Audit: Analyzing Financial Statements and Maintaining Quality of Audit
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This article discusses the analysis of financial statements of AMP ltd and the maintenance of quality of audit. It covers analytical procedures, relevant audit procedures, concept of audit quality, steps undertaken by accounting bodies and maintenance of quality of audit.
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Running head: AUDIT Audit Name of the Student: Name of the University: Author’s Note
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1 AUDIT Table of Contents Introduction......................................................................................................................................2 Discussions......................................................................................................................................3 Part A...............................................................................................................................................3 Analytical Procedures of the Financial Statement.......................................................................3 Relevant Audit Procedures for the Business...............................................................................5 Part B...............................................................................................................................................6 Concept of Audit Quality.............................................................................................................6 Three Steps Undertaken by Accounting Bodies..........................................................................9 Maintenance of Quality of Audit...............................................................................................10 Conclusion.....................................................................................................................................10 Reference.......................................................................................................................................12 Appendix........................................................................................................................................14
3 AUDIT The net profit margin of the business is shown to have increased significantly in comparison to previous year balance. This is mainly because there is an increase in the life insurance contracts which is offered by the business to the customers. The return on asset of the business is shown to be significantly low and therefore the auditor needs to check whether the profits which are shown in the financial statement is appropriate in nature. 2.Liquidity Ratios showing Ideal Results On the other hand, the liquidity ratios of the business are shown to be favourable and even ideal in nature. The auditor needs to assess whether the assets which are shown in the balance sheet of the business are actual and whether the same related to the current year. 3.Increase the Usage of Debt Capital In the Business In case of solvency ratios, the same comprises of debt to equity ratio and financial leverage. The debt amount is shown in the financial statements have increased in comparison to previous years which suggest that the management of the company is relying on more debt capital for meeting the day to day operations of the business. Therefore, there is a significant risk when the auditor considers the rise in debts of the business and also their implication in the financial structure of the business. 4.Valuation of Life Insurance Contact Liabilities Then another area which is identified from the financial statement is the life insurance contract liabilities which form around 17% of the total liabilities of the business. In addition to this, these are very difficult to value and has a complex process of disclosures as well. This area might contain some misstatement which needs to be considered by the auditor of the company. 5.Valuation of Investments
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4 AUDIT The investments which are made by the business are shown in the balance sheet and the balance is shown to be of significant amount which is $ 136,675 million which forms around 92% of the assets side of the business. The concern which can be raised is appropriate valuation of the same and the auditor needs to ensure that the same are not overvalued. In addition to this, there is always a detection risk which depends on the sample size which is considered by the auditor of the business. Relevant Audit Procedures for the Business In order to assess the risks of the business, the auditor needs to apply relevant audit procedures for determining the risks of the business and thereby also take appropriate steps for minimizing the risks which are associated with the business (Glover & Prawitt, 2014). The relevant audit procedure are undertaken by the auditor to ensure that the overall risks which is associated with the business can be minimized. The first step which the auditor needs to take is to ensure that the internal control of the business is appropriate in nature. The internal control needs to be strong so that the auditor can rely upon the same while taking major decisions for the business. The auditor needs to perform vouching practices on revenue which is generated by the business and ensure that the same is effectively represented in the financial statements of the business. The auditor also needs to ensure that the revenue which is recorded in the financial statement are appropriate in nature as the entire profitability of the business depends on the revenue which is shown in the financial statements. The auditor needs to value the life insurance contract liabilities and the investments which are made by the business as both form major part of the liabilities and assets of the business. The audit can take help from an expert as per the audit standards of ASA 620. The valuation is to be done appropriately in order to ensure that the
5 AUDIT balance which is shown in the balance sheet of the business is appropriate and showing a true and fair view. In case of checking the profitability of the business, the auditor can apply vouching strategies for the purpose of ensuring that amount which is recorded in the annual reports are appropriate in nature.
