Auditing and Ethical Practice - Example

Auditing and Ethical Practice EXECUTIVE SUMMARY The role of the auditor has immensely increased since rent past mainly after the global economic crises. Companies in Australia, collectively in general and mainly in the mining sector, are regarded fragile; hence, the rate of insolvency, warning of going concern and the liquidations has increased massively. Comparison of the auditors’ report and the researcher’s observation has been produced and based on the literature in the aspect it has been concluded auditors opinion are always retained questionability. INTRODUCTION The role of auditors is considerably increasing the contemporary business world. The accelerated importance of the auditors’ opinion lies in the fact that companies since the recent past has increased their vulnerability with respect to sustaining operation as going the concern and continues operations. Aligned with the fact, companies in Australia are also facing troubles as highlighted by Ryan (2014). Around one-third of the companies in Australia are marked red flag as compared to one in every fifth company flagged red in global financial crises (CPA Australia. 2014). Another research reported that most of the businesses undergoing into liquidation in Australia are a small business (Philips, 2013). Collectively, these place an important emphasis on the role of the auditors, their opinion and the analytical procedures employed for the assessment of company financials. In line with this fact, this report is based initially introduced the purpose and related ideas of the analytical procedures mainly in accordance with the Auditing and Assurance Standards Board (AUASB). The later section of the report takes into account the comparison of the auditor’s opinion and the researcher for the insolvent, going concern and qualified opinion company. PURPOSE AND CONCEPTS OF ANALYTICAL PROCEDURES: The auditing standards of Australia represent the Auditing Standard Suite proposed by the Auditing and Assurance Standards Board (AUASB) comprised of Auditing Standards that have been made under section 336 of Australian Corporation Act 2001. ASA 805 Special Considerations ASA 810 Engagements to report on Summary Financial Statements. The purpose of the Auditing Standards is to set up the obligatory requirements and to offer descriptive guidance on auditor’s report. The report has been issued after conducting the audit of a general purpose financial report of the company that has been prepared in light with the framework of financial reporting, which is especially designed to obtain the fair representation (The Auditing and Assurance Standards Board, 2007). Since the analytical procedures are one of the financial audit procedures, they assist the auditor to understand the business of the client along with any changes in their business. It recognizes the potential areas of risk in order to plan and formulate other procedures of the audit. The purpose of the analytical procedures in the auditing standards is to incorporate a comparison of the recorded values with some expectations builds up by the auditor. Analytical procedures provide the evaluation of financial information that is constructed by the study of a reasonable and likely relationship between the nonfinancial and financial data of the company (Accounting Concerns. n.d.). Analytical procedures have been extensively used by the external auditors. It helps the management accountant to locate and rectify the misstatements prior to the time when they turn out to be problematic. The main purpose of the analytical procedure in the planning of audit is to facilitate the planning the timing, extent and nature of auditing procedures. They are used for trend analysis, ratio analysis, and reasonableness tests. The objective of the analytical procedures is to discover the matters like the presence of unusual events and transactions, amounts, trends and ratios that might point to the things that have an implication in the audit planning and financial statements. They can be applied at phases of the audit and facilitate the auditor to do the comparisons regularly. LISTED COMPANIES IN AUSTRALIAN STOCK EXCHANGE: Company in Insolvency Insolvency refers to the inability of the company in meeting its obligations or due to any reason, the inability of the company in continuing the operations (Sealy and Milman, 2008). The Smart Company Pty Ltd bearing an ACN 061 975 344 went insolvent and proceedings for the liquidation in the year 2011. Limited availability of the financial information constrained the analysis. However, based on the available information from the judgment it is inferred that company also had doubtful conduct. For instance, court noted serious doubts with respect to the transaction’s validity that required the assignment of the claim amounting to AU$4bn to the sole shareholder/ directors in place of the trust. The decision was in contradiction with the claim lodged by unsecured debt holders, in case if any present (Bransgroves Lawyers.2011). Hence, the company then liquidated. Company with Auditors’ Opinion on Ongoing Concerns: Kimberly diamonds have received a warning over the going concern of the company after lodging the company’s full year accounts (Klinger, 2014). The going concerns for the company is mainly on the decreasing level of cash and for the fact that the company is in need to raise the cash. The company also had fractured and broken share reregister. It has been declared by Earnest Young; the auditor of the Kimberly diamonds, that there is a material uncertainty which may shed significant and considerable doubts the ability of the company to continue its operations as a going concern. However, the company has passed a statement that it raised the cash in order to realize and accomplish its future plans which also includes the resuming the Lerala diamond mine in Botswana (Mining Link. 2014). Relevant Data: Kimberley Diamonds In 000 Year 2014 Year 2013 Year 2012 Sales $ 77,559 $ 48,306 $ 43 Fixed assets $ 37,841 $ 20,478 $ 1,808 Total assets $ 66,089 $ 63,921 $ 3,809 Total Liabilities $ 49,254 $ 51,238 $ 750 Shareholders equity $ 16,835 $ 12,683 $ 3,140 Operating Income $ 18,051 $ 1,276 $ (656) Net profit $ (19,241) $ 2,282 $ (656) EBIT $ 18,051 $ 1,276 $ (656) Interest Expense $ 1,069 $ 533 $ - (Morningstar. 