Performing the Purchase Function Effectively - Assignment Example

Auditing Contents Contents 2 Question 3 Question 2 6 Question 3 9 Question 4 11 References 14 Question Introduction: The essence of the ment stated above is that the auditor is required to take decision independently while publishing the financial statements of the company. The statement emphasises on the fact that it is not sufficient in considering the auditor as independent but it should be reflected in the financial report of the entity. The decision of the auditor should be unbiased and it should not be influenced by the decision of others. The independence provided to the auditor assists him in planning and executing the objectives of the organization effectively and efficiently. Independence permits the auditor in delivering opinion which is not affected by his personal judgement thus allowing him to act with integrity for exercising the professional scepticism. The main objective of the independent auditor is to provide an independent opinion about the financial position of the company. The auditor must be independent from the client company such that the opinion of the auditor will not be influenced by the relationship between them. Main body: Employee can’t be auditor The employees cannot be auditor of the company since the employees are the part of the organisation. The decision of the employees as an auditor may be influenced by the views and opinion of other employees working in the organisation. The confidentiality of the entity is hampered and affected when the employees acts as an auditor. The financial statement prepared by the employees as an auditor may be misleading. The employee might act emotionally rather than logically in preparing the financial report of the concerned entity. The statement above cannot be fulfilled if an employee performs the role of an auditor since the employee cannot act independently (Armstrong and Stephens, 2005). 2. Share holder can’t be auditor The shareholders cannot be the auditor, since the shareholder cannot perform its role independently. The financial report prepared by the shareholders might be influenced by the interest of the shareholders. The responsibility of the auditor is to perform the role of a watchdog in analysing the performance and productivity of the entity. The information or the data collected by the shareholders may be inadequate or irrelevant, since the auditor has no relation or direct contacts with the employees in the organization (Blouin, Grein& Rountree, 2007). 3. Close relative of auditor cannot hold more than 20% According to the rules and regulation laid by the council of auditors, the close relative of the auditor cannot hold more than 20% share or voting rights in the organisation. An organisation cannot run efficiently if majority of the voting rights are owned by the close relatives of the auditor. The auditor is expected to perform independently therefore the close relatives of the auditor should not be biased in preparing the financial report of the entity. 4. Auditor cannot be trustee holding 10% of shares in company  The trustee is mainly appointed by the company for charitable funds etc. The function or the role of the trustee differs from that of the auditor. The auditor is appointed by the company for analysing the productivity and the financial performance of the company. The auditor is responsible for detection of fraud and error in the business. The trustee is the outsiders to the company. Therefore the auditor acting as a trustee cannot perform his role independently (Cahan and Zhang, 2006). 5. Auditor holding share cannot vote on auditor maters at AGM The voting right of the auditor is limited. The voting right of the auditor is determined by the Auditing practice board. 6. Auditor cannot take loan for client The auditors are paid executives of the company. The company mainly appoints the auditor for detection of risk of the entity. The internal matters of the company are not disclosed to the auditor. The auditor is unaware of the financial feasibility and the past records of the company. Therefore the auditor cannot take loan on behalf of its client (Carcello and Nagy, 2004). 7. Overdue audit fees must not be considered a loan to the client The overdue audit fees must not be considered as the loan. Since the right to receive or disburse loan to its client by the concerned auditor of the entity is restricted. The auditor should not get too much involved in the internal affairs of the entity. Too much involvement may act as a barrier for the auditor in acting independently on behalf of the company (Dauber, 2009). 8. Audit cannot accept goods, services and hostilities form a client The auditors are outsiders to the company therefore it is against their principle to accept goods and services from the client. The auditor is expected to provide fee based service to its clients. 9. Audit partner and senior staff cannot be related to officer or senior employee The auditor is appointed to detect the misstatement in the financial report of the entity. Therefore the auditor should not be related with the members of the organisation. 