The Main Objective of an Audit - Case Study Example

Running header: Auditing Student’s name: Instructor’s name: Subject code: Date of submission Auditing The audit expectation gap can be defined as the term which is used to show the difference that exists between the expectations of the users of the financial statements and the expectations of the auditor in relation to the financial statements that are being audited. It is in err for the partner to term the expectations of the users of the financial statements as being unreasonable. It is the motive and desire of all users of financial statements to have the audit report reflecting the true and the fair view of the financial position of the organization being audited. As such, their expectations are not in any way unreasonable. An example is the case of the shareholders of the company being audited. It is their desire to get the utmost value from their investments in the company (Josphine, 2008). They as such have expectations of having an audit opinion that reflects the true position of their company. The main objective of an audit being undertaken is to get an opinion as to the position and the genuineness of the financial statements of a company. As such, by the frauds being detected, the actual position will be shown. The people who are also perpetrating the frauds in the company will also be identified and the appropriate measures and actions are taken to them. The undertakings of a business are based on the going concern concept. This is where the business is expected to be in operation for the next future that is unforeseeable. Through the principle of going concern, the users of the financial statements in the case of the shareholders believe that once the frauds are detected at an early stage, they will be rectified in time before they affect the progress and the prosperity of the business in future. This hence means that the undertaking of an audit to them will be directed towards the discovery of the weak and strong position of the internal control systems of the company. The auditing task should be at a slow but sure pace. This is not time wasting but rather a chance to increase the possibility of the detection of the frauds that may be present in the undertaking of the activities of the company. It might be costly to the company but also a worthy undertaking. The detection of frauds that exist will hinder such from occurring in the future All the operations of companies are directed at two main motives. The first is cost minimization. This is where the company seeks to reduce the cost that are incurred in the operations that it undertakes. This is where expenditures are minimized to the lowest levels possible. The second objectives profit maximization for the profit making organizations. This is where they adjust their systems to get the highest levels of profit possible. Through the reduction of the frauds that exist, there will be a general increase in the profitability levels. The companies will hence have attained its final objectives of profit maximization. It is important and crucial for an auditor to ensure that there is the ensuring of the highest levels of integrity possible. This is through the utmost adherence to the audit code of ethics. They state that the auditor should be responsible for his activities. He is however not liable for giving an opinion on the position of the financial statements of a given company. He should hence strive to his level best to see to it that there is a true and a fair view given as to the condition of the books of account of a given company. In this case, ABC limited has issues with its internal control systems. They are weak. He gives example of this in the condition of the inventories. The inventories lack exact values of the amount of the inventories in the stock levels that are present. This is what causes the use of estimation in the arriving at the inventory number at the end of the financial year. Weak internal control systems makes the auditor to give a negative opinion as to the state of the financial statements of a given organization. This is the case like this where Eric indicates in his report that the internal control systems of the company are poor. Ethics require the issuing of the true and fair view of the condition of a given organization. In this case, the replacement of the report that was prepared by Eric and converting it into a summarized copy, which does not portray the actual condition of the company, makes it lack a true perspective. He needs to meet john and tell him of the matters that exist as to the condition. This will result to a change in the report that was made by John. The process of auditing requires the auditor to use the highest levels of integrity and professionalism possible. Through addressing the issue to John, he will be able to meet all the integrity issues that concern the matter. The true and fair view through this will be upheld. Through the raising of the matter to him, he will also be ensuring professionalism in his work. Professionalism is where he deals the issue with John rather than first exposing them to all and sundry. This will hence give John room to rectify the report that he had earlier prepared as to the position of ABC Company. This will also help John to keep his integrity also. This will hence be a two-way benefit. Both for John and Eric will benefit from the deal. Once the issues are aired to John, he is bound to change his report. In case he does not change it, Eric needs to address a higher authority on the issue (Jared, 2005). Through this, he will preserve the levels of accuracy of the report that is given. This will hence not mislead the users of the financial statements of the company. This should also be the final stage after John has failed