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Auditing And Ethical Practices Assignment Add in library

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Question:

Describe the purpose and concepts of analytical procedures based on the applicable auditing standards (ASA) in Australia.

 

 

Answer:

Executive Summary

The report helps to prove a clear and precise idea about the purpose and concept of the analytical procedure and its significance in determining the performance, risk and continuity of the business of the companies. The knowledge of the analytical procedure helps to determine and analyse the financial statement of the company. The financial statement helps to provide a brief notion on the company financial position in the market. The repost consist of the comparison between the three company listed in Australian stock exchange which states the company insolvency, auditors opinion on the going concern issues and company without any qualified opinion. The report helps to provide an idea about the performance and risk and continuity of the companies on the basis of the analytical procedure. In the last of the report a precise idea about the reliability of information and auditors judgement is critically analysed.

Introduction

Financial statement considered to be one of the most vital element which helps to determine the basis for the analytical procedure of the company. Analytical procedure consist of overall evaluation and detailed analysis of financial information such as balance sheet, income statement and cash flow statement of the company which help to throw light on the company several key business risk which are solvency risk, measure the performance and other key risk related to the company. Analytical procedure is executed on the basis of the study of reasonable relationship between the financial and non financial data. Financial data and non financial data proves to be the platform which help to determine and analyse the company several key ratio which eventually give a clear and precise idea about the company efficiency, profitability, performance and risk related issues. The financial information of balance sheet help to throw light on the asset and liabilities aspect, income statement helps to provide an idea on the profitability aspect and cash flow statement helps to throw light on the company three primary activities financing, investing and operating activities.    

 

Purpose and concept of analytical procedures

The purpose of the analytical procedure helps to provide a set of standard which ensure that the company is preparing and publishing the financial statement on the basis of proper analysis of the last year performance of the company. Auditor have the significant responsibility which help to perform the analytical procedure near the end pg the audit that will eventually help to guide and thus form key observation related to the company performance, solvency and risk relate to the company overall operation in the coming future.

Analysis of the Three Selected Companies

Selection of Companies

First of all, in order to carry out the effective analysis of the individual company’s performance, risk related factors and continuity of the business procedures, selecting or identifying a company according to the requirement is considered as a major stage. The rest of the analysis procedure will be performed on the selected company and the method will be chosen on the nature of analysis (Champlain, 2003). In this case, the selection criteria are known to be the Australian Public Companies listed in the ASX between the time periods of 2011 – 2014. Integrating to the initial criteria, three companies named as, Amcom Telecommunications Ltd, Automotive Holdings Group Ltd and Metlifecare Ltd. In this case, it is worth to mention that the first company of Metlife is going through the process of facing the insolvency risk, the second one named as Automotive Holdings is needed the auditor’s opinion on the current concerns and issues, lastly, Amcom is company which is without any qualified opinion.

Analysis of Performance, Risk and Continuity

In this particular portion, the performance, risk and continuity of the three selected companies will be discussed by considering the appropriate analytical procedures as the part of company auditing process (Harms and Rosen, 2002). The different financial statements of these three different companies will be evaluated in order to perform the analysis on the specifically mentioned areas. In this specific context, the entire process of analysis can be done easily and smoothly on the basis of calculating the ratios from different areas of operation by the companies and the generated value can give the overall picture of regarding the identified areas.

The first company, named as Metlife Ltd has the lack of business performance and the fact can be generated by looking at the current ratio of the company. The value of current ratio for the company in the three different financial years (2012, 2013 & 2014) are not looking strong as they never crossed the benchmark of ‘one’ (Knell, 2006). Therefore, the company has not been able to utilize its assets to cover up the debts. This individual factor proves that the company is more open to the risks of being insolvent in the near future if it continues to give the same picture. As a matter of concern, the trend of the current ratio is constantly shows the downward picture as 0.03, 0.08 and 0.74 in the three respective financial years. In an addition, the continuity of the company depends on its profitability and growth in the market. In this case, the growth of the company can be referred by the net margin and it has improved slightly in the current financial year but was diminished in the previous year.

The financial performance in case of Automotive Holdings Group Ltd is much improved by depending on the current ratio. Throughout the current and also the previous two financial years, the company has been able to display a good and health value out of the current ratio (Koletar, 2003). 1.27, 1.23 and 1.23 are resulting values that are obtained from the calculation of current ratio. The risk associated with the company can be ascertained by considering the debt-to equity ratio and in this case, a Debt-to-Equity value of 0.50 or less is considered as the standard margin. This company has been able to keep the values of Debt-Equity well under that margin throughout the every financial year that have been considered. Therefore, the risk factor is minimized for the concern of this company. Alternatively, compared to 2012 and 2012, the net income has not increased in the recent financial year and that is why the company should need to look into this matter.

 

In the last three financial years of 2012, 2013 and 2014, the financial performance of the company named as Amcom Telecommunications Ltd is much improved and the fact can be established by considering the current ratios of 1.12, 1.16 and 1.11 respectively (Schou, 2011). By analysing the Debt-to Equity ratio, the significant business operation and their continuity can be concerned as it is determined that the company is pursuing the operation by avoiding the huge burden of risks or debts. The Debt-Equity ratio for the three examined financial years displayed as 0.29 0.30 and 0.12. Apparently, analysing the growth of the company, it is acknowledged that the company was able to recover from a downward situation to achieve significantly from the market. Analysing the net margin of the company, it should need to look after the diminishing return in the current financial year as compared to the previous ones.