10. Rotate partners and senior staff The auditor should be independent of his clients. According to the Auditing Practice board it is required to rotate the partners or the staff leaving the entity at the same place. 11. Single client fees cannot exceed 15% (10% if listed company) gross practice income The fees charged by the auditor should be in accordance with the standard set by the Audit committee. Conclusion The auditor should act independently and should abide by the code of conduct formulated by the Auditing practice board. The auditor is expected to perform the role of a watch dog efficiently. The failure to detect error by the auditor may create problem for the company. Question 2 Introduction External auditor performs an important and vital role in preparing the financial system of the entity. The auditor of CIDL ltd performs a crucial role in assessing the risk of the entity. The external auditor exists outside the organisation and performs its role independently. The auditor of the concerned organisation is required to abide by the Generally Accepted Principles in preparing the balance sheet and the income statement of the company. The external auditor has to maintain transparency in its operation. The external auditor is appointed and selected by the board of directors of the company on the basis of the performance and efficiency. The board analyses the report that is prepared by the external auditor and evaluates whether the auditor has prepared the financial statement independently. The audit and the risk committee of the entity establish or introduce a definite or specific benchmark on the basis of which the performance of the auditor will be analysed and compared. The decision of appointing the auditor is taken by the audit and the risk committees of the entity. The organisation mainly focuses on appointing the external auditor since all the functions cannot be effectively performed by the internal auditor. The decision of the external auditor is not biased since it is not influenced by the views and opinion of the other employees or managers of the entity (Douglas, Prawitt, Smith and Wood, 2009). Main body Statutory responsibility of the auditor The statutory responsibility of the auditor is very crucial since it involves risk in preparing the financial statement of the entity. The external auditor performs its role independently. The auditor is responsible for analysing whether the data or the information that is available is relevant for preparation of financial statement of the company. The external auditor in the process of performing the statutory responsibility is required to abide by the statutory audit in determining whether the entity has been true in reflecting the financial position of the company. The auditor also access the inherent risk faced by the entity (Griffiths, 2012). 2. Professional responsibility of the auditor The professional responsibility of the auditor is to assess the audit risk associated with the entity. The auditor also designs the audit procedures in such a way that the risk is minimized and reduced to a lower level. The auditor is required to verify the financial statement and accounts of the company on a frequent basis. The more responsibility is assigned to the auditor in detecting the risk, the more amount of evidence or proof is required by the auditor of the company. The main professional role of the auditor is to prevent the undesirable practices in its operation, to detect the fraud that is done either intentionally or unintentionally, to assess the loss that is incurred in the business due to the wrong or inappropriate decision of the board of directors of the entity. The auditor can increase the profitability as well as the efficiency (Greenwood, 2002). 3 Scope of the audit  The scope of audit includes the information that is collected by the auditor on the basis of which he prepares the report and reviews the financial system of the entity. Audit is considered as the important vital element in an organisation for maintaining of physical, IT, administrative and personnel security. The significant increase in the scope of audit led to the emergence of various new and well defined concepts in the context of auditing (Khurana and Raman, 2008). New concepts have been introduced mainly includes the social audit, cost audit, management audit, operation audit and tax audit. The scope of audit is changing with the passage of time. In the beginning, the concept of audit was restricted to detection of fraud and error. But gradually with the development of the concept, the role and the duties of the auditor has increased which includes identifying the truth and fairness in the financial statement along with the detection of frauds and error. The auditor is required to adopt the changes in accordance with the principles formulated by the Institute of chartered Accountants (Gupta, 2004). Conclusion The external auditor is assigned with an important and vital role in maintaining transparency in the preparation of