Auditing and Assurance Standards - Essay Example

Auditing Table of Contents Question 12.4 3 Question 12.7 4 Question 12.14 6 Question 12.17 7 Question 12.31 8 References 10 Bibliography 11 Question 12.4 Date is important to judge the right of an entity to assert an asset. It is also essential to evaluate whether the asserted liabilities are obligation to an entity or not. Date plays a crucial role in the audit report as for occurrence of any major changes between the date of report and issuance of the report require adjustments in the financial statement. Balance sheet data, date of audit report, date of issuance, all these plays a significant role as changes or occurrence of any events before and after these dates might have an effect on the financial status of a company and are required to be disclosed. 1 Fixing up the date of the audit report is the other important aspect. The date should not be earlier than the probable last date of collecting all the audit evidences to support the auditor’s opinion or the last day of the field work. AU 530 has mentioned the appropriate date while delivering additional copies of the previous report as demanded by CPA. 2 Question 12.7 Here subsequent events refer to the events that have occurred between the balance sheet date and that of the audit report. The process to identify the events that may require changes or disclosures in the financial statement can be presented accordingly. To ensure that the subsequent events have been recognized, the auditor needs to review all the processes that have been established by the management. Careful checking of the minutes of the meeting is also required. The meeting that has been held after the balance sheet date among the shareholders, board of directors and auditors is regarded here. Diminutive observation of the interim financial statement is also required. The other way of determining the subsequent events is to make inquiry of the lawyers who are concerned with litigation and claim. Even management can also be inquired to find out the events occurred after the balance sheet date. The auditor needs to be conscious regarding certain factors; namely development of any risk factor or contingencies, unusual accounting adjustments and the status of the items those are accounted on the basis of the inconclusive data. 3 Even the departments or the components of an entity that have been audited by any another auditor, should also be audited by the principal auditor. The auditor needs to observe the events those have materiality influences on the financial statements to check whether it has been accounted properly in the financial statement. 4 Question 12.14 The responsibility of the auditor is to evaluate the appropriateness of the process of using going concern assumption of the management while preparing the financial statement. They need to check whether any material uncertainties regarding the ability to carry on as a going concern is disclosed in the financial statements or not. Again it is also important to state in this regard that being a human being; an auditor can not predict all the risks and uncertainties for an entity. Therefore, if there is an absence of indication of going concern uncertainties in the report of the auditor, it does not ensure that the organization is completely free from all uncertainties. 5 The auditor should take certain steps to confirm the appropriateness of the going concern basis when the company is operating under a parent company and seek financial help. As the auditor finds one subsidiary company not appearing to be a going concern, he needs to demand a letter of financial support from the parent company, where the company will commit that they will provide all possible and required support to the subsidiary to continue the business. 6 Question 12.17 Before analyzing the answers few vital dates are needed to be mentioned. Balance Sheet Date: 30th June, 2010 Audit Report Date: 6th August, 2010 Distribution of Annual Report: 18th August, 2010 Situation 1: The material was stored for publishing the books up to 18th of August. Prior to the publication and distribution of the annual report, there were no changes in the plan. Therefore no modification is required in the financial report and also not in the audit report. The event that would be responsible for the changes in the raw material valuation is the death of Mr. Cosby, who passed away on 20th August, 2010. It refers that there will be no effect in the valuation criteria which ensures that there would be no change in the financial statement. The date of taking the decision of pulping the book is insignificant as event has occurred after all vital dates. Situation 2: The second situation is the instance of printing mistakes as the figure was correctly mentioned