Difference between Financial Report Audit and Environmental and Efficiency Audit - Essay Example

Difference between financial report audit, Environmental and efficiency audit A financial report audit is an examination into the books of accounts of an organization as presented in the annual reports with a view to forming an opinion as to whether the financial statements represents a true position of the financial position of the organization as at the given date and also whether there is compliance with the set standards and legal framework during preparation of the reports. An environmental audit on the other hand is an evaluation of the organization’s operations and the processes it has designed to protect the environment around which it operates. An efficiency audit is an examination into a program or a department in the company with the aim of assessing the optimal resource allocation and identifying the areas of wastages and duplication so as to enhance the overall efficiency of the company. It may entail evaluating the actual performance against the expected or set standards so as to determine the variance and hence institute corrective measures. Difference between reasonable and limited assurance According to AASB (2010) reasonable assurance is an opinion given by an auditor indicating that he was able to gather sufficient appropriate evidence in relation to the financial statements and that he can conclude that with the evidence gathered, the financial statements were prepared in compliance to the laid down reporting standards. In this case, sufficient appropriate evidence means that the auditor has been able to gather the right quantity of evidence in relation to the subject matter and that the evidence is of the expected quality because of its relevance and reliability. The report that the auditor gives will be a positive assurance. A limited assurance on the other hand is an opinion given by the auditor indicating that the evidence he has gathered about the preparation of the financial statements does not reveal that the laid down legal requirements and accounting standards have not been complied with. The report given in this case is a negative assurance which indicates that the auditor is not confident enough to give a reasonable assurance about the financial statements either due to the limitation in collection of evidence or the scope of works. (AASB, 2010) Reasons for auditing rather than reviewing Mclellan’s Shoes It is very important that an audit is carried out in to the books of McLellan’s Shoes before Chip acquires the business rather than conducting a review. A review entails an inquiry on the financial statements of the business with the main aim being to determine their plausibility whereas an audit entails an in depth evaluation of both the company’s transactions as well as the internal control and it goes beyond to examine the evidence available in a bid to support the information that has been supplied. In case of a review, the auditor will conduct analytical procedures that form the basis on which the auditor gives a limited assurance that there is no material modifications required to the financial statements to make them compliant with the set standards. McLellan’s Shoes having been in operation for over 12 years and there having not been conducted an audit previously, its paramount that the financial reports be audited as an audit will go deeper into even assessing the fraud risk, conducting a test on the accounting records as well as evaluating the internal control systems of the business the evidence of which will provide a solid basis on which the auditor will from his opinion. Such an opinion even though not absolute will be a reasonable assurance on which Chip can use to decide whether to buy on not to buy the business. Factors to consider when selecting an audit firm Ron should consider a number of factors when selecting an accounting firm to complete the audit of McLellen’s Shoes. The first one is the qualification of the partners as well as the key people to be involved in the audit. It is paramount that the firm is duly registered with the relevant regulatory bodies as well as the partners of the firm. It would also be advisable that the staff that will be involve in the audit posses the relevant academic qualifications as this will ensure that not only will the firm conduct the audit as per the scope of work but they will give value to the company in terms of advise on possible areas of improvement. Another factor to consider would be the price (audit fee) charged by each of the audit firms. Ron must consider how much the business is in a position to pay and also how much he is will to pay for the audit services. Large reputable firms may offer good audit services but they prices may be too high for Mclellan’s Shoes and therefore the selected firm must be charging reasonable audit fee that is affordable to the business It is also important foe Ron to select an audit firm that is experienced and of good reputation as this will make his audited financial statements more credible as opposed to going for a newly established or unknown firm. The experienced firm may also be beneficial to Ron through provision of advisory services on best ways of improving the business as well as strengthening the internal control systems. Cloud Pty Ltd case study Audit as a profession is guided by a number of fundamental ethical principles that the auditors must comply with in conduct of their duties. These principles include integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. To preserve the integrity and role of auditors and accountants as a noble profession, it is paramount that the auditor is not only independent but must be perceived to be independent in the conduct of the audit duties (Beattie & Fearnley, 2002). The audit firm must ensure that there is no relationship between the professional audit firm and the client to be audited that has the potential to impede or influence the opinion