Strategic Audit Report: Diploma in Accounting & Finance - Toyland's

This report presents a strategic audit of Toyland's Toy Box, a traditional toy store in the UK, owned by Thomas Smith. It delves into the history and current regulatory environment for auditing, identifying rules of professional conduct for auditors, and emphasizing the importance of legal and professional requirements. The analysis covers the overall audit strategy, the effectiveness of the audit monitoring process, and the risks involved, along with measures to minimize them. Furthermore, the report identifies the link between the preparation of accounts and the audit conducted, providing a comprehensive overview of the necessity and significance of strategic auditing for the organization. Desklib provides access to similar solved assignments and past papers.

Strategic Auditing
DIPLOMA IN ACCOUNTING &
FINANCE
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Table of Contents
1.0 Background of the company …………………. …………………………………. 2
2.0 History and Current Regulatory environment for Auditing ……………………… 2
3.0 Identification of Rules of Professional Conduct for the Auditors ……………….5
4.0 Identify the importance of legal and professional requirements
when performing the audit ………………………………………………………….8
5.0 Analysis of overall Audit Strategy and effectiveness of the audit monitoring
Process …………………………………………………….………………………10
6.0 Risk involved in the process of Audit and measures to minimize same ………… 13
7.0 Identification of the link between preparation of accounts and audit conducted ….14
8.0 Reference ……………………………………………….…………………………. …………16
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1.0 Background of the company
A tiny, traditional toy store in the UK called Toyland's Toy Box is owned by proprietor
Thomas Smith. The company sells expensive games and toys. They operate a manual
accounting system, comprising a cash book and weekly petty cash book, and the fiscal
year runs from September to August. The purpose of this study is to provide an overview
of the necessity and significance of strategic auditing for this organization.
2.0 History and Current Regulatory environment for Auditing
To analyse the development of auditing over the years, the review will be separated into
five chronological periods to ease the critically examine the auditing’s historical
evolution (i) Before the 1840; (ii) the 1840s to 1920s; (iii) 1920s to 1960s; (iv) 1960s to
1990s; and (v) 1990s-present date.
Before the 1840
Before 1840, auditing was limited to performing detailed verification of every
transaction. The auditing procedure did not include the concept of testing or sampling.
Internal control was also not known to exist at that period. According to Fitzpatrick
(1939), the initial audit goal was essential to confirm the sincerity of people in charge of
handling finances.
The 1840s -1920s
Large industrial enterprises were able to get started because of the "middle class" that
developed throughout the industrial revolution. However, the market was unregulated and
highly speculative during this time, which helped a number of small investors who were
in desperate need of protection develop. As a result, it was clear that professional auditing
was on the rise (Brown 1962).
The UK passed the Joint Stock Companies Act in 1844. During this time, auditors'
primary concerns were spotting fraud and accurately portraying the company's soundness
on the balance sheet.
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From the 1920s- 1960s
The social-economic situation at this time had a significant impact on the growth of
auditing. The main traits of the audit strategy used during this time as highlighted by
Porter et al (2005), included understanding on the company's internal controls and
sampling methods were employed.
From the 1960s- 1990s
Auditors place heavy importance on advanced computing auditing tools during this
period and also they provide advisory services in addition to the preparation of financial
statements.
From the 1990s to present
Today's auditing has evolved into a process based on the client's perspective on risk,
according to Porter et al. (2005). During this time, the auditor's responsibilities also grew,
particularly in corporate governance areas.
It's crucial to remember that the auditing profession's response to societal changes and
changes in expectations do not always happen at the same rate. As a result, there is an
inevitable natural time lag between shifting user expectations and professional answers,
which results in the expectation gap, often called the audit expectation gap (Saha &
Baruah, 2008).
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3.0 Identification of Rules of Professional Conduct for the Auditors
Auditors might find ethical guidelines in the code of ethics for professional accountants
published by the Chartered Accountants of Sri Lanka. This is based on the declared code
of ethics for accounting professionals published by the International Federation of
Accountants (IFAC).
