Keywords: freedom of brain meaning
The phrase of 'INDEPENDENCE' is thought as 'liberty from situations and interactions which will make it probable that a reasonable and knowledgeable alternative party would conclude that objectivity either is impaired or could be impaired. ' (Kaplan, 2009, pp. 117)
There are 2 types of self-reliance, that are independence of mind and independence to look at:
Independence of mind
The mind-set that permits the expression of a conclusion without being affected by affects that bargain professional judgment, therefore, allowing a person to act with integrity, and exercise objectivity and professional scepticism.
Independence in appearance
The avoidance of facts and circumstances that are so significant a reasonable and educated third party, having knowledge of all relevant information, including safeguards applied, would fairly conclude a firm's, or a member of the confidence team's, integrity, objectivity or professional scepticism have been compromised.
(b) How come external auditor's independence so important? Illustrate with any past or current audit failures. (10 grades)
It is very important to exterior auditors to be self-employed because external auditors act on behalf of the owners of the business enterprise, normally the shareholder, and survey on the financial claims prepared by management for the good thing about shareholders. In case the external auditors are not independent of the shareholder, for example, if indeed they hold stocks in the companies that they audit, their capacity to form an objective thoughts and opinions on the financial claims will be impaired.
In addition, external auditors must be also be observed to be 3rd party because if they are not, the owners of the business enterprise won't have self confidence in the audit reviews that the audits concern. This is why it is auditor's unbiased is so important because to prevent further scandals such as those of Enron's and Parmalat's case, and etc.
For example in the case of Phar-Mor, Inc one of the very best 10 deep discount medicine store chains in america and announced bankrupt in the entire year 1995. Phar-Mor, Inc announced bankrupt because the company contributing to the frauds and capability for it up for so long. The following the summarized of the factors adding to the fraudulence:
Phar-Mor, Inc understanding of audit method an goals. Phar-Mor's scam team was made up a several past auditors, including at least one previous auditor who got worked well for Coopers on the Phar-Mor audit. The scam team indicated the particular one reason they were successful in concealing the scam from the auditors was because they knew what the auditors were looking for.
The Phar-Mor acquired financial fascination with financial reporting, probable self-interest threat may occur. Such the scams in the Phar-Mor case included:
- Overstating inventory and tracking consigned inventory as owned inventory
- Recording revenue from receipts from suppliers under certain advertising and exclusivity contracts when received, rather than over the life span of the agreements
- Understating the quantity of accounts payable by possessing disbursement checks
- Recording revenues and receivables from sellers at budgeted, rather than actual, amounts
The rule imposes an responsibility on all professional accountants to be straightforward and genuine in professional and business relationships. Regarding Phar-Mor, the Phor-Mor didn't perform genuine in professional and business relationships. The Phar-Mor provide misstatement of margins, inventories, and cash flow in studies to management and on the whole ledger and financial statements (to cover up other misstatements), and Diversion of resources to affiliated companies via physically written investigations (character of disbursements falsified when registered in literature and files).
(c) The following situations may violate moral codes imposed by regulatory physiques including the MIA By-Laws (On Professional Do and Ethics):
Roslan, an audit spouse, owns materials amount of shares in a trust finance investment company, which owns stocks in Roslan's greatest audit customer. Reading the investment company latest financial survey, Roslan is amazed to learn that the company's possession in his client has increased dramatically.
From the truth above, an associate of the audit team has possible financial fascination with your client, potential self interest threat might occur and the present go up to Roslan possible self-interest.
Form my point of view, it appears less significant in conditions of threats because the trust fund is indirect investment in your client. However, if the ownership in the client increases resulting in a significant proportion of Roslan's finance to be committed to the client, then your hazard may be significant. Additionally Roslan can be an audit partner who audit in the investment company.
Safeguard or action to be studied is because the threat may well not be so significant, it may not be necessary to get Roslan to dispose from the financial interest. However, it would be better to remove or re-assign Roslan from the audit guarantee engagement.
