The Financial Audit - Report Example

Title: AUDIT Institution: Date of Submission: Case Study: CLOUD 9 Question 1 (40 marks) (a) What are the main differences between a financial report audit, an environmental audit and an efficiency audit? Financial Report Audit McLellan's Shoes financial statements need to provide performance, financial position and cash flows of the firm that can be used to make and evaluate firm’s decisions on the allocation of its limited resources. Financial audit report is used by several groups of individuals, such as investors and those interested in buying the firm in making informed and economic decisions. Unlike environmental audit that focuses on legal and economic situation (Klamer, Pg 67). Environmental audit Environmental audit is an auditing practice done because of the current change in economic and legal environment. Dynamic legal and economic environment has critical implications on the firm’s financial reporting, its operations and the laws regulating it. This change increases the risk in the business environment, thus requires enough response and disclosure in the financial statements. Environmental audit, in the current environment, requires auditors to consider a variety of developing factors resulting in added challenges. If McLellan's Shoes firm is comprised of several entities there are added difficulties that need to be addressed (Klamer, Pg 68). Efficiency audit An efficacy audit is kind of audit that is different from both environmental and financial report audit in that it focuses the program practices and the resources providing descriptions of universal audit activities. This kind of audit analyzes the maintenance, procurement and implementation of resources to determine areas of improvement (Klamer, Pg 76). (b) What is the difference between reasonable assurance and limited assurance? There are two permitted assurance engagements by the International Framework for Assurance Engagements. These assurances include limited and reasonable assurance engagements. The main difference between these engagements is that in reasonable assurance engagement, adequate appropriate evidence is collected by the auditor. This will enable him/her to reach a conclusion that the issue under consideration agrees in all material aspects with the selected criteria and provides a report in positive assurance form. On the other hand, limited assurance engagement requires the auditor to collect all adequate appropriate evidence to enable him reach the conclusion that the issue under consideration is believable in the situations and provides a report in a negative assurance form (Klamer, Pg 72). The term “adequate appropriate” is somehow a technical terminology. Adequate stands for the amount or quantity of evidence needed. The evidence gathered needs to be sufficiently enough and this depends on the practitioner engagement situation and his/her risk profile. In reasonable assurance, the amount of evidence gathered will not be limited since the practitioner will be trying to summarize that the financial statements are in agreement with the appropriate criteria in all material aspects. In limited assurance engagement, the practitioner collects adequate appropriate evidence that only verify that the financial statements reliable and he/she can build an opinion from it. This shows that the quality and quantity of evidence collected in limited assurance engagement is lower as judge against those in reasonable assurance engagement. This is because the objective of limited assurance engagement is not necessary to cover all McLellan's Shoes financial statement’s material aspects (Klamer, Pg 76). The term appropriate in this context refers to evidence quality. This can farther be split into two components that is, reliability and relevance. Evidence gathered is referred to as appropriate if relevant to the subject matter under consideration and if it was collected from a reliable source. In reasonable assurance engagement, a positive opinion is given when the practitioner provides a direct assurance on the financial statements. While in limited assurance engagement, the practitioner provides a negative opinion by giving out an indirect assurance on the McLellan's Shoes financial statements. b) Why would Chip ask that Ron have the financial report for McClellan’s Shoes audited rather than reviewed? In the last few decades, several firms have preferred reviewing their financial statements over auditing them. Their main reason is their need to cut cost on financial reporting. But Ron should consider auditing the McClellan’s Shoes since the actual cost of reviewing financial is actually high in reality than what is perceived above. This is because accurate financial reporting is important for firm’s stakeholder such as employees, shareholders, financial lenders, vendors, other investors and interested buyers like Chip. The audited financial statements will help Chip in cheating the way forward for the business, determining its value and in evaluating the creditworthiness of the business (Toylor, Pg 16). The annual reporting level of medium business basically is dictated by their banking statements and financial statement users. To save