Company Auditing

gaining appellation HBC614B smart set Auditing split up 1 THE external AUDITING STANDARDS BOARD AND ITS IMPORTANCE TO THE DEVELOPMENT OF AUDITING STANDARDS IN AUSTRALIA AND NEW ZEALAND The International Auditing and arrogance Standards Board (IAASB) is an independent threadb ar setting body within the International Federation of Accountants (IFAC). Established in 1978, origin entirelyy known as International Auditing Practices Committee (IAPC), it flipd its name to IAASB in early 2001 and was then reformed by IFAC in 2003.IAASB puts human race interest first and aims to improve the shade and uniformity of practice through extinct the world and to strengthen normal confidence in the global size uping and assurance trade by facilitating the convergence of external and national standards. IAASB is move to achieve its objectives through the following works Developing Standards establish utmost quality inspecting, review, other assurance, quality engage and link servi ces standards, much(prenominal) as International Standards on Auditing (ISAs). orbicular Acceptance & crossing promote the acceptance and adoption of IAASB pronouncements throughout the world and support a strong and solid international accountancy profession by coordinating with IFAC member bodies, regional organisations and national standard setters. Communication advocate debate and present papers on a variety of take stock and assurance issues and subjoin the e very(prenominal)day image and awareness of the activities of the IAASB. To date, the IAASB has earned revealment recognition for the quality of its standards and the believability of its standard setting lick.This has contributed to the increasing use of its standards worldwide. Over 100 countries are now using or are in the process of adopting ISAs into their national scrutiniseing standards. For investors in international capital grocery stores, the quality of examine reports and take stock opinions on fiscal reports are crucial when they make decisions about capital allocation. Audits, working within internationally accepted auditing standards, increase the credibility and reliability of the financial information provided in the financial reports.As Australian capital markets are increasingly link with overseas markets, it is central to catch a globally standardised financial reporting poser that is back up by globally accepted auditing standards. The Australian Auditing and Assurance Standards Board (AUASB) made the compliance with IAASB standards easier via a long-standing insurance of convergence and harmonisation with ISAs. The AUASB uses ISAs as a base to develop Australian Standards on Auditing (ASA).For whatsoever rescript and enhancement of ISAs initiated by the IAASB, the AUASB forget make permit consequential amendments to ASA. The AUASB and IAASB generally issue an expo reliable engage of a proposed auditing and assurance standard con periodly for considerat ion by interested parties. In bare-assed Zealand, New Zealand Auditing Standards (AS) and Audit Guidance narrations (AGS) are to a fault based on ISAs and International Auditing Practice Statements (IAPS). The New Zealand auditing po 10tial adopts the IFAC documents and amends them only as necessary to achieve its 1 of 11 Group Assignment HBC614B fellowship Auditing objectives. Amendments to the IFAC documents may be made to reflect peculiar(prenominal) proposition New Zealand legislative requirements or to reflect specific audit practising arrangements within New Zealand. As we can see, for years since IAPC or IAASB was established, it has played a very essential role in enhancing and standardizing the quality of auditing and assurance services around the world. ============================= 2 of 11 Group Assignment HBC614B go with Auditing PART 2 CO-REGULATION OF AUDITING PRACTICE IN AUSTRALIAIn most developed countries, including Australia, the auditing regulatory fr amework is provided, at least to some ex ten dollar billt, by government through legislation and government agencies. In the past, however, the auditing profession in Australia was largely self-regulated through the rules and requirements self-imposed by the principal players in the field, i. e. auditing firms and auditing professed(prenominal) bodies. As a result of the Corporate Law Economic Reform Program (CLERP) 9, the Auditing and Assurance Standards Board (AUASB) became a statutory (government) body.Since April 28th 2006, the Australian Auditing Standards (ASAs), which drive been released by AUASB for purposes of section 336 of Corporation Act 2001, have Force of Law. The pecuniary inform Council (FRC), a statutory body at a lower place the Australian Securities and Investments Commission Act 2001 (ASIC Act), is responsible for providing vast lapsing of the process for setting accounting and auditing standards as well as monitoring the effectiveness of listener libert y requirements in Australia.Yet the control and enforcement mechanism of these standards is also supported by the auditing profession represented by two primary superior accounting organisations CPA Australia and the Institute of Chartered Accountants in Australia (ICAA). Although the membership in these two organizations is voluntarily, it is still a necessary condition to get registration as a Comp any Auditor or a Liquidator. Some methods of control of quality of the auditing services imposed by these professional organisations include peer reviews, continued professional development and periodical rotation of the auditors. at that place are also disciplinary procedures in place to encourage improved ethical behaviour and quality of service provided. This token sit of co-existence of government regulation and assiduity self-regulation in Australia is called co-regulation of auditing practice. Co-regulation provides interactions that produce hugs for the refinement of regul atory structures in terms of openness, consultation, independence and speed of response to urgent accounting problems Malcolm C. Miller. ============================= 3 of 11 Group Assignment HBC614B Company Auditing PART 3 QUESTION 6. 