of which we (Loughran and Shrives), acting as an auditor of Hammerson plc would be responsible for ensuring that utmost transparency and efficiency is maintained in the audit process. Additionally, engagement letter for Hammerson plc is mentioned below: To the Directors of Audit Committee, As an auditor of Hammerson plc, we are taking the opportunity to divulge certain imperative aspects related to the impending auditing process. The aspect of financial transaction record would be quite vital to be thoroughly examined in the process. It has been revealed that Hammerson plc upholds proper financial statement by following the guidelines of Companies Act 1985 which depicts true and fair values that facilitate the company to maintain accurate financial records. Additionally, audit report of the company is also conducted by following the guidelines of International Standard on Auditing (ISA) which is authorized by International Auditing and Assurance Standards Board (IAASB). Moreover, while preparing audit report, Hammerson also utilises various financial transaction tests that facilitate it to identify the valuation of assets and liabilities which are essential to be considered. The Audit Committee should also note that Hammerson takes the responsibility for protecting the assets of the company along with safeguarding them from the hand of fraud, error and non-compliance by adhering to the laws and regulations which are mentioned in Companies Act 1985 under Section 389(A). The company also provides other financial services under the Financial Services Act 1986. Compensation which will be due for the provided service to Hammerson can be calculated on the basis of the times which are spent by your partners and also on the basis of skills and responsibilities that are involved amid your staff. The scope of audit will be to make a comprehensive evaluation of the books of account in order to ascertain the validity and reliability of the published materials of the company. Our company shall be highly obliged if you can confirm your agreement or engagement by singing and returning the enclosed copy of this letter. Thanks & Regards Yours faithfully Manager Loughran and Shrives Chartered Accountants B. Ethical Issues Leaflet Interdependence is a one of the fundamental as well as considerable aspects while preparing an audit report. In order to maintain suitable ethical standards in an audit report, it is essential for the auditors to be independent in terms of mental attitude while dealing with their respective clients. The users of financial statement are primarily concerned about the aspect that the auditors should not compromise with their interdependencies by considering the viewpoints of the clients during the preparation of audit report. Truthfulness, honesty, integrity, confidentiality and professional behaviour are the most essential aspects for the auditors in order to maintain ethical standards and also bring transparency while preparing an audit report. It is also necessary for the audit firms to maintain similar kinds of rules and regulations while preparing an audit report for their respective stakeholders. It is the responsibility of an auditor to ensure that the company should operate in an ethical manner while dealing with financial transactions. In this regard, auditor should scrutinise the quantitative data of a company in order to bring accuracy as well as compliance within the audit policy. The accountability of an auditor is quite significant because strict penalties are associated with business losses of a company. Auditors always utilise the company’s materials such as computing files, fax machine and other business resources while making an audit report. Therefore, it is the accountability of an auditor to utilise all these materials in an appropriate and confidential manner rather than making the use of them for personal purposes. Auditing standards and code of ethics assist auditors to perform their responsibilities in a professional and confidential manner. These two elements illuminate auditors on certain guidelines, practices and professional standards of a company for which they are going to prepare a financial statement. Through these elements, an auditor can make sound judgement while dealing with its respective clients, colleagues or companies during the preparation of an audit report. In this way, an auditor can maintain ethical standards and also avoid issues which are associated with an audit report. Contextually, being an independent auditor, it is necessary to scrutinise how well an organisation can able to ensure regarding the quality of its products and services while preparing an audit report so that it can be comprehensively reliable for the stakeholders. In order to bring transparency and maintain suitable ethical standards, it is necessary for the auditors to adopt as well as follow certain rules and guidelines. In this regard, it has been observed that there are certain causes that may lead to rise of ethical issues. There are certain ethical aspects that need to be followed by the auditors. Auditors should follow and maintain their specific guidelines and procedures carefully in accordance with the auditing standards and instructions. It is also imperative for the auditing professionals to maintain integrity, interdependence, professional competence, objectivity and confidentiality while preparing an audit report. By following these overall aspects, an audit report can be prepared on the basis of ethical standards. C. Turnbull Report Letter Turnbull report is considered as an internal control and risk management guideline for the directors of the