Audit and Assurance

This document provides comprehensive study material on Audit and Assurance. It covers topics such as audit credibility, independence, professional competence, and more. The document also includes procedures for uncorrected misstatements and going concern indicators. It is a valuable resource for students studying Audit and Assurance.

Audit and Assurance
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Contents
Audit and Assurance........................................................................................................................1
Question 1........................................................................................................................................3
(a).................................................................................................................................................3
(b).................................................................................................................................................4
(c).................................................................................................................................................4
Question 2........................................................................................................................................5
Question 3........................................................................................................................................7
REFERENCES..............................................................................................................................11
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Question 1
(a)
Audit credibility corresponds to the capability of external auditor, throughout his/her auditing
activities, to behave with honesty and objectivity. Public views on integrity of audits are focused
more on their interpretation of independence as auditor than on legit independence.
Independence: Auditor independence implies to independence state of internal as well as external
auditors from clients having financial interests within business that being audited. Here,
Independence need integrity as well as objective approaches within audit procedure.
Integrity: In relation to audit this requires that auditor should maintain integrity in financial,
commercial and professional relations. This not only implies honesty but also truthfulness and
dealing fairly.
Objectivity: This refers to state of mind that is concerned with all considerations required to
express independent opinion.
Professional competence: This relates to capabilities to effectively perform audit duties in
professional manner as well as performing specific professional task by applying skills with
relevant quality.
Confidentially: This fundamental aspect require that auditor should not disclose confidential and
personal details or information of client with other except client’s consent.
Professional behaviour: This includes imposition of key obligations on auditor to do compliance
with all the prescribed relevant guidelines, regulations, legislations and laws.
Included are:
1) Audit Committee:
Audit committee shall comprise of a specified number of representatives of board of
directors of corporation whose primary responsibilities are to assist auditors to stay independent
from management, i.e., committee should assist auditor in multiple audit conflicts instead of
overseeing them.
2) Size of audit firm
A significant feature that represents independence of auditor is the scale of the audit
company. The integrity of an auditor is specifically related to audit accuracy. Big-audit
companies will make certain to have impartial quality audit services as the bigger audit firms
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appear to provide stronger analysis facilities and reliable financial services, more modern
technologies and more qualified staff who'll be capable of conducting large business audits
relative to smaller audit firms (Barr-Pulliam, Brown-Liburd and Sanderson, 2020). Big audit
companies have higher customer portfolios that enable them to withstand management demands,
whereas small businesses offer customised services since their customer portfolios are smaller
and they'll have to yield to the requirements of management.
3) Competitiveness degree in the audit service sector
Competition described as external influence impacting the independence of auditors. As
the customer can quickly procure services from another auditor, several organisations that work
in a highly competitive market can have trouble staying autonomous.
4) Tenure of audit firm that meets the interests of a particular client
The term of audit company relates to the period of time needed to meet a particular
client's audit requirements. A long relationship with a corporation and accounting firm is
probable to occur in close identification of corporation with its customers' needs, making it
impossible for the auditing firm to take autonomous action.
5) Auditing size and non-audit fees:
IFAC's Codes of Ethics suggests that consumer size determined by fee level could cast
doubts about the integrity of auditor. "The (overall) fee for client should not surpass a certain
proportion of the overall audit company turnover, EFAA states plainly," The auditors tended to
have been in collusion with managers in covering illegal practises in contexts of transparency
scandals (such as the Enron and WorldCom). The key feature of reservation was the money the
auditors collected from clients towards non-audit fees.
(b).
(i) There is lack of independence as in this case Audit manager holding securities in the
client company which may affect Auditor’s opinion.
(ii) This case is subjective in nature, but considerable aspect here is that client is major
source of income for auditor since total income is 700000 out of which 100000 is
receivable by client.
(iii) There is also lack of independence of audit in this case as auditor has taken loan form
the same bank in which she is auditor.
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(iv) There is no matter of opinion of auditor in given case thus auditor is asked for giving
advice thus this is not an audit engagement thereby there is no requirement of
checking integrity and independence of auditor.
(c).
External Auditor: Public accountant is external auditor who performs reports, assessments and
other function on his firms. External auditors are independent of entities such that financial
statements and management control mechanisms of these firms can be assessed impartially. This
auditing opinion is strongly respected by customers and borrowers who require an unbiased
review of the corporation's financial statements.
Internal Auditor: Internal auditors are qualified business professional who conducts unbiased and
impartial financial and organisational assessments, involving corporate governance. This is their
responsibility to ensure that businesses compliance with legislation and regulations, obey
appropriate protocols and run as effectively as possible. A accountable and unbiased information
on entity should be collected as internal auditor.
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(iii)
Threats: There is a possibility of self-interest if auditor is personally or implicitly interested with
the business or relies on client for a significant payment. In this regard, there in first scenario
there is self-interest threat since auditor receive around 7% of his total income from Bakers co.
