Discuss about the Audit Committee Characteristics and Audit Report.
Audit reports generally must give an assurance to the managers and directors of a company a clear view of the financial position of such a fimr.There are therefore certain aspects which have to be taken into considerations such as the audit procedures, various audit opinions, existence of audit committee and factors which makes an audit report to be effective. Audit assurance focuses on evaluating financial statements while compliance on the other hand focuses on adherence to the laws, regulations and standards. This paper will focus on some of the above mentioned aspects of audit, assurance and compliance.
The company selected in the ASX is AZN Banking. Based on the assessment of the auditors' section including the other areas of the auditors there are a number of an issue which has been noted. For example, the auditor has complied with the independence requirements. One of the requirements of an auditor’s independence is that the auditor must hold the highest levels of integrity and this was displayed in the auditor’s report. The auditor expressed the highest levels of integrity by being honest while carrying out his duties (Church, Jenkins & Stanley, 2018). Additionally, the auditor was objective while carrying out the audit work and this typically forms one of the key requirements for independence of an auditor. The audit report also indicated more disclosure of information and also an increased communication with the management.
The huge disclosure of information and more communication with the management is a fundamental requirement of an auditor’s independence, and this was exhibited in the financial statements under the auditors' section, and hence the auditor complied with the auditor’s independence requirement (Peterson, 2018). Further, there were few cases of conflicts of interest between the management and the auditor. The few cases of conflict of interest are one of the critical requirements for an auditor's independence, and thus the auditor had adhered to the independence requirements. The company also has the audit committee who are responsible for pre-approval services after an audit report has been submitted to them. Audit committee typically forms the significant requirements for auditor independence and this, therefore, proves that indeed the auditors had complied with the independence requirements (Roy & Saha, 2018).
The auditor's section also indicated that the prohibited non-audit services such as actuarial services, bookkeeping, valuation of services and financial information system design had not been carried out by the auditor (Carcello, Neal, Reid & Shipman, 2017). The prohibited non-audit services are one of the essential requirements of an auditor's independence, and this, therefore, confirmed that the auditor of the company had complied with the independence requirement.
Audit Procedures and Assurances
Analysis of the auditor’s remuneration shows a constant increase in the amount of money paid to the auditors. The key objective of the company is to ensure that the financial information disclosed represent a clear and fair view of the firm. The following table, therefore, indicates the auditor's remuneration, and the payments are compared on a yearly basis as shown below;
The audit fees for consolidated financial statements comprise of integrated return which had been audited.Also, the remuneration of auditors relates to those fees paid to the auditors who had appointed to carry out audit work in the last two years. The percentage of total audit fees for 2017 compared to 2016 was 49 percent while that of 2015 to 2016 was 51 percent.
Based on the audit matters, there are various audit procedures which had been done by the auditors with the intention of providing assurance for all the issues. Some of the audit procedures included the following as discussed below;
The above procedure was carried out to determine the effectiveness of the control measure which was being sued by the management of the company. The procedure helps to detect any particular material misstatements. There are various categories of a test of controls which were used by the auditors and such include, an observation which entailed looking at a variety of business processes and the control elements (Blokdijk, Drieenhuizen, Simunic & Stein, 2014). The other category of test control which had been used was the inspection where the auditors inspected different documents for approval such as stamps and signatures, and this was to ascertain whether the controls had been conducted properly. The last category of tests of control was reperformance, and this involved the initiation of new transactions in determining whether the client had applied the controls.
The substantive testing is also another audit procedure which had been used by the auditors of the company. The procedure was primarily conducted to assess the financial statements including the supporting documents to get errors in the annual report. Further, the audit procedure above was done to ensure that all the financial records were accurate, valid and complete (Blokdijk et al., 2014). There are a variety of samples in which the tests had been carried out in, and they included, contact of various clients to validate that the accounts receivable were accurate. The other test was to ascertain the accuracy of inventory valuation estimations. Some of the other tests were communication with the suppliers to validate whether the accounts payable were accurate or not and a bank confirmation was issued to validate the ending cash balances. During this procedure, the minutes of the board of directors were reviewed to check for the presence of dividends which had been approved by the directors of the company (Graham, Bedard & Dutta, 2018).
Analyzing Audit Remuneration
The analytical procedure is also one of the audit procedures which had been used by the auditors of the company. It entailed an assessment of the financial information by evaluating the relationship between the non-financial and financial data. The key examples of analytical tests which had been used by the auditors were the regression analysis and trend ratio. Also, the above audit procedure was used together with the other audit procedures such as the substantive testing. The primary reason for the integration of the other procedures was to identify the misstatements in the various account balances (Tricker, 2016). Additionally, the procedure was found to be more efficient compared to the traditional procedures which often necessitates for a lot of time to be used for the verification of the various transactions and account balances. The analytical procedure involved five key steps, and this included, an analysis of the possibility of misstatement of material, the formation of an independent outcome based on particular account balances. The other step involved an investigation into the cause of the various financial discrepancies to typically identify the cause of such deviations in the financial statements. The variations existing in the reported and estimated amounts were identified. The last step entailed the ascertainment of the nature of any other auditing procedures (Schreiber, 2017).
The analysis of the audit section in the annual report also shows that there is an audit committee. The audit committee comprises of five directors. There of the members of the committee are executive members, and two of them are the non-executive members of the audit committee (Desai, 2015). The committee is chaired by an independent auditor, and he is not part of the board. The assessment of the auditors' section also shows that there exists an audit committee charter. The charter highlights the purpose of the committee, the composition of the audit committee, the roles and responsibilities of the audit committee, the resources of the audit committee and the various meetings of the audit committee.
