Being an Auditor - Assignment Example

Auditing Name Institution Date QUESTION 1 Being an Auditor Dear Kim, I hope this finds you well, I have been thinking about the conversation we had during our last meeting and thought it would be better to share with you some insights on auditing so that you can understand the extent of auditing in a firm. It is true that auditing does not guarantee that a company will succeed and this is covered in a concept in auditing called reasonable assurance. Reasonable assurance is a concept that states that even though auditors follow all the guidelines in auditing standards it does not guarantee that there will not be a material misstatement in the financial statements of our clients. There are various reasons why the audit procedures used by auditors could fail to detect material misstatements in the financial statements of their clients and some of them include; using the applications or testing methods on samples rather than the real population. Conducting the tests on samples does not guarantee the same results as testing the actual materials to be testes and thus resulting in failure to detect material misstatements in the financial statements. Another reason that could lead to failure of detecting material misstatements in financial systems is inherent problems or challenges with the systems being used for accounting and internal control. These problems in the accounting and internal control systems may not have been detected by the users and therefore making it difficult for the auditors to detect any challenges or misstatements in the financial statements of the clients. The evidence produced by the audit procedures may so compelling that it becomes very difficult to detect any material misstatements in the financial statements. This is because the evidence produced bears a persuasive nature instead of a conclusive nature that is it leads the auditors or the clients to an opinion by making them believe in the evidence instead of being conclusive in nature meaning that it should be able to convince them of the results (Basu, 2012). There are many more limitations in the auditing procedures which could lead to failure to detect material misstatements in the materials being audited. Allow to elaborate more of these limitations. There could also be poor judgment by the auditor in the process of gathering evidence and also in drawing the necessary conclusion on the position and performance of the client firm or business. There could be bias as you implied during the audit process especially if the auditor has any relations to the firm being audited and this could lead to failure to detect any misstatements in the financial statements of the client. There may not be a clear distinction between the management of the firm or business being audited and the auditor on what misstatements fall under the category of being material or immaterial thus causing a challenge in determining the real material misstatements in the financial statements of the firm or business. Others may also include errors committed by auditors because of the human nature, high costs of internal control, overriding by the management team and also any associations with third parties to deliberately soil the audit process among others. Given all these limitations to the auditing process, it is safe to say that an audit does not guarantee absolute assurance for the client firms or businesses (Basu, 2012). Another issue that I would like to share more about with you is your skepticism towards the honesty of managers. This is covered more in another auditing concept called professional skepticism which is not the same as implying that the managers always share deceitful information with the auditors to save the image of their company. Professional skepticism in auditing refers to have an attitude that involves bearing an inquisitive mind and ability to critically assess the evidence of an audit process so as to be able to detect possible material misstatements in the financial statements and also offer useful insights to the firm being audited. Being professionally skeptical does not mean that the auditor does not trust the manager of the client firm; rather it means that the auditor is paying extra attention so as to identify key issues and messages that will be of great relevance to the audit process. Some managers may try to deceive auditors to save the image of the company or save themselves but the concept of professional skepticism does not mean that all managers are trying to deceive the auditors (Basu, 2012). Yours faithfully, Name…………. QUESTION 2 a Provision of non-audit services to audit clients Many audit firms have been venturing into the non audit services market for their clients and this is because of the growing demand by the firms and businesses seeking special advice from these audit firms and Hertenstein Limited is not an exception. According to Elise it seems that her predecessor offered these services (non audit services) to their clients but at a lower fee and she hopes to increase the firm’s revenues from the non audit services with the hopes that it will increase her reputation in the audit industry. However, my opinion is that such a drastic move on her part will cost the firm more clients. This is because her predecessor, Marjorie Platt was in the industry for a longer period of time and also had an incredible reputation of being ethical in her profession and her reports and therefore such a move on Elise’s part will make the clients view her as an ambitious person and will damage her reputation (Basu, 2012). Elise will be better off studying the industry and introducing change gradually as she gains trusts from her peers in the audit industry and also the firms’ clients instead of trying so hard to create a reputation from the flaws of a predecessor who is regarded so highly in the industry. Therefore, Elise should not increase the service fee the firm charges for non audit services to their clients (Basu, 2012). QUESTION 2 b There are many non audit services that audit firms offer to their clients and they can be categorized into three. The first category are services that are required to be undertaken by the auditors according to the legislation of the region and these include; stating their returns to the relevant regulatory body, reporting on the non audit services offered that are not cash related and also report on the nature of the agreements of all their contracts among others. Audit firms could also offer non audit services to clients because they have an abundance of existing knowledge of the business that clients seek advice for. They could also offer the