in the draft version but was changed in the final version. The final annual report will be provided to the shareholders on 18th of August whereas the auditor has recognized the mistake on 9th August, 2010. It refers that there is a scope of changing the errors before circulation of the annual report. The auditor should add one note beneath the Chairman’s review status. This is important to amend as profit percentage is one of the most important aspects of the annual report. Any misstatement can lead to a huge penalty for the company. Situation 3: As the date of settlement of the case is prior to the date of submission of the audit report, there is a requirement of change in the financial report as well as in the audit report. But the matter of concern is that the amount that has been paid. It is important to analyze that whether the 50% of the sum claimed is also a material amount or not. If the amount that has been compensated is noteworthy then it needs to be mentioned in the financial report otherwise not. In financial report, the changes should be made beneath the financial statement, under the heading ‘Notes to Account’. Basically in this kind of cases, discloser of the compensated amount is necessary. Question 12.31 Before analyzing the case in context to the going concern problem, it is necessary to draw certain points that need special consideration. Those are as follows: 20,000 customers are required to be at the break-even point Technological constraints of Tiger Pty Ltd. Higher supplier bargaining power (third party) Shantill’s customer base Shantill’s Technological advancement (Software having capacity to support 50,000 users) The first three points reveal the status of Tiger Pty Ltd. which has a customer base of 17,000. It refers that the company is operating in losses as they are performing below break-even point. Management’s decision of acquiring the comparatively smaller rival, Shantill can prove to be a win-win situation for the company. It will not only provide additional customer base but also enable the company to expand their network. Most importantly, Tiger will be able to conceal their major lacuna i.e. technological constraints. Ignorance of this acquisition strategy will lead to further losses and the company might become insolvent in due course of time. Actually the problem is with the management of the parent company of Tiger Pty Ltd., Bear Ltd. According to them, Tiger Pty Ltd will be financially supported only when it will be in a critical condition of going into receivership. In such scenario, the possibilities of acquiring Shantill have been reduced. Even another way of accumulating finance for acquisition, capital injection from each director of Tiger Pty Ltd has also been delayed. These are the two factors that indicate the possibilities of a going concern problem of Tiger Pty Ltd. Initially the technological inability of Tiger Pty Ltd, which has a capacity to serve only 17,000 subscribers, indicated the going concern problem but now when the management has an option of acquisition, it can not be considered. To mitigate the factor Tiger Pty Ltd management can take loan from outside. They can take loan from bank also on the basis of their future project. References AIS, 2010. “Auditing Dictionary of Terms”. “Accounting Institute Seminars”. http://www.ais-cpa.com/glosa.html Delaney, Patrick R. & Whittington, O. Ray. Wiley CPA Examination Review, Outlines and Study Guides. (John Wiley and Sons, 2010). ISA 570, 2000. “Auditor’s Responsibility”. “Going Concern”. http://www.icisa.cag.gov.in/Background%20Material/GOING%20CONCERN_08_23%20%28570%29.pdf Knowledge Bible, 2010. “Subsequent Events”. “Auditing & Assurance Standard 19”. http://www.knowledgebible.com/forum/showthread.php/465-Auditing-Assurance-Standard-19-%28AAS-19%29-Subsequent-Events P7 Advanced Audit and Assurance Study Group, 2010. “Forum”. “ACCA”. http://opentuition.com/groups/p7-advanced-audit-and-assurance/forum/topic/p7-advanced-audit-and-assurance-study-group-june-2010/?topic_page=6&num=15 SA 560, 2000. “Audit Procedures”. “Subsequent Events”. http://www.icai.org/resource_file/15398Link33_560SA-AAS19.pdf Bibliography Dicksee, Lawrence Robert. Auditing: A Practical Manual for Auditors. (BiblioBazaar, LLC, 2009). Dauber, Nick A. Wiley the Complete Guide to Auditing Standards and Other Professional Standards for Accountants 2009. (John Wiley and Sons, 2009). The National Computing Centre Limited, 1996. “Internal Quality Audits”. “What they are and How to carry them out”. http://www.tarrani.net/linda/docs/InternalQualityAudits.pdf Teague, Andrew., 2008. “The Audit Going Concern”. “In Practice Ireland.” http://www.accaglobal.com/pubs/members/publications/sector_magazines/in_practice_ireland/archive/2008/43/going_concern.pdf Read More