company. With reference to this report, a company’s director possesses certain obligations regarding United Kingdom governance ‘Combined Code’ in order to maintain ‘internal controls’. The Turnbull report was primarily published in the year 1999 by the Financial Reporting Council (FRC) in order to set out superior management practices particularly for the UK companies which are listed in London Stock Exchange. Additionally, in the year 2004, FRC developed a ‘Turnbull Review Group’ in order to assess the internal control system and risk management procedure of several listed companies. In the year 2011, FRC conducted a series of meetings with UK companies, advisors and investors where council members discussed regarding the risk management and internal control system. Through this Turnbull report, an auditor can ensure the quality check of an audit report in order to identify fraudulent activities before they create any problem. Moreover, this report primarily focuses on a company’s internal control system which plays a significant role for managing its risks in an efficient manner that in turn helps the company to attain its business objectives. In order to execute this report successfully, it is necessary for a company to make clear understanding regarding its business objectives. The core intention of Turnbull report is to bring efficiency within the internal control system by which the company can able to recognise its potential risks that are involved within its business operations. By identifying and managing the risks effectively, an organisation can bring more efficiency within its operating system and also be more responsive towards its external environment. With the help of this report, an organisation can avoid potential risks which might hamper its business activities. This report reflect effective business practices where internal control system is directly embedded with the business activities through which a company can successfully pursue its business goals. It has been observed that a company’s internal activities and external business environment are continuously changing where it faces various challenging issues in terms of business activities. Therefore, an efficient internal control system is quite essential in order to make thorough evaluation regarding the nature as well as the extent of the risks which are involved within its activities. Moreover, through this report, a company can also bring effective control within its financial activities by maintaining appropriate accounting records which are considered as essential elements of an internal control system. In this way, a company can avoid its potential financial risks and develop consistent financial information within the business activities by which it can fulfil its determined financial objectives. To the Directors of Audit Committee, I would like to inform you that Hammerson follows Turnbull report by which it is able to maintain its internal control and risk management system along with identifying financial risks in an efficient manner. The Turnbull report makes it compulsory for the companies to report whether or not the board has made a re-evaluation of the internal control and risk management system within the companies. Turnbull report also facilitates the organisations to identify and to fulfil the key challenges that are underlying within our approachable path. Moreover, by rendering critical focus on this report, two internal controls that can be advised to be reviewed include adequacy and usefulness of the present system and any financial along with contingent liabilities to the organisation. The company’s board has already taken certain necessary measures in order to bring efficiency within the company’s internal financial control as well as risk management system. Moreover, interim report of the company is also prepared by concerning upon internal control and risk management. I hope these revealed factors can be quite invaluable during the entire process. Thanks & Regards Yours faithfully Manager Loughran and Shrives Chartered Accountants Part 2: D. Audit Planning Memorandum Introduction Hammerson plc primarily deals with investment and real estate property development activities. The company’s vision is to be the superior owner, manager and developer of real estate properties within the European nations. Its business activities are primarily focused in order to maximise the shareholder returns and incomes from its offered property dealings. It has been observed that the company experienced certain specific issues while dealing with audit report. Due to the changes witnessed in European financial regulations and continuous government interventions, the company is facing certain difficulties while preparing its financial reporting. Additionally, it has been noticed that company experienced significant financial reporting issues while assessing its annual or half-yearly report as well as interim management statement at the time of formal announcement. Therefore, it is quite essential for Hammerson plc to engage a financial assistance as well as auditing professionals in order to bring transparency within its audit reporting. ‘Credit Crunch’ is generally recognised as the increase in cost or debt of finance which are borrowed by an organisation for its business purposes. This aspect is one of the considerable issues, which affects a business entity while making an audit report. In this regard, audit committee members should evaluate the debt related risks of Hammerson at the time of audit reporting so that financial statement can demonstrate the true and fair value of the business. By considering