Safeguard to Threats: Auditor should reduce their dependency on client. External quality control
procedure or Consulting with third party or authority can also be safeguard against this threat.
Threat: There is threat of independence in this case as Peter was an employee of client but now
want to internal audit of company. Although, he can act as internal auditor as there is no
requirement to assess the independence level in case of internal audit.
Safeguard to Threats: Company can take assurance from Peter to give unbiased opinion or
replace internal auditor which have no personal issues with company personnel in any manner.
Question 2
(a). Procedures to be taken with respect to uncorrected misstatement
–The scale of possible mistake should be taken into consideration and thus, potential size of error
should be checked for a broad sampling of inventory items.
– Possible errors should be addressed with management of John Co to explain that there are these
stock discrepancies.
– The fault should be contrasted with materiality to determine if error is material separately.
– If it is not, such other errors reported after audit should be applied to determine whether the
faults are still substantial as an aggregate.
(b). Going Concern Indicators:
A new rival, Drums Concept Co (Drums), enters the industry and by aggressive pricing acquired
significant market sharing from John. There is possibility that this would then effect on potential
cash flows when Clarinet manages to loss share of market. Moreover, pressure could be placed
on John to lower its costs to compete, which would affect income and cash-flows (Kend and
Basioudis, 2018).
A big client has discontinued exchange with John and switched the firm towards Drums.
It might lead to a substantial loss in potential sales and earnings and reduction of projected cash
flows until this client is substituted.
Several developers from John quit the organization and approached Drums, and owing to
their expertise and skills company found it impossible to replace them. The business strives to
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produce new technologies and needs properly trained employees to achieve this. Unless
sufficient employees are employed, the company may interrupt the production of the product and
discourage the organization from increasing profits.
The largest source of special equipment from John has recently ceased trading. There's
also a danger that John can not be likely to get these goods from other industries if equipment is
extremely advanced, thus impacting on its trading capabilities. Other vendors are more probably
but could be more costly in terms of growing John outflows and worsening the cash flow
outlook.
In order to increase market share, John has to collect financing for the production of new
goods and approach its partners for additional financing but has failed to spend further. If
John cannot get proper financing, the shareholders might find Clarinet would be too unsafe to
investing in. You will be worried that John would not be able to provide you with a sufficient
return on your savings, signalling issues with cash flow.
The overdraft of Clarinet has risen markedly over year. If the corporation is reluctant to
secure substitute credit, so it will not be likely to progress trade if bank does not
extend overdraft.
For the next 12 months, John's cash flow outlook indicates a dramatically worse position.
Unless the organisation maintains capital outflows, it would further raise overdraft and begin
running out of money.
(c). Going concern procedure:
 Get a cash balance outlook from the business and monitor cash ins and outflows.
Evaluate reasonableness of assumptions and review the outcomes with executives to
acknowledge why the organisation has adequate cash flows.
 Perform sensitivity study of cash flow to consider Company 's net cash in/outflow
margins of protection.
 Discuss to finance director about acquiring new clients to replace one absent.
 Study company's post-year revenues and orders book to determine whether trade volumes
are expected to grow in the face of intensified drum competitiveness and cash-flow
estimated revenue figures.
 Discuss with the managers whether replacement designers skilled in replacing drummers
have been hired.
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 Review all contracts with Bank, particularly in regards to overdrafts, to decide whether
any contracts have been broken.
 Check all loan communications in order to determine the bank's risk of overdraft renewal.
 Study the communications with shareholders and see whether any of them can rethink a
rise in contributions in the business.
 To assist with the latest product growth, please discussion with directors if they have
approached any financial banks.
 Ask the company's lawyers for any further disagreement and recommend that they
determine Clarinet's risk of needing to pay to client who plans to suit for income loss.
 Conducting checks to assess certain things that may suggest or minimise that the
likelihood of risk-issue is not acceptable for future incidents.
 Review minutes of board post-year to find any concerns that may suggest the company
with additional financial difficulty.
 Review of administration accounts at the end of the year to determine if they are in
compliance with the cash flow estimate.
(d). The John and Jane Co (John and Jane) directors have promised to make public disclosures, but
the effects of such disclosures on audit report will rely on how satisfactory they are. If the
information is sufficient, audit report would be updated as a matter-specific focus will be needed.
In this paragraph, audit judgement shall not be revised, there shall be substantial
ambiguity and a connection to management's disclosure statement. It will be included right
after paragraph of the opinion. If management disclosures aren't sufficient, it is appropriate to
change audit opinion because a significant error happens. This would be a knowledgeable or
adverse judgement, based on materiality of the matter.
Just before Opinions, a paragraph outlining the issue leading to the amendment would be
incorporated and this explicitly defines the inability to communicate the existing ambiguity in
question. The clause of Opinion shall be changed to say "except" or it shall not be viewed with
honesty.