Basic Guidelines for Professional Ethics
 Integrity
In order to sustain the ethical norm of integrity, a professional accountant must be open-
minded and truthful in all business and professional transactions. Any reports, returns,
correspondence, or other materials cannot be intentionally handled by them if they have
cause to believe that:
a) Makes a claim that is materially false or deceptive;
b) Conveys facts or assertions that are careless; or
c) Withholds necessary information when doing so would be deceptive.
Also must be honest and straightforward.
 Objectivity
A professional accountant must abide by the objectivity principle, which forbids an
accountant from letting prejudice, conflicts of interest, or undue influence from others
impair their ability to make sound business decisions.
An accountant's neutrality may be compromised by circumstances. It is hard to categorize
and offer remedies for each of these circumstances. If a situation or relationship biases or
unreasonably impacts the professional judgment of the Accountant regarding the service,
the accountant is not compelled to render the professional service.
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 Professionalism and due diligence
a) The following requirements are imposed on all professional accountants by the concept
of professional competence and due care:
(i) By maintaining professional and specialized knowledge and skills at the necessary
level, one can make sure that clients or employers are served by qualified professionals.
(ii) To exercise diligence in adhering to relevant technical and legal standards.
b) Professional knowledge and expertise must be applied along with good judgment to
provide competent professional service. Two distinct stages of professional competence
exist:
(i) Demonstration of professional competence; and
(ii) Maintaining professional competence.
c) Professional competency requires ongoing knowledge of relevant technical,
professional, and business advancements. Through continual professional development,
an accountant can acquire and keep the skills needed to work effectively in the
workplace.
d) The obligation to complete a job with care, thoroughness, and on time is a component
of diligence.
e) A professional accountant is required to take reasonable measures to guarantee that
people working under their direction in a professional capacity receive the necessary
instruction and supervision.
f) The restrictions of the accountant's professional services must, where applicable, be
disclosed to clients, employers, or other customers.
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 Confidentiality
To maintain the confidentiality of information obtained through professional and business
relationships
a) Disclosure is legal and has been approved by the customer or employer (in writing)
b) The law mandates disclosure (legal case) It is necessary to produce documents or
provide other forms of evidence in judicial procedures.
Any legal transgressions that are discovered must be reported to the relevant government
agencies.
c) Where it is not prohibited by law, there is a specialized professional obligation or the
duty to reveal.
To adhere to the quality review of a member body or another professional body.
 Professional Conduct
A qualified accountant should abide by all existing laws and regulations and refrain from
taking any activities that can damage the standing of the industry.
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4.0 Identify the importance of legal and professional requirements
when performing the audit
Maintaining the credibility of financial accounts for all external users is the legal
importance of an audit.
When fulfilling their tasks and making sure they respect the transparency, usability, and
trustworthiness of financial information provided by reporting businesses, auditors run
the risk of facing legal and criminal penalties.
Auditors may be held liable in civil and criminal cases when performing their duties.
They are required to abide by a professional code of conduct (mentioned under Task 2
above), which makes sure they exercise due caution in the course of their work.
The public disclosure of a firm's financial situation enhances the company's reputation
and encourages potential investors and business partners to work with the company. The
company's chances of receiving finance from significant financial institutions increase as
its reputation in financial management improves thanks to audits. The advantages of
auditing exceed the drawbacks, notwithstanding the relatively few restrictions that are
associated with it.
An entity's internal management systems and resource use policies are assessed and
evaluated through the auditing process. The accomplishment of the organization's goals,
missions, and objectives depends heavily on creating and improving efficient internal
management systems. Companies build mechanisms for getting functional financial
reporting systems on their operations through audits. Similar to this, auditing gives
commercial entities the ability to control fraud, collusion, and instances of errors in asset
appropriation, minimizing losses and boosting production. To successfully evaluate the
development of the internal systems, independent and objective audit structures are
required. Employing internal auditors allows businesses to monitor the effectiveness of
their asset and financial management systems.
