The Impact of Continuous Auditing

This assignment delves into the influence of continuous auditing on the quality of financial information reported online. It analyzes scholarly articles and publications that explore the effectiveness of continuous auditing in ensuring accuracy and reliability in financial statements. The study considers perspectives from auditors, academics, and practitioners to provide a comprehensive understanding of the benefits and challenges associated with implementing continuous auditing practices.

FINANCIAL SYSTEM AND
AUDITING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Purpose and uses of different accounting records.................................................................3
1.2 Importance and meaning of the fundamental accounting concepts......................................4
1.3 Factors that influence nature and structure of accounting system........................................6
TASK 2............................................................................................................................................7
2.1 Different components of business risk .................................................................................7
2.2 Analysis of control system....................................................................................................8
2.3 Evaluation of risk of fraud in the business and ways to detect them ...................................8
TASK 3............................................................................................................................................9
(1) Planning of audit for the FA Jet ltd and its scope, materialism and risk...............................9
(2) Identification and uses of audit tests...................................................................................11
(3) Type of record that will maintained in the audit process....................................................12
(4) Draft audit report.................................................................................................................12
(5) Management letter in relation to audit ................................................................................13
CONCLUSION..............................................................................................................................14
REFRENCES.................................................................................................................................15

INTRODUCTION
Financial system and auditing are the important aspect of any organization. It is necessary
to improve this system because if same will not be in proper manner then organization will not
comes to know its true financial position. In this report issues related to financial system and
auditing are addressed in proper manner. In respect to this, accounting records of the firm are
explained in detail in the report. After that various issues related to accounting system are
discussed in detail. Along with this some of the factor that make accounting system more
complex are also discussed in detail in the report. After that in the middle part of the
report,different components of business risk are identified and their impact on the organization
are also explained. Addition to this, control systems are also analyzed in respect to the firms. At
the end of the report, audit is done and process that can be follow for conducting audit are
describe in detail. Along with this, documents that need to be prepared while conducting audit
are discussed in detail in the report.
TASK 1
1.1 Purpose and uses of different accounting records
Following are the accounting records that have different purposes for an organization. Journal- It is a statement that is used by the business firms in order to record all the
accounting transactions. In this accounting statement, detail related to all business
transactions is recorded whether they are related to any person or thing. In the journal,
there are two sides; one is debit and other is credit. Apart from this, ledger folio and date
column is also available in the journal (Champlain, 2003). On the basis of journal, ledger
account is prepared. Through journal account, one comes to know about the transaction
that was done on specific day. In this statement, debit and credit amount are always same.
This accounting record acts as foundation of preparing other accounting records. Hence,
it is prepared in each and every type of business. Ledger – It is an account that is formed on the basis of entries that are made in the
journal. Ledger is an accounting record in which all the transactions related to specific
accounts are recorded at the single place (Moeller, R., 2016). For example: all the entries
related to cash are recorded into cash account. Same happens in case of other accounts. In
the ledger account, value of debit and credit always remain same and if, same does not

happen then it means that some of the entry of journal is not recorded in the ledger.
Hence, it can be said that this statement helps in identifying the accounting errors. This
statement also gives an entire overview of the specific account. Hence, this is a very
important accounting record for the firm. Bank statement- It is a statement that reflects company’s bank balance in different bank
accounts. It also reflects the transactions that are done by the firm from the specific
account. Inversely, it indicates the amount that firm receives from their business clients in
the specific bank account. Bank statement can also be used for the bank reconciliation. It
is a technique that is used to make sure that all the accounting transactions are recorded in
the company books of accounts and everything is in a proper manner (Cannon and et.al.,
2006). If, less amount or extra amount is recorded in the company books of accounts then
managers try to identify points where company accountant makes a mistake while
recording of business transactions.
 Financial statements- There are three types of financial statements namely income
statement, balance sheet and cash flow statement. Income statement is a statement that
refers to income earned and expenses incurred by the firm. On the basis of analyzing this,
financial manager identifies the areas where it makes extravagance. These managers
make a strategy in order to make sure that same mistake will not be committed again in
future. On the other hand, there is another financial statement which is known as balance
sheet. It is a statement that reflects the financial position of company and status of assets
and liabilities (Usmani, 2004). On this basis, ratio analysis is done and company
performance is measured from different angels. Hence, it can be said that this is the
reason due to which balance sheet is widely used by the business firms. At last, cash flow
statement comes in which there is information about the cash flow from investing,
operating and financing activities. On the basis of these information, managers get an
information about the direction in which firmcash flow isgoing.
1.2 Importance and meaning of the fundamental accounting concepts
Accounting concepts are those which are followed while making entry of the specific
transaction. These act as rules and regulations which are considered while recording business
transactions (Chorafas, 2001). These concepts are the basis of doing entry in a different way.
Some of the important accounting concepts are as follows.

