1.Audit, a significant process to keep in-check the standards, functions, departments, procedures and books of an organization has become an integral necessity now. By an official examination such as in the above mentioned areas & others, brings out the critical assessment which may be overlooked at the time. Legitimately, an audit team’s responsible to carry out an analysis for the prevention of frauds, highlighting irregularities & evaluate systems of internal controls. Audit report has sacred importance for the stakeholders of an organization which gives true and fair view of concern, accepted for the reason that it ensures a quality audit. It also gives an insight to investors interested in becoming part of a company and its growth (Tech, S. H. 1992)
Blay, D. A. (2005) says All of this can be achieved through an accurate evaluation of an independent audit team providing services in accordance with audit firms’ policies and procedures. This directs us to the case which draws attention to some of these issues.
Situation # 1 |Conversation with Chris|
This Situation # 1conversation reflects the importance of CJ for client and in the market as a quality audit firm. A request made by LTH board of directors to vouch for the company in engaging investors from market is the threat. By doing so the Advocacy threat arises. Also the statement clearly states if Geoff would decide otherwise there’s a chance to lose a client. If Geoff agrees to the proposal, it will compromise the independency of auditors leading to ambiguity. Due to detailed analysis of LTH’s accounting books, a recommendation in a public seminar from CJ can influence some investors but chances are that recommendation would be inaccurate and fictitious.
So, to maintain the reputation of Clarke & Johnson, Geoff must refuse the proposal of assistance as it is also against policies and procedures.
Situation # 2 |Conversation with Chris|
Again, this situation sheds light over Self-interest threat, another scheme from LTH which emphasize upon the treatment of audit. Chris offering complimentary packages to audit partners attached with the approval to conduct audit smoothly shows their intention of controlling the investigation and generate an outcome of their choice. Figuratively, this is a provision of audit services to remain separate, also not to avail any sort of reward which is not a normal practice. Geoff & CJ has the obligation to deny the proposal also assuring to perform audit in compliance to the rules.
Situation # 3” |Conversation with Michael|
This conversation notifies Michael enthusiasm and reveals his relation with LTH is of personal nature. As he mentioned, his father serves as a financial controller which highlights Familiarity threat. Appointment of Michael on audit team will lead to false & sympathetic judgments of clients financial statements. To prevent this scenario CJ must obtain Safeguards in Work environment where according to policies and procedure the relationship of individual audit team member or of company can be estimated.
Situation # 4 |Conversation with Annette|
This conversation highlights the facts that Annette has previously worked at client firm which leads to possibility of close relationship with the employees at client organization. Besides Familiarity threat, Intimidation threat is also to account for as she has previously done tax calculations and accounting entries for client. She could be possibly pressurized to overlook by suggesting mislead judgment. Here, safeguards created by profession, legislation or regulation can be taken with specific safeguard of making different reporting lines to discourage the non assurance service to client.
2.The audit firm would consider the fact that plant, property & equipment by a company is listed once in their accounting books, which can leave an error in the financial statements. Further, an error of incorrect price valuation of asset to date might also occur.
- In relation to purchase of equipment and spare parts the business risks that MSL might face are as follows;
- Inherent Risk
- Fraud Risk
After obtaining right knowledge of client’s business and risk associated with it, among inherent risk comes incorrect classification of the asset. This shows whether the assets are categorized among short-term or long-term lease holds and kinds of lease agreement for different assets. Due to which the implication of accounting policy will differ and payment methods against the purchase of equipment or maintenance payments would be recorded wrongly.
With the purchase comes depreciation of the equipment, chances are that there could be a mechanical error or the useful life remaining of asset before & after the sale and lease agreements will show discrepancies. As mentioned in the case study, MSL has several operational centers across Australia, where equipment or spare parts are stored. These warehouses must incur the carrying cost. The risk of carrying cost not fairly valuated arises due to un-revised valuation system, use of false data and prices. Fraudulent error may occur when PPE is purchase on inflated rate or the reconciliation is not timely.
- In relation to identified business risks the audit risks related to them which affect the account balances are as follows;
- Opening Balances
The auditor must look for risks that cost of item purchased are recognized in books only when it’s actually paid. Also, it’s recognized according to the advised accounting principles. According to the component approach, in the statements auditor would verify whether the useful life is measured of an entire asset or specifically of a component. If that’s the case how well is it depreciated accordingly or not? Furthermore, the Valuation of equipment or spare part is as per the revaluation model chosen by the company. And the fair value of asset considerate is reasonable according to the market value. Simultaneously, the cost recorded for equipment transactions are on normal credit terms or otherwise. The auditor will also be analyzing the board minutes or correspondence in finalizing and acquiring the equipment. So finally to determine the procedure of inviting & accepting the quotations on the behalf which verifies gains or losses incurred are properly recorded in profit loss statement.
Blay, A. D. (2005). Independence threats, litigation risk, and the auditor's decision process.
Teoh, S. H. (1992). Auditor independence, dismissal threats, and the market reaction to auditor switches. Journal of Accounting Research, 1-23.