Assurance Services, Inherent Risk, Control Risk: Essay.

Advantages and Disadvantages of Auditors Providing Non-Audit Services

Part A

The Assurance services refer to the professional service that has been provided by a CPA or Chartered Certified Accountant with an intention of improving the information context so that the information can be relied on by the decision makers in a better way. There are different assurance services that can be provided by the auditor. Some of them are as follows:

• Auditing: In case of auditing, the auditor examines the financial statements that have been provided by the clients and weighs down its accuracy and legitimacy.
• Financial Assurance Services: These services includes internal finance projections for the clients
• Non Financial Assurance Services: The non financial assurance services include assurance services in the area of data security, quality control, performance claims, environmental performance etc.
• Certification: The auditors at the same time will auditing the numbers gets some numbers certified as per the requirements of the law. In this case being they are certifying some numbers the responsibility is relatively on a higher side. (Gresham, 2017)

Part B

In case, the client engages the auditors for carrying out both the audit as well as non audit services. There are both some advantages and some disadvantages attached to the decisions. It has been stated that the appointment of the auditors for carrying out the non audit services has been with an intention that the auditors has a wide understanding of the dynamics and they can very well meet out with the situations. The auditors can look at the problems with an independent view point which can help in putting light to the problems that appears to be intractable from the perspective of the organization. Further, there is another picture to this allocation. Being the auditors are been allocated with the non audit services they tends to interact more with the employees which may not be in the interest of the auditors and in long run may affect the independence of the auditors. This is the biggest disadvantage that is attached to the case.

 In the given case, Jobbo & Hobbo (J&H) has been carrying out the audit work of Bolts and Nuts Ltd. The company has been engaged in the business of manufacturer of bolts and nuts. Because of the nature of the work that has been carried out by the company and the transactions that has been taken in place by the company, the management of the company is subject to certain inherent risk. Inherent risk refers to the risk that the financial statements contain errors and omission caused by factor other than lack of controls. In case of financial statements, the inherent risk is likely to occur at times when the transactions are complex and at times of situations when high degree of judgment is required to make estimates.

• Foreign exchange risk: The management of the company initially was engaged in procuring the entire purchase from within the country but after the shortfall in the country for steel, the company has decided to procure the raw material from other parts of the world. All the international shipment that has been received by the country is paid in US dollars. All the payment that has been made by the company is paid after 30 days from the date of shipment. Thus in that case, there is always a risk attached related to the foreign exchange gain or loss that may arise because of difference in the exchange rate from the date the invoices are prepared and the date when the same has been paid. In this case, the auditors of the company will be interested in checking the foreign exchange that has been booked in by the company and the exchange rate that has been considered by them in the above calculation. In this case the accounts that will be impacted will be freight expenses, accounts payable accounts. The audit assertion for the account selected will be completeness and accuracy
• Contingent liabilities:The off balance items has their own importance associated to the financial statements of the company. The management has to clearly mark down the contingent liabilities and state the correct picture in front of the stakeholders and shareholders of the company. In this case, the auditor of the company is at the risk whether any provision is required to be made in the books in respect to the contingent liability. In this case the accounts that will be impacted will be provision accounts and all the other liabilities accounts that are related to the contingent liabilities. The audit assertion for the account selected will be completeness and accuracy.
• Inventory: The valuation of the inventory is again a major are that arose the attention of the auditors. Being the company is engaged in the manufacturing industry and it has been provided that the inventory levels of the company has been increasing consistently on account of reducing sales, the probability of existence of inherent risk increases. Thus in that case, there is an existing inherent risk attached to the inventory level for the company. Further, the method used in for inventory valuation should be considered considering the nature of the product that needs to be valued. The physical verification carried out by the management is also important considering the large size of inventory. In this case the accounts that will be impacted will be the inventory accounts, Cost of goods sold etc. The audit assertion for the account selected will be completeness, rights & obligation and existence.
• Accounts receivables: The Company deals with numbers of dealers within the county. 50% of the company’s sales were made to Bunnings, 40% to Masters and 10% to Home Hardware. However, after the closure of Masters has been a significant fall in sales of the company. Thus in that case the valuation of the same and checking the correct aging the balances is again a challenge for the company. In this case, the auditor of the company is at the risk that the account receivable balances are not overstated mean whether the company has made adequate provisions in the books for the aged accounts receivables or not. In this case the accounts that will be impacted will be the accounts receivable balances and the provision for doubtful debt accounts. The audit assertion for the account selected will be completeness, rights & obligation and existence.