3 ASA 315 UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT HOMECHEF PTY LTD. A first and very important step of the audit process refers the auditor gaining an early apprehensiveness and cognition of the clients vocation. In fact, ASA 315 requires that this step is carried out during the audit proposening stage. The auditor must obtain or update their discernment of the clients processs and pot, including its organisational structure, management policies, the bon ton position in its industry, the economy and its legal obligations.ASA 315 provides capacious guidance on results related to obtaining an consciousness of the entity and its environment, which may be classified into three main categ ories (1) familiar control / organisational structure (2) Operational and legal structure (3) Industry and economic conditions An catch of these three elements helps the auditor assess the clients business adventureiness and identify the events, transactions and practices that may have a significant effect on its financial report. This report presents a recent review of the operations and circumstances of one of our clients, HomeChef Pty Ltd. in accordance with the requirements of ASA 315. The main objective was to identify the events and developments at HomeChef which may have a significant bearing on the participations business take a chance and consequently affect our audit. This understanding depart help us see and perform the audit more efficiently and effectively and will ultimately improve the services we provide to our client. HomeChef Pty Ltd has been the market leader in the boutique food and boozing industry for the last two years.The political party manufactur es, supplies and retails quality ingredients for use in the home kitchen and small eatery market. During the review our audit group identified a number of major events/transactions that may have a significant impact on the business and affect our audit process. Below is a instruct discussion on each of these events/transactions 1) New products and services Recently, HomeChef introduced pre-packaged meals suited to be served at a dinner party. Preparation of the ready to serve meals would require extra steps to produce the final product.This would involve more processing facilities, more staff and more advertising. One potential related business attempt might be the increased product liability. There may be extra compliance requirements from the forage Safety Regulators. There could also be risk that the demand has not been dead-on(prenominal)ly estimated. The alliances capital and current expenditure may increase significantly because of the launch of the late product. This home scats to increase our audit risk. The auditor, therefore, should carefully consider how this changing operating characteristic may affect his/her auditing process.For example, he/she may lack to review some Food Safety Regulation requirements to assess that go down amounts of expenditure is attributed to this particular type of compliance or refer to some industry literature to get a let out understanding of the niche market for this type of product. Reviewing 4 of 11 Group Assignment HBC614B Company Auditing gross revenue figures and sales agreement forecasts may also help to assess to what degree the troupes business risk may be affected by this tonic development. 2) New lines of business HomeChef has recently opened a number of small cafe where customers can sample the s companys product range.By doing so, the company is venturing into unfamiliar territory. In addition, the notes of HomeChefs draft financial report reveal that the company has entered into symmet ricalnesss for building and developing a new entertainment complex. These events indicate not only changes in the companys useable structure, but also those relating to its environment. New opportunities bring new risks. As this is HomeChefs first venture into a new business theater of operations, lack of expertise and experience could be a real tint. The hospitality industry operates quite differently from the food manufacturing.There could be many more competitive forces and regulations in place. This move could change the organisational/operational structure of the company drastically. For example, new divisions may need to be established and the company pecking order changed. Apart from the potential risks of increased product liability and inaccurate demand estimates, similar to the case of all new products, this could introduce new risks associated with the companys innate control. Also, the companys potential business risk would increase its inherent risk. In general, this event is likely to increase our audit risk.It is very important that the auditor familiarises him/herself with the companys new operational structure, the industry conditions and regulatory environment related to this new line of business. Reviewing the hospitality industry publications and significant industry legislation may assist with basic understanding of how the company business risk is affected by this move. Aggressive marketing and acquisition schema quick growth Over the last two years HomeChef