Audit Confidentiality - Case Study Example

ASSIGNMENT 1 Question 1: (i) Bob is an audit assistant currently undertaking university studies. While auditing the books of Club Casino, he comes across certain financial information that he believes will assist him in completing one of his university assignments. He copies the information and uses it in his assignment, carefully removing all reference to Club Casino in order to preserve the client’s confidentiality. (ii) Wendy has been the engagement partner on the Ace Limited audit for a number of years. Some time ago, Ace’s long-standing company secretary retired and Ace took six months to find a replacement. At Ace’s request, Wendy performed company secretarial duties for this period of time. (i) Even though the auditor had in mind the need to avoid breaching confidentiality issues, he still ended up breaching the standards and regulatory requirements of confidentiality as an auditor. This is because confidentiality does not merely refer to the non-disclosure of the source of information. Once the source alone is undisclosed, all that the auditor is doing is ensuring anonymity and not confidentiality. It is worth noting that “management systems are often the intellectual property of the club” (Gymnastics Australia, 2006). The alternative course of action was to use the information for the sole purpose of compliance assessment. Alternatively, he could have sought permission from owners of information and if upon approval, used the information with the names of source indicated to avoid plagiarism. (ii) In the given scenario, both Wendy and Ace Limited infringes the Framework for Assurance Engagement para 8, which ensures that an engagement should be backed by a very high degree of confidence “other than the responsible party about the outcome of the evaluation” (Christopher, 2012). In the current situation, Wendy’s task as a secretary will be compromised for confidence and quality assurance as that is not her area of expertise but auditing. Alternatively, the secretarial role could have been vacant instead of audit so that the right persons would be assigned to the right position. Question 2: Consider the following independent situations, all of which apply to audits of entities for the year ending 31 December 20X7: (i) Slipway Limited, a listed company, has been experiencing declining sales over the last 2 years. Cost cutting has proved difficult due to the high level of imported machinery used in Slipway’s operations and consequently margins have been falling. While the bankers are presently happy to continue providing Slipway with loan facilities, they do expect to see improved results in the next financial report. Articles about Slipway’s expected financial results appearing in recent press reports all had quite a pessimistic tone. (ii) Getaway Pty. Limited is a long established firm which has been operating a boutique hotel in the Blue Mountains for over 20 years. During this time, it has adopted a conservative business strategy that has seen it produce adequate, though slightly unimpressive, results. A new CEO has been appointed to run the firm from 1 September 20X7. He has already released his plans for renovating the hotel, despite not officially serving as CEO yet. You have also heard him discuss the implementation of a new marketing strategy to boost occupancy rates. (i) The impact on audit risk likely to emanate has to do with the fact that the company, which is under pressure to meet the requirements for gaining the loan facility are likely to tamper with valuable accounting data in their financial books in order to have clean books. Once this happens, it paves the way for tendencies that the auditor in-charge may not detect the accounts misstatement that will be arising from fraud on the part of the company. Out of their anxiety to get the bank loan, there is the likelihood that clients will fail to detect internal control system errors and so a client-controlled risk will arise. In this case, the audit risk involved would be control risk. (ii) It has been proven that in cases of declining conditions such as the one experienced in Gateway Pty, there is the tendency that management will be under pressure to seek opportunity by manipulating financial statements, leading to higher risk of material misstatement (PCAOB, 2010). Higher risk of material misstatement contradicts Auditing Standard No. 8 and may be the immediate impact on audit risk in the scenario. On the components of audit risk, since issues of susceptibility of an assertion to a misstatement leads to inherent risk auditors in Gateway Pty may be dealing with inherent risk (PCAOB, 2010). Question 3: You are the audit senior on the audit of Harmony Pty Ltd, a large manufacturing company, for the year ended 30 June 20X7. It is now 25 August, 20X7 and you are reviewing the audit working papers prepared by the audit assistant, Susan Jones, and notice the following matters: (a) Susan attended the stocktake on 30 June and observed that the client followed the stocktake instructions. She selected numerous items for test inventory from the client’s inventory sheets and all were found to be correct. Cut-off details were noted and subsequently checked and found to be correctly treated. Susan concluded that inventory was fairly stated. (b) Susan selected 20 invoices to test the control that the sales clerk checks that the prices agree with the authorised price list. She found 3 instances where the sales clerk had not signed the “prices checked” box in the invoice. The sales manager explained that the sales clerk always checks the prices but sometimes forgets to sign the box. As the prices on all the invoices agreed with the authorised price list, Susan concluded that the control was operating satisfactorily. (c) As part of her work on subsequent events, Susan noted that there were a large number of returns in July of Product 75L. However, as this product was first sold in June and represented only 1% of sales for the year, Susan concluded that the amount was immaterial and no further work was necessary. (a) There were three major actions taken by Susan that largely conforms to auditing practices as far as inventory taking are concerned. First, she selected as many items as possible. This is a justified practice unless of course she did not vary the type or kind of items taken. Secondly, she used the client’s inventory sheet. This is also a good practice because client inventory sheets are thought to be more official and reliable for decision making. Finally, there were evidence collected from the cut-off details to ensure that they were corrected treated. These three major practices justify Susan’s practice as correct and based on valid evidence. (b) One unpardonable mistake in auditing is that of assumptions and unauthenticated trust. Indeed, the mere reason that the other prices tallied is no guarantee that the unchecked columns contained correct figures. This argument is made especially against the backdrop that three out of twenty entries forms a very significant percentage of the overall entries, which is more than 1%. Susan did not do sufficient audit evidence by basing on assumptions rather than proof. (c) 1% is by no means a negligible value in accounting and auditing. Susan was therefore wrong in this conclusion. Moreover, the fact that returns in the June represented one out of seven months actually means that she was dealing with 14.3% and not 1%. What is more, account records for an entire month has a lot of influence on decision making and can greatly affect decision to be taken on management level regarding the trend of products to deal in. Susan’s conclusion was therefore not based on sufficient evidence. REFERENCE LIST PCAOB, 2010. “Auditing Standard No. 8.” http://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_8.aspx (Accessed August 19, 2012) Christopher, 2012. Learning Material. Lecture Notes Gymnastics Australia, 2006, “Audit Confidentiality” http://www.gymnastics.org.au/default.asp?Page=3005&MenuID=Member_Services%2Fc20034%2F3623%2CClub%2Fc20090%2F3022%2F%2CAuditing%2Fc20094%2F3001%2F (Accessed August 19, 2012) Read More