 Accrual concept- This is a concept in which all business transactions are recorded as per
the date on which they are happening in the business. Many times, income is earned by
business but not received and vice verse happen . in case of expenses an amount is not
due but it is paid by the business firm. In this case, accrual concept applied in the
accounting. Under this concept, even business transaction is done before time but it will
be recorded in the company’s books of accounts at the specific date and at the specific
value. As per this concept, if Kingston is liable to pay any specific amount but it does not
make payment then also accounting transaction will be recorded in the company’s books
of accounts (Miller and Jentz., 2009.). This will be done because firm does not make
payment but it is liable to pay same. Hence, in this way, accrual concept applies in
accounting. Going concern concept- It is a concept in which it is assumed that firm business will run
forever even its management will change. Due to compliance with this accounting
concept, all accounting records are recorded on the name of the company not on the name
of business owner. Kingston purchases machine of 1,00,000 then it will be recorded in
the books of accounts on behalf of the company’s name not on the basis of business
owner.
 Dual aspect concept- This is a very important accounting concept and under this, it is
believed that any transaction has two sided aspect. It means that when any business
transaction happens then debit and credit side of the business transaction get affected. If,
Kingston makes electricity expenses then this transaction will affect both the debit and
credit side (Fortin and et.al., 2010). Cash is paid on the business transaction and it will be
recorded on the debit side and name of expense will be recorded on the credit side of the
journal. Due to payment of electricity, both assets and liabilities are affected. On
purchase of machine, cash is paid and due to this reason, assets get reduced by the paid
amount. On the other hand, bill is paid and this is the reason due to which liability to pay
bill comes to end. Hence, liability amount is also reduced by the paid amount. Thus, it
can be said that both assets and liabilities are affected by the single business transaction.
Hence, debit and credit side are also affected by the business transaction. Thus, it can be
said that dual aspect concept is applied in the accounting of business transactions.

1.3 Factors that influence nature and structure of accounting system
There are several factors that affects accounting of the business transactions. It can also
be said that there are number of factors that affects structure of accounting system in the
Kingston. Complexity of business is one of them and Kingston like companies are large in size
and enter in to number of business transaction in a single day. As a result, it become very
difficult to make accurate entry of all business transactions. Some of the transactions are
recorded at in accurate value or some remain unrecorded. Due to this reason, when financial
statement is prepared lots of problems are faced in preparing it accurately (Carmichael and et.al.,
2012). In order to resolve this issue Kingston can either outsource its accounting work to nay
company and can give its responsibility to match accounting transaction or to reconcile books of
accounts with bank account details. If the business is complex then several business transactions
are performed and all are interlinked to each other. If any one accounting entry is not done then
other accounting entries become wrong and balance does not matched. So either Kingston can
employee specific employees and give them responsibilities to manage specif accounts or it can
take a service of BPO.
Along with complexity of business transactions large size of business is also one of the
factor that greatly influence accounting system of the firms. If the business size is large then
huge number of business transactions happened and become very difficult to store and manage
huge accounting data related to the business. Moreover, recording of all these transactions
accurately is another big problem that accountant faced in his practice. Hence, large size of the
business is one of the reason that affects accounting system of an organization (Sikka, Filling and
Liew 2009). Due to large size accounting system become complex and lots of errors comes in
existence in these records. Inversely, to this it is observed that those firms that have small
business size easily manage accounting records and there are less errors in their business
transactions. Thus, size of business is another factor that affects accounting system of the
Kingston.
Skills and competencies of accountants in compliance with new accounting policies is
another factor that affects accounting system of the business firms. Many times these accountants
are not well experienced or they are not competent to apply new accounting policies in proper
manner. Due to this reason lots of errors are observed in the accounting records and multiple
people involved in resolving accounting issues in large size organizations. This lead to