(a) Assistance Pty Ltd’s a charity which is managed by a board of directors which consists of two independent directors and the CEO. While conducting the audit of Assistance Pty Ltd’s auditor has identified various control risk that affects the auditor's overall audit independence

It means when related internal control in Assistance Pty Ltd’s exists but ineffective internal control  or in other words, we can say that when absence or failure in the operation of the relevant control of the entity results in a material misstatement in the financial statement. The material misstatement exists in assertion because of theineffective internal control system of the entity due which frauds and error are not prevented, controlled and detected by theentity before entering in the financial statement.

Assessment of control risk is higher if financial statement is prepared by individual who don’t have necessary technical knowledge of accounting and finance in Assistance Pty Ltd’s.

Four Types of Inherent Risk and Their Impact on Audit

According to standards of auditing the auditor through understanding the entity and its environment the auditor identify and assess the risk of material misstatement. The risk when auditor fails to detect fraud and error in the financial statement due to which it may issue an unqualified report (Beattie, Fearnley, & Brandt, 2005).

Audit risk is consists of

• Inherent risk
• Control risk
• Detection risk

Based on the given information auditor has identified various control risk such as

When a large amount of cash received and paid by thecompany .It maximizes the opportunity for employees to misappropriate funds.

High chances of risk in amisstatement of financial statement occur due fraud and error while recording the cash payment and cash receipt while as per the given information all expenses payment and receipts of Assistance Pty Ltd’s are done according to acash basis.

CEO wife working as an employee organizing fundraising and coordinating sales of raffle ticket may so as per the given situation close relationship between the CEO and his wife of Assistance Pty Ltd’s creating a threat that might affect the auditor independence.

When all the functions are performed by same person due to any reason involves the high occurrence of fraud and error as per the given situation CEO of Assistance Pty Ltd’s don’t involve director to the risk due to director’s busy schedule and himself manages the whole risk.

When decision are taken by the individual without  superiors approval leads to misstatement in financial statement as per the situation CEO  of  Assistance Pty Ltd’s takes important decision such as cash withdrawal without directors formal approval (Beattie, Fearnley, & Brandt, 2005).

(b) Corporate governance is the process of decision making and implementing that decision. It is all about transparency, fairness, accountability, legal compliance, ethical conduct and accountability.

Corporate governance means rules and regulation are framed and implement in such a way that it fulfills present and future needs of all the stakeholder or in other words, we can say that the interest of all stakeholdersis taken into consideration while making a decision. Corporate governance requires optimum use of resources, fulfilling business, ethical and legal requirement, monitoring the risk and full disclosure of operation.

No.	Basis	Strength of corporate governance	Weakness of corporate governance
1	Understanding	Proper understanding and bonding between the employees result in corporate governance. As ceo understand directors busy schedule and don’t bring any risk to directors as he handles on its own.	Excessive understanding and bonding in between the employeesresult into disputes and fights. As ceo decision to risk results into fights and disputes without management permission.
2	Approval	Long term relation and trust with employees create easy decision making and fluent working. For easy and fast working ceo sometimes don’t takeapproval from directors make cash payment decision?	Sometimes decision-related to huge cash payment taken by the ceo increases the chances of misstatement of funds.
3	Personal Relation	Ceo wife is working as employee and organizing fundraising and coordinating sales of raffle ticket.	When personal relationship exists in business land then there will large chances of frauds and errors.
4	Decision Making	Corporate governance is the process of decision making and implementing that decision.	When decision is taken without everyone's approval and their mutual interest affects the auditor independence.
5	Internal Control	Proper internal control so as to prevent any possible abuse of power.	Ineffective internal control increases the control risk.
6	Commitment Of Management	Ensures commitment of management in managing the business organization.	Long term commitment to the management results into failure of the work.
7	Avoiding Scams And Scandals	Proper compliance with rules and regulation and laws helps in avoiding scam and scandals.	Avoiding the rules, laws and regulation results into penalties, fines, and imprisonment.