Comparison and Contrast of Opinion

In this portion, the effective comparison and contrast of the three previous discussed areas of these three selected companies will be discussed in order to reach an effective auditing conclusion (Stallings et al., 2008).

In the areas of performance, the analysis reports of these three companies suggest that Metlifecare Ltd is weak in terms of financial abilities among the two companies. Alternatively, Amcom Telecommunications Ltd is among the selected three companies which has significantly shown the consistent financial performance in every financial years examined.

Considering the diminishing trend of the current ratio, the company of Metlifecare Ltd is vulnerable to the associated business risks and the other two companies have been able to mitigate the business risks and continued to perform in the business world (Taylor, 2006). The entire analysis is supported by the calculation of Debt-to-Equity ratio.

In case of continuity of the companies, the analysis was carried out by evaluating the growth percentage and net margin for the individual companies. Determined from the year-based comparison of the result of the particular companies, Metlifecare Ltd has been able to improve slightly in the recent financial year while the other two companies must need to look after their earning capabilities to achieve the desired growth and continuity.

Impact of Reliability of Information and Auditor’s Judgement

The analytical procedures play the significant role in the part of the auditing process and it consists of the analysis and evaluation of the financial information that are generated from the study of plausible relationships among the non-financial and financial data (Thomsett, 2007). From the range of simple comparisons to utilization of the complex models can be involved in order to carry out the analysis relating the elements of data. The plausible relationships among the various data and reasonability are the factors that should be present in any form of analytical procedure. With the absence of these desired characteristics, the different variations in the particular relationships can be observed and these are known as the events like transactional changes, business changes, accounting changes, misstatements and several other fluctuations.

Analytical procedures

Purpose

It is very important to conduct the appropriate audit process by the auditor. Analytical procedures mainly consist of evaluation of financial information with the help of standard analytical technique (Schou, 2011). The analytical procedures are used throughout the audit process to achieve accurate result. Financial statements are critically reviewed and analysed throughout the audit process. ISA 520 is one of the most reliable and standard evidence obtains from substantial analytical technique.

Concept

Substantive analytical providers are more effective than the other procedures and for this particular purpose the auditors uses this particular technique in recent times to achieve the precise result of the audit. However, There are several steps are followed by the auditors to complete the entire process of audit by using the standard techniques and among them establishment of independent exception is one of the most initial and significant stage that is taken under consideration (Zakhem, et al., 2008). There are some factors were involved that provide critical impact on the analytical procedures such as disaggregation, data reliability and predictability. These factors were considered by the auditors while conducting the audit process and valuable measures were taken to prevent any kinds of damage that can hamper the process of auditing.

 

The assurance of the analytical procedures is being considered upon the consistency and continuation of the recorded amount with the exceptions developed from the data generated from the other sources (Zadek, et al., 2013). The reliability of the data depends on the generated results should be appropriate and match the expectations for the desired level of assurance from the analytical procedure. One auditor must examine the reliability of the information by considering the source from where the information is generated and the condition from which it was developed. Also, in this case, the knowledge of the auditor about those information is judged as the key factor for performing the analysis.

According to the referred journal articles of AU Section 329A, some of the factors have been identified as they influence the auditor’s consideration related to the reliability of information in order to achieve the auditing objectives (Zakhem, et al., 2008). They are known as the following:

  • Information generated from the independent source situated outside or inside the entity
  • Independency of the sources within the entity for those who are responsible for auditing the amount
  • The development of the information is resulted under the reliable system with the presence of adequate controls
  • The collected information is subjected to the audit testing in the current or prior year
  • The desired expectations are met by the information generated from the variety of sources

Conclusion

In the concluding portion of this paper, it should be mentioned that the effectiveness of the analysis procedure depends on the proper approaches of auditing while considering the ethical dilemmas. It is the effective part of the reviewing process of any company and it assists the auditor in assessing the different financial and non-financial concerns of the organization to reach the effective conclusion. The overall evaluation can be done on this basis and the presentation of the entire financial statements can be secured by the process (Schou, 2011). The fact is also gathered that there is the presence of wide variety of useful analytical procedures for the specific purpose of the company. In this case, an auditor must consider his/her knowledge to identify the factors of adequacy of the evidence related to the gathered data and unexpected or unusual balances or relationships. This can support the company to reach for the effective outcome as a result of auditing practices.

References

Champlain, J. (2003). Auditing information systems. Hoboken, N.J.: John Wiley.

Harms, D. and Rosen, E. (2002). The impact of Enron. New York: Practising Law Institute.

Knell, A. (2006). Corporate governance. Amsterdam: Elsevier/CIMA.

 

Koletar, J. (2003). Fraud exposed. Hoboken, N.J.: John Wiley & Sons.

Schou, D. (2011). Going concern. Frederiksberg.

Stallings, W., Brown, L., Bauer, M. and Howard, M. (2008). Computer security. Upper Saddle River, N.J.: Prentice Hall.

Taylor, E. (2006). The effects of in-group bias and decision aids on auditors' evidence evaluation. [Tampa, Fla]: University of South Florida.

Thomsett, M. (2007). Annual reports 101. New York: American Management Association.

Zadek, S., Evans, R. and Pruzan, P. (2013). Building Corporate Accountability. Hoboken: Taylor and Francis.

Zakhem, A., Palmer, D. and Stoll, M. (2008). Stakeholder theory. Amherst, N.Y.: Prometheus Books.

 

 

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