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Application Of Auditing Theory And Practice

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Question:

Discuss about the Application of Auditing Theory and Practice.
 
 

Answer:

Introduction:

Auditing is part of organizational management, it is explained as the process of examining the financial reports of a business enterprise as presented in the business annual reports, an independent person or an organization performs the audit process. The progression and development of organizational performance is accomplished by conducting audit and understanding the auditing theory and related practices (Arens, et al., 2012). Auditing is also outlined as the systemic and unbiased examination of organizations books of accounts, statutory information, documents and vouchers of an organization to visualize how some distance the economic statements further to non-economic disclosures present genuine and fair view of the business enterprise (Eilifsen, et al., 2013). Auditing and compliance practices try ensure that the organizational financial books are effectively maintained as required by the international auditing standard board, and if they are maintained under the regulation provided by the existing laws.

Auditing independence is outlined as the independence of the external and internal auditor from other parties and individuals who may have economic and financial interest in the business enterprise that is being audited. According to Arens, Elder, & Mark 2012, the auditors indepence requires integrity and essential audit measure to the auditing procedures. The study reveals that, some factors may affect the integrity and auditing measures and process of an auditor (Arens, et al., 2012). On the other hand, the auditors integrity is also affected by the business risk, these risk influence the decisional making process of auditors and top organizational management.

However, auditing practices compel the auditor to put into actions and measures which might be crucial even as performing the practices. Auditing planning is the strategic management degree for auditing, it carried out at the beginning of the audit process this is to make sure that the correct attention is fermented to important areas, to sure that the capacity issues are promptly identified and viable solutions are generated to lessen the impact (Elder, et al., 2011). The main purpose of encouraging the audit planning is to ensure that all the audit work are fully finished and coordinated.

 

Threats affecting auditor independence

Clarke & Johnson (CJI) is an audit company this is identified for proving the first-rate services in the audit business enterprise; Luxury Travel Holidays LTD (LTH) is commercial enterprise that provides travel service. Both corporations have taken into consideration the importance of market segmentation and diversifying their enterprise operation far from their nearby market. Clarke & Johnson (CJI) Company is re-engaged by Luxury Travel Holidays LTD (LTH) to offer audit services before submitting their 30 June 2015 financial report to the stakeholders. The factors affecting the integrity and auditing approach used by the auditors could affect decision-making process (Gay & Simnett, 2000). Qualified and non-qualified audit opinion is the relevant concepts that are used to draft the audit report.

This is a primary factor affecting the independence and the decisions to be reached by an auditor.  The size if the audit firm implies the size of the business enterprise to be audited and the particular auditing firm. According to this case study, Clarke & Johnson (CJI) Company is an audit firm that has been providing audit services to small market the company is also to provide its services to Luxury Travel Holidays LTD (LTH) that performs its business activities in Asia, Europe and U.S market. The larger the audit firm the lesser the impact of impairments, the smaller the audit company there will be more factors that will affect the independence of the audit company (Eilifsen, et al., 2001).

This is amongst the dangerous threats which might the independence of the audit company. The advising threat implies that, some stakeholders may have the economic and financial interest in the company to be audited. According to the case study, Clarke & Johnson (CJI) Company and Luxury Travel Holidays LTD (LTH) have been collaborating for years this could build some interest between themselves (Jackson, 2016). Therefore, the auditor is compelled to present audit opinion that favors the stakeholder who has economic and commercial interest.

The threats regarding the referrals from the customer impacts the independence of an auditor. Clarke & Johnson (CJI) Company is an audit firm that has been offering audit services to Luxury Travel Holidays LTD (LTH); Luxury Travel Holidays LTD (LTH) may make many referrals to the auditor, and thus affecting the audit process and of the Clarke & Johnson (CJI) Company.

The organizational control has an excessive impact on the audit opinion to be made with the aid of the usage of the auditor, the organizational pinnacle ought to affect this critiques in view that they may pressure the auditor to utilize the referrals made. Luxury Travel Holidays LTD (LTH) and Clarke & Johnson (CJI) Company had been participating for more than one years. Luxury Travel Holidays LTD (LTH) may want to refer the accounting department to make adjustments to company book of accounts, those changes and adjustment made are ought to affect the findings of the auditor and thus the audit independence is automatically affected.