2015) Kimberley Diamonds Financial Ratios Year 2014 Year 2013 Year 2012 Asset Turnover ratio 1.17 0.76 0.01 Fixed Asset Turnover ratio 2.05 2.36 0.024 Debt to Equity Ratio 2.93 4.04 0.24 Operating profit margin 0.23 0.03 -15.26 Net profit margin -0.25 0.05 -15.26 Interest coverage ratio 16.89 2.39 0 For analyzing the performance, risk, and continuity of the Kimberley Diamonds the assistance from the financial ratios has been taken for three years from 2012-2014. Though the asset turnover ratio is improving but fixed asset TO have declined for the latest year. However, the improving debt to equity ratio is mainly due to the acquisition of finance from equity investors. The operating profit margin of the company has increased, but net income has decreased massively that in turn raises questions about the performance of the company. Company without Any Qualified Opinion or Emphasis of Matter: For this part of the paper the company that has been chosen is Telstra, it is among the leading public listed companies in Australian Stock Exchange. It is the largest and leading media and telecommunication company that provides mobile phones, home phones, mobile devices and broadband internet to its customers (Telstra.com. n.d.). Relevant data: Telstra In Million Year 2014 Year 2013 Year 2012 Sales $ 26,296 $ 24,776 $ 25,503 Fixed assets $ 28,922 $ 30,624 $ 29,575 Total assets $ 39,360 $ 38,527 $ 39,525 Total Liabilities $ 25,400 $ 25,652 $ 27,836 Shareholders equity $ 13,960 $ 12,875 $ 11,689 Operating Income $ 7,185 $ 6,090 $ 5,822 Net profit $ 4,549 $ 3,640 $ 3,424 EBIT $ 7,185 $ 6,090 $ 5,822 Interest Expense $ 1,113 $ 1,152 $ 1,022 (Telstra.com 2013 and Telstra.com 2014) Telstra Financial Ratios Year 2014 Year 2013 Year 2012 Asset Turnover ratio 0.67 0.64 0.65 Fixed Asset Turnover ratio 0.91 0.81 0.86 Debt to Equity Ratio 1.82 1.99 2.38 Operating profit margin 0.27 0.25 0.23 Net profit margin 0.17 0.15 0.13 Interest coverage ratio 6.46 5.29 5.70 For analyzing the performance, risk and continuity of Telstra, the assessment has been done with the help of financial ratios. The asset turnover shows that the company is consistent throughout three years in utilizing its position, however there is still a need of improvement for the company. Similarly, the company is improving its capacity utilizing, and this reflecting the fixed asset turnover ratio of the company. The company has a high level of debt as compared to the equity, and the capital structure of the company is based much on raising capital through debt. However, the company is shifting its capital structure on the equity side, and debt to equity is showing a declining trend with passage of time. The operating profit margin is slowly improving which is reflecting that the company is efficient in its operations and increasing its percentage earnings from its sales. The interest coverage ratio of the company is showing that it is in a very good position to pay the interest expense on its outstanding debt and is burdened by its debt expense further, the company is improving its position and the results reflect that the company is not risky (Telstra.com. 2013 and Telstra.com. 2014),. COMPARE AND CONTRAST OF RESEARCHER OPINION WITH AUDITOR’S CONCLUSION As a matter of fact, there can always be a difference of opinion between the auditors’ opinion and the other parties including company’s management, investors, analyst, etc. However, for the above cases discussed it has been found that the auditors opinion assert the idea generated by the researcher. With regard to an insolvent company, the auditors view is not present as the company simply went into liquidation. It has been inferred from the judgment that in case an auditor would have assessed company the judgment would have carried the concerns. The review of the Kimberley Diamonds the auditors warning hold as the company has incurred notable losses. Already retired considerable amount of debt, and incurring losses could lead to the company’s default in the future that will further wipe the investment of the investors. Hence, the auditor and researcher’s opinion stands on a similar point. The qualified opinion in the case of the Telstra is different, and the company’s financials are reported to the assessed by the auditors as reported in the annual reports. Though the information is not produced according to the GAAP rule; however, provided information are found complete in the auditor’s opinion. CRITICAL ANALYSIS OF THE AFFECT OF RELIABILITY OF INFORMATION AND AUDITOR’S JUDGMENT OVER THE RESULTS OF ANALYTICAL PROCEDURES Judgment studies are an important focus of the auditing research, and this is because of their perceived and apparent potential in order to improve the professional practices (Bonner, 1999). In due course an evaluation of the relevant literature proposed that the most of the time