Sofia Ali is doing the audit of a large dealership. She is just the audit helper in the audit team. The sales manager of your client tells her there is a sale (at a substantial discount) on new cars that is limited to long founded customers of the dealership. Because her audit firm is doing the audit for quite some time, the sales administrator has chose that Sofia should also be eligible for the discount.
Discuss if the facts in virtually any of the situations above give rise to threats to self-reliance. (15 grades)
For the situation above, Sofia Ali has been given prolonged gift and hospitality by customer that is by means of a discount to acquire on new car by the sales manager. This might give come up to possible self interest and familiarity threats. The dangers may be significant because of the extent of surprise and hospitality that is audit staff emerges discount. However, the threats might not be significant if the surprise and hospitality is within client's normal commercial terms, that is customer offer to some other clients.
Safeguard or activities to be taken is the audit staff, Sofia Ali should refer to insurance policies of audit company prohibiting or getting agreement before recognizing the items and hospitality from older personnel.
Describe the idea of 'sufficient appropriate' audit research and explain why exterior auditors aren't expected to gather all information to be able to express an view on the reality and fairness of the financial claims of an entity.
ISA 500 Audit Information requires auditors to 'obtain sufficient, appropriate audit data to be able to draw realistic conclusions which to starting the audit point of view'. Sufficiency and appropriateness are interrelated and connect with audit evidence from both exams of control and substantive procedures.
(ACCA, 2008, pp. 119)
Sufficiency is the measure of the amount of audit evidence. The number of audit information required is damaged by the level of risk in the region being audited. First of all, it's the level of natural risk confronted by auditors is high. For instance, high technology developments in a market which is very competitive can lead to going matter problems and even more likelihood that the client's Financial Statements will be misstated. This will likely lead to an increase in the natural risk and can cause the difficulties for auditors to analyze Financial Statements in a volatile industry scheduled to no regularity in Financial Statements and more research is needed during the planning stage. Besides, lack of IT control in a computerized environment may cause the level of control risk faced by auditors is high. It is because more evidence is necessary for auditor when auditing the business. (ACCA, 2008)
Appropriateness is the way of measuring the quality or reliable of audit evidence and its own relevance to the audit subject material. If quality is high, then your auditor may need less evidence. The product quality or reliability of facts is afflicted by several factors, such as exterior sources, evidence immediately by auditor, entity, written records, and original documents. Original documents are usually more reliable than photocopies or facsimiles, which can simply be altered by the client.
Testing control is a test for the auditor to determine if the control is functioning effectively throughout the period under review stage. The auditor must consider the sufficient appropriates audit proof is to support the assessed degree of control risk is audit evidence is obtained from lab tests of control. For instance:
Design: the control systems are suitably made to detect and appropriate significant departures from the problem of accountability or material misstatements in any assertion
Operation: the control systems exist and have operated effectively throughout the relevant period.
The auditor should always perform substantive steps on material items. The ISA says 'irrespective of the evaluated rick of materials misstatements, the auditor should design and perform substantive techniques for each materials class of orders, balance and disclose'. When obtaining audit research from substantive procedures, the auditor must consider the sufficient appropriate audit evidence from such types of procedures together with any proof from checks of control to aid the audit thoughts and opinions.
(ACCA, 2008, pp. 99)
In an audit of a financial report, the audit thoughts and opinions is given on the assertions by management, explicit or otherwise, that are embodied in the financial survey. They could be categorized as follows:
- Assertions about classes of transaction and situations for the time under audit
- One of the cases is occurrence, where a purchase or event occurred which concerns the entity during the period.
- Assertions about bank account balances at the period end
- For example presence is an advantage or a liability exists at a given date, protection under the law and obligations is an asset or a liability concerns the entity at a given day, and etc.
- Assertions about demonstration and disclosure
- An item is disclosed, labeled, and described in accordance with the relevant financial reporting construction.
