BUS306 Auditing Report: Cloud 9 Pty Ltd - Audit Considerations

This report provides a comprehensive analysis of the audit procedures for Cloud 9 Pty Ltd, conducted by BUS306 Partners. It delves into the audit issues that must be considered before tendering for the audit, including the assessment of Cloud 9 Pty Ltd's reputation, potential conflicts of interest, and c...Read More

BUS306 – Auditing

TABLE OF CONTENTS
Introduction................................................................................................................................3
Task 1.........................................................................................................................................3
Audit issues to be considered by BUS306 Partners before determination of tendering for
the audit ofCloud 9 Pty Ltd....................................................................................................3
Task 2.........................................................................................................................................5
Audit issues to be considered while planning of Cloud 9 Pty Ltdby BUS306 Partners........5
Task 3.........................................................................................................................................6
Reasons due to which the partners at BUS306 are concerned that Cloud9 Pty might have
cash flow issues......................................................................................................................6
Task 4.........................................................................................................................................8
Mitigating factors providing comfort to auditors that Cloud9 Pty will continue and operate
well in future..........................................................................................................................8
Task 5.........................................................................................................................................9
Assessment of existence of appropriate research effort, referencing and format in audit
report......................................................................................................................................9
Conclusion................................................................................................................................10
References................................................................................................................................11

INTRODUCTION
An audit can be defined as official inspection of an organisation conducted by an independent
auditor or audit firm. The requirement of the audit can be statutory or voluntary which varies
business to business (Gaynor and et al., 2015). In accordance with audit provisions applicable
in Australia; corporate entities are required to conduct on a compulsory basis. The present
study is based on the description of audit procedures of Cloud 9 Pty Ltd to be conducted by
BUS306 Partners as per the given case scenario. Description will be supported by applicable
Australian audit standards and provisions.
TASK 1
Audit issues to be considered by BUS306 Partners before determination of tendering for the
audit of Cloud 9 Pty Ltd
International Federation of Accountants (IFAC) Code of Ethics meant for Professional
Accountants says that ‘before agreeing to the relationship of new client, a professional
auditor engaged in public practices is required to identify whether an agreement could create
an impact on compliance regarding the basic principles’ (West and Andrew, 2017).Same is
cited under APES110 Code of Ethics for Professional Accounting and supported by Section
210. Possible threats to professional conduct or integrity might be produced from, such as
questionable issues linked with the client like its owner, managerial activities etc. For the
acceptance of audit of a new client, the company must examine the possible client (its owner,
managerial activities) to determine if or if not there is the existence of any question regarding
the potential client’s integrity, that creates offensive risk. Toy, Alan and David (2015) stated
that this action of examination is generally conducted as knowing the client or customer due
diligence, that can be performed so as to act in accordance with regulations of anti-money
laundering. In respect to the cited provisions of concerned standard following audit issues is
required to be considered by BUS306 Partners before determination of tendering for the audit
of Cloud 9 Pty Ltd:
Reputation, background and history of Cloud 9 Pty Ltd: The auditor must collect all the
information regarding the reputation of the client in order to ensure that the firm is not taking
on risky clients (Andon and et al., 2015). Especially, the auditor is required to consider the
integrity of management.