financial report of the concerned entity. The external auditor is generally appointed by the organisation, since the financial report prepared by the external auditor is unbiased. Question 3 Introduction The internal control system of auditing is mainly adopted by the organisation for delegating the responsibility to its employees. The internal control system helps in formulating plans and procedures of the organisation. The internal control system plays an important role in monitoring the activities of the concerned entity. The importance of the internal control system facilitates the company in implementing the policies required for the smooth functioning of the department, the internal control system also assist in recording the transaction and expenses that are incurred by the firm. The case of Ms. Melita mentioned in this study focuses on the internal control system of the concerned organisation. In this case Ms. Melita is responsible for holding and managing the petty cash of the company (Sharma, 2011). The importance of the internal control system can be explained with reference to the case of Ms. Melita. She performs the role of a custodian in recording of the transactions and she is also responsible for internal reporting of the organisation. The different kinds of internal control system that is followed by the organisation are inquiring, reviewing, observing, examining of the documents or he materials, preparing the memorandum for audit and evaluating the overall policies and procedures of the organisation. In this concerned case Ms. Melita is also engaged in performing the different types of internal control system (Roy and Edwards, 2014). Main body 1. Implication Ms. Melita performs different kinds of internal control system. She inquires about the areas where the cash has been utilized; she reviews the cash on a frequent basis and maintains a record of all the expenses that has been incurred by the company. The major type of internal control system that is adopted by the entity is reviewing that is associated with the internal check and control of the activities (Sherer and Turley, 1997). The importance of implementing the internal check and internal control system in the company is that it helps in preventing the misstatement in the balances by detecting the error and monitoring the cash and the financial system of the organisation on a continuous and regular basis .But the internal control system which is intervened is that no definite procedures is followed for maintaining of the record and the expenses incurred. Ms Melita has to take the initiative for maintaining of the record (Knechel and Vanstraelen, 2007). 2 Improvement of the system: The problem that is encountered by the concerned entity in maintaining proper internal control system can be minimized or overcome by allocating the duties and responsibilities to different personnel and monitoring the performance of different personnel within the organisation .The internal control can be effectively applied in the organization by increasing the reliability of the financial reporting, improving the efficiency and effectiveness of the operations and complying with the laws and regulations. Under the Sarbanes Oxley act, the auditors are required to perform the function of fraud risk assessment process of the organization. (Raghunandan, Dasaratha and Read, 2001). Conclusion Delegating the job to the employees can help the entity in eliminating the problem that is encountered by the entity. Adopting standard procedures will assist Ms. Melita in performing her task in a proper and well maintained manner. Implementing the internal control system will facilitate the organisation in performing its task in an effective manner and will assist the organisation in running its business smoothly and efficiently. Question 4 Introduction The case discussed in this paper focuses on the purchase system. The case focuses on the role of Maria who is the accountant of the company. She is assigned the role of maintaining the purchase invoice of the concerned organisation or the entity. Gail who is the owner of the business has handed over the responsibility to Maria. But this process includes various problems. The concerned owner trusts her accountant blindly which is against the principle of the business. Gail is expected to review the statement on a frequent basis in order to prevent the fraud or error in the purchase invoice (Spira & Page, 2003). 