The auditor has a statutory duty to make a are accountable to the entity's customers on the truth and fairness of the entity's annual accounts. This survey must express the auditor's opinion on if the claims have been prepared relative to the relevant legislation and whether they give a true and reasonable view of the loss or profit for the entire year and state of affairs at the entire year end. The duty to report on the truth and fairness of the financial assertions is the principal duty associated with the external audit.
The assurance distributed by auditors is governed by the fact that auditors use judgment in deciding what audit strategies to work with and what conclusions to draw, and also by the limits of every audit. The auditor's task is to decide if the accounts show a genuine and good view. The auditors aren't responsible for creating if the accounts are accurate atlanta divorce attorneys particular. It is because normally it takes significant amounts of time and trouble to check the accuracy of even a very small purchase and the estimation which means that financial statements can never be completely exact.
It is not easy and impossible to examine each and every item in the financial records. Here, as we shall see, auditor provides thoughts and opinions about the financial claims, however, not certificate that the financial claims are accurate. Besides, audit techniques are designed to reduce the risk of the misstatements in the financial statements, but not eliminate the mistake in the financial statements. This is because by giving sufficiently reliable bottom line arriving by using using the sampling methods.
The sampling risk arises from the probability that the auditor's summary, based on a sample, may be different from the conclusion reached if the entire population were put through same audit technique. A sampling risk can be reduced by increasing the sample size for both test of control and substantive methods.
(ACCA, 2008, PP. 189)
(b) Describe the following audit procedures found in gathering audit research and for every single procedure, illustrate with a good example:
This entails seeking verification from another way to obtain details in client's accounting data.
Example: Verification from bank amounts by referring to the bank statement.
(ACCA, 2008, pp. 121)
Analytical procedures imply the analysis of movements and ratios in financial and non-financial information. It can be used within audit likely to identify risk areas and also as a means of gathering substantive facts, for example by determining as estimation of a particular figure predicated on knowledge of the business enterprise and checking this to the genuine figure.
Example: An evaluation of gross income percentages month by month for a company could be performed and any unconventional fluctuations looked into as these could indicate problems such as omission of sales, loss of inventory or other problems.
(ACCA, 2008, pp. 121)
Observation means observing a procedure being carried out. It is usually used as a means of gathering data about the inner controls in a company.
Example: A appropriate to observe the methods that are carried out when the post is opened up to evaluate whether controls can be found to avoid the misappropriation of cash.
(ACCA, 2008, pp. 121)
Inspection means considering documentation, literature and records or assets. This may be done to confirm existence of a secured asset, to verify values or to provide evidence a control has occurred.
Example: The inventory of any company at the year-end could be inspected within the evidence relating to its value. The inspection would give information as to if the inventory was at good saleable condition.
(ACCA, 2008, pp. 121)
Inquires mean asking for information. This could be from individuals within the company, either orally or in written representations, or in formal written demands to third celebrations.
Example: Another example would be to send a typical confirmation letter to the business's bank
(ACCA, 2008, pp. 121)
(a) Explain what is meant by the term audit risk? (8 marks)
Audit Risk is the chance of presenting an inappropriate thoughts and opinions on the financial statements. For example, failing to qualify when the financial claims contain a material mistake. Audit Risk has three specific components in the method:
Inherent Risk is the susceptibility of any assertion to a misstatement that may be material singularly or when aggregated with misstatements, supposing there were no related internal controls. Inherent risk is also a risk that it is impossible for auditors to control and transfer away due to the nature of the business and its business deal.
Control Risk is the risk that material misstatement which could occur in an assertion and that may be material, individually or when aggregated with other misstatements, will not be prevented or diagnosed and corrected on a timely basis by the entity's interior control.
Detection Risk is the chance that the auditor won't detect a misstatement that is out there within an assertion that may be material, independently or when aggregated with other misstatements. For confirmed degree of audit risk, the satisfactory level of diagnosis risk bears an inverse romantic relationship to the diagnosis of the chance of materials misstatement at the assertion level.
(b) Describe why auditors need a knowledge of the client's environment, including its interior controls, and list some areas of client's environment and inner controls.