The divergence of interest: Ensuring that the client acceptance will not create any impact on
the conflict of interest for the existing clients. Along with his, client acceptance must also not
create any impact on the conflict or threat to freedom, integrity and auditor’s objectives.
Audit engagements: In case a company tends to replace its current auditor or to agree with a
nomination as the auditor’s replacement. Further, the company is required to acquire the
potential clients grant to interact with the existing accountant. In case the potential client is
not providing a grant, then the Code states that company has to decline the nomination or the
audit involvement. If the company gets the permission to interact with the existing
accountant, the company must give in written that, requesting all the information which will
allow the company to make better decisions in accepting the nomination or audit involvement
(Moroney and Trotman, 2016). ASA 210 of auditing standard requires that the accountant
must comply with the audit engagement with the company, which must be stated in written
by the accountant and forwarded to the company. The accepted terms shall be stated in the
letter of audit engagement or any other viable contractual form. The letter of audit
engagement wherever reliable shall contain the arrangements to be made with the predecessor
auditor, if any, in the case of an initial audit.
Communication Cloud 9 Pty Ltd’s previous auditor: Before agreeing to any of the audit
statement, the auditor must communicate with the predecessor auditor in order to make sure
that there is no reason behind not agreeing the audit or there are no fair/legal problems.
Nonetheless, the new or planned auditor will ask for client’s permission before
communicating with predecessor auditor, and in case the client rejects it, the auditor shall be
taken out from the appointment. Before giving a response to new auditors, the previous
auditor will ask for client’s permission to give a response and in case the client does not
permit; the new auditor must reject the nomination. Communication done with predecessor
auditor is a compulsory necessity, and it has to be completed in a formal manner (Yoon and
et al., 2015).
Audit engagement shall not be accepted if there is the presence of such situations:
 Restrictions on analytical procedures and workings to done for the purpose of
collecting evidence
 Financial reporting structure is invalid

Management declines to offer acceptance which admits its duties regarding financial
statements (Cefaratti and Bhattacharjee, 2013).
After considering all the above aspects, the auditor might make the decision to agree or refuse
the client. In case auditor makes a decision to comply with the client, then these following
procedures will be taken into account
 Verify whether the removal/acceptance of the previous auditor is performed under
viable terms and requirement
 Ensuring that engagement of new auditor is according to the statutory requirement.
 Further Engagement Letter must be submitted
TASK 2
Audit issues to be considered while planning of Cloud 9 Pty Ltd by BUS306 Partners
Audit planning engages the introduction of the total audit strategy regarding the appointment
of an audit plan. Knechel and Steven (2016), specified that a proper planning procedure,
gives advantage to the financial statements audit in many ways: such as identifying and
devoting suitable devotion to significant areas of the audit, resolving prospective
complications, managing audit engagements and facilitating the direction and supervision of
engagement team members and the review of their work. Following audit issues are required
to be considered while planning of Cloud 9 Pty Ltd by BUS306 Partners.
Taking into account the internal and accounting control systems: auditor shall request to
understand the policies of accountancy implemented by the company and same with its
changes. The increasing understanding of about the internal and accounting control system
and the relative emphasis expected to be placed on tests of control and substantive procedures
(Mohamed and Abdel-Aziz, 2015). Overviewing the issues occurred in last year’s audit,
which might contain long-term relevance in the present year. This can be completed by
assessing last year’s working paper. The auditor must determine the areas having poor control
over accounting issues. Giving proper concentration must be provided to those areas in the
audit procedures. Considering the impacts of changes in accounting policies or legislation
impacting the company’s financial statement. The audit plan must be inclusive of reviewing
changes and is or if not the client is conducting according to viable requirements (Ratzinger-
Sakel and et al., 2013)

.
The auditor must ask with managerial authorities regarding the existing circumstances of
trading or any other considerable business change conducted and the company’s
management. For example, management changes can create a great impact on the internal
con troll system by weakening it. Determine any of the considerable change in the accounting
policies of a client like installation of a new computer information system. Any modification
in the computer system can lead to weaker controls. Circumstances are needing more focus
like the presence of associated parties. Assess future or current financial complexity, which
could face the company. For example lack of raw materials or incapability raising operating
capital
The auditor is required to investigate the nature of communication and reports with the
customer; further, the audit plan lodges the nature and timing (Feng and Chan, 2014). For
example, the auditor should assess the timings of yearly meetings, inventory taking, and
availability of dates for management reports. Berglund and et al., (2015), asserted that setting
levels of materiality regarding the purpose of the audit, particularly for determining areas
having material communications. Moreover, the auditor must identify the amount of audit
members needed, speciality, experience and the dates of the audit visits.
TASK 3
Reasons due to which the partners at BUS306 are concerned that Cloud9 Pty might have cash
flow issues
AASB 107 ‘Statement of cash flow’ is applied to attain the main objective of providing
information relating ability of an entity to generate cash and cash equivalent and application
of same as cash flows. Cash flow statements are continuously monitored and assessed by
management so that it can be ascertained that whether sufficient funds are available with the
company for accomplishing its daily operations. The circumstances which led an auditor to
believe that cash flow issue exists in a company are late payments or non-payments or
liabilities, symbols relating to inadequate cash flow, excess dependency on finance for long-
term requirements as well as daily operations. Assessment of entity’s ability to meet out
dividend obligation out of operating cash flow is also assessed to ascertain whether the issues
relating to cash flow exist in the entity or not (Asare and Devin, 2014).