 

Safeguards to threats that influences the independence of an auditor

The success of every operating business organization is determined by the extent and how the company is involved in the audit practices. The independence of the auditors should not be influence since they impose some negative effects to the findings that are used as the basis of the audit opinion which is the primary element of audit report.

The size of the firm is categories to be the threat that affects the auditor independence, the organizational management of Luxury Travel Holidays LTD (LTH) should consider the size of the firm that will perform the audit practices. Consequently, Clarke & Johnson (CJI) Company should ensure that they create and implement policies that will limit threats affecting their independence.

Advising threats is a fatal component that influences the independence of an auditor. The relevant audit opinion to be utilized by an auditor ought to be based totally on the instantaneous findings. The auditors are advocated not to provide any economic or financial cautioned to their clients because their findings after the recommendation will have an impact on the audit opinion (Knechel & Salterio, 2016).

Multiple referrals could also affect the auditor's opinion. According to the case study both business enterprises have been in business for a number of years, Luxury Travel Holidays LTD (LTH) could make referrals to the finance department to make the adjustment to some vouchers and documents, this is to present the interest of some management individuals. Clients are advised not to make any referrals to any departments, the exact finding of the auditor portrays that the organization needs to implement on some applicable measures.

Audit Planning risk and business risk

According to Gay, & Simnett, 2000, audit planning is strategic control measure for auditing, it conducted at the beginning of the audit procedure this is to make sure that the right interest is fermented to essential organizational areas. This is to ascertain that the potential problems are promptly recognized and viable solution are generated to reduce their impact, to make sure that all auditing work is completed and coordinated. While developing and creating the audit practices, there are some elements that may affect the auditing procedures (Lyon & Maher, 2005).

Clarke & Johnson Company and Luxury Travel Holidays LTD (LTH) are now taken into consideration to function in new markets. New markets are bounded and guided by means of commercial laws and regulations which are surpassed through the federal governments (Knechel & Salterio, 2016). Consequently, the organizations that operate outside their nearby market are affected by the legal processes that are used to regulate the business enterprises when it comes to their commercial activities. U.S Common Laws are the examples of the commercial law that are used to guide organization business activities U.S and European market (Johnstone, 2000).

Economic threat is the primary external environmental factor that impacts the operations business corporation in international markets. They incorporate elements such as GDP and unique country financial improvement quotes. Some markets are affected by down-tuning economic developments, currencies also affect the activities of a business organization. For instance, U.S currency is a globally accepted currency, it is used in the international market for the exchange of goods and services (Sadgrove, 2016).

 


According to Jackson 2016, the declining in product demand is a marketing factor originating aftermarket segmentation and diversification. Operating in an expanded marketplace place create a room for more corporations to create products and services which resemble the ones produced by using the existing organizations (Jackson, 2016). Companies operating in the broader market are advocated to ensure that they produce quality products and services that meet the competitive market they operate in.

According to Johnstone 2000, financial dangers chance contains those monetary aspects that stand up because of lack of monetary management procedures and measures. The economic worldwide marketplace has experienced many issues that have affected the operation of commercial enterprise companies, mainly Crampton and Hasaad and Mining Supplies LTD (MSL) corporations (Johnstone, 2000). The research conducted by Knechel 2007 concluded that the financial contributes to the economic failures of a company that operates internationally (Knechel & Salterio, 2016).

Inherent audit risk is the risk that involves the material misstatement in the financial statement of an institution arising due to errors and omission (Kachelmeier, et al., 2014)made as a result of failing to implement on specific controls and measures. The impact of inherent audit to a business organization are felt when the companies operating in specific market fails to implement on the existing financial measures and controls (Ricchiute, 2001). These risks are perceived to be generated when the business organization failed to make application estimation while making complex transactions.