costs, several businesses often go to their banks to seek permission to provide reviewed instead of audited financial statements for their yearly reporting. According to various lending financial institutions, reviewed financial statements are not reliable compared to audited financial statements. Therefore, most financial institutions prefer Audited financial statements in order to lend their funds. (d) What factors should Ron consider when selecting an accounting firm to complete the McClellan’s Shoes audit? Fees Ron should consider the accounting fees charged by the firm. This is because several firms charge varied accounting fees. Some firms charge set fee for every financial task they do and others charge hourly rate (Toylor, Pg 6). Business Specialties Ron should also consider the firm specialties. Even though auditors generally have few areas of specialty, a retail tax accountant might be not be helpful to McClellan’s Shoes as compared to accountant specializing in auditing financial statements (Toylor, Pg 6). Certification Auditing firms employ and trains auditors but these firms might not offer adequate advice to McClellan’s Shoes. Generally, the greater Ron’s accounting needs, the higher the benefit will be gained from general accounting firm that recruits Certified Public accountants (Toylor, Pg 6). Advice Some audit firms are fast to give advice while other take time to compile required financial reports but offer little advice or feedback. The quality and amount of advice needed by Ron will depend on auditing firm experience and knowledge. If Ron needs a lot of help, he should choose an audit firm offering in depth financial advice (Toylor, Pg 6). Level of Service The choice on the accounting firm to audit McClellan’s Shoes will depend on level of service required by Ron. If Ron needs entire bookkeeping services, he will need to look for a full service accounting firm which have bookkeepers handling clients transactions on daily basis. The charges will be high if a Certified Public Account handles these roles as compared to giving it to a firm having bookkeepers (Toylor, Pg 6). 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 information provided by Josh Thomas, who is the audit senior in the audit firm W&S Partners has impact on the decision by the firm to accept Cloud 9 Pty Ltd for audit engagement. The relevant information provided by Josh about the relationship of the finance director at Cloud 9 and a partner in the consulting department of W&S Partners may compromise the confidentiality and integrity of the final audit report. This is because the consulting department is responsible for handling the external auditors who in this case are Cloud 9. This is likely to compromise the independence of the auditors who will not be able to act with integrity and objectivity (Toylor, Pg 16). The auditor`s independence may also be compromised by the fact that there is perceived self-interest from the consulting department at W&S Partners who have tendered for an IT installation project at Cloud 9. This is likely to create intimidation on Cloud 9 and thus causes a threat on the independence of the auditors. The firm`s decision to accept Cloud 9 is also likely to bring about familiarity threat because there exists close relationship between the firm and the client`s personnel. This because of the findings of the survey which showed that about 30% of the audit staff at W&S Partners are customers of Cloud 9`s products. The appointment of Cloud 9 as the auditing firm at W&S Partners was likely to have been influenced by the fact that the four members of the IT department at W&S Partners are shareholders at a retailing company that sells products of Cloud 9. This is likely to compromise the independence of the auditors through familiarity threat. (b) List and explain any additional actions you would take before making your client acceptance recommendation to the partner, Jo Wadley, in this case. Before making recommendations to Jo Wadley, it is necessary that the W&S Partners firm understand the importance of auditor independence and integrity of the audit report. An important recommendation to the partner will be to look for a completely different firm to carry out the audit. This is because of likely integrity issues which may arise if Cloud 9 is given the responsibility to perform auditing in the firm. The relationship between the workers in the two firms and the perceived familiarity threat will undermine the independence of the auditors bringing into question client integrity issues. As a result the auditor could be owed duty of care by the client hence compromising the integrity of the audit report. It will therefore, be necessary to hire a more competent auditor which will comply with ethical and auditing requirements. (c) Assume the decision is made to accept Cloud 9 as a client. Prepare the client engagement letter. Client Engagement Letter 31st Dec 2011, Cloud 9 Pty Ltd, Dear Si/Madam, AUDIT OF W&S PARTNERS Considering you request t perform the audit of compliance with APES 110 for W&S Partners firm for the year ending 31st December, 2011, we are pleased to inform you of our acceptance and understanding of this engagement by means of this