Auditing: Importance, Legal Requirements and Appointment of Auditors
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This document discusses the importance of auditing, legal requirements for auditing in New Zealand, and the appointment of auditors for EML. It also covers the audit expectation gap, advantages and disadvantages of voluntary auditors, and factors to consider before accepting an audit engagement.
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Running head: AUDITING Auditing Name of the Student Name of the University Author’s Note
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2AUDITING Requirement 1 a.Audit expectation gap can be considered as the difference between the expected and actual performance of the auditors. The main reasons for the occurrence of audit expectation gap are complex nature of audit, complicated and conflicting role of auditors and others (Ruhnke & Schmidt 2014). The role of the auditors is to express the truthfulness of the financial statements by evaluating necessary audit evidence and compliance of the audit client with the required financial reporting standards. Hence, as per the concept of audit expectation gap, the concern of the shareholders are correct as the audit fails to ascertain the correctness of the company’s financial statements. b.In order to address this concern of the shareholders, the Board of Directors of EML can change the existing auditors with the aim to appoint new auditors who will address these concerns of the shareholders.Apart from this, the Board of directors of EML can include an expanded audit report that will provide the scope to the users to know what the auditors actually do, expanding the roles and responsibilities of the auditors in the areas of illegal acts, frauds and others with the aim to strengthen the auditor’s independence (xrb.govt.nz, 2019). Requirement 2 1.The audit of EML helps the managements of the company to recognise the loopholes in their accounting system so that improvements can be brought. 2.In the presence of correct auditing, the Board of Directors of EML can know that the business is running as per the information they are receiving (Carey, Knechel & Tanewski, 2013). 3.From the correct audit operations, EML can receive effective advices on how the business can be run and what the margins can be.
3AUDITING 4.EML can ensure the reduction in data breaches as well as other crimes related to data when they have an effective audit function. 5.When the financial statements of EML are properly audited, it becomes possible to reduce the possibilities of financial errors and frauds by detecting the material misstatements in the financial statements. 6.For the users of the financial statements, the audited financial statements provides the true and fair information about the financial position and performance of the firm. 7.Effective audit adds credibility to the published financial information of EML for the customers,employees,shareholdersandotherstakeholders(Vanstraelen& Schelleman, 2017). 8.Effective audit program helps EML in maximizing their profitability that is beneficial for both the company and the users of the financial statements. Requirement 3 It needs to be mentioned that New Zealand has certain legal requirements for the financial statements of the companies to be audited. These are mentioned below related to EML: a.It can be seen from the provided information about EML that the company has more than $30 million revenue in the year 2019. At the same time, the company has more than 10 shareholders. In the presence of all of these reasons, the regulation of the Financial Reporting Act 2013 puts the obligation on the Board of Directors of EML to ensure the preparation of their financial statements within five months of the balance date in order to make them audited. At the same time, it is also the obligation on the Directors of EML to ensure the timely filing of the audited financial statements of their business (deloitte.com, 2019).At the time of the audit on the 2019 Annual Report of EML, the auditor is needed to comply with the standards and regulations of
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4AUDITING External Reporting Board (XRB). It has three major requirements for the auditors; they are to obtain an understanding of the situations of the audit client for identifying and assessing the risk of material misstatements, to make judgements on process to assess risks that includes judgments about the audit procedure and to address the reporting considerations for forming the audit opinion (xrb.govt.nz, 2019). b.It can also be seen from the provided information of EML that the company has a plan to expand their business with the issue of bond worth $10 million. In this situation, EML will be able to retain their current position. For this reason, EML will be needed to present their audited financial statements in the year 2020 along with the timely filing of them (deloitte.com, 2019).In this situation, the auditor should conduct the audit by complying with the standards and principles of XRB. Requirement 4 1.After the appointment of voluntary auditor, EML will be required to disclose the confidentialinformationoftheirbusinesstothevoluntaryauditor.Thisis disadvantages for EML because it would affect the confidentiality of their business information. 2.It needs to be mentioned that EML will be needed to make increased payment to the voluntary auditors and it will increase the overall cost of the company.Increase in overall cost due to the increase in audit expenses can affect the company’s overall profitability by reducing the profit for the years and this is a disadvantage for the business. 3.At the same time, it needs to be mentioned that the appointment of voluntary auditors candelivertheauditoutputthatmaynotbefavourableforthecompany’s shareholders (Choi, Han & Lee, 2014).It would be disadvantageous for EML in case the voluntary auditors express their doubts and discomfort on the truthfulness and