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Similar to the rules and regulations of most businesses, the management team is in charge
of making sure the business complies with all applicable laws and regulations, such as
those that govern stated numbers and disclosures in financial reports. Even if the
management team is exclusively responsible for guaranteeing compliance with these
rules and regulations, it is the responsibility of auditors to spot material inaccuracies in
financial reports that result from management's failure to adhere to laws and regulations.
(Eggert 2014)
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5.0 Analysis of company Audit Strategy and effectiveness of the audit
monitoring process
Establishing the range, time, and direction of the audit as well as providing direction
for creating a more specific audit plan are all part of the general audit plan. Assuming
the auditor's risk evaluation processes are completed both the resolution of ensuing
concerns, the auditor is able to determine the following thanks to the process of
creating the overall audit strategy:
1) The allocation of resources to a particular audit area, such as the involvement of
experts on complicated issues or team members with the necessary experience in
high-risk areas.
2) The number of material that will be devoted to specific audit areas, such as the
number of audit team members in charge of keeping track of the amount and
extent of the material locations' inventory counts to which the work of other
auditors will be examined or the audit budget in hours for high-risk sectors in the
case of group audits.
3) Exactly when these materials will be needed, for example, during interim audits
or to meet deadlines.
4) When team briefing and debriefing meetings should take place, how partner and
management evaluations should be conducted (on- or off-site, for instance), and
whether engagement quality control checks should be carried out.
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As discussed above the auditor is in charge of developing the overall audit
A strategy which comprises of the following aspects:
(a) List the characteristics of interaction that characterize its range;
(b) Schedule the timing of the audit and the kinds of communications that are
required based on the objectives of the engagement.
(c) Think about the elements that, in the professional auditor's opinion, ought to direct
the engagement team's efforts.
(d) Consider the results of the engagement's initial activities, and if appropriate,
decide whether the engagement partner's experience from prior engagements finished
for the organization is relevant.
(e) Establish the kind, time, and volume of resources needed to complete the
engagement.
Continuous monitoring is a management responsibility that ensures the effectiveness
of the organization's policies, processes, and business operations. It also discusses
how management must evaluate the suitability and efficacy of internal controls.
Furthermore, continuous monitoring typically entails the automated testing of all
transactions and system activities within a specific business process area against
control rules. Depending on the nature of the underlying business cycle, monitoring
may take place on a daily, weekly, or monthly basis.
Although internal auditors frequently employ continuous monitoring techniques
similar to those used by management, continuous auditing allows auditors to evaluate
the efficacy of management's monitoring function as well as pinpoint and assess risk
areas.
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Key steps in implementing continuous Auditing
The implementation of the auditing monitoring process comprises the following
steps:
1. Identifying areas which needs priority
2. Establishing monitoring and continuous auditing rules
3. Establishing the frequency of the process.
4. Setting up continuous audit parameters.
5. Follow-up.
6. Results communication
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6.0 Risk involved in the process of Audit and measures to minimize the same
Auditors must plan and execute audits with professional scepticism and use
professional judgement.
Auditors must modify audit procedures based on the client's risk profile.
If the danger is considerable, additional testing must be done to reduce it to a
manageable low level.
There is a risk of audit when the financial statements have serious defects and the
auditor declares an incorrect audit opinion.
Inherent Risk
An assertion's susceptibility to a false statement that, in the absence of internal
controls, might be significant either on its own or in combination with other false
statements. This is the danger that an item's attributes may be misrepresented, eg :
estimates
Control Risk
The possibility that a major misstatement won't be quickly found, stopped, or fixed by
a company's internal controls.
Despite the presence of controls, the risk may occur.