complexity in the accounting system. More and more people involved in resolving a issue more
an accounting system become complex. Hence, it can be said that lack of skills and competencies
of employees is another factor that affects accounting system of Kingston.
TASK 2
2.1 Different components of business risk
Business risk refers to the threats that affects business performance and impede its
growth in the industry. Some of the business risks to Kingston are as follows. Occupational Health, Safety and Environmental requirements – It is one of the
business risk that Kingston is facing in the business. Occupational health refers to the
trading done by the firm. Many times trade of the firm decline to due to poor economic
health. This lead to fall in the company revenue(Chiang and Lightbody, 2004). Hence, it
can be said that poor occupational health is one of the big threat to the Kingston. Apart
from this there some of the rules relatd to safet and environment that companies needs to
follow. Failure to comply with these rules many invite penalty from the regulatory
authorities. Hence Kingston needs to needs to take care of all these things. Competitive environment- Currently, business environment is very complex because
there are number of firms in the industry and business conditions are also uncertain.
Means that economic environment is not stable and keeps on fluctuating consistently.
This negatively affects business in terms of contraction int trade volume (Yang, David
and Guan 2004). Hence, it can be said that competitive environment is another threat to
the Kingston.
 Insurance risk- Insurance risk is another factor that affects business firms. Kingston do
insurance of vehicles, plant and machinery etc. If any thing get destroyed then it can
claim insurance amount but it is not easy to get compensation amount of accurate amount
easily. Case of insurance goes to court and there accurate compensation amount is
determined. Hence, delay cause in receiving compensation amount. In order to bring
business on track Kingston will needs to make fresh investment and compensation
amount will be received very late. It will be very difficult to make investment in assets
easily. Hence, insurance risk is also very huge threat for the firm.

2.2 Analysis of control system
There are two types of control system in every organization one is corporate governance
and second system is audit. In Kingston corporate governance system is good and this is done in
order make sure that all rules and regulations are followed strictly. Corporate governance is a
system in which all rules are prepared and they are implemented for the effective management
and proper performance of business operations. Apart from this there is a audit system that must
be good in every organization. Under this system at the end of the year audit is done in the
Kingston office. In audit there are auditors and they analyze company accounts. Along with this
they also view company invoices that are related to the business transactions. These invoices are
used to make sure that all accounting transactions are recorded at accurate value in the company
books of accounts. They also visit many other paper documents in order to make sure that all
assets and liabilities are entered at the proper value in the company balance sheet. Many times in
business some of the Directors and accountants join hands and are involved in the malpractices
of the company account information (Hala and Mohamed, 2016). By doing so they earn a extra
money from the firm in illegal way. Kingston in order to stop such practices can commence
external auditing under which external people will do auditing of the company accounts. This
sort of auditing will take place after auditing will be done by the internal auditor. This will help
Kingston top management in making sure that everything is going well in the company and
accountants and top management is not involved in any unethical business and professional
practice.
2.3 Evaluation of risk of fraud in the business and ways to detect them
There is a very high risk of fraud because currently many cases comes in existence where
top managers were involved in preparing fake company income statements and other accounting
records. In some cases it is done to satisfy own interest and in some cases it is done in order to
benefit company to protect its name. In case of Toshiba it has been seen that top managers and
accountants were involved in malpractices of the company books of accounts. Firm from long
time was facing loss in the business but in order to maintain its image it show fake financial
statements (Shin, Lee and Park, 2013). Hence, it can be said that there is high risk of fraud in the
business. Hence, this case can also be observed in case of Kingston and due to this reason it
become necessary for the firm to identify the ways that can be adopted in order to detect fraud in

