Critical Evaluation of Current Events in Auditing

This document provides a critical evaluation of current events in auditing, focusing on procedures to be performed before accepting a client, risk assessment and planning, test of controls for accounts receivable, and the impact of poor audit work on organizations. It emphasizes the importance of auditing procedures and accounting principles.

CRITICAL EVALUATION
OF CURRENT EVENTS IN
AUDITING

TABLE OF CONTENTS
.........................................................................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Procedures to be performed by Dyke & Co. before accepting FHL as client.............................1
Information to sought and procedures to perform during risk assessment and planning phase.. 3
Key business risk faced by FHL, consequences and the measures for mitigating risks..............4
Test of controls for obtaining the audit evidences related to the accounts receivable.................5
Current issues over the poor audit work and impact on organisations........................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Auditing refers to critical inspection and evaluation of books of accounts. Inspection and
audit is done by professional auditor. It ensures that companies are maintaining all the regulatory
frameworks for recording the transactions. The auditing standards lay down the procedures for
evaluation of different events and transactions carried out in an organisation by auditor. Auditor
is responsible for identifying the accuracy and fairness of the financial statements prepared by
company. Report will reveal about nature scope of internal control processes and auditing. It will
give an understanding and evaluation of accounting and internal control risks and systems. The
importance of audit evidence, audit procedures and critically reviewing the audit risks that can
affect the organisation. Main purpose of auditing is to ensure that financial statement of
organisation represents true and fair of the financial position and is complying with all the
reporting framework of accounts.
MAIN BODY
Procedures to be performed by Dyke & Co. before accepting FHL as client
As per IFAC code of ethics for professional accountants before accepting relationship wit
new client, professional auditor in practice is required to ensure that accepting an audit
engagement will not create threat in complying with fundamental principles. Firm have to
investigate about potential client, owners & activities of business for evaluating integrity of
business that can create an unacceptable risk (Singh, 2015). Investigative procedures are known
as customer due diligence procedures. It is essential for audit firm to assess integrity of
management and principle of the prospective client. Companies with negative reputation should
not be accepted by company.
Preliminary Conference
Preliminary conference should be held between FHL and Dyke after showing interest in audit
firm. The factors that can be discussed in the meeting depends upon integrity of client. Firstly the
capabilities of firm, it competency in the industry should be discussed by firm to FHL. Reason
for the change of auditor are to be asked by company. Firm should discuss the structure it will
follow for performing the audit of company (Burks, 2015). Firm should inform client that
communication with predecessor will be made and evaluation of the business firm will be done
before accepting the audit engagement.
Pre acceptance procedure
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The evaluation consists of two phases that are information gathering and evaluation .
Obtaining and analysing financial statement of FHL and concerning the accountant what where
the changes that were made on instruction of previous auditor. Communicating with key
executives for knowing the actual scenes behind resignation.
Making enquiries from third parties about reputation of firm and useful operation of business.
Bankers and legal counsel can provide more accurate credit reports about FHL. They can be
communicated for any hidden and material liability not shown by company.
Communicating with predecessor auditor about the company it is planning to audit. Predecessor
auditor should be inquired deeply regarding the matters that will guide the successor auditor
about the decision for accepting engagement of company. Special matters regarding management
integrity and disagreements over accounting policies , auditing procedures or any other important
matter and the reason behind changing the auditors (Brusca, Montesinos and Vela, 2015).
Pre - acceptance Evaluation
Firm should also identify technical competence and independence to an auditor in company. It is
of material concern for the auditor to identify the level of independence that is granted in
organisation. For the technical aspect concerning IT audit whether company will be providing
required access for auditing the systems and internal control processes . Firm will analyse
circumstances that are focusing on unusual risks under engagement or are requiring special
attention of the auditors. As it is stated that firm was having problems in recording the accounts
receivable and other transactions as per the requirement of accounting principles. The financial
statements of the company are to be analysed deeply by the firm for identifying the risk of
material misstatement and unusual risks.
Practice Management Consideration
After analysing the reputation and integrity of the management and principles firm will
be analysing practice management consideration that can control decision about engagement.
The overall work to be performed by the firm should be analysed by firm. The service level of
the client should be analysed by firm and the risk associated with the work should be identified.
Compilation and other needs of financial statements should be analysed by firm.
Assessing the internal control systems
ISA 210 about the audit engagement provide for the terms of audit engagement that will be
followed by firm for auditing the company. Firm is required to evaluate the internal control
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system of the company for checking the amount of responsiveness of company on errors and
mistakes done in recording transactions. Firm should evaluate the flow of business transaction
and structure being followed. Adequacy of internal control related to the IT audit should also be
reviewed in advance by company.
Information to sought and procedures to perform during risk assessment and planning phase.