letter. This auditing will be done with the objective of expressing a conclusion on W&S Partner`s compliance with the Corporation Act standards. The responsibilities of the auditor The audit will be carried out in accordance to the Corporation Act standards and applicable Australian Auditing and Assurance Standards which require that we comply with ethical requirements plan and perform our engagement for quality assurance. We would like you to note that there is unavoidable risk that some non-compliance may not be detected even though this engagement is well planned and executed in accordance with the Corporations Act standards. This is because of the inherent limitations of assurance engagement and internal control. While making our risk assessments, we will consider internal control relevant to the W&S Partners` compliance in order to design audit procedures which may be necessary but not for making opinions on the effectiveness of the firm`s internal control. We will however, duly inform you in writing of any deficiencies in the internal control relevant to compliance with the Standard that we have identified in the engagement process. This engagement is not meant to be an examination of all aspects of your organization. All details that we will give you in the report through writing or verbal should not be used as comprehensive (Klamer, Pg 67). Your Responsibilities This engagement will be carried out with the acknowledgement and understanding that W&R Partners will be responsible to: 1. For compliance with the Corporation Act Standard 2. To provide us with: a. Access to all information relevant to the engagement b. Additional information which we may request for the use in the engagement c. Unrestricted access to persons within the firm from whom we determine it necessary to obtain evidence 3. To advise or provide us with issues or materials relating to the engagement 4. To make sure that internal controls are in place W&S Partners will be responsible for non compliance risk which may occur as a result of internal controls. We will be held responsible should fraud or error occur even though this engagement may act as a deterrent against them. Representations from those charged with governance As part of our engagement, we will request that W&S Partners make a written confirmation concerning oral representations made to us in connection with the engagement and that W&S Partners acknowledges that such representations would be relied upon by us during the engagement. Report We will make a report on the conclusions according to the Corporation Acts Standard and the applicable Auditing Standards. No assumptions will be made on the reliance of the report other than for its stated purpose. A disclaimer will be included in the report. Independence Established policies and procedures will be used to ensure our independence in accordance with applicable Accounting and Professional Ethical Standards. Fees The engagement fee for the year ending 31st December 2011 will be $xxxx, exclusive of GST and out-of-pocket expenses, as agreed. If we incur additional costs as a result of factors such as: Information not provided in the required time Errors provided that do not give significant information Changes in the scale of engagement Our fees will be paid as the work goes on. Health and safety The health and safety of our people should comply with the occupation health and safety legislation in that all practical steps will be taken. There will be common liability to all workers to ensure the total safety in the place of work Other services The firm will be pleased to give any other services that will be importance in drafting the final audit report. The engagement should be applied to the scope of work laid out in the letter. If there’s further work over and above such separate terms of engagement should be formulated. The engagement letter will not cover accounts preparation, advice or assistance to the firm. General matters Terms of this engagement letter will apply to all the work carried out by us before the signing date of this letter. This letter can be use for future years unless we advice for its modification or change. Please sign and return the attached copy of this letter to show your acknowledgement of, and in agreement with the understanding for our audit of the financial statements, including our particular responsibilities. Yours sincerely ­­­­­­­­­­­­­­________________ W&S partners Acknowledgement We hereby acknowledge that the engagement letter dated 31st December 2011 is in accordance with our understanding of the arrangements for W&S Partner’s audit of compliance with the Standard. Signed for and on behalf of the members by: Signature: _______________________________ Name: _______________________________ Title: _______________________________ Date: ______________________________ Work Cited: Auditing and Assurance Standards Board, Framework for Assurance Engagements. Journal of Auditing and Assurance Standards. New York; NY: Springer. 2010 print Klamer Andrian. Auditing; A practical Approach, Macquarie University. 2012 Print. Toylor Glender.10 Things to Consider When Choosing an Accounting Firm. Cambridge, CA: Demand Media. 2011 print. Read More