What Are the Main Differences between a Financial Report Audit, an Environmental Audit and an Efficiency Audit - Assignment Example

Auditing Student’s Name Institution Affiliation Question 1 (a) What are the main Differences between a Financial Report Audit, an Environmental Audit, and an Efficiency Audit? Financial reports audit involve close examination of the financial reports of an organization by an independent organization. The objective is to ascertain whether the presented annual reports represent the financial position of the company in a true and fair manner. The financial reports will include the: balance sheet, income statement, statement of changes in equity, cash flow statement, and the reports’ accompanying notes”. Auditing seeks to find if there is a material difference between the reported and actual financial position (PwC Australia, 2013). The management does environmental auditing. It involves a systematic and periodic examination of the financial statements. The objective is to ascertain whether the organization or a system of management and processes is designed to protect the environment with the aim of ensuring management control and checking compliance with organizational policies. Efficiency audit also involves periodic examination of organization’s statements, focusing on the recorded resources and practices of a department or a program. It analyses procurement, using and acquiring of resources and identify areas, which are weak. The objective is to ascertain whether organizational plans are executed as planned, or if they executed in a way that benefits the organization. It therefore takes note of variances between planned and actual performance (Demald, 2013). (b) What is the difference between Reasonable Assurance and Limited Assurance? Reasonable assurance involves a practitioner compiling sufficient evidence to support formation of a positive opinion that the subject matter is true and fair (Moroney, Campbell, & Hamilton, 2011). It also means that the subject matter in all material respects conforms to the appropriate criteria. In this level, ‘sufficient’ is referring to the quantity of evidence available. Evidence compiled after collection has to be enough. The right quantity will depend on the practitioners risk profile. It will also depend on circumstances in the engagement at that time. An aggressive auditor may need lesser evidence to inspire the sought confidence. On the other hand, conservative auditors would collect more evidence with which to draw an opinion. Limited assurance engagement is where the auditing practitioner collects insufficient appropriate evidence to enable him to draw a conclusion that the subject matter is plausible, giving the report in the form of negative assurance. This provides moderate level of assurance. A compared to reasonable assurance, the quality, and quantity of evidence gathered would be low. The objective is not to find how all the material respects (Arens, 2005). (c) Why would Chip ask that Ron have the Financial Report for McLellan's Shoes Audited rather than reviewed? Chip wanted audited statements in order to verify and analyze the historical performance and forecasted profitability that the preliminary purchase price was based on. Buyers who are strategic, who are looking for growth will be interested in audited financial statements so as to uncover the true value of the company they are interested in. Many businesses these days are opting for reviewed statements rather than audited statements. The main attraction to reviewed statements is the low cost – businesses will be saving on financial reporting. That is not as convenient and cost effective as it sounds because it presents the risk of having inaccurate financial statements. Wrong financial statements may lead to wrong pricing of the company. Chip was worried of the possibility of overcasting the price of McLellan. Ron could also benefit in case they had under-cast the price. Due diligence audit is therefore very important for both the exiting company and the incoming buyer. Due diligence audit could bring forth adjustments in revenue recognition, accounts receivable, stock costing, unrecorded liabilities and stock obsolesce (Shaw, 2011). The other obvious reason for Chip to require audited financial statements is he come is as a third party, outside the management of McLellan, so he needed the audit for him to pin his trust on the statements. Based on trust, Ron did not need an audit because he ran the business himself. (d) What factors should Ron consider when selecting an accounting firm to complete the McLellan's Shoes audit? There are few factors to be considered when selecting an external auditor. The most important factor is the practitioners’ qualifications. Ron must find someone who is qualified to conduct the audit. The person must be a certified public accountant or should be registered with an organization like the Association of Certified Chartered Accountants. Reputation is also an important factor. Ron should research to find about kind of feedback the auditing firm receives from clients. Negative feedback shows that most probably the firm has mediocre services. It is also important to choose an auditor with experience. A smoother auditing process is expected from a more experienced auditor. Experience has to be relevant in terms of the kind of companies the firm or the practitioner has dealt with. An auditor used to dealing with the kind of businesses like McLellan is more preferable. Another factor to consider is the qualifications of the other audit staff working with the auditor. The auditors work in a team; some tasks during the audit process may be handled by the other staff; their qualifications could therefore affect the entire auditing process in the end. Question 2 (60 marks) (a) Prepare a document that explains the impact, if any, of each piece of relevant information on your client acceptance decision for Cloud 9. The first stage of any audit is client acceptance. Before an engagement letter is prepared, the auditor is expected to carry out an integrity check on the client. The auditors should as well assess their ability to carry out the audit in terms of e.g. availability of qualified staff, resources etc. Independence of an auditor is very important; an auditor must be independent and seen to be so. The marriage between the finance director at cloud and the distant relative of PS Nethercutt raises the question of whether the auditors’ independence will be compromised. In this case, this relationship does not seem to be close enough to decline the client, Cloud 9. Independence is compromised when there is a close relation. With regard to independence, S&W partners should therefore accept cloud 9 as a client. The second issue coming up is that the consulting