(a) Audit risk in general comprises of all Inherent, control & detection risk. When a business auditor issued an unqualified opinion it should have a prime justification behind framing the opinion. Auditor must follow due ethics and consider risk assessment procedures while analyzing the financial statements. Hazard related to the audit is taken in account as the combination of all the above mentioned risk. Jyoce as a senior auditor of Cthly Ltd. must work out in assessing the audit procedures.

Inherent risk is related to the arising of the material misstatement in the financial statement of Cthly Ltd. This may be due to the factors of error, fraud or any omission in the financial statements. This may be resultant factor of the failure in adequate internal control implanted by the Cthly Company. The respective financial statement segment related to area where high degree of judgment is involved there is great risk of inherent risk exist in the particular circumstance.

Different Types of Control Risk

When there is failure in the operational activity of the business or there is situation which relates to the internal control structure of the company hazard related to control risk is raised. Here in case Cthly Ltd’s auditor Jyoce if do not have sufficient techniques and control to detect the frauds and errors then it will enhance the difficulties related to control risk of the enterprise. For instance if the financial statement are being prepared on computerized basis then audit using the CAAT techniques are required basis.  In case if auditor is not aware of the computerized risk assessment procedures then it enhances the overall risk related to the audit control procedures.

Frauds are resultant of the intentional procedures of the insider management and it is difficult to determine the errors instead of the frauds. When the auditor finds difficulty in the assessment of the fraud or any material misstatement existing in the financial statement then the particular omission resulted out in the detection risk. In the particular case study senior auditor Jyoce has to be cautious while examining the financial statements to overcome the risk related to detection of material mis-statement (Khorwatt, 2015).

(b) As per the case study of Cthly Ltd the respective entity inherent risk is determined on the higher variant. In the particular case structure the entity is suffering from lack of internal control structure which enhances the vulnerability of enterprise to omit the mis-statements in the financial statements. There is no existence of internal audit department in the firm which puts the complete burden on the external auditor to determine the material mis-statements (iandb07, 2012). The auditor Jyoce also addresses the control risk on the higher side due to the existence of the above mentioned factors. In the case it is assumed by the business auditor that both the inherent risk and control risk in the Cthly Ltd are set to be 70 % and if the auditor don not want that overall audit risk should not be greater than the 10 % segment than the respective detection risk should not be greater than segment evaluated as follows –

0.10 = 0.70 * 0.70 * Detection risk

Detection risk = 0.10 / 0.49

Detection risk = 20.40 %

Here in the particular case of Cthly Ltd. the detection risk of the auditor should not be greater than the 20.40 % to meet out the standard deadline of 10 % as overall audit risk percentage. This assessment of detection risk is made by the business analyst just to ensure the auditor level of risk bearing capacity towards formulating its finding procedures. The auditor in this case has to be more cautious and careful while approaching for the audit procedures. Instead of sampling survey the maximum data of the financial statement need to be scrutinized. As auditor in the particular case has already assessed that inherent and control risk of Cthly Ltd is on the higher side the only possible tool available with the Jyoce is to detect those material mis-statements and report an opinion in the financial statements accordingly (Accountsimplified, 2013).

Risk Due to Direct Cash Receipts and Payment

(c) The items which required detailed analysis and check are tend to be material for the relevant company. The areas where there exist probability of frauds and errors are on higher side are considered to be taken into account to evaluate the overall materiality. Any omission in these material segments will greatly affect the opinion of the auditor. In the particular instance the dollar value of items related to net income before taxation, total assets and total liabilities are considered as material for the auditor Jyoce. Frauds in the segment are more relevant to the stakeholders than any other defaults (Beattie, Fearnley, & Brandt, 2005).

ANZ stands for Australia and New Zealand Banking Group Limited. The company is the fourth largest company in Australia in terms of market capitalization. The company is majorly into commercial and retail banking division. The major operations of the bank are in Australia and in New Zealand. Apart from these two countries the bank is operational in 30 other nations. In the year 2008, the bank has been rated by Dow Jones Sustainability Index as the world’s most sustainable bank. The ANZ bank has been established in the year 1951 after the merger of Bank of Australia with the Union Bank of Australia Limited. The company at the present day serves more than $5 million. The asset base of the company crossed $247 billion.