It has been assessed through financial statements of Cloud 9 Pty, that cash flow issues exist in
the company. As the company is spending more in comparison to its charges or fees taken
for providing services, thus for satisfying the customers more amount is borrowed which
eventually leads to a loss for the company. A fact which cannot be denied is that a business
cannot survive for a long period in case of absence of appropriate cash.
AASB 107 provides separate disclosure for operating, financing and investing activities in
order to assess all the operation of these activities in an appropriate manner. An auditor can
assess the quantum of the amount which has been availed by the company through its main
operating by analyzing cash flow from operating activities. Thus it can be ascertained
whether the Cloud9 Pty is dependable on outer sources or is able to generate appropriate or
required amount of cash through its operations. Financing activities provide details relating to
the amount which has been borrowed and the amount paid back to financers (Sundgren and
Tobias, 2014). Late payments, reduced payments to lenders; this kind of situation might exist
in case of Cloud 9 Pty which led auditors to assess in detail relating to issues of cash flow.
ASA 500 provides provision relating to audit evidence which is required to be attained prior
to forming an opinion relating to the entity. In the present case of Cloud 9Pty Ltd. substantial
and analytical procedures have been applied to the cash flow statement and it has been
ascertained that balance of saving account has been declined in comparison to previous year
statement. Moreover, the reason behind the same is cost relating to new store, trucks and
marketing campaigns. Due to the same discussion has been done with management and
requested finance director to compare cash flow with budgeted figures in order to ascertain
the issue in detail.
The auditor came to this conclusion due to above-specified reason and was sure about the
same after assessing latest available interim report. The auditor also considered budgets, cash
flow forecast and other reports provided by the management. Significant changes in working
capital; journal and other accounting records relating to non-compliance with a term of the
loan; a transaction which has been occurred subsequent to the date of a report by the auditors
of Cloud 9 Pty Ltd in order to be sure regarding their opinion relating to issues in cash flow
statement.

TASK 4
Mitigating factors providing comfort to auditors that Cloud9 Pty will continue and operate
well in future
ASA 570 Going concern
The assumption of going concern is applicable if Cloud9 stays in business for the predictable
future. As per this assumption, valuations of assets are based on their continuous utilization
on the operating activities of the business. Further liabilities are recorded and sorted as non-
current and current liabilities, by considering the client’s ability to pay off the debts which are
due in the upcoming years. It is Cloud9 management responsibility to consider if or if not
their management is able to stay in a going concern.
Risk of going concern:
For cloud9, BUS306 Partners are required to use professional judgement in order to consider
if or if not the assumption of going concern is valid. There are numerous indicators that can
recommend that the assumption of going concern might face risk or not. Under ASA 570
(ISA 570, there is a complete record of conditions and measures placing doubt regarding the
assumption of going concern. Indicators are inclusive of losing a considerable customer, an
important debt to equity ratio, high-staff turnover, long-standing losses, incapable of
forfeiting outstanding debts, loss of key managerial personnel, and overdependence on
certain customers or dealers, long-term loans getting matured, reluctance by suppliers for
providing goods on credit.
Mitigating factors of going concern risk: Mitigating factors helps in reducing risks when the
assumption of going concern might be in a doubt of risk (Seyam and Sharon, 2016). For
instance, in case a client faces an immense shortage of cash, however, has a letter offered by
a bank stating that they will provide further financing, the letter reduces the risk but not
eliminates it the risk that the going concern assumption may be invalid. Other mitigating
factors are inclusive of a guarantee letter received from parent company, noncore assets
accessibility that can be put on sale to offer required cash without interrupting the company’s
operating capacity, capability to increase extra finance through selling shares or borrowings,
ability to put into sale an unprofitable business segment (Saha and Mitrendu , 2017).