The audit committee is made up of five directors, and two of the members are non-executive members. The audit committee has appointed by the board of directors of the company. Also, the members are mainly independent directors, and this is based on the regulations made by the Capital Market Supervisory Board. One of the members of the audit committee has a wide knowledge to ensure that the financial statement and budgets are reliable.
Structure of Audit Committee
Sultana, Singh & Van der Zahn (2015), argues that there are various roles played by the audit committee in the company. For example, the committee determines the internal control of the company by ensuring that they are effective and this is done on a quarterly basis. The committee also approves the appointment of the chief audit executive of the company through voting by the members (Cohen, Krishnamoorthy & Wright, 2017). The committee also assists the board of directors in oversight roles especially in the risk management systems, financial reporting, and various audit functions.
Another responsibility of the audit committee is that it monitors and evaluates the audited financial statements provided by the external auditors. Further, the audit committee plays a fundamental function in corporate governance, and this relates to the control, accountability, and directions of the company (Abernathy, Beyer, Masli & Stefaniak, 2015). Another responsibility of the audit committee is that it oversees the process of disclosure of the AZN Banking and this is to ensure that there is compliance with the international and local laws. Apart from the roles mentioned above of the audit committee, they also have a responsibility of approving the budgets and plans proposed by an external auditor. They have to check the benefits and costs of administering certain audit duties before carrying out an audit procedure of the company (Khlif & Samaha, 2016).
The analysis of the auditors' sections shows that the auditor’s opinion was unqualified. It, therefore, meant that the financial statements of the company are a true view of the position if the company. Also, the unqualified audit opinion indicated that the Generally Accepted Accounting Principles were conformed to by the financial statements (Bhasin, 2015). The above opinion was arrived at by the auditors after getting adequate audit evidence on the financial statements due to the various audit procedures such as the substantive detail testing of such statements provided by the management.
The directors and management of the company have varied roles in relation to the financial report. The main role of the management during the financial reporting is to ensure that all the financial statements are sufficient and also are disclosed according to the reporting standards. Also, they have to ensure that all the financial statements contain information which is truthful and does not ruin the reputation of the company (Badolato, Donelson & Ege, 2014). Additionally, the management checks the disclosures in the financial reports to ensure that the available information is accurate, relevant and reliable for the users who will use the information to make certain viable decisions. The directors, on the other hand, keep proper accounting records which will be used during the disclosure of financial information in the annual reports. The directors are also expected to have knowledge in accounting which will enable them to challenge the assumptions and approximations in the financial reports. Further, the accounting knowledge will enable the auditors to comprehend the substance of various transactions in the financial reports (Kothari, Mizik & Roychowdhury, 2015).
The roles of the auditors, however, differ from those of the directors and management during the financial reporting. For example, the auditors only carry out an evaluation of the financial statements of the company, and this is unlike for the directors and management who ensure that such financial statements are reported according to the accounting standards. The work of the auditors is to just examine the documents of the firm (Knechel & Salterio, 2016). During the financial reporting, the auditors' responsibility is to give details in report form as to whether there was adequate evidence collected which would allow them to give the assurance which is reasonable to indicate that such financial statements had been fairly prepared. They also look at whether there was material misstatement in the documents which would justify that the report prepared contained certain errors. Based on the above discussion, it is concluded that the roles played by the directors, management and the auditors differ during the preparation of the financial reports.
The auditors' section also shows that there were subsequent material events after the reporting period. The subsequent material events identified were primarily two that is recognized and non-recognized events. The recognized subsequent events are treated by adjusting the financial statements in the current financial statements of the company, and this was done issuing them in the statements of financial position (AICPA, 2017). The non-recognized events, however, on the other hand, are treated by issuing them in the in the next year financial statements.
Based on the assessment of the auditor’s report, it can be concluded that material information reported by the auditor is effective. The report can be considered effective because the right audit procedures which had been used by the auditor to carry out the audit work. The audit report can also be said to be effective since it had been carried out by certain competent auditors of the company (Loughran & McDonald, 2014). Most of the auditing work was done based on the appointees of the audit committee, and it is expected that any particular auditor of the firm must have the experience and knowledge to undertake the activity. Additionally, they have to meet the independent requirements before being allowed to carry out some of the auditing tasks.
According to Leuz & Wysocki (2016), the other reason which makes the audit report to be effective is because of the quality control which had been done by the auditors during the process. All the control systems of the organization had been looked into, and this was done to identify the strengths and weaknesses of the internal control system of the firm. Lastly, the information in the audit report was effective due to the quality assurance which was displayed by the auditors while carrying out their audit work for the company. The factors mentioned above typically prove that the audit report was effective and hence could be relied on by a variety of financial users such as the investors, government, employees and the public among others. The auditing report was found to be effective and hence there no case of missing information in the report. The level of competency which was applied in the preparation of the audit report resulted in no missing material information. All the details were fully explained, and hence the information provided could be relied upon by the different users of the financial information.
In summary, it is evident that the quality and assurance of an audit report is based on a variety of issues which must be taken into account by auditors. For example, the auditors must comply with the different accounting standards of auditing. There are also a variety of audit procedures such as substantive detail testing and the analytical procedures and they must be strictly adhered to when conducting audit work. In the financial reports, under the auditors section, the company is said to have an audit committee tasked with various responsibilities such as oversight roles especially in the risk management systems, financial reporting, and various audit functions. However the responsibilities of the management and auditors differ on the basis of planning and control. An audit report should also be effective and this is indicated by various elements such as competency of the auditors among others.
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