The Audit committee acts as a pillar of effective corporate governance. The Audit committee has been formed by the board of directors of the company. Through the help of the Audit committee, the management can offer effective oversight of the independence, performance and objectivity of the auditors. The quality of the audit is also very well discussed at the Audit committee. (PWC, 2015)

The Audit committee works along with the shareholders and the management of the company to carry on the organization to run the business in the interest of the stakeholders. After the number of financial crisis in the world, the role of corporate governance has become very important. In order to get a company listed on the stock exchange and get it listed over a period, one is required to have strong corporate governance. In this situation, the role of audit committee increases in relation to the organization control, direction and accountability. The Audit committee of a listed company is involved with the external and internal audit, accounting and financial reporting, internal control, regulatory compliance, and risk management. (Baidhani, 2014)

The corporate governance principles stated by Australian stock exchange has become the benchmark for the companies listed in Australia. In the third edition, there has been significant changes have been made in the definition of the eight principles and recommendations. It provides information about the board skill matrix that is required for forming up the audit committee for a listed company. The company secretary of the listed company as result of the corporate governance principles is directly accountable to the board of directors. Further, it provides that the audit committee of the listed company should have at least 3 members who are non executive directors and one of them should be independent director. The audit committee should be chaired by the independent director. It should be noted that the person at the same time cannot chair both the board and the audit committee. (KPMG, 2015)

Risk Due to Family Relation

By looking at the annual report of the company, the company has total eight 8 non executive directors and one executive director, the chief executive directors.  Out of eight non executive directors, 6 directors of the company are independent.

The company that we have selected is Australia and New Zealand Banking Group Limited. The audit of the company was carried out by KPMG. The financial year of the company ended on 30^th September 2016. The auditor of the company has clearly demarked that the financial statements of the company is prepared in lines with the Australian Accounting Standards and the Corporations Regulations 2001 and gives a true and fair view of the company’s financial position and performance of the company.

The audit of Australia and New Zealand Banking Group Limited was carried out by KPMG. The financial year of the company ended on 30^th September 2016.The audit report of the company was signed by partner “Andrew Yates”. The audit report of the company was signed on 2^nd November 2016. The auditor in the audit report stated that “

(a) the financial report of Australia and New Zealand Banking Group Limited is in accordance with the Corporations Act  2001, including:

(i) giving a true and fair view of the Company’s and the Group’s financial position as at 30 September 2016 and of their performance for the year ended on that date; and

(ii) Complying with Australian Accounting Standards and the Corporations Regulations 2001.

(b) The financial report also complies with International Financial Reporting Standards as disclosed in note 1(A) (i).

The auditor in the audit report has considered the Australian Accounting Standards and the Corporations Regulations 2001 and ensured that the financial statement of the bank complies with the provisions of these acts and regulations. The auditor in the audit report has clearly demarked these points.  The auditor further complied with the independence of the Corporation Act 2001.

The audit exception gap refers to the difference in the expectations that that the users of the financial statements has from the auditors and what the auditors themselves believes they actually possess. This gap generally arises because of some higher expectations made by the users of the financial statements from the auditors. The auditors of the company are required to work within the guidelines and framework provided by law and in that case there might be some difference they may arise in the expectations set up between the users and the auditors.

In order to reduce the expectations gap, steps are required to be taken by the companies and the regulators. The regulators and the companies are required to educate the users of the stakeholders of the company about the expectations that can be made from the auditors. They are required to tell them the powers along with the rights and obligations of the auditors and try them to link it with the expectations from the auditors. Thus the companies can reduce the expectation gap only by increasing the education level of the users.

References

ANZ.com, Basic Background abut the company, viewed on 30^th April 2017, Retrieved from

https://www.anz.com/australia/aboutanz/corporateinformation/company.asp

ANZ, 2016, Annual report of the company, viewed on 30^th April 2017, Retrieved from

https://news.iguana2.com/anz/ASX/ANZ/459865

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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2487167

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KPMG, 2015, Corporate governance principles, viewed on 30^th April 2017, Retrieved from https://www.asx.com.au/documents/asx-compliance/asx-corp-governance-kpmg-report.pdf

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https://www.icaew.com/en/technical/ethics/auditor-independence/provision-of-non-audit-services-to-audit-clients

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https://smallbusiness.chron.com/assurance-services-cpa-firms-provide-41156.html

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