has acquired a number of smaller competitors and become the market leader in its industry.This is an indication of the companys aggressive approach to expansion and growth. In such situations, it is often noticed that a companys infrastructure is likely to lag behind in the process. In a hurry to expand, the organisational structure of the company may be changing too fast. There could be staff members with insufficient experience, the IT establishment may not cope well unde r the new conditions as new procedures and processes are added in. This significant and rapid expansion of operations could create strain and increase the risk of a breakdown in controls.The auditor needs to discuss with the senior management and gather evidence from the companys documents to assess this risk. He/she may need further understanding of the current cycle in the industry, to assess how this acquisition spree could affect HomeChefs business risk, and consequently the audit risk. Reviewing government statistics, trend forecasts, trade journals and financial newspapers may help improve the auditors understanding of the industry in general and the business in particular.Changes in key personnel The departure of a key executive (HomeChefs finance director), probably with a significant loss of corporate biography and experience, may also have an impact on the business. The new finance manager has been with the company for less(prenominal) than a month and may take some time to gain the knowledge and understanding of the business. He may have a different focus or 3) 4) 5 of 11 Group Assignment HBC614B Company Auditing understanding of the companys internal control.The auditor should take this factor into account when assessing the risks of misstatements associated with the companys financial report which, possibly, has been prepared under the instructions of the new finance director. 5) Newly-established internal audit group HomeChef started using the service of an internal audit group for the first time this year. Generally, the existence and operation of an internal audit group indicate the commitment and serious consideration given to maintaining high standards of internal control by the management. This would normally reduce the control risk in a business and later reduce the audit risk.In addition, the external auditor could, to some extent, use the work of an internal auditor, after having gained knowledge of and satisfied with the scope of in ternal auditing and the audit teams technical competence and professional care. However, in this case, as HomeChefs audit team is new, careful considerations are required if the auditor is to rely on the internal teams audit work. Installation of a significant new IT ashes related to financial reporting HomeChef switched to a new computer system early this year. The system was installed by a professional computer company and the old and new systems were run parallel for 3 months.Some new functions/modules have been introduced in the new system, including the ability to process stocktake results, account payable invoices and payments at the store level. This event highlighted a major change in one of the companys internal control components. It seems that the new system is rather reliable as a systematic testing plan and an integrity checking process were carried out by the professional computer company and there have been no major problems with the system so far. The use of this ne w system could potentially decrease the companys control risk. The audit strategy could focus on test of control.A proper and systematic testing plan on the new system is recommended, especially on the new modules for stocktake and accounts payable process. Significant amount of non-routine/non-systematic transactions HomeChefs draft Income Statement includes an extraordinary item of $231 million without any notes or explanations attached to it. The existence of this extraordinary loss would for sure have a significant impact on the business and would increase the audit risk considerably. This particular transaction requires a significant amount of attention by the auditor.Enquiries should be made to understand the disposition and extent of all relevant details of this transaction. This would help the auditor assess if the transaction is legal, not dismissing the adventure of fraud, or errors, such as transactions enter without substance, intentional misapplication of accounting policies, mathematical mistakes, oversight or misinterpretation of facts. The auditor should also examine if the valuation and allocation of the amounts have been done correctly. Company records and legal documents will need to be reviewed. An extensive substantive audit approach would be suitable for this particular area of the audit.Debt structure Covenant agreement Note (e) to the draft Financial Report reveals that a covenant agreement exists between HomeChef and its bank. The bank loans are secured against the companys remaining property, plant and equipment. This agreement specifies that the company should maintain a 6) 7) 8) 6 of 11 Group Assignment HBC614B Company Auditing positive wampum tangible asset ratio and a positive current ratio. Given the large amount at stake, there is a great incentive for the company to falsify, alter and manipulate figures to achieve these positive ratios at any cost.This situation would increase HomeChefs business risk significantly and consequently increase our audit risk. The audit plan could focus on substantive testing of the accounts related to the current ratio and plunder asset ratio. The auditor must exercise reasonable care and skill and