Auditing Materiality & New Evidence
Added on 2020-02-24
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AUDIT & ASSURANCE
Audit & assurancePART-AAnswer- Part A-1Before accepting an audit engagement, the auditor should consider a number of conditionswith regard to the client and his business. One of such conditions is that the auditor shouldconsider the facts that whether or not the client is following all the ethical requirements ofconducting business. While conducting a business, the client should consider theenvironmental protection and should not use any such technology in business which isharmful to the environment (Church et. al, 2008). The client firm and its management teamshould not indulge in any act which is unethical or illegal. In the given case, the company Pharmaceuticals Ltd. is under allegations that the chemicalsfrom the company’s factory are being emitted into the nearby river and hence is creatingenvironmental pollution. Before accepting the audit engagement, the auditor should considerthis matter and also that the management is involved in the said matter. The auditor will haveto mention all the points relating to environmental hazards in his report as it shall affect thepublic in large (Church et. al, 2008). Hence, before accepting the audit engagement, theauditor needs to judge whether the allegations on the company are correct or not. He shouldalso communicate with the previous auditor before taking up the audit.Answer- Part A-2In the cases where the auditor finds out errors and weaknesses pertaining to hedging where itis of high level of risk as given in the case of Pharmaceuticals Ltd., such errors werediscovered in the hedging transactions recording and thereafter no actions were taken by themanagement, he needs to take following actions:i.He should perform procedures that he thinks necessary like checking theauthentication of the entries, reconciling with the evidences to determine whetheror not the errors by the management have resulted into any material misstatementin the financial statements.ii.In case the misstatement is not material, then also the impact of the same on theaudit report should be determined by the auditor and if the need arises, he shouldperformer-assessment procedures to check the same (Gay & Simnet, 2015). Thiscan be done by going to the history of the entires.2
Audit & assuranceiii.He should consider and analyze the information in the financial statementswhether or not the errors may lead to hidden frauds. Any suspect be dealt in astrong manner and must be provided in the footnote if the management fails tojustify. In case there is any indication of fraud, the auditor needs to consider allthe other aspects of audit as the reliability of management will be under suspicionin such a situation.iv.He should in the case of Pharmaceuticals ltd., carry out substantive procedures forthe hedging transactions on a random basis to know the intensity of the errors andthe control weaknesses inherent in the company operations. The auditor shalldeeply study the procedures of hedging transactions of the company as well as themethods followed to record such transactions.v.The auditor should be very particular in judging the errors, be it small or large,due to the given fact that there are weaknesses in the internal control by themanagement representatives. Where the internal control of an organization isweak, the procedures that the auditor performs should be performed withmaximized efforts (Gay & Simnet, 2015).3
Audit & assuranceAnswer- Part A-3Billing & Associates have given audit engagement letter to Reaction Pty Ltd. forconducting an audit of the said company. The company has accepted the engagementletter and the audit firm has conducted the audit. As the audit team was not able to gainsufficient audit evidence of accounts receivable due to lack of documentation, it haddecided to issue a modified audit report. In such as case, if the client is now requesting the audit team to cancel the engagementletter as an audit and rather issue an engagement letter in its place for review of thecompany, this is a clear case of audit limitation been set by the company. Themanagement of the company is now claiming that the company is not required to getaudited. If there was no requirement of the audit, the company should not have acceptedthe audit engagement letter in the very beginning. Claiming of no audit requirement afterthe audit has been conducted itself shows that the management is trying to cover up itsflaws of documentation (ACCA, 2016). Once the audit has been conducted, the auditorshall not withdraw the procedures performed and shall issue the modified audit reportbecause of the limitations being set on the audit as the auditors were not provided withsufficient audit evidence Hence, the audit team shall go ahead with its modified audit report in this case.Answer- Part A-41)The given case is the case of self-review threat of the auditor independence. Theauditor has suggested the client about many adjustments to account for impairment ofassets. The auditor’s responsibility is to present a fair opinion about the financialstatements prepared by the management team and not to guide the management abouthow to manage the adjustments in the books of accounts so that he can present apositive opinion only (Cappelleto, 2010). In such cases, as the auditor has himself toldabout the adjustments, he will not be able to review and comment independently onsuch adjustments done.The safeguard to such self-review threat can be that opinion of another professionalshall be taken along with the auditor so that the audit report shall present an unbiasedopinion.4
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