the financial crisis of 2008, it has been viewed that the United Kingdom’s economy had witnessed two times of depreciation affect, while a majority of the economists are still worried that the nation might face triple depreciation in upcoming years. Therefore, it is necessary for the committee members to consider the company’s past financial situation in order to represent true and fair value of businesses through auditing. By concerning towards the Hammerson’s business activities, it has been viewed that the company deals with several types of investors or clients throughout the world, where a majority of the clients’ nature or attitude are quite different regarding investment. Therefore, it is necessary for the committee members to consider the viewpoints of the clients so that they can obtain accurate financial information of Hammerson. Audit Approach The scope of the company’s audit approach is to identify the regulatory environment and demonstrate appropriate information to the investors which would facilitate in auditing report. In order to fulfil the higher standard of financial reporting, the company’s audit professionals should adopt three phases of audit approach i.e. developing a reliable audit plan, rigorous testing and business focused recommendations. In relation to audit plan, audit committee professionals primarily should evaluate business operations of the company in order to identify the financial reporting risk. After evaluating the risk, committee members should assess internal controls such as the company’s operations, financial position and cash flow system. By following these overall aspects, committee professionals should be able to make a series of stringent tests through control reliance strategy. Contextually, through these tests, Hammerson can ascertain that its accounting policies comply with Generally Accepted Accounting Principles (GAAP). On the basis of this analysis, the company can evaluate its accounting principles and make estimates regarding necessary data which are required for the preparation of financial statement. In terms of ‘materiality’, the objective of Hammerson’s audit report is to facilitate the auditors to express their individual viewpoints on the basis of material perspectives such as GAAP and Auditing and Assurance Standard (AAS) guidelines while making a financial statement. Through ‘Materiality’, the company’s auditing professionals would be able to provide true and fair representation of financial statement. Initial risk assessment is an analysis for identifying higher risks which are associated with business financial transaction. The below depicted table provides a summary of five risks of the company and the planned approach to deal with those risks: Risks Audit Approach An initial and pertinent risk can be generated from the internal control system and financial reporting. In terms of internal control system, unauthorised disposition or utilisation of assets can take place. Incapability towards upholding appropriate accounting records, non-compliance with relevant regulatory guidelines and rendering undependable financial information can cause major risks upon the overall sustainability of the organisation. Frequent review of the various financial statements need to made in order to identify any kind of mismanagement between the previous statement and the present statement. Operational and compliance system need to be made stronger in which any deviation from regulatory guidelines can result in major repercussion for the concerned authority. Industry reporting standards need to be vehemently followed in any circumstance. Another crucial risk is associated with the act of corruption along with bribery. This activity can severely dent the faith of the concerned stakeholders from the company. Any misconduct in terms of financial corruption along with taking of bribes from misrepresentation of financial accounts or statements can cause a major risk towards the sustainability of the company. In terms of audit approach, it can be stated that auditors need to keep a strong vigil upon prevailing bribery control reports of the company so that they remain updated with the occurrences in the workplace. It would facilitate them to take necessary actions if it is recognised that organisational authorities are deliberately or non-deliberately overlooking this imperative aspect. Risks arising from property and corporate investment can be a major considered risk factor. This is because property valuations related conditions are apparently observed to be quite fluctuating as per the prevailing economic environment. Thus, it can hamper the valuation of properties portfolio rendered by Hammerson to its stakeholders. Moreover, this significant risk can cause unanticipated liabilities and considerable amount of financial loss. With regard to audit approach, it can be said that a comprehensive review and financial appraisal would be maintained in order to identify the properties that are becoming vulnerable or can create long-term losses for the company so that immediate actions can be taken accordingly. The significant facet of corporate responsibility can generate another vital risk for the company. This risk factor can occur from the unfavourable publicity arising through failure towards dealing with environmental related concerns. Moreover, if the company fails to meet with the corporate responsibility based measures finalised by it then the brand image and reputation of the company can be tarnished. Audit approach in this regard can be based on making independent review of the company’s prevailing performance. Based on the review regarding