maintain an attitude of professional scepticism throughout the audit. Based on HomeChefs financial ratios being adverse and the subsequent encumbrance in complying with the terms of loan agreements, the auditor may need to raise a dismission hit issue.It would be necessary for the auditor to discuss this problem with HomeChefs management so that appropriate measures could be taken by the company to overcome this situation. As a result of reviewing HomeChefs operations and environment, including its financial and marketing position, using the precepts of ASA 315, our audit team has been able to update our knowledge of the companys situation and assess our audit risk accordingly. This understanding and judgment will direct the development of our strategy and plan for th e audit of HomeChef. ============================ 7 of 11 Group Assignment HBC614B Company Auditing PART 4 QUESTION 6. 22 IMPACT OF BUSINESS RISK ASSESSMENT ON AUDIT STRATEGY This report presents a compendious case study of interweave Limited. The main purpose of the case study is to look at how caper Risk impacts on Audit Risk, and consequently, on Audit Strategy and Plan. lift Limited is a virtually held private company, manufacturing high-quality woollen cloth. It has been in operation for almost 60 years and the CEO of the company is also its major shareholder.Currently, the company is under a great financial stress due to increased ambition and falling sales volume. Three years ago the company was sued for dumping chemical pollutants into the local river. As a result, a settlement was signed with the Environmental Protection Agency providing that rove construct a water handling facility within five years. Our Audit Firm has been auditing Weave for the last ten years, and the current year interim audit revealed that there has been virtually no activity in the piddle Treatment Facility Construction account in the current financial year.To prepare for this year audit we need to take the following steps (1) review the companys business risk i. e. the risk that Weaves business objectives will not be attained due to the above-mentioned pressures and, ultimately, the risk associated with its positivity and survival. (2) assess the implications of the companys business risk on our audit risk (3) develop our audit strategy and audit program in response to the assessed risks. In order to assess Weaves business risk, we felt that a PEST analysis would be the most appropriate approach.It involves identifying the political/legal, economic, social and technological influences on an entity. Environmental Protection Laws may have a heavy terms on the business. Compliance with these Laws (such as building a water treatment facility) may be very expensive, b ut non-compliance may actually have a suicidal effect on the company. Economic risk should also be taken into account. Increased competition and limited market for Weaves high quality and possibly expensive products could pose a serious threat to the companys profitability and ultimately its very survival. Social risk component is also present in this case. The surrounding area is poor and unemployment rate is high. The companys management may feel a social pressure to provide employment at any cost. The obligation to build a water treatment facility could be very expensive and resource-consuming. It is not an easy task to estimate or to make furnish for the resources required to meet this obligation. It is even harder to estimate the costs of not meeting this obligation. This adds unusual pressure on the management.Potential incentives could arise for management to understate the companys profit/ change flow to use as an excuse in an attempt to avoid fulfilling this particular li ability. This situation is likely to increase Weaves inherent risks. 8 of 11 Group Assignment HBC614B Company Auditing In assessing the companys control risks, certain observations and issues have come to our attention which suggest an unsatisfactory internal control system The companys CEO is also its major shareholder who seems to be a strong character that has the overriding authority and decision making power. The CEO does not seem to take the compliance with the conditions imposed by the Governments Environmental Protection Agency seriously. He opinionated to stop work on the water treatment facility as he thought that the State would not fine or close the company down for non-compliance. The company does not seem to have any risk assessment policies or procedures for dealing with business risk. Based on the above findings, the audit team agreed that Weaves business/inherent risks and control risks could be assessed as high.This conclusion has had an impact on our audit strategy and audit plan. As we believe that the control risks are high, an audit strategy of a preponderantly substantive approach has been adopted. We do not plan to obtain a thorough understanding of the companys internal control or to carry out tests of control. Instead, we plan extensive substantive audit procedures based on a low to medium acceptable level of detection risk (depending whether the assertions under examination are at risk).In response to the high level of inherent risks, we decided to assign more experienced audit personnel and to conduct the audit with a heightened degree of professional scepticism. As mentioned earlier, an accurate assessment of the extent of liability related to the breach of the environmental laws is not easy to achieve. As the companys management does not seem to recognise the seriousness of this risk or to respond to it properly, we decided to engage environmental and