It is the responsibility of auditor of identifying and assessing risk of material
misstatements in financial statements . This is done by understanding environment of the entity,
its structure and internal control of the company. ISA 315 lays down processes and procedures
for identifying the material misstatement in financial statement of company. Auditor is required
to undertake procedures for risk assessment involving inquiries from management and external
parties, also other procedures like observance & inspection are to be carried out (ISA 315, 2019).
Only risk assessment procedures cannot provide appropriate evidences from framing the
decision of company. Internal controls are in specific to be identified and analysed by auditor.
Audit firm will perform risk assessment and analytical procedures(Griffith and et.al., 2015).
Information are to be gathered by auditor related to the business and transaction to be
carried out in business. The risks associated with business and accounting requirements are to be
identified by auditors for effectively evaluating the evidences gathered. Information related to
the accounting policies and it is whether it is complying with regulatory compliance requirement
of company is to be identified by the business. They should identify and analyse the uncontrolled
documents that may provide important information about internal transaction (Internal control
systems, 2019).
The information regarding different sales and purchases should be cross checked by auditor for
checking the reliability and ensuring that fake transactions are not recorded by company.
Information regarding financial instruments related party transaction are to be gathered very
specifically. The information is to be gathered keeping in mind requirements of ISA 300, ISA
315 and ISA 330 for preparation of financial statements giving true and fair view.
For identifying the high risk areas it will perform procedures laid under ISA 300. Auditor
will have to conduct initial risk assessment procedures for getting the required information and
sufficient appropriate audit evidence. The factors and events impacting the financial statements
of company are to be assessed by auditor. The relationship with customers, suppliers and other
competitors should be checked by the auditor. Information related to compliance with regulatory
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requirements, legislations, laws applicable to the industry are to be assessed(Gimbar, Hansen and
Ozlanski, 2016).
Auditor should firstly analyse the key internal controls established in business. It will
help to analyse the level of control being followed in company and what kind of reliability is to
be placed over transactions recorded. The report of previous auditor should be reviewed for
getting the key matters that were considered by auditor at that time and whether the controls have
been installed for meeting those errors.
Key business risk faced by FHL, consequences and the measures for mitigating risks.
Business risks that are prevalent in the company are relate to the integrated centralised
accounting systems followed by company. The transition was handled by finance director of
company. The issues related to the centralised system include variation in the balances.
Maintenance of accounts at single place creates more errors in the record keeping process. Errors
like balance in branch account may not be changed when if not informed by other branches a
time. At the same time company is still facing problems in recording the inventories of different
branches at single place. Billing at main office and at branches are misstated several times due to
system defaults. The old accounting process was keeping the backup of the transactions which
could be used for reconciling the business records at the time of system failures and
misstatements. Maintaining accounts at single place is not giving accurate information about the
transactions and balances of different accounts (Griffith, 2017).
As a result company is not able to provide accounting records. Variations in the balances
of different accounts are affecting the management of payment and receipt of collectibles.
Failure of systems misstate the balances of branches and main offices. Returns of inventory are
many time omitted when the sale at branch receives the return of product at main office. The
misstatement is affecting overall accounting processes as it has to make changes several times.
These are also impacting the tax consequences over a period. It is not possible for auditor to give
clean opinion over the financial statements of company in such situations.
Steps and measures are to be taken by company for updating he systems of recording
transactions centrally. More advanced technologies should be installed over the branches so that
errors do not occur at branches and main office. The internal control should be enhanced for
cross checking the transaction at short levels that any error or mistake could be identified at the
instance (Griffith and et.al., 2015). Also company for keeping backup till the centralised system
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starts working efficiently should maintain the old accounting system that will may be cross
checked in event of failure of centralised systems. Timely checks should be made by company
for ensuring that control system are working effectively and also company should physically
verify inventory over reasonable period of time.
Test of controls for obtaining the audit evidences related to the accounts receivable.
Test of controls are adopted by company for analysing the effectiveness of control
systems and for preventing and detecting the material misstatement in financial records of
company. Audit firm will perform the test of control for evaluating the accuracy and reliability of
accounts receivables. The test of control is adopted as company is having transactions related to
accounts receivable ranging from 4000 to 5000 per month. Apart from this the main focus is on
six biggest customers of company having current balance of GBP 230000 that amounts to only
15% of the receivables. Therefore the auditors are required to analyse and identify significant
appropriate audit evidences for the accounts receivables (Burks, 2015).
Firm will be adopting enquiry from client personnel’s by sending letter to the clients for
confirming the balances. They should receive the statement of the company's account in their
books for reconciling. This will provide authenticate the transactions with the parties.