the business. Some of the business risks that can come in existence due to unveil of business
fraud are as follows. Decline in revenue- If Kingston found to be involve in any fraud then its revenue will
decline because people who are the customers of the firm will loose confidence on same
and will abstain from purchasing company products. Hence, due to this reason unveil of
fraud done by the firm will lead to reduction in the loyal customer base.
 Weakness in the business ties with trading partners- If Kingston is found to be involved
in the fraud then its business relations with the suppliers and business friends become
weak. Important stakeholders would loose confidence on the firm and creditors might sue
on the firm for presetting fake accounting information before them. They will demand
payment of debt amount immediately (Ahmi and Kent 2013). Hence, this will be second
risk that will comes in existence after fraud detection.
Some of the ways that can be adopted in this regard are as follows. Monitoring movements of top managers- Kingston can monitor movements of the top
managers because these are those who can do fraud easily in the firm. By identifying
their movements firm can identify chances of fraud that can be done by the employee in
the firm. In this regard firm can employee one officer at top level that is at top
management in the firm. Through that person firm will be able to keep an eye on the top
managers and can take action on time to curb fraud in the firm.
 Stringent rules and regulations- Kingston can prepare a strict rules and regulations that
make sure that firm top managers does not have any opportunity to be involved in the
fraud (Piot, 2007). Their access can be limited to some of the company secret information
and only company owner can access same. By doing so chances of fraud can be reduced
to large extent in the firm.
TASK 3
(1) Planning of audit for the FA Jet ltd and its scope, materialism and risk
It is necessary to understand the audit scope and materiality concept. There is a wide
scope of the audit and in this the main target of auditor to make sure that all entire accoutering of
business transactions is done in proper manner. In this regard auditors review many documents
that are related to the firm. They check all invoices and makes sure that the amount showed in
the invoice and company books of accounts are matched to each other. In other words, it can be

said that auditor by matching invoice with accounts try ton identify is there any transaction that
is determine at the undervalue or overvalue amount. If this happens then auditor bring facts in
light of the top management. On the other hand there is another term that is known as
materialism and this means to identify the mistakes that were committed while preparing
financial statements like income statement, balance sheet and cash flow statement. While
preparing these accounts accountant needs to follow accounting policies and rules as well as
regulations in strict manner. Non compliance with these rules can not be tolerated by the
authorities where these are submitted. Before doing auditing of the FA jet company accounts
auditor will review company past annual reports (Brazel, 2005). On review of the annual report
auditor will comes to know about the expenses that firm incurred in last five years and income it
earned in the business. He will also comes to know about the strategy that was employed by the
firm in order to counter threat and capitalize opportunities. On analysis of expenditures auditor
will comes to know about the percentage of revenue that was covered by the specific expenses
each year. It must be noted that every expense cover a certain percentage of revenue and every
year this percentage remain almost same (Auditor reporting. 2016). Means that percentage will
be same but amount will get changed with increased or decrease in the revenue level. For the
auditor will use financial modeling technique and on that basis he will prepare a cost sheet. After
preparation of cost sheet auditor compute percentage of sales that is covered by each and every
expenses in the current income statement. He will compare newly computed figure with the
values that are in cost sheet. If there will be variance even it is moderate in nature then auditor
will try to make sure that these expenses are recorded at accurate value. In this regard he will
demand all invoices related to specific expenses in which he have doubt regarding recording of
unfair value. He will verify all those invoices and add their value and will matched to the value
that is entered in to the income statement (Rhan, and Ng, 2002). On this basis he will make sure
that all things are valued at fair value and there is no fraud and malpractices in the company book
of accounts. Finally he will prepare a report in which he will certify that company is not
indulging in unfair activity and all accounts are prepared in proper manner by complying with
accounting policies and concepts. In this way entire auditing will be done by the auditor at the
Kingston.
(2) Identification and uses of audit tests
There are many types of audit tests and some of them are as follows.

 Risk assessment procedures- It is an audit test that is used by the auditor in order to
understand the business firm and the business environment in which it is currently
operating. Such sort of audit test is used to identify any misstatement that may happen in
the company financial statement. In this test facts related to company are taken from the
various sources of information. These facts may be related to the company profit and
expenses and its standing in the industry. Under this managers also identify that there is
any regulatory authority that is controlling firm. If there is any, then firm is fulfilling its
responsibility towards that authority or not (Karapetrovic and Willborn 2000). Auditors
also identify the tactics that Kingston follow in order to give competition to the
competitor firms. Hence, it can be said that in this stage auditor gather company
information and try to understand it as much as possible. Test of control- This is the very important auditing test and under this auditor try to
understand the control system of an organization. If auditing system is good then there
will be less chance of fraud in the firm. But if there is a very loose control system then it
means that there are chances of fraud in the firm. On the basis of assessment of the
control system auditor identify the direction in which he needs to go in order to audit
company accounts. Hence, it can be said that this tool is very effective and important for
the auditors in their practice. Re-performance- It is very difficult to measure effectiveness of the control system by
just understanding same. Hence, a technique was developed which is also known as re-
performance (Kouakou, Boiral and Gendron 2013). Under this method auditor perform a
business transaction and he view entire procedure of the firm. On that basis he identify
that firm have good or weak control system. Thus, this is also very important and more
effective method then test of control. Observation- Here auditor simply observe the main factors that are related to the firm
control system. On the basis of perception he identify that firm have strong or weak
control system. Hence, it can be said that in this technique the main focus is on main
control factors not on entire control system of an organization.
 Inspection- This is simple method that is used by almost all auditors and in this method
mentioned professional inspect all documents related to the company business