technical experts to assist by providing us with legal/environmental opin ion and estimates.The strife of an environmental consultant will be scheduled to happen before the year end audit. Weaves increased inherent risk and control risk increase our audit risk. Some assertions in the companys financial reports have been identified as the key audit assertions as they tend to be more at risk. These assertions will be examined closely (please refer to the matrix below) and more efforts will be focused on obtaining sufficient and appropriate evidence to test these assertions.Financial Acct Liability Acct (provision for water treatment facility) Contingent Liabilties Valuation of the provision Sales Acct (Income Statement Assertions) Completeness all sales recorded Accuracy of recorded sales amounts Correct accounting period cut-off Inherent Risk Control Risk Debtors confirmation Assertions at risk (Balance Sheet Assertions) Completeness of all liabilities Inherent Risk Engagement of environmental expert/consultant honorable mention / project estimations are recorded properly with appropriate amounts Audit Risk Procedures/Evidence 9 of 11 Group Assignment HBC614B Company Auditing To test if the liability account for the water treatment facility contains any material misstatement we will focus on whether the account has included all liabilities as per the environmental specializers advice and the amounts are properly estimated and recorded (completeness and valuation). We could do this by seeking confirmation from the environmental specialist and checking estimates/quotations for the project.To support the companys claim of low sales volume and low level of cash flow, we will test if all sales transactions pertaining to the company have been included in the income statement (completeness) and all sales occurred during the current accounting period have been properly recorded with the correct amounts (accuracy and cut-off). Collecting debtors confirmations could be the approach to carry out this test. As our team has audited the comp any for the last ten years, it is assumed that there must be a certain degree of familiarity and complacency.However, due to the new developments in the company situation, more specifically, higher level of business risk, this years audit strategy and plan have been revised accordingly. Apart from additional audit procedures and probably a larger sample size, our team will need to maintain a higher level of professional scepticism to make sure that the companys accounts contain no material misstatements. It should be noted that had this audit been undertaken in the ordinal year after the signing of the settlement with the Governments Environmental Protection Agency, the situation would be different.As the condition of the settlement to build a water treatment facility would have been breached by now, there is an imminent threat of the company being closed down by the government. A going concern assessment at the planning stage (as required by ASA 570) would provide the following go ing concern problem indications (1) increased competition and falling sales, (2) noncompliance with statutory requirements, and (3) legal proceedings against the entity. In cases where going concern is related to cash flow or solvency problems, some mitigating factors could be considered (such as sale of assets or additional contributions by owners).However, in this case, it could be judged that a going concern basis is not appropriate as the business is now subject to closure by government regulation enforcement. We, as the auditors, would need to discuss ways to deal with the problem with the companys management. The possible outcomes could range from renegotiating the settlement agreement to making the decision to liquidate. In the latter case, the auditors would have to assess the impact that a forced sale of assets would have on the book values and the classifications of assets.The auditors would also need to assess the amount and classification of liabilities, including any pr ovision for staff termination payments and other closing-down expenses. In any way, if going concern is an issue it should be adequately reflected (disclosed) in the Financial Reports. The Auditors Report should also include an emphasis of matter ASA701. 09 & ASA570, clearly stating that there is a significant uncertainty regarding a going concern problem. ============================= 10 of 11 Group Assignment HBC614B Company Auditing REFERENCES 1. 2.Australian Auditing and Assurance Handbook, 2007 Edition, CPA Australia Australian Governments Financial Reporting Council 2005, Australian Governments Financial Reporting Council, viewed 20 May 2008, http//www. frc. gov. au/about 3. skeleton History 2008, International Auditing and Assurance Standards Board, IAS Plus, Deloitte, viewed 18 May 2008, http//www. iasplus. com/ifac/iaasb. htm 4. Chris Pearce, Parliamentary Secretary to the Treasury, 22 November 2004, The future of government regulation in Australia, Address to the 21st National Conference of Chartered Secretaries Australia, viewed 19 May 2008, http//www. reasurer. gov. au/DisplayDocs. aspx? doc=speeches/2004/001. htm=005=cjp=20 04=1 5. Gay & Simnett, 2007, Chapter 6 Planning, Knowledge of the Business and Evaluating Business Risk, Auditing and Assurance Services in Australia, revised edn 3, McGraw-Hill Australia Pty Ltd. 6. International Auditing and Assurance Standards Board 2008, IFAC, viewed 18 May 2008, http//www. ifac. org/IAASB/ 7. James M. Sylph, January 14, 2005, Global Convergence Near or Far? , American Accounting Association Auditing Section 2005 Mid grade Conference