Auditors should obtain a knowledge of the entity and its environment, including inside control, sufficient to identity and assess the risks of material misstatement in the financial assertions whether scheduled to fraud or error. Then, the auditors in a position to design and perform further audit techniques.
It is essential for auditors to comprehend the client's environment, including its inside controls because the data of knowledge of the client's environment will guide auditors to build up or maintain a good professional romance with your client. Listed below are the reasons why auditors need an understanding of the client's environment, including its internal controls.
A consumer may entail in a volatile sector of overall economy, which means that the industry has rapidly which is planning further growth that may require additional resources. This will cause the stock outdated and the obsolete stock may be overstated in the Financial Assertions. In such circumstances, there's a risk that collectors should go unpaid and the business enterprise will get into liquidation. It is very risky for directors of the business and the auditors if they auditing the company.
Today's world is speedily changing such as technology. It is very competitive with new technology improvements in market because competitive can lead to going matter problems and much more opportunity that the client's Financial Claims will be misstated. This eventually will boost the natural risk for the auditors especially in the aspect when the auditors auditing the financial claims. It is also will lead to a rise in the inherent risk and will cause the difficulties for auditors to investigate Financial Statements in a volatile industry anticipated to no reliability in Financial Claims.
Besides, the management's attitude, whether are they reliable and trusted available is suspected. This can reveal that the management's integrity is doubtful and mismanagement may be took place. This in-turn will cause the Financial Assertions may be at the mercy of manipulation by existing auditors when they auditing the business as management is bias.
Nevertheless, financial aspect will be considering if the company is facing financial problems. The company would requires a bank loan to finance the director ambitious strategies. However, the loan facilities are scare. The risk for auditors to audit the Financial Assertions will increase when the management of the company would use an extreme accounting tactics to manipulate the Financial Statements.
Last but not least, there's a misappropriation to a specific ascertain for a cash orders or account balances in the. The money balances may impact the Financial Statements and can cause an increasing risk for auditors to audit Financial Assertions and there is a restriction for the auditors to discovered completeness of sales and inside controls are insufficient.
The areas of client's environment and interior controls are as follow:
Industry, regulatory and other exterior factors, like the reporting framework
Nature of the entity, including selection and request of accounting policies
Objectives and strategies and related business dangers that may cause material misstatement in the financial statements
Measurement and review of the entity's financial performance
The control environment
Monitoring of controls
An important aspect of an exterior auditor's audit of financial assertions is observation of the carry out of the client's physical inventory count up.
Explain the purposes of the auditor's observation of the client's physical inventory matter?
It is very important to auditors to see client's inventory stock count up. This is to check assertions of lifetime of inventory items that makes up the total amount, means that the stock matter done by your client staffs are according to the Stock Taking Training (STI). All of the companies are properly allocated, ensure that the stock mentioned in the stock list are in fact exist. If don't have such stock exist as per the stock list, ask the management or superior for the reason.
Besides, the auditors should ensure that the condition of the stock are clearly stated through the stock count up, such as identify proof damaged or slow moving inventory because it pays to for the further evaluation of the inventory. This also wished to confirm that the genuine stock record data are as per the stock count.
Not only that, observation of stock count number is to ensure that all the stocks held in the warehouse are especially owned by customer, that's right and obligations assertion. Any stock presented for third party, make sure it is properly separated from the client's stock and examine the agreement between the third party and client regarding about the stock kept.
Lastly, the auditors should check by assertions of completeness. That is the audit should ensure all sales and acquisitions are well saved and all the inventory at season end is roofed on the assertion of budget.
(b) You came across the next situations during the 31 Dec 2008 physical inventory count number of Shoe Company Sdn. Bhd. :
In observing the inventory of liquid boot polish, you note that one great deal is 5 years old. Through the inspection of some bottles in an available box, you will find the liquid has solidified in almost all of the bottles.