1. What is the purchase system The purchase system of the organisation deals with the collection of the input or the raw materials hat is required for smooth running of the enterprise. The purchase system deals with providing the right quantity and right quality at the right time. In the said case, Maria is responsible for performing the purchase function of the concerned entity. The purchase system plays an important role in maintaining inventory of the organisation (Stewart and Subramaniam, 2010). Main body 2. Weaknesses The weakness or the limitation that is associated with the process is the owner of the company is not concerned about valuation of the materials. One of the most important functions is detection of error and maintaining transparency in the operation is not revealed in the case. The cost of purchase and the cost of conversion are not disclosed by the concerned accountant. The limitation of purchase system faced by the concerned company are lack of adequate checking is encountered by the organization, since the owner of the concerned company does not check the invoices on a frequent interval basis, the owner signs the blank check without encountering the amount paid to the suppliers by Maria, Gail does not take initiative in supervising the raw materials ordered by the company for which she have paid the blank cheque to her accountant.(Subramaniam and Carey, 2004). 3. Recommendations The concerned organisation is required to adopt a standard procedure in performing the purchase function effectively and efficiently. The accountant must follow the LIFO and FIFO method. The concerned accountant of the enterprise should furnish receipt for maintaining transparency in its operation. The financial statement is required to be reviewed on a frequent basis (Tritschler, 2013). A register is required to be maintained for recording the inputs that is purchased. The cheque that is provided to Maria for payment to the suppliers of the company is expected to be recorded by her. The amount of cheque that is disbursed to the suppliers should be maintained in the register. Gail provides blank cheque to her accountant. Therefore it is the duty and responsibility of Gail as an owner to review the cheque disbursed along with the suppliers invoice on a frequent basis in order to prevent misstatement in the financial statement (Swanger and Chewning, 2001). Conclusion The purchase system plays an important role in maintaining inventory of the company. The organisation is required to perform the purchase function effectively for the adequate valuation of the inventory. The case discussed in this paper focuses on the weakness of the concerned organisation in performing the purchase function effectively and efficiently. The accountant of the organisation is required to maintain transparency in its operation. The owner of the concerned enterprise is expected to review the invoice on a frequent basis which is required for preparing the financial statement effectively. References Armstrong, M. and Stephens, T., 2005. A handbook of employee reward management and practice. London: Kogan Page Publishers. Blouin, J., Grein, B. & Rountree, B., 2007. An Analysis of forced auditor change. The Accounting Review. 82(1), pp. 621-650. Cahan, S. F. & Zhang, W., 2006. After Enron: Auditor conservatism and ex-Andersen clients. The Accounting Review. 81(1), pp. 49-82. Carcello, J. V. & Nagy, A. L., 2004. Audit firm tenure and fraudulent financial reporting. Auditing: A Journal of Practice & Theory..23 (1), pp. 55-69. Dauber, N.A., 2009. The complete guide to auditing standards, and other professional standards for accountants. Canada: John Wiley & Sons. Douglas, F., Prawitt, J. L., Smith, A. & Wood, D. A., 2009. Internal Audit Quality and Earnings Management. The Accounting Review, 84(4), pp. 1255-1280. Greenwood, R.P., 2002. Handbook of Financial Planning and Control. New York: Gower Publishing, Ltd Griffiths, P., 2012. Risk-based auditing. Burlington: Gower Publishing, Ltd. Gupta, 2004. Contemporary auditing. New Delhi: Tata McGraw-Hill Education. Khurana, I. & Raman, K. K., 2008. Audit firm tenure and the equity risk premium. Journal of Accounting Auditing and Finance. 23(1), pp. 115-140. Knechel, W. R. & Vanstraelen, A., 2007. The Relationship between Auditor Tenure and Audit Quality Implied by Going Concern Opinions. Auditing: A Journal of Practice and Theory. 26(1), p. 113. Raghunandan, K., Dasaratha, V. & Read, W. J., 2001. Audit Committee Composition, Gray Directors, and Interaction with Internal Auditing. Accounting Horizons, 15(2), pp. 105-118. Roy, A.C. and Edwards, J.R., 2014. Recurring issues in auditing: Professional debate. London: Routledge. Sharma, A., 2011. Auditing. New Delhi: FK Publications. Sherer, M. and Turley, S., 1997. Current issues in auditing. London: SAGE. Spira, L. F. & Page, L., 2003. Risk management: The reinvention of internal control and the changing role of internal audit, Accounting, Auditing & Accountability Journal, 16 (4), pp.640 – 66. Stewart, J. and Subramaniam, N., 2010. Internal audit independence and objectivity: emerging research opportunities. Managerial Auditing Journal, 25 (4). pp. 328- 360. Subramaniam, N.and Carey, P., 2004. Outsourcing internal audit services: An empirical study on Queensland public-sector entities. Australian accounting review, 14 (3). pp. 87-90. Swanger, S. L. and Chewning, E.G., 2001. The Effect of internal audit outsourcing on financial analysts’ perceptions of external auditor independence. The Journal of practice., 20(2), pp. 119-122. Tritschler, J., 2013. Audit quality: Association between published reporting errors and audit firm characteristics. New York: Springer Science & Business Media. Read More