Detection Risk
The risk is that an existing, possibly serious error—either by itself or in combination
with other false statements—will go unnoticed because of the measures the auditor
uses to keep audit risk under control. For an audit to be effective and efficient, proper
planning procedures are crucial. (Using techniques, sample)
Audits are planned to minimize risks and execute the following tasks:
1) Assist the auditor provide the audit's most important areas the proper amount of
focus.
2) Assist the auditor quickly identify and resolve any potential issues.
3) Assist the auditor organize and manage the audit effectively to ensure that it is
completed quickly.
4) Assist in choosing the right team members and giving them the right tasks.
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5) Leadership, supervision, and evaluation of the work.
6) Aid in the coordination of the experts' and auditors' work on the components.
7.0 Identification of the link between preparation of accounts and audit conducted
The approaches, goals, and parties in charge and accounting process and accounting
statements' audit differ significantly. The accounting records of the company are
examined during an audit. The corporation itself or forensic accounting may conduct an
audit.
Identification, measurement, and communication of economic data to various users are
all done through accounting. It is in charge of creating financial statements and
maintaining accounting records.
The systematic process of gathering and objectively assessing evidence-based claims
concerning economic acts and occurrences is known as auditing. The goal of auditing is
to ascertain if these claims adhere to predetermined criteria and to convey the findings to
interested users. To express a view, the financial statements must be critically examined.
The relationship between Accounting and auditing has been discussed under the
following headings:
Methods:
Finding transactions and events that affect the entity is a need of accounting procedures.
In the accounting records, these items are measured, documented, categorized, and
summarized after they are identified. Following this procedure, financial statements that
follow generally accepted accounting standards are prepared and distributed. In order to
assess whether management's financial statements accurately reflect the entity's financial
condition, operational outcomes, and cash flows, the auditor must collect and examine
information pertaining to the accounting records.
Objectives:
The ultimate goal to use accounting is to convey relevant, reliable financial information
that may be used to make decisions. rather than coming up with something altogether
fresh.
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Responsibility:
Accounting calls for imagination. Despite the fact that an entity's employees take part in
the accounting process, senior management is ultimately responsible for the financial
statements. Accounting frequently begins where bookkeeping ends, whereas auditing
always begins where accounting concludes.
Accounting is very thorough and compiles all information relating to financial activities,
records, and statements, whereas auditing frequently uses financial statements and
records as examples.
Timing:
While accounting is a continual process requiring the recording of every financial
transaction, auditing is more of an annual activity that occurs after the creation of final
accounts and financial statements. While auditing is more interested in past financial
accounts, accounting concentrates on current financial transactions and operations.
The auditor is responsible for compiling and evaluating evidence in keeping with widely
recognized auditing standards, as well as for writing an audit report that includes the
auditors' conclusions and an opinion on the financial statements. If the company is
publicly traded, an executive sovereign authority usually conducts the audit. The audit
procedure includes a detailed review of all a company's financial activities as well as its
overall year-end statements. The results of the independent audit have validated the
accuracy of the books and accounting procedures.
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8.0 References
Audit Strategy, Audit Planning and Audit Programme, The Institute of
Chartered Accountants of India
Azham Md, Ali, (December 2008), The evolution of auditing, an analysis of the historical
development.
Brown, R. (1962). Changing audit objectives and techniques. The Accounting
Review, 37(4), 696-703
Fitzpatrick, L. (1939). The story of bookkeeping, accounting, and auditing.
Accounting Digest, 217.
International Ethics Standards Board for Accountants, (2013), Handbook of the Code of Ethics for
Professional Accountants
Porter, B., Simon, J. & Hatherly, D. (2005). Principles of external auditing. John
Wiley & Sons, Ltd.
Relationship between Accounting and Auditing, (202), Q Study https//qsstudy.com/relationship-
between-accounting-and-auditing/#:~:text=Rather%20than%20creating%20new%20information,final
%20financial%20statements%20and%20records.
Saha, A. Baruah S. (2008). Audit expectation in India. The ICFAI Journal of Audit Practice, 5(2), 67-
83.
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