The Audit Engagement - Example

Running Head: Audit Engagement Name Course Lecturer Date Q1 The basis for carrying out any form of audit is to ascertain, evaluate its records and provide an opinion on the organization’s performance. Auditing is an in depth examination of the organizations financial statements, relationship with the environment, use of resources and relationship with personnel. Financial report audit refers to the examination of an organization’s financial statements to ascertain if true and fair records are maintained in the organization. This audit enables the auditor to provide an opinion on the organizations financial statements depending on their experience on the verification of financial statements. For financial report audit the auditor is interested with the organizations statement of financial position, statement of comprehensive income, statement of cash flow and other records maintained by the accountants or the management that would boost the auditor’s evidence on the opinion expressed. Financial report audit opinion is relied on by various stakeholders who are concerned with the financial statements of an organization. After carrying out a financial report audit an auditor gives either a qualified or an unqualified opinion or may fail to give an opinion in case they feel that there was limited access to information. Audit of financial reports promotes the confidence of the shareholders in the organizations. The audit also verifies the organization’s compliance to IAS in their preparation of financial statements. Among the responsibilities of an organization is the responsibility to ensure environmental protection in the course of carrying out business. It is therefore important to access the performance of the organization in relation to environmental protection from damage. Environmental audit therefore is the examination of the business performance in preserving the environment. It helps the management review its compliance to the environmental policies. This audit ensures minimized exposure to risks for those in and around the organization. It also boosts the compliance to policies in relation to environmental skills. This audit is carried out through the assessment of the systems in place to enhance environmental protection and determination of how much the policies are complied to. This form of audit strengthens the performance of the management. The resources required in carrying out the resources of an organization are limited. Therefore, it is good for the management to ensure proper utilization of these resources. Efficiency audit is used in an organization to focus on ensuring economical use of the resources of an organization by carrying out an examination on the use of resources in an organization. This is effectively done by analyzing the procurement of resource and their allocation. Therefore, it is good for the management to ensure proper utilization of these resources. Efficiency audit use in an organization ensures improved performance of the organization. Reasonable assurance is exhibited where the prepared financial statements are free from any material misstatement and therefore no chances for making biased audit opinion. This means that the auditor has a higher level of confidence on the financial statements to use them in developing their opinion. Reasonable assurance creates confidence on the audited financial statements since they are assumed that there are no material misstatements in the financial statements. The assurance guarantees that though the audit is not expected to be perfect the auditor will have done his best. Limited assurance on the hand the auditor gathers evidence to prove that the statements are reliable. Due to the high level of subjectivity that is possible the auditor gives a negative opinion to reduce the liability. This means that there is no certainty to the reliability on the reliability of the statements as free from misstatements but from the evidence provided it is thought so. It means that the auditor has less confidence on the statements in giving their opinion. Chip asked Ron for audited report rather than review auditing because unlike review of the financial reports auditing ensures that no errors or fraud are carried out in presenting of the financial statements. Auditing also ensures that financial are compliant with IAS .Auditing unlike review of statements requires that the financial report provide a basis for comparison by availing the reports for the previous years. This would help Ron access information on the performance of MclleLan’s Shoes in the previous years and thus can compare and make a clear investment decision. When choosing the accounting firm to carry out the audit Ron should consider the competence of the personnel working with the firm. He should also ensure that no relationship exists between the organization and the firm so that the audit is carried out independently. The compliance of the firm with the IAS should be a key factor to consider before engaging them so that proper audit is carried out. The terms of engagement with the firm should be well established so that no conflict arises. Q2 a) Impact of the client acceptance decision There is a conflict of interest that exists in all the cases of information provided. This compromises the independence of the partners to take an audit to Cloud 9 international or undertake any other business dealings. People expect the auditors to provide a good report of a company's performance and therefore rely extensively on it. In this case, the auditors face conflict between their own interests and their professional obligation to give a good advice on the audit engagement. This conflict of interest compromises the auditor and therefore should not take any assignment where independence is compromised. In the first case, the Cloud 9 finance director is married to PS Nethercott who is a partner in W&S Partners in consulting department. This compromises the other partners in the audit firm to take audit in Cloud 9. Her spouse is a partner in the subsidiary and therefore should not undertake to audit the company. The impact of this is that there will be impartial decisions which will be made by the auditors to safeguard the interest of the spouse; they will not make decisions based on the audit evidence obtained thereby providing misleading information to the users of the financial statements of the Cloud 9 Company. In the second case, W&S Partners should not provide others services to Cloud 9 Company other than the audit services. This will prevent compromising the independence of the audit partners. Furthermore, the consulting department of the audit firm has a spouse of the Cloud 9 Company who is the finance director. In addition