5AUDITING fairnessofthecompany’sfinancialstatementsasitcandissatisfythekey stakeholders. Requirement 5 1.The auditor of EML needs to consider the aspect that for which purposes the audited financial statements of EML will be used. 2.Afterthat,theauditorneedstoconsidertheaspectwhetherthecompanyis maintaining its going concern status or not (Blay et al., 2014). 3.The auditor is needed into consideration the issue related to the attitude of EML’s management towards the aspects of financial reporting. 4.After that, the potential auditor needs to ascertain the attitude of the company’s management towards the external auditors of the company. 5.The potential auditor is needed to ascertain whether EML is following the correct standards and principles for financial reporting. 6.The potential auditor is needed to address the concerns of the shareholders of EML as it is an essential issue that they need to resolve (Blay et al., 2014). 7.After that, the potential auditor will consider the fact that what general impression can be developed of the EML’s Board of directors and principles. 8.Lastly, the potential auditor of EML will consider the fact that whether the acceptance of the audit engagement in EML would lead to the violation of any fundamental principles of the audit profession. These eight issues need to be considered. Requirement 6 a.It needs to be mentioned that EML is needed to provide the new auditor with the required assistance to complete their professional and ethical requirements. In this process, the Board of Directors of EML is needed to assure providing the needed
6AUDITING information to the new auditors on various aspects like management, financial reporting, going concern and others (Butcher, Harrison & Ross, 2013).According to XRBInternational Standard on auditing (New Zealand) 210, before accepting the audit engagement, the auditors are needed to follow certain steps. First, determining whether the applied financial framework for financial reporting is acceptable or not; second,determiningwhethertheagreementsofthepersonnelresponsiblefor governance for the preparation and presentation of financial statements is acceptable or not. In addition, the auditors are needed to ascertain whether the company has complied with all the needed ethical standards and regulations in financial reporting (xrb.govt.nz, 2019). b.For EML, an auditor must be appointed by the Board of Directors. In this process, the first step will be to obtain the written consent on the fact that he/she is eligible for appointing as an Auditor and the proposed appointment is as per the correct act. After that, the Board of Directors needs to ensure the appointment of the auditor within a specific time. The auditor will hold office until the occurrence of the Annual General Meeting (Bedard & Compernolle, 2014).As per the requirements of XRB, the agreed terms and conditions for the audit engagements need to be recorded in the audit engagement letter or other acceptable form of written agreement. This agreement mustincludetheobjectivesandscopeofaudits,auditor’sresponsibilities, responsibilities of the personnel charged with governance, identification of auditable financial statements, reference to the expected content or form of audit report and others. In case the auditors consider these legal requirements sufficient, they are needed to include these in the audit engagement letter (xrb.govt.nz, 2019).
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7AUDITING References Auditing & Assurance Standards Framework » XRB. (2019).Xrb.govt.nz. Retrieved 27 March2019,fromhttps://www.xrb.govt.nz/reporting-requirements/auditing-and- assurance-standards-framework/ Bedard, J. C., & Compernolle, T. (2014). The audit committee.The Routledge Companion to Auditing, 253-263. Blay, A. D., Notbohm, M., Schelleman, C., & Valencia, A. (2014). Audit quality effects of an individual audit engagement partner signature mandate.International Journal of Auditing,18(3), 172-192. Butcher, K., Harrison, G., & Ross, P. (2013). Perceptions of audit service quality and auditor retention.International Journal of Auditing,17(1), 54-74. Carey, P., Knechel, W. R., & Tanewski, G. (2013). Costs and benefits of mandatory auditing of for‐profit private and not‐for‐profit companies in Australia.Australian accounting review,23(1), 43-53. Choi, Y. K., Han, S. H., & Lee, S. (2014). Audit committees, corporate governance, and shareholderwealth:EvidencefromKorea.JournalofAccountingandPublic Policy,33(5), 470-489. Deloitte.(2019).Www2.deloitte.com.Retrieved6March2019,from https://www2.deloitte.com/content/dam/Deloitte/nz/Documents/audit/Accounting- Alert/accounting-alert%20-december-2013.pdf ISA(NZ)210»XRB.(2019).Xrb.govt.nz.Retrieved27March2019,from https://www.xrb.govt.nz/assurance-standards/auditing-standards/isa-nz-210/
8AUDITING Ruhnke, K., & Schmidt, M. (2014). The audit expectation gap: existence, causes, and the impact of changes.Accounting and Business research,44(5), 572-601. Vanstraelen,A.,&Schelleman,C.(2017).Auditingprivatecompanies:whatdowe know?.Accounting and Business Research,47(5), 565-584.