Question 3
(1) Audit risk is the risk that occurred in the business when auditor presents inappropriate audit
at the timing of financial statements are not matched properly. The main reason of audit to
deduct the audit risk in effectively low level by authentic testing and enough evidence. Audit risk
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is mainly based on the two elements that are match financial statement items and detect risk. It is
classified two way such as:
Inherent risk: It is susceptibility of declaration in regard of class of activities, account balance or
revealing of misstatement that could be material even separately or collective with other
misstatements before focus on any accompanying controls.
Control risk: It is a type of risk that misstatement occur because of error and fraud in declaration
and could be material, separately in relation with others misstatement will not be perceived at
basis of time by the organisation's inner control.
Detection risk: This is the situation when auditor not able to find out material misstatement that
occur in the organisational financial reports. For this auditor follow the procedure of audit to find
out the error in the financial statements. The detection risk is affected by sampling and non
sampling risk.
(b) Audit risk and auditor's response:
Peter's has obtain $5m on updating, maintaining and replacing a particular amount of the
manufacturing procedure of product. When expenditure classified into capital nature so it should
be capitalised as portion of plan, property and equipment (PP&E) as per the IAS 16 property.
When all the expenditures are not classified in proper manner so that time income and PPE could
be under or overstated (Sabillon, Serra-Ruiz, Cavaller and Cano, 2017).
At the end of year there will be capable to manage all 15 stocks counts and they requires
to assure that they achieve enough appropriate audit evidence over the stock counting controls,
integrity and presence of stock for any warehouse not visited. Stock is stored in 15 warehouse
that are closely-held by Peter and some rented third parties. Along with some warehouses
occupied by Peter should be consider inside the PPE. Thus, there is risk of over statement of PPE
and understatement of rental expenditure whenever Peter capitalised all 15 warehouses.
Auditor response: The auditor must analysis of changes of such costs to determine the split of
revenue as well as capital expenditure. Moreover, testing should be acquire to assure about the
classification of financial reports.
The auditor should analysis of inventory sites that will attend for counts. It will be any
material stock or which have a history of significant errors. If auditor not visited that time require
to analysis of level of expectations noted at the time of count and discuss with administration any
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problem arise at the time of count. The auditor should determine supporting documentation for
warehouse in which consist of PPE to assure about ownership through Peter and to assure about
non-current assets are not overstated.
(c). The auditing strategy lays out audit's scope, timetable and course and assists in
designing audit plan. Here, following primary areas should be considered:
 The key characteristics of commitment that determine its scope must be defined.
 The monitoring priorities of the commitment to schedule the date of audit and the scope
of the correspondence needed should be determined.
 The approach should take into account the considerations that are important in the Peter
Cola Co's audit team's activities as professionals’ opinion.
 The outcomes of the preliminary audit plan operation and whether information acquired
about Peter Cola Co's other obligations is appropriate, should be considered where
appropriate.
 In audit plan the type, time and scope of resources required to execute audit should be
identified.
(d)
Interim audit is component of audit until the ending of year. The auditor shall conduct interim
audit for processes which, due to timing pressure, become difficult to conduct at end of a year.
While final audit will be held after the ending of year and closes with forming of the auditors and
the voicing of a view on audit report for whole year. It is crucial to remember that
both preliminary and the full audit reports are considered in final opinion (Maso, Lobo, Mazzi
and Paugam, 2020).
(e).
Procedures that can be carried out during interim audit include:
– Review and modification of Peter Cola Co accounting framework documents.
– Conversations with managers on recent development and all other improvements in the Peter
Cola Co organization during the current year to refresh the auditor's comprehension of the
organization.
– Risk appraisal that would have an effect on Peter Cola Co's final audit.
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– Perform audits on the sales, acquisitions and inventory periods and credit management of
Mila's main transaction times.
– Enforce substantial benefit and loss activity significant processes for year to date as well as all
material transactions ended.
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REFERENCES
Books and Journals:
Barr-Pulliam, D., Brown-Liburd, H.L. and Sanderson, K.A., 2020. The effects of the internal
control opinion and use of audit data analytics on perceptions of audit quality,
assurance, and auditor negligence. Assurance, and Auditor Negligence (February 7,
2020).
Kend, M. and Basioudis, I., 2018. Reforms to the Market for Audit and Assurance Services in
the Period after the Global Financial Crisis: Evidence from the UK. Australian
Accounting Review, 28(4), pp.589-597.
Sabillon, R., Serra-Ruiz, J., Cavaller, V. and Cano, J., 2017, November. A comprehensive
cybersecurity audit model to improve cybersecurity assurance: The cybersecurity audit
model (CSAM). In 2017 International Conference on Information Systems and
Computer Science (INCISCOS) (pp. 253-259). IEEE.
Maso, L.D., Lobo, G.J., Mazzi, F. and Paugam, L., 2020. Implications of the Joint Provision of
CSR Assurance and Financial Audit for Auditors' Assessment of Going‐Concern
Risk. Contemporary Accounting Research, 37(2), pp.1248-1289.
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