to this, the fees charged would be twice the amount of the audit fees, if they accept the tender for the W&S Partners; they will negotiate for the audit fees to be reduced thereby putting the audit partners in a compromising situation. In this case the independence is compromised further by the fact that the finance director in the Cloud Company is a spouse of one of the partners in W&S Partners, they are doing business by a member of a board of directors in the other company. In the third case, there is no conflict of interest from W&S Partner’s staffs purchasing Cloud 9s products. This does not compromise the independence of the auditors in any way. In the fourth case, already the size of the shareholding is considered material thereby compromising the independence of the audit partners to carry out audit in that company. W&S Partners should not audit the financial statements of Cloud 09 Company because of the conflict of interest of the staff members who hold shares in that company. There would be partial decisions made in expressing the opinion due to questionable audit evidence provided by the audit assistants. In the fifth case, this case does not compromise the auditor’s independence though they ought to carry out more audit evidence to ungrounded the mater. The impact of this in the expression of opinion on the financial statements is not material since they do not affect the preparation of audit evidence used to make judgment. b) Actions considered before accepting engagement of a client Before making the client acceptance recommendation, the W&S Partners should consider the business risk involved in the Cloud 9. Considering the industry risk, the management risk and the entity risk will avoid engaging in unhealthy acceptance. Considering the experience, integrity, attitude as well as actions of the management, the market and marketing, liquidity and suspicious business practices for the entity and competition, technology, regulations and barriers to entry on the part of the industry should be taken in to account. Bearing in mind the audit risk like the high volume year ends and uncommon complex transactions will prevent the auditors jeopardizing themselves. Frequent auditor changes and propensity of litigation towards the client should as well be contemplated. c) Engagement letter W&S Partners, Certified public accountants and statutory audit, P O BOX 47467, Maryland. Cloud 9 P O BOX 46383 Maryland Dear Sirs/Madams, RE: ENGAGEMENT LETTER This is our engagement letter following our appointment as the auditors of Cloud 9 international. This is to confirm our understanding of objectives and terms of engagement, the limitations and nature of the services that we will provide to your company. The reason for this letter is to set the basis on which to act as the auditors of Cloud 9 and responsibilities of the company and ourselves as well. In this respect, we will carry out our audit on your company's statement of financial position, the cash flow statements, the statement of comprehensive income and other related consolidate statements. Objective of the audit The main objective of our engagement is to express an opinion on whether the Cloud 9s financial statements represent true and fair view in all material respect and in conformity with the international accounting standards (IAS), international financial reporting standards (IFRS) and international standards on auditing (ISA). We are pleased to confirm our acceptance of the engagement by means of this letter. Period of engagement This engagement will start with Cloud 9 audit for the accounting period to 31st august 2013. The W&S Partners will deal with matters arising in respect of periods prior to the above period as appropriate. The responsibilities of the auditors The audit will be conducted in accordance to auditing standards generally accepted in the United States of America. W&S Partners will perform and plan its audit in order to obtain a reasonable assurance of whether the financial statements are free from material misstatements and present a true and fair view. This will involve performing procedures to get the audit evidence about disclosures and amounts in the financial statements. Auditor’s judgement will determine the procedures selected including assessing risks of material misstatements of the financial statements, whether due to error or fraud. Management’s responsibility The responsibility of the management concerning this audit is preparation and presentation of financial statements in accordance with generally accounting policies accepted in the United States of America. The management is also responsible for design, implementation and maintenance of an internal control system for preparation and presentation of financial statements free from material misstatements. In addition, it should provide access to information to which it is aware it’s relevant to preparation and presentation of financial statements, any additional information the auditors may request for the reason of their audit and allow unrestricted access within the Cloud 9 from whom they determine necessary to get audit evidence. The reporting frame The auditors expect that the management have prepared and presented the financial statements according to the international accounting standards (IAS) and international financial reporting standards (IFRS). The auditors therefore will base their audit in conformity with these accounting standards. Fees The audit fees will be calculated on the time spent on the Cloud p company by the partners and other staffs of the partners, the level of responsibility and skills, any expenses incurred in regard to the audit and value added tax. These fees will be billed during the audit period at appropriate intervals. Confidential information The partners will not disclose any information the management deems confidential to any other party and will be guided by accountant’s code of confidentiality as the IAS requires. Agreement of these terms This engagement letter will remain effective from one audit assignment to another well until it’s replaced. The auditors will be grateful if Cloud 9 confirm in writing their agreement to terms of this engagement letter by signing and returning it. Yours sincerely, W&S Partners. We agree to the terms of this letter References Bell, T Landsman, W& Shackelford, D (2001) Auditors' perceived business risk and audit fees: analysis and evidence Journal of Accounting Research. Curtis, E & Turley, S (2007) the business risk audit–A longitudinal case study of an audit engagement Accounting, Organizations and Society. Epps, K & Messier J (2007) Engagement quality reviews: A comparison of audit firm practices Auditing: A Journal of Practice & Theory. References Read More