of the auditors. Such relationship may be personal or financial in nature. (APESB, 2006) Personal relationship between the audit firm and the client company arises where the key audit personnel or the audit partners of the audit have personal relationship with the directors or key management of the client company. In this case, David the Finance Director of the client company is married to a distant relative of one of the partners. This may not constitute a breach on the independence of the auditors but in is important for the audit firm to evaluate critically whether it constitutes a perceived breach of their independence. Financial relationship arises where the partners or members of the audit team have some financial interest in the client company or have some joint interest with the directors of the client company. The fact that the IT department staff members have been buying Cloud 9‘s products does not give rise to financial interest. The fact that four members of the IT department at W&S partners have share in retailers that sell Cloud 9’s products also does not constitute a financial interest that would threaten the independence of the auditors. This IT department staffs are not involved in the audit work and also they have no way of influencing the preparation of the financial statements in Cloud 9 hence there is no conflict of interest and subsequent threat to the auditor’s independence APESB (2006). Before making the client acceptance recommendations to W&S partners, it is important to assess whether such acceptance would give rise to any threat of compliance with the fundamental principles. It is imperative to safe guard among others the integrity and professional behaviour of the auditors by ensuring that there are no questionable issues related to the clients and its directors including its major shareholders. Due diligence procedures are therefore important in a bid to properly know and understand the client as well as the directors and management so as to avoid a situation whereby the audit firm accepts the client only to realize that the nature of the business of the client is questionable or illegal. This has the potential of putting the integrity of the audit firm into disrepute ACCA (2010). An additional action to take before client’s acceptance is the assessment on the areas that have possible threat to the independence of the auditors. The financial and personal relationship issues highlighted above as well as the IT tender at Cloud 9 by consulting department of W&S partners may not necessarily constitute a conflict of interest and threat to the independence of the auditors but there is likelihood that such relationships may be perceived as such. It is therefore important for the audit firm to institute the necessary safeguards in a bid to protect its independence. Such safeguards may include reducing the amount involved in the tender such that it doesn’t constitute a substantial income from Cloud 9 besides the audit fee that it will charge. The audit firm may also rule that P.S Nethercott who has a family relationship though distant with David the Finance Director from Cloud 9 does not engage in any matter involving that audit process and the signing of audit reports of Cloud 9. Engagement letter The Board of Directors Cloud 9 Pty Ltd P.O.BOX........ From W&S partners P.O.BOX........ Dear Sir/ Madam Ref: Letter of engagement As per your request to conduct an audit in to the financial statement of your company for the year ended 31st December 2011, we herby write to you to confirm our acceptance. We will carry out the audit as per the requirements of the international standards on auditing that requires that we observe the ethical principles and we plan and conduct the audit to obtain reasonable assurance that the financial statements do not have material misstatement. The audit will be carried in a test basis and therefore due to this fact and other inherent limitations we do want to inform you that there remains a risk that some material misstatement may still remain undiscovered. We would like to point out that it is the management’s responsibility to prepare the financial statements that present the true and fair financial position and performance of the company in accordance with the international financial reporting standards. This responsibility as well includes designing, implementing and maintaining proper internal control systems and also applying appropriate accounting policies as per the relevant regulatory framework. In course of the audit, we will require written confirmations from the management relating to representations made to us in relation to audit queries. Our audit fees will be a total of $ 2, 500 which will cover the time of the audit reviews, stationery and communication, report writing and discussions with the management. We look forward to receiving cooperation and support from your staff in course of the audit work. Yours Faithfully, ............................... For W&S partners ISA 210 (2007) Reference APESB (2006).APES 110: Code of ethics for professional accountants, retrieved on 14th July 2013 from http://www.ceo.wa.edu.au/home/carey.peter/Accounting_and_Finance/APES_110.pdf Beattie, V., & Fearnley, S. (2002). Auditor independence and non audit services: a literature Review, retrieved on 14th July 2013 from http://www. icaew. co. uk/publicassets/00/00/03/64/0000036464 ISA 210 (2007). Internal standards on auditing: terms of audit engagement, retrieved on 14th July 2013 from http://www.ifac.org/sites/default/files/meetings/files/3007.pdf Auditing and Assurance Standards Board (2010). Framework for assurance engagements, Australian government retrieved on 14th July 2013 from http://www.auasb.gov.au/admin/file/content102/c3/Clarity_Assurance_Framework_19-04-2010.pdf ACCA (2010). Acceptance decisions for audit and assurance engagements, retrieved on 14th July 2013 from http://www.chinaacc.com/upload/html/2013/06/27/lixingcunfa2d6838a3984bb887a651795245559f.pdf Read More