Subsequent cash receipts should be audited for identifying that invoices are not overstated and
sales return have been recorded by company (Audit procedures for Accounts Reseivable, 2019).
Auditor should check and verify the balances that are outstanding for long and no actions for
recognising the amount has been taken. Documentation will give idea about level of control that
is being applied in the business. The credit period exceeding the agreed period should be
inquired. Control procedures will be re-performed by auditor for checking the effectiveness of
these controls.
Current issues over the poor audit work and impact on organisations
Company is having the complexities in its new IT system and the tendency of company
of reflecting the accruals and revenues aggressively for meeting the requirement of creditors. A
company cannot overstate it profits or revenues giving false position of company to escape from
liabilities of company. As per the accounting standards ISA 315 auditor should check that
financial statements are not misstated. The risk of material misstatement can lead investors to
suffer because investors rely on financial statements of company. Misstated profits and
receivables depicts false image about the efficiency of company. ISA 240 deals with frauds
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resulting from misstatement of financial statements, auditor is responsible for identifying
misstatements. Previous auditors were not able to perform audit procedures over the software
systems of company because of which it is not able to identify the differences in balances. Also
the test of controls were not effectively applied by previous auditor. The inefficiency of auditor
to assess the software systems affected the balance systems of company as the errors and
mistakes were not identified by the auditor(Griffith and et.al., 2015). Giving a clear opinion over
financial statements having material misstatements affects the reputation of company and will
amount to fraud. The auditor and the company may have to face legal consequences because of
the material misstatement in audited financial statements. ISA 240 refers to the standard that is
essential for the material risks that affects the business. Marzers review of audit have failed to
meet target requirements where 12.5% of the sample audits are below acceptable standards.
Result of firms is also seen in firms like PWC from 84& to 65 %. In the recent cases it firm
found the difference in the financial statements. The financial statement framed by company
were incorrect and because of that many investors suffered losses. The fault was due to the issue
of auditor.
CONCLUSION
Carrying out the above research about the FHL conclusions can be drawn about the importance
of auditing procedures and accounting principles. In the present case FHL is planning to get its
company audited by the Dyke and Co. Before accepting the engagement it is important for the
audit firm to analyse and evaluate the business integrity, management and principles of business.
The firm structure and environment should be evaluated. Successor should discuss about the
scope and independence of audit procedures to be followed in company. Auditor has the
responsibility of auditing the financial transactions of business and confirming that they are free
from material misstatement. Auditing standards and other compliance procedures for the
company are to be followed by company.
Firm should accept the audit of FHL Ltd as the evidences show that company was
inappropriately reporting the bills receivables, improper recording of inventory and cost
accumulations. But carrying the risk assessment as per ISA 315 of company by the firm it has
identified that company is granting access over business and is not misrepresenting its accounts.
The mistakes followed by company can be suggested to be changed. Also on assessing the
market integrity of the company it is found that it is not negative record in past. Previous auditor
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has also stated that changes were made in the financial statement on its recommendation for
getting clear opinion on the audit report. At last fir is suggested to accept the audit as company is
having the scope for IT audit also which will increase the experience of audit firm
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REFERENCES
Books and Journals
Singh, J.P., 2015. Fair Value Accounting: A Practitioner's Perspective. IUP Journal of
Accounting Research & Audit Practices. 14(2).
Burks, J.J., 2015. Accounting errors in nonprofit organizations. Accounting Horizons. 29(2).
pp.341-361.
Brusca, I., Montesinos, V. and Vela, J.M., 2015. Public Sector Accounting and Auditing in
Spain. In Public Sector Accounting and Auditing in Europe (pp. 173-188). Palgrave
Macmillan, London.
Griffith and et.al., 2015. Auditor mindsets and audits of complex estimates. Journal of
Accounting Research. 53(1). pp.49-77.
Gimbar, C., Hansen, B. and Ozlanski, M.E., 2016. The effects of critical audit matter paragraphs
and accounting standard precision on auditor liability. The Accounting Review. 91(6).
pp.1629-1646.
Griffith, E.E., 2017. When Do Auditors Use Specialists' Work to Improve Problem
Representations of and Judgments about Complex Estimates?. The Accounting
Review. 93(4). pp.177-202.
Online
International Standard of Auditing 315. 2019. [Online]. Available through :
<https://www.ifac.org/system/files/downloads/a017-2010-iaasb-handbook-isa-315.pdf>.
Internal control system. 2019. [Online]. Available through :
<https://www.iaasb.org/system/files/meetings/files/IAASB_Agenda_Item_3-ISA-315-
slides.pdf>.
Auditing procedures for Accounts Receivable. 2019.[Online]. Available through :
<https://yourbusiness.azcentral.com/substantive-audit-procedures-accounts-receivable-
3214.html>
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