6 AUDIT Part B Concept of Audit Quality The concept of audit quality is widely used among the shareholders and other users of the financial statements. As per theInternational Auditing and Assurance Standards Board (IAASB), the definition of audit quality is complex and therefore cannot be defined (Gul, Wu & Yang, 2013). However, it is to be remembered that a professional should always take all the necessary steps in order to ensure that the quality of audit is at all times maintained by the management of the business. IAASB has introduced a framework whereby the audit quality is described by the input, process and output factors that contribute to the overall audit quality. The main function of an audit is to enhance the degree of confidence of the potential users in the financial statements and the same is achieved by auditors by gathering sufficient appropriate audit evidence in order to express an opinion on whether the financial statements are showing true and fair view (Arruñada, 2013).It is to be noted that the responsibility for performing audits with high quality rests primarily with auditors and the level of efficiency which the auditor has. However, it is often noticed that audit quality can be best achieved in an environment where there issupport from, and appropriate interactions among, participants in the financial reporting supply chain. This is the main concept and its states that both the auditor and the management of the company needs to work together in order to ensure that high quality of audit is conducted. This is not only beneficial for the business but also for the users of the financial statements as the same can help effectively in decision-making process of the business.
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7 AUDIT Figure 1: (Framework to Determine Audit Quality) Inputs As per the framework quality audit requires an auditor to exhibit appropriate values, ethics and attitudes and should also have appropriate competence and knowledge to make them applicable in the auditing process(Ifac.org,2019). Outputs The auditing process should be able to generate outputs in a timely manner. This principle describes the relationship between the financial reporting supply chain of the business and the same also includes output from the auditors(Iaasb.org.,2019).Outputs normally consists of reports and information that are formally prepared and presented by one party to another. Process
8 AUDIT The principle requires the auditor to perform continuous audit process and apply control measures so that the overall quality of the audit is maintained at all level. Another important element which the auditor of the company needs to closely follow is the communication process for ensuring that there is transparency between both the parties. Three Steps Undertaken by Accounting Bodies The need for maintenance of quality of audit is very important in a business environment as it is on the basis of the same that users of the financial statement takes important decisions regarding investments. The steps which have been taken by different accounting bodies are given below in details: Public Company Accounting Oversight Board (PCAOB), USA An overview board of PCAOB has recently issued audit quality indicators which are an extension of the audit quality program which was introduced earlier by the board. The aim of the board is to maintain the quality of audit which are undertaken for Public companies. The PCAOB suggests a phased approach which would allow a step by step adoption of AQIs. The board want entities to reports on the indicators which are applicable to their business. International Auditing and Assurance Standards Board (IAASB) IAASB has played a vital role in ensuring that the auditors maintain the overall quality of audits of a business. The IAASB issues auditing standards which are to be followed by the professional auditors while conducting the audit process. The compliance of the auditing standards can itself lead to a better quality of audit of a business. Chartered Accountants of Australia and New Zealand (CAANZ) The board has since 2003 required all auditing firms to submit a transparency reports and the same are review by the board. The purpose of the review is to ensure that the auditing firms
9 AUDIT follow the framework consisting of the five elements which are linked with the overall quality of the audit. The five elements are inputs, output, process, interaction and context. The board requires the auditing firms to maintain the overall quality of audit during the course of the same. Maintenance of Quality of Audit Thequalityofauditcanberegardedasoneofthediscussedissuesamongthe shareholders of the business as the it plays an important role whether the financial reporting framework which is adopted by a business is appropriate or not. The quality of audit is important as the reports which are prepared by the auditor plays a key role in contributing to the credibility of the financial statements on which they are reporting (Edwards et al., 2015). High-quality audits support financial stability and thereby also gives confidence to the public that the company is worth making investment. In addition to this, high quality audit conducted by a business also has a tendency of reducing the chances of frauds in a business and also promote effective control in the organization. It is important to remember the primary role of an audit is to check whether the financial statements are free from material misstatements and also provide confidence to the stakeholders of the business that the financial position of the business is appropriately demonstrated. In addition to this high-quality audit can effectively reduce the audit risks of the business thereby making the whole audit process more efficient (Gaynor et al., 2016). High quality audit report can provide confidence to the banks as well as they would be able to rely on the judgement of the auditor and the company would be able to get better access to loans. Conclusion The above discussion shows two parts which dealt different aspects of audit in a business. The first part mainly considers the business of AMP ltd for which financial ratios are computed.
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10 AUDIT On the basis of such financial ratios various risks of the business are identified. The above discussion mentions the audit procedures which is to be applied by the auditor to ensure that the risks associated with the audit can be minimized. The second part deals with the quality of audit and how the same can be beneficial for the users as well as the companies.
12 AUDIT Vovchenko, G. N., Holina, G. M., Orobinskiy, S. A., & Sichev, A. R. (2017). Ensuring financial stability of companies on the basis of international experience in construction of risks maps, internal control and audit.European Research Studies Journal,20(1), 350-368.
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