the strategies for environmental compliance, appropriate suggestions can be provided to ensure that any loophole in the prevailing system can be plugged. The crucial aspect of property development is another imperative facet for consideration in terms of operational risk. In this regard, risk can arise from the fact that in the present economic environment occupiers or property buyers have been at times observed to be reluctant to avail leased spaces through making contracts. Furthermore, incapability to abide by the issue of sustainability in the undertaken development programmes can result in creating considerable extent of risk for the company. In this context, it can be stated that audit approach would be based on ensuring that the undertaken projects of development of the company are prepared based on frameworks regarding sustainability development. Review of projects that are progressing need to be made on a monthly basis so that any deviation from the prepared plan can be traced and actions can be taken promptly as well. Segmental Reporting Operating segment is generally considered as an essential component of the organisations through which they involve with their business activities in order to earn revenue and business expenses. In relation to Hammerson, operating segments refer to the classes of business entities by which the company discloses the information regarding its operational activities in terms of services, geographical areas within which it operates along with the customers or clients it serves. Hammerson’s business activities deal with marketing services, commercialisation and leasing. In relation to marketing services, the company deals with customer insight, portfolio wide events and retailer liaison among others. Moreover, in terms of commercialisation, it operates exclusive shopping centres, where millions of shoppers visit every year, for product promotions, brand awareness, advertising and sponsorship among others. Additionally, the company also has expertise leasing team which delivers exclusive services as per the needs of the retailers. Furthermore, it operates its leasing activities under dynamic tenant mix strategies, insight driven and upholding strong relationship with retailers among others. It is necessary for the audit committee members’ to consider the entire business operational segment and the activities of Hammerson while preparing an audit report for the company. By evaluating the business segments of Hammerson, committee members can bring transparency within the financial statement which in turn provides true and fair value of the company’s operational activities. Related Party Transactions The International Standard of Auditing (ISA) 550 emphasises on auditor’s responsibilities which are associated with the relationship of related party and allied transactions in an audit of a financial statement. Primarily, this principle further expands on ISA 315, ISA 330 and ISA 240. These three principles generally concentrate on risks of material misstatement which are associated with related party transactions and relationships. ISA 240 is primarily concentrated with the auditor’s accountabilities related with fraudulent activities in an audit of a financial statement. ISA 240 is primarily based on how ISA 315 and ISA 330 should be applied in terms of risk assessment of material misstatement as raised due to fraudulent activities within an audit report. While making an audit report of Hammerson, it is necessary for the audit committee to consider these two auditing standards for preparing guidelines. Apart from these guidelines, audit committee is needed also to make proper planning in order to acquire adequate audit substantiation so that the report can demonstrate true and fair value of the company’s business. Moreover, committee members should also maintain confidentiality while preparing the audit report to avert any scope of being engaged in fraudulent activities. Bibliography Ashbaugh, H. (2004). Ethical Issues related to the Provision of audit and non-audit Services: Evidence from academic research. Journal of Business Ethics 52(2), pp. 143-148. Burke, A. (2011). Introduction to audit planning. Certified Public Accountants, pp. 1-7. Carey, A. (2012). The Turnbull report. Retrieved from http://www.publicservice.co.uk/pdf/home_office/spring2000/p124.pdf Campbell, T., & Houghton, K. (2005). Ethics and auditing. Retrieved from http://epress.anu.edu.au/wp-content/uploads/2011/05/ethics_auditing.pdf Deloitte Global Services Limited. (2013). IFRS 8: operating segments. Retrieved from http://www.iasplus.com/en/standards/standard48 Financial Reporting Council. (n.d.) International Standard of Auditing (UK and Ireland) 240. Retrieved from http://www.frc.org.uk/Our-Work/Publications/APB/240-The-auditor-s-responsibility-to-consider-fraud.aspx Hammerson. (2013). About us. Retrieved from http://www.hammerson.com/about/ Hammerson. (2013). Audit committee. Retrieved from http://b2de0febdea80fa78eb4-5cad31df697fe43d78c0459eba68b1d4.r36.cf3.rackcdn.com/wp-content/uploads/2013/03/1212JP-final-audit-committee-tors-19.07.12-original.pdf IFAC. (2013). International Standard On Auditing 550: Related parties. Retrieved from http://www.ifac.org/sites/default/files/downloads/a029-2010-iaasb-handbook-isa-550.pdf Oxford University Research Archive. (2008). Audit Materiality. Retrieved from http://ora.ox.ac.uk/resolve/info:fedora/uuid:c2cbbe54-83f7-426e-961a-4fa90fe4b3e4/ATTACHMENT01 The Financial Reporting Council. (2005). Internal control revised guidance for directors on the combined code. Retrieved from http://www.ecgi.org/codes/documents/frc_ic.pdf Read More