department at W&S Partners has tendered for an IT installation project at Cloud 9. This certainly raises questions on whether exchange of goods and services will threaten independence. This case will not cause conflict of interest because IT installation is on of products which W&S partners offer. Since the value of installation is more than the audit fees, this is construed to threaten independence. In the same way, the survey has revealed the 30 per cent of the staff at S&W Partners have purchased products at Cloud 9. It also follows that the products, which the staff of S&W auditors bought, formed part of Cloud 9’s core business. However, this cannot be construed to cause conflict of interest because the value is less than the audit fees expected. A fact, which should give sufficient reason for S&W auditors to decline acceptance of cloud, is the beneficial shareholding of some staff members. This presents the threat of protecting self-interests, which in the end will interfere with the firm’s objectivity. The shareholding has been deemed material confirming that indeed conflict of interest is imminent. Based on this, the auditing firm should not accept cloud 9. Reputation is another factor to consider in client acceptance this is important because there are audit clients who when admitted, they ruin the reputation of Auditing firm. This case involves several allegations against the Cloud 9. Ethics do not support child labor as Cloud 9 is accused of. However, the accusations do not meet local regulations. There is therefore independence J. Wadley should accept. (b) List and explain any additional actions you would take before making your client acceptance recommendation to the partner, Jo Wadley, in this case. Refusing to take up a potential client may mean loss of revenue for the auditing firm, but wrongly accepting a client is even worse for it will tarnish the firm’s reputation causing even more loss of opportunities. This calls for additional actions just to make sure that the final recommendation for acceptance was based on a well-informed decision (Drira, 2011). It is important to find out the clients willingness to allow the auditor to have full access to the information needed. Before signing the engagement, the management and staff should be screened to assess how corporative they can be. Having non-corporative hosts, waters will be like having the auditors working with their hands tied. Cloud 9 should also be willing and able to pay the audit charges accruing. Auditing staff are highly talented and well remunerated individuals; there are substantial costs to pay them. Finding out the reason behind switching of the auditor is beneficial to both parties. It is important to S&W partners for it will help them anticipate challenges in the audit. It will also assess how the reason for switching auditors will affect the engagement. This information could be available from Cloud 9, through communicating with the previous auditor or from competitors. Another area to look at before signing engagement is the management of Cloud 9 to find out their attitude towards risk exposure. I will also find out how well and appropriately, they apply accounting principles. Their attitude towards internal control systems is also relevant. (c) Assume the decision is made to accept Cloud 9 as a client. Prepare the client engagement letter 27th July, 2013 [Insert Contact Name] Chief Executive Officer Cloud 9 Pty Limited [Insert Address] Dear [Insert Contact Name] You have requested that we audit the financial reports of Cloud 9 Pty Limited, which comprises of the balance sheet of the as of at31 December 2011 and the associated statements of income, as well as cash flows for the year then ended. We are writing to convey our understanding and acceptance of this engagement. We shall conduct our audit for drawing an opinion on the final financial reports. Our auditing will be conducted as per Australian Auditing Standards, which require us to plan and carry out audit in order to gather reasonable assurance regarding the financial statements; whether they are do not contain any material misstatement. The audit will involve carrying out procedures to gather audit evidence on the disclosures and the amounts in the financial reports. Selected procedures will depend on the judgment of the auditor. The audit will also involve evaluation of appropriateness of the accountingregulations and policies employed, and the extent of reasonableness of the accounting estimates done by management. We shall evaluate the overall financial report presented Your Responsibilities We shall conduct this engagement on the basis that you acknowledge and understand that the Member/the Firm has responsibility: a. For compliance with the Accounting standards. b. Allow us access to all the relevant and additional information that we may request from people in the company. c. To advise us of any material and / or contentious issues relating to the engagement. d. To ensure that proper internal controls are in place. Such internal controls reduce but do not eliminate the risk of non-compliance. The Member/the Firm assumes responsibility for such risk. While the conduct of this engagement may act as a deterrent against fraud or error we cannot be held responsible for not preventing them. As enshrined in the The Corporations Act 2001, you will not hire another auditor during the course of this engagement. Limitations of the Engagement The audit offers reasonable assurance regarding the financial statements; whether they are do not contain any material misstatement. Please note that because we do not examine all transactions, and owing to inherent audit and internal control limitationsthere is a risk that there may still be undetected material errors, illegal acts and fraud. Yours faithfully ......................... Josh Thomas Partner W&S Partners. Acknowledged and agreed on behalf of W&S Partners by ......................... Sharon Gallagher Audit Manager Date: References Arens, A. (2005). Auditing and Assurance services in Australia. Pearson Education Australia. Demald, M. (2013). Defination of Program Audit Vs Efficiency Audit. Retrieved from http://www.smallbusiness.chron.com/defination-program-audit-vs-efficiency-audit-36746 Drira, M. (2011). Game theory and auditing - impact on client acceptance division. Retrieved from http://www.unb.ca/fredericton/business/ideas_with_impact/drira_auditing.html Moroney, R., Campbell, F., & Hamilton, J. (2011). Auditing: A practical approach. Wiley. PwC Australia. (2013). Assuarance, Financial Assurance. Retrieved from http://www.pwc.com.au/assurance/financial/statements/audit.htm Shaw, G. D. (2011). Reviewed financial statements vs. Audited. Retrieved from http://www.dgccpa.com/2011/10/reviewed-financial-statements-vs-audited/ Read More