to make changes to the report, which he has given, as it is not in any way representative. Before the preparation of an audit plan, several factors need to be put into consideration. These factors determine the efficiency and the applicability and efficiency of the plan that is going to be put in place. As such, they are the issues, which will act as the guidelines in the process of the preparation of the final audit plan of the company. Failure to include them and to consider them will result to the failure of the audit plan developed to be applied in the company. As such, it will not be effective. The first factor that should be taken into consideration is the creation of the understanding of the business. This is where the auditor needs to see to it that he is well aware of the systems and the policies that are used by the company in the undertaking of its activities. This will be best in the determination of the high and low risk areas in the levels of the internal controls of the company. This will facilitate the putting in place of better policies in the control and the minimization of the levels of the risks that are associated with the areas. The second factor is the understanding of the business environment. This is in terms of the location and the market trends. The environment is also comprised of the competitors of the company. They influence the undertaking of the activities of the company. A company should put in place measures based on the competition levels that exist. The audit team also needs to have knowledge on the focus that the management places on the business in which it operates. Through this, they will be able to be at par as to the progress, which the business seeks to attain in the next future of its existence. It is also crucial to analyses the trend of the results that are made by the business over the last couple of years. This will help in the determination of the profitability of the business and the efficiency of the standards that it has put in place. This also gives it a base for perfect analysis of the results and the improvement in the fraud determination mechanism. Sample audit plan Contents 1. understanding the business 2. audit approach and scope 3. significant risks identified 4. other risks identified 5. results of interim work done 6. communication of audit matters 1. Understanding the business This business has been in operation for the last 20 years. This indicates that it has created strong presence already in the market. This is also an indicator of experience in the field. The owner has vast knowledge in the business and so is the daughter. This makes them a team of highly knowledgeable people. The daughter has also acquired academic skills aimed at increasing her knowledge and competencies in the business management. This makes her to be at an upper hand in the running of the affairs of the business. This also seeks at the identification of the procedures and the activities and the systems of the business. Through the understanding of the business and its activities, it will be easier to audit the activities that are undertaken in the premises of the business. This will also seek at gathering knowledge of the independence levels of the employees who work in the various departments of the company. 2. Scope of the audit The scope of the audit is the whole business environment. It will cover all the departments of the business. This are the human resource department, the accounting department. The second area that also needs to be checked into is the information technology (IT) department. This is in order to check the areas that are more prone to weaknesses of the internal control systems of the company. Through this, the high-risk areas will be identified and set aside from the rest of the activities of the company. This will also aid in the reduction of the total amount of time that will be spent in the undertaking of the audit task. Through the reduction in the time that is taken in the undertaking of the activities, there will also be a reduction in the costs that are involved in the carrying out of the audit assignment. The audit will also focus on the segregation and division of duties and activities in the company. This is where the number of tasks that are undertaken by one person are scrutinized. The undertaking of many tasks by one person reduce the efficiency of the company. It also increases the chances of frauds occurring in the business. It is also a common indicator of a weak internal control system of the business. The audit will also seek at developing knowledge of the levels of independence and the integrity levels of the people who work in the company. This is made possible through arranging of forums where the employees are made to express their views and opinions freely as to how the company undertakes its activities. 3. Significant risks that are identified. Following the analysis of the books of the company, the main risks that are involved is in the allocation of tasks to the personnel of the company. There is the tendency of the over reliance of the company in the services of one person. In this case, there is the over reliance on the services that are rendered by Isabel. She is the accounting clerk of Tiffany. She is responsible of most of the activities that are undertaken in the business (Dewey and Tufts, 2013). They include activities in the filing and accounting department. She is also responsible for the updating of the spreadsheets that are used in the valuation of the work in progress. Isabel is also responsible for the ensuring that the necessary EDI acknowledgements are sent and reports are printed. With this, she is the backbone of the operations of the company. It is also indicated that once she is on leave, the operations of the company