transactions. They simply match financial statement figures with the values of all relevant
invoices. On that basis they detect fraud in the firm.
(3) Type of record that will maintained in the audit process
Following are the type of records that will be maintained in the entire audit process. Preparing a list of documents- In this stage a list of the documents will be prepared that
will be demanded from the company officers while conducting an auditing. Such
documents may be company annual reports ad invoices etc. On the basis of these
documents auditor will come to know about the firm business and its transactions in
respect to trade and finance (Edwards, 2013). These documents will be further used for
ensuring that firm accounts are prepared in proper manner. Preparing an audit plan- This is the second document that will be required to perform an
audit. Under this audit plan will be prepared in which steps will be determine that will be
followed in order to perform audit. This plan is prepared on the basis of audit test applied
by the auditor on the Kingston. Hence, this will be second document that will be
prepared by the auditor. Meeting documents- Here a tabular list will be prepared in which step by step auditor
will be meet to the company top officers and will collect entire information about the
company in terms of its control system, profit and business strategy (Francis, 2011).
 Preparation of report- After conducting an audit an auditor will prepare a report in which
detail about the company evaluation will be made available. In this comments related to
the company control system will also be done. Auditor will also make some
recommendations regarding the areas in which firm needs to bring improvement.
(4) Draft audit report
Draft audit report for the FA jet Ltd is given below.
To
The Board of Directors of FA jet Ltd
Date- 25th February 2016
On analysis of the company financial statements and auditing of the company accounts it is
observed that firm financial statements are prepared in proper manner. All the accounting
policies and concepts are followed while preparing company accounts. It can be said that firm

prepare financial statements in proper manner. It is also find out that some of the mistakes are
committed while preparing the accounts. The only mistake that was done in preparation of
financial statements is that impairment of asset is not done by thew firm accountant. This is a
very important concept and under this true value of the assets is computed and they are recorded
at the newly calculated value. Many times due to change in economic cycle price of the
products get changed very quickly and it is not possible to sale specific asset at the value at
which it was recorded in the earlier financial statement because value of the asset is highly
depreciated due to downturn in the economy. Hence, it is recommended to the company
accounts that they must use concept of present value for doing calculation for the impairment of
asset. Under this method accountant of company will use present value concept and will
compute present value of the asset. These assets will be recorded at the value that is given by
the present value formula. The value of that asset in the market does not matters in this practice.
Means that asset will not be recorded at their market value in the company financial statement.
In this way this concept will be applied in the accounting practice.
(5) Management letter in relation to audit
Management Letter for the Financial Year of 2015
To
The Board of directors of FA jet ltd
Date- 25th February 2016
On auditing it is observed that all accounting policies are followed in the firm and there is a
little bit issue in the company accounting system. The concept of impairment of asset is not
used by the firm accountant and in respect to this necessary recommendations are made in the
draft audit report presented above. Management needs to make sure that all accounting policies
are followed by the accountant while preparing company accounts. However, there is no issue
on this front but management need to follow cautious approach. As we see that concept of
impairment of asset was not followed while preparing accounts and due to this reason assets
were not valued at fair price in books of accounts. This lead to computation of wrong balance
sheet and financial position of the firm is also not measured correctly. Ratios computed on the
basis of this balance sheet are also showing wrong liquidity position of the firm. Hence, it is

necessary for the management to make sure that accounting records are prepared in proper
manner by the firm accountant.
CONCLUSION
On the basis of above discussion it is concluded that audit is a very tough process and
auditor needs to review lots of factors in order to auditing of the company accounts. In this
regard auditor needs to evaluate company business and its control system. By doing so auditor
get a deep insight about the company and comes to about the extent to which there are a chances
of fraud in the firm. In this regard he conduct many auditing tests. It is also concluded that
auditors needs to identify the direction in which they needs to work. Hence, they needs to follow
a cautious approach while auditing any company accounts.

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ONLINE
Auditor reporting. 2016. [Online].Available through: <
https://www.ifac.org/auditing-assurance/projects/auditor-reporting>. [Accessed on 25th
February 2016].