the researched aspect of the judgment performance of the auditor has been based on the auditor’s consensus and usage of indications in audit program planning, internal control and direct tests (Kida and Cohen, 1989). This is mainly because of the fact that the analytical reviews mainly consists of the audit risk model which is among its significant component (Loebbecke and Cushing, 1983). The analytical procedures are important because assessing the reliability of the source of information because these procedures help in revealing the unexpected and unforeseen amount in the financial statement of the business entity. On this basis, exploratory hypothesis have been generated which lead to the requirement of the corroborative information and evaluation in order to test the hypothesis, on this basis a decisions are formulated on the successive audit actions (Koonce, 1993) The expectations of the auditor play a significant role in the evaluation of the outcomes of the analytical procedures that can challenge the explanations of the management of the organization of the divergence from the expected results. It has been also observed that the auditors are found sensitive over the alteration in the reliability of the information (IAASB.n.d). According to Kohen and Kida (1989), the decision makers must need to adjust and regulate their judgments in relation with the reliability of the information and data they utilize, because this essential principle facilitates the auditors in the planning of the analytical review procedures and their performance (Cohen, and Kida, 1989). CONCLUSION The report above has developed a comprehensive review of the role of auditors’ opinion using analytical procedures. Based on the assessment of the companies it can be concluded that auditors’ opinion held true in under discussed cases. However, there has been an added discussion with regard to the auditors’ judgment over the results from the analytical procedures. Such judgments are also affected by the quality of information. Hence, it can conclude that the provision of the most concrete set of information is immensely important for the due judgment from the auditor. References CPA Australia. (2014). Media Release: A third of ASX companies in serious financial strife. Retrieved January 5, 2015 from http://www.cpaaustralia.com.au/professional-resources/audit-and-assurance/australian-audits-report Philips. A. (2013., April). Feature: An analysis of official liquidations in Australia. Australian Insolvency Journal. The Auditing and Assurance Standards Board. (2007). Auditing Standard ASA 700: The Auditors Report on a General Purpose Financial Report. Retrieved January 5, 2015 http://www.comlaw.gov.au/ComLaw/Legislation/LegislativeInstrumentCompilation1.nsf/0/BD414F6F9929BBAECA257325001722A0/$file/Compiled_ASA_700__27_June_2007.pdf Accounting Concerns. (n.d.). Analytical Procedures. Retrieved January 5, 2015 http://www.accountingconcern.com/accounting-dictionary/analytical-procedures/ Sealy, L., & Milman, D. (2008). Sealy and Milman: Annotated Guide to the Insolvency Legislation 2008/2009. Sweet & Maxwell. Mining Link. (2014). Kimberley Diamonds a Going Concern. Retrieved January 5, 2015 http://mininglink.com.au/story/kimberley-diamonds-a-going-concern Morningstar. (2015). Kimberley Diamonds Ltd:  KDL. Retrieved January 5, 2015 http://quotes.morningstar.com/stock/kdl/s?t=XASX%3AKDL Bonner, S. E. (1990). Experience effects in auditing: The role of task-specific knowledge. Accounting Review, 72-92. Cohen, J., & Kida, T. (1989). The impact of analytical review results, internal control reliability, and experience on auditors use of analytical review. Journal of Accounting Research, 263-276. Coakley, J., & Loebbeke, J. (1985). The expectation of accounting errors in medium sized manufacturing firms. Advances in Accounting, 2(1985), 199-246. Koonce, L. (1993). A cognitive characterization of audit analytical review.Auditing-a Journal of Practice & Theory, 12, 57-76. Lin, K. Z., Fraser, I. A., & Hatherly, D. J. (2003). Auditor analytical review judgement: a performance evaluation. The British Accounting Review, 35(1), 19-34. Cohen, J., & Kida, T. (1989). The impact of analytical review results, internal control reliability, and experience on auditors use of analytical review. Journal of Accounting Research, 263-276. IAASB. (n.d.).Staff Questions and Answers. Retrieved January 5, 2015. http://www.ifac.org/sites/default/files/publications/files/IAASB%20Professional%20Skepticism%20QandA-final.pdf Bransgroves Lawyers.(2011, February). Smart Company (In Liquidation) v Clipsal Australia [2011] FCA 35. Retrieved January 5, 2015. http://www.bransgroves.com.au/insolvency/smart-company-in-liquidation-v-clipsal-australia-2011-fca-35.html Ryan. P. (2014, September). Nearly a third of ASX-listed companies are fragile, at risk of financial catastrophe, report says. ABC News. Retrieved January 5, 2015 from http://www.abc.net.au/news/2014-09-24/one-third-of-asx-companies-fragile/5764640 Klingerr. P. (2014, October). Kimberley Diamonds woes deepen. Austrailia News Yahoo. Retrieved January 5, 2015 https://au.news.yahoo.com/thewest/a/25160296/kimberley-diamonds-woes-deepen/ Telstra.com. (n.d.). Home. Retrieved January 5, 2015. https://www.telstra.com.au/ Telstra.com (2013). Annual Report. Retrieved January 5, 2015 http://www.telstra.com.au/abouttelstra/download/document/Telstra-Annual-Report-2013.pdf Telstra.com (2014). Annual Report. Retrieved January 5, 2015 http://telstra.ice4.interactiveinvestor.com.au/Telstra1401/AnnualReport2014/EN/body.aspx?z=2&p=6&v=2&pgl=&uid= Read More