non audit services if the information or advice clients seek is a byproduct of the audit process they have conducted on the firm or business. These services may not be required of the audit firm by the law because the nature of the services is largely drawn from financial records of the firm that has been audited. Audit firms could also help businesses and firms ensure that they are complying with the tax regulations and also help firms to prepare reports that are required during acquisitions or reorganizations and the reports are required in a very short span of time for the firm or business to comply with (Basu, 2012). Audit firms could also venture into services that are also provided by other firms and these may include management consultancy, consultancy on human resources and also tax advice among others. However, there are services that audit firms should avoid and some of them include services that have inadequate safeguards and could pose a threat to the independence of the audit process such as promoting the shares of clients of the audit firm. The firm should also avoid services that do not follow the combined code of corporate governance that is should not engage in services that have not been disclosed in writing to the audit committee. This will help establish the relationship with the auditors making sure that their independence as well as their objectivity is not compromised (Basu, 2012). The firm should also avoid no audit services that provide a large proportion of the firm’s entire gross income. This means an audit firm should not offer non audit services to just one source so as to make a clear distinction on different types of income for the firm. Audit firms should refrain from offering non audit services whose results cannot be easily accessed by the clients of the audit firm (Basu, 2012). QUESTION 2 c It would not make any difference if the company was a private company or a listed public company because they are all under the same regulatory body so they follow the same rules and regulations. The only difference between a proprietary audit firm and a listed public audit firm is the formation and management practices but they follow the same rules set by a regulatory body. QUESTION 3 a Understanding the client and its governance Factors to be considered by managers when conducting an audit of the Industry and its economic effects and at its entity levels There are a number of factors that managers should consider when conducting an audit of the firm in the industry and its effects on the economy and some of these factors include audit risks and materiality which we have discussed into details and also effectiveness of the audit procedures which will ensure less risks and less system control tests for the firm (Basu, 2012). Factors to be considered at the entity levels include internal control issues that will ensure that the directives of managers with regards to the business of Ajax Limited will be carried out efficiently and effectively. The managers of Delaware Partners should ensure that Ajax Limited they test the effectiveness of the internal control of the company over financial reporting so as to make an effective auditor’s conclusion of the new client, Ajax Limited. The main issues tested at the entity level include; the control environment of the new client, its ability to assess risks, the effectiveness of its communications and information, its ability to monitor its activities and also the effectiveness of its control activities (Basu, 2012). The results or information obtained from the entity level audit is then used to; identify various types of potential material misstatements of financial statements of the company. The information is also used to identify the factors that could affect the risks of potential material misstatements of financial statements and also used to develop tests for various controls and procedures when required by the company or firm. According to Basu (2012), auditing of the entity level controls is very important because its effectiveness affects the control selection and the nature of the audit procedures in terms of the nature of the audit, time spent as well as the extent of the procedures. If the entity level controls have been determined to be effective they will reduce other control tests and also they will be able to address potential risks and reduce tests required to deal with the specific risk. Question 3 b Principle 4 of the ASX corporate governance council’s corporate governance principles The fourth principle in the ASX corporate governance council’s corporate governance principles is all about safeguarding integrity in financial reporting. This principle ensures that the work of both internal and external auditors is overseen, semiannual and annual financial statements are reviewed, the firm or business complies with the statutory requirements and also ensure that the management and control of the financial and operational risks of the company are effective. The fourth principle of the ASX corporate governance council’s corporate governance principles also requires that a board is formed and it should have three board audit committee members that are independent which includes the chair of the committee. Given these requirements we can conclude that Ajax Limited is complying with the fourth ASX corporate governance council’s corporate governance principles and recommendations (Efic, 2014). Conclusion The main role of an auditing firm is to ensure that it gives express opinions on the performance of the firma after it has tested and gone through its control systems and financial statements. We have also seen that other than conducting audits, auditing firms can also offer non audit services to their clients as long as they comply with the legislative requirements, offer services that could be as a results of the byproducts of their audit process among other provisions. These non audit services are allowed to make part of the firm’s income but not make up the abundance of the firm’s gross income. Audit firms should comply with regulations that are created by their relevant regulatory bodies along with other governing principles and recommendations. Auditing procedures should be very effective to avoid further system control tests, reduce risks and also ensure minimal or no material misstatements of the company’s financial statements. References Efic, (2014). ASX Corporate Governance Principles. Retrieved on July 30th from http://www.efic.gov.au/about/governance/framework/Pages/ASXcorporategovernancepri nciples.aspx Basu, S, K., (2012). Fundamentals of Auditing. 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