halt for a period. It has also been indicated that once she is away on vacation, the suppliers of the business are asked to wait for her to come back to be served and acted upon. The undertaking of activities by one person will reduce the levels of integrity that they have. This is because they are more prone to undertake and commit fraudulent activities. This is because in such a case, the levels and the degree of supervision also reduces in such cases as this. This is the main risk that exists in the business. Few more risks are involved. They include the undertaking of the activities of the company at home. This is risky as it can result to the exposure of the secrets of the business to other third parties who are not supposed to have an idea about them. This stands as a risk because such parties as competitors can get access to the information through the other media outside the company premises. The above listed risks are identified based on the threat that their existence pose to the company. This is the degree of occurrence of losses if a certain criteria occurs or fails to occur. Another risk that exists is in the issuing of the passwords and other security controls to the company and the people involved in its activities. The issues should be then investigated and the results of the findings are communicated to the main people to the audit. They are the owners of the company. In this case, they are George and Tiffany. Once they receive the audit report, they will be able to get a fair view of the activities of the company and the progress that it is making. This will be crucial in the tackling of the hurdles that exist in the business premise. Through communication, they are given a chance to go through the report and come up with the issues that are raised. They are then made aware of the main risky areas of their business. These are the areas that they anticipate to be risky. Through this, they will take corrective and preventive measures to deal with them before they occur. Through addressing them, they will reduce the chance of their occurrence in the near future of the risk. This also helps to reduce the impact of the risks in case they occur to the business. Several factors need to be put in place to address the risks that exist in the business. The first risk that is identified is the risk of having one employee to do much work in the organization. It is a risk due to the fact that in case the employee quits from working for the company, it will adopt a trend of making losses and hence a reduction in the levels of profitability (Kimberly, 2002). The best way to reduce this from occurring is by increasing the numbers of employees that are being trained in the departments and filed that are covered by one person. This will hence result to replacement or substitution in case it occurs. Through this also, the business will have a positive trend in its operations. It will be on a profitability trend and the overreliance on one person will be eliminated. The business will hence not send away the customers or the suppliers because of the absence of a person qualified to serve them. The employee by also doing so may increase the chances of undertaking fraudulent activities and with little or no detection at all. In such a case, the levels of independence of a person are increased to extremely high levels. Their undertaking of activities will be an activity hard to monitor. Through this hence, the people charged with the responsibility of doing so will not be able to monitor the activities of such a person as Isabel. She should instead be charged with the responsibility of working on only one department activity. Through this, her efficiency levels and her competence will be increased. The other risk that was identified was that of taking activities of the business home. This is a risk because other parties at home who are not authorized to can see them. This can lead to a loss of the top secrets of the business to the other outsiders. To eliminate this, the business activities should only be undertaken in the business premises only (Lowell, 2005). To address the issue that may arise during other hours than the working hours, there should be in place a precautionary and a special workforce, which should be charged with the responsibility of dealing with such matters that may arise outside the working hours of the company. This will help in the preservation of the secrets of the company. The inventory of the company should be set on a first in first out (FIFO) basis. This is where the first stocks to enter the warehouse of the business should be the first to leave. This helps in the reduction of such issues that may arise in the issuing of the values of the inventories. As such, this will help also in reducing the wastages that may arise due to expiration of the inventory that is present. The FIFO method has the benefit of that the business can be able to reduce the costs that are incurred in such activities as storage and replacement of overdue stocks. This is mostly so because the items in stock will be the latest to enter into the premises of the factory. It is also advisable for the company to use the market value in the valuing of their inventory. This is because it will give a more fair view of the actual value of the inventory that exists in the stocks. This will result to an actual determination of the proceeds that will be made from the sales that will be made from the operations of the company. References Josphine, K2008, Audit, New York, John Wiley & Sons. Jared, B2005, Audit and assurance, London, Rutledge. Kimberly, L2002, Audit, London, Book Works. Lowell, B2005, Auditing and corporate ethics, Cambridge, Cambridge University Press Dewey, J, & Tufts, J2013, Ethics, New York, H. Holt and Co. Read More