The control risk comprises the threats originating from the fabric misstatement existing within financial reporting of the company, this fabric misstatement is experience due to failure to work under the financial policies and measure of the organization (Bell, et al., 2001). Crampto and Hasaad and Mining Supplies LTD (MSL) are advocated to have the applicable financial internal control measure, this measure is relevant in preventing and reducing frauds originating from the internal business transactions (William Jr, et al., 2016).

According to Bell, Landsman, & Shackelford 200, the detection risk is that risk that arises when the external auditor fails to come over the cloth misstatement in the financial information of the company, vouchers, assets and other relevant documents (Bell, et al., 2001). While implementing the audit planning, the auditor is encouraged to focus on the relevant financial and documents of the company and provide the solution to the financial misstatement. The business organizations are advocated to make use of the audit measures that will reduce the fabric misstatements in the financial statements and asset documents of an enterprise that ought to be audited. Eilifsen, Knechel, & Wallage 2001, concluded that, while mitigating the dectecion risks, the audit company is recommended to increase and take the variety of sample transactions (Eilifsen, et al., 2001).

 

Conclusion

In conclusion, auditing is explained as part of the managing a business organization, it is the independent examination of the company financial reports, this is to assure that the financial information of the business organization shows true and fair view of the company. The audit opinion is a relevant element of audit report as presented by the external auditor. Some aspects affect the independence of an external auditor, these aspects comprise multiple referrals, size of the firm and advising threat.

Business risk is defined as the primary factors that affect the business organization, especially those which are operating in the international market. Legal risk, financial risks, economic risks and declining in the product demand are the examples of the business risk addressed in the paper. Inherent risk, detection risk, and control risk are the examples of audit risk affecting the auditor practices.

 

References

Arens, A. A., Elder, R. J. & Mark, B., 2012. Auditing and assurance services: an integrated approach:. Boston: Prentice Hall..

Bell, T. B., Landsman, W. R. & Shackelford, D. A., 2001. Auditors' perceived business risk and audit fees: Analysis and evidence.. Journal of Accounting research,, 39(1), pp. 35-43.

Eilifsen, A., Messier, W. F., Glover, S. M. & Praw, 2013. Auditing and assurance services.. s.l.:McGraw-Hill..

Eilifsen, A., Knechel, W. R. & Wallage, P., 2001. Application of the business risk audit model: A field study. Accounting Horizons. s.l.:s.n.

Elder, R. J., Beasley, M. S. & Arens, A., 2011. Auditing and Assurance services. s.l.:Pearson Higher Ed..

Gay, G. E. & Simnett, R., 2000. Auditing and assurance services in Australia.. Sydney: Mcgraw-hill.

Jackson, R. A., 2016. Business at risk: keynote speakers for this year's IIA International Conference identify emerging risks facing organizations. Internal Auditor,. In: s.l.:s.n., pp. 40-46.

Johnstone, K., 2000. Client-acceptance decisions: Simultaneous effects of client business risk, audit risk, auditor business risk, and risk adaptation. Auditing:. A Journal of Practice & Theory, 19(1), pp. 1-25..

Kachelmeier, S. J., Majors, T. & Williamson, M. G., 2014. Does Intent Modify Risk-Based Auditing?. The Accounting Review. s.l.:s.n.

Knechel, W., 2007. The business risk audit: Origins, obstacles and opportunities.. In: s.l.:s.n., pp. 383-408.

Knechel, W. R. & Salterio, S. E., 2016. Auditing: assurance and risk. s.l.:Routledge.

Lyon, J. D. & Maher, M. W., 2005. The importance of business risk in setting audit fees: Evidence from cases of client misconduct.. Journal of Accounting Research, 43(1), pp. 133-151.

Messier, w. f., 2014. An approach to learning risk-based auditing.. Journal of Accounting Education, 32(3), pp. 276-287.

Ricchiute, D. N., 2001. Auditing and assurance services.. s.l.:South Western Educational Publishing..

Sadgrove, K., 2016. The complete guide to business risk management.. s.l.:Routledge.

William Jr, M., Glover, S. & Prawitt, D., 2016. Auditing and assurance services: A systematic approach.. s.l.:McGraw-Hill Education.

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