As an exterior auditor, the audit methods I would take is to discover or enquire whether this box of liquid continues to be area of the inventory balance, that is inventory record. Besides, I'll ensure that the box of water in this inventory is written off and not saleable anymore. Last but not least, I'll also determine whether the sales of the liquid boot polish are respected at the 'lower of cost' or 'online realization value', if it's saleable. When the liquid footwear polish still cannot sell, then dispose the liquid shoe polish.
During your observation of the inventory count up also, you noticed that some
counting staff are employing pencils to track record down inventory counted.
Describe the methods that you'll take as an external auditor?
As an external auditor, the audit steps that I'd take is I will ensure that client's staff are pursuing instructions through the inventory count number. Besides, no pencil is allowed through the inventory count. This is because by using pencil to record down inventory counted is exhibiting wii count education. Therefore, I will inform the individual in charge of count up that some personnel are using pencils to track record down inventory counted to prevent any adjustment easily to be produced. Lastly, I'll follow up to see whether the personnel are employing pen subsequently during the inventory count number and observe the condition of the stock properly to make sure it is clearly stated as per through the stock count number, as it pays to for the evaluation of the inventory.
(c) Explain the audit procedures an external auditor would perform to validate whether inventory should be appreciated at cost or online realizable value.
The management of the company is in charge of the id and reporting of stocks that are worth less than cost to the auditor in a kind of a schedule listing all the determined items. The types of inventory that may be worth significantly less than costs include slow-moving, outdated and damage companies.
Audit methods for securities worth significantly less than costs are the following:
Enquire from management concerning how they take into account and identify such inventories, including the assumptions they made about this, conditions and value of the inventories.
Inspect sales, marketing and other information, and review the degree to which inventories that are worth significantly less than costs have been reduced to net realizable value (NRV) in previous years. Analytical procedures may be performed to judge the appropriateness of the jot down in today's year.
Analyse the client's computerized data, if available, to recognize goods that are old or slow-moving. The information could also show mere seconds and damaged goods. Any information produced by the computer system for management associated with inventories need to be checked out. Computer Assisted Auditing Techniques (CAAT) may be used for these purposes.
Auditor's need to examined the appropriateness of this is of old and slow-moving distributed by the management, by making references to competition products, technology changes and legislation.
For high value items the auditors should refer to the expert's valuation report to observe if any materials differences exist.
At the inventory matter, a note should have been made of any items which were old, slow-moving or damage and the matter records should be inspected to see if indeed they do show such goods.
Describe external auditor's obligations to report appropriately on the going concern facet of an audit client.
The auditors' responsibility is to consider the appropriateness of the going concern assumption created by management and whether any kind of materials uncertainties about the entity's potential to continue as a going concern that need to be disclosed in the financial claims.
In obtaining an understanding of the entity, the auditor should consider and stay alert to obtain evidence as to whether any incidents or conditions and related business dangers which may happen and cast significant question on the entity's potential to keep as a going concern through the auditing. If such event or conditions were discovered, the auditor should perform addition audit methods to consider their impact to the audit assessments.
The auditors should :
- Review management's arrange for future actions based on its going concern assessment
- Gather sufficient appropriate audit research to confirm if a material uncertainty exists. Considering the affects of any ideas of management and other mitigating factors
- Seek written representations from management regarding its plan for future action
- The auditor also needs to inquire management concerning its knowledge of events or conditions beyond the period of assessment employed by management which may cast significant question on the entity's potential to keep as a heading concern.
The audit process that auditor should carry out to realize that may have influence on company going concern issues are as follow :
- Analyse and discuss cash flow, income and other relevant forecasts with management.
- Analyse and discuss the entity's latest available interim financial statement
- Review the word of debentures and loan agreements and determine whether they have been breached
- Read minutes of meetings for the mention of financial difficulties
- Enquire of entity's lawyer regarding the litigation and claims
- Consider the entity's position if unfulfilled customers order
- Assess financial ability to provide additional funds
- Review occurrences after period end for item affecting the entity's ability to continue as going matter.
- (ACCA, 2008)