After assessing the financial statement of Cloud 9 Pty Ltd, the mitigating factors which are
available which provide the surety to the auditor that the company will operate in future has
been discussed below:
It has been assessed through financial statements that even though appropriate assets are
available with the company in case the company requires urgent cash and that too without
interrupting operating activities of the company. The company is paying its liabilities on time
in most of the case, and reasonable extension is provided by the supplier in case the company
requires the same. Another mitigating factor which exists is the ability to raise additional
funds through financing or other option such as the sale of shares. Further, for being sure
regarding the payment to third parties, the letter has been attained from them in which it has
been provided that the company is paying on time to third parties.
From above mitigating factors it can be assessed that the company will continue to operate
well in future; as it has not stopped its main operations; letter has been received from third
parties that company is appropriately paying off its liabilities. Further, the internal control
and other available details from the financial statement as well as management provide that
going concern assumption is appropriate for the company.
TASK 5
Assessment of existence of appropriate research effort, referencing and format in audit report
ASA 700 deals with the formation of opinion and manner of reporting on a financial report of
an entity. Krishnan and Changjiang (2014), stated that the standard specifies the manner in
which auditor has to provide the opinion relating to financial statements of an entity. It has
been provided that auditor’s opinion has to be provided in the first section of the audit report.
Further, details relating to opinion paragraph, i.e. the basis on which the opinion has been
formed, an i.e. statement relating to sufficiency and appropriateness of audit evidence. ASA
701 provides assistance relating to Key Audit matters in Independent Auditor’s Report. After
specifying the base of opinion, i.e. procedures through which audit evidence has been
attained by the entity details if any relating to key audit matters is provided in the audit
report.
Responsibilities of management for preparation of financial statement and ensure that the
information provided in the financial statement is relevant, reliable, understandable and true

and fair. ASA 705 and ASA 706 are applied in case auditor modifies the opinion or emphasis
on matter paragraph in auditor’s report. As the auditor has attained reasonable assurance
relating to a financial statement that they are free from a material statement from fraud and
error; it can be said as a reference that appropriate procedures have been applied for attaining
audit evidence.
As the opinion has been formed in accordance with ASA 330 after attaining sufficient
appropriate audit evidence, audit is assure that no material misstatement either individually or
in aggregate exits in the financial statements; it specifies that appropriate research effort has
been made by the auditor of Cloud 9 Pty in order to conclude appropriate opinion of the
financial statement. The auditor also requires too assure that reasonable accounting estimate
have been prepared by the management (Coetzee and Dave, 2014). Further, the auditor has
assured that financial report is relevant, comparable and reliable information relating to an
entity has been provided through same. As the audit report of Cloud 9 has been prepared in
the format provided in ASA700 after attaining sufficiency audit evidence as per ASA300; it
can be said that the report has appropriate research effort, referencing and format. Further,
even the opinion has been made by auditor after conducting substantial and analytical
procedure in order to attain substantial adequate evidence. These procedures ensure the
statement relating to the appropriateness of research effort, referencing and format in the
audit report of Cloud 9 Pty.
CONCLUSION
The above study depicts that auditing standards provide assistance and support to auditors to
conduct their duties and obligation in more appropriate manner. Risk assessment and
reporting phases are two main variants of an auditor’s obligation. The auditor adopts a broad
view in order to ascertain the same as a whole industry to which the organization operates.
The audit plan of an auditor is in accordance with the risk relating to the existence of extent
of material misstatement, i.e. more time and detail checking is done in case of higher risk. In
the present case of Cloud9 Pty, the auditor has applied appropriate auditing standard in order
to conclude opinion of the financial statement. Further, the final opinion has been concluded
after application of substantial and analytical procedures in order to attain substantial

adequate audit evidence for the formation of opinion relating to truth and fairness of financial
statements.

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