Auditing And Assurance Services : Assessment Answers

Discuss about the Auditing and Assurance Services for Integrated Approach.

Auditing is the verification of accounts and it includes the activity of examining and inspecting of the process and the system to ensure that they are in compliance to the requirements. The report prepared by the auditor is the integral element for the audited financial statements of the business. The process of auditing should be performed by the auditors by integrating the principles, rules and regulations of Generally accepted accounting principles. The auditors issue two types of audit report after performing the audit process that is qualified and unqualified audit report (Alvin et al. 2014). The auditors present the qualified audit report when they have not dealt with all the issues and there is a limitation in the audit work. The qualified opinion of the auditors conclude that the financial information is limited in scope and company has not appropriately maintained the GAAP principles. On the other hand, in the qualified audit report the auditors conclude that the business presents its financial statements fairly in all the material aspects. The auditors has the responsibility of maintaining the certain aspects when performing the audit operation of the company (Arens et al. 2012).

In the given case study, King and queen being the auditor of Impulse Pty ltd has presented the unqualified audit report for the year ended 30^th June, 2012. Impulse Pty Ltd was suffering from the liquidity problems as there was a drop in the inventory turnover and debtor’s turnover. The company was running out of liquid assets. The above facts was well known to the King and Queen and despite this it did not take any additional audit regarding the valuation of these assets. No additional work was conducted for valuing the inventory and debtors which shows that auditors has not fairly presented its report (Beasley et al. 2012). The Impulse Pty Ltd was granted a huge amount of loan for its working capital from the finance company, Easy Finance Limited. The loan was provided on the basis of unqualified report issued by the auditors, which stated that the financial position of the company is sound. The company liquidated in December and the firm was unable to recover the loan amount and this was due to the negligence of auditor. The company did not make any adequate provision for the fall in the inventory value and regarding the doubtful debts. This is the case of “Negligence of the auditor’s responsibility” as the auditors did not consider the important aspect of the financial position of the company (Crous et al. 2012). The EFL provided the loan on the basis of the audit opinion and therefore, King and queen would be liable to Easy Finance Limited.

The specific case reference relating to the above answer is provided by the given case. The case that can be considered for this purpose is the case of “Hedley Byrne and Co Ltd v Heller and Partners (1964) AC 465”. The negligence of the auditors impacted the company being audited. The court stated that the audit report would have an impact on the decision making process of the parties being audited (Eilifsen et al. 2013).

Another case is about the auditing done by KPMG. The case of “Law Society vs. KPMG Peat Marwick and Others; CHD 3 NOV, 1999”. The auditing firm was very well aware that the compensation fund of the society would depend on the auditor’s decision. The malpractices in the accounting could not be discovered early because of auditor’s negligence. The auditor was held liable for neglecting his professional responsibility (Glover et al. 2014).

The above two case discussed that the negligence of the responsibility of the auditors is a serious offend which damages the reputation of the organization being audited as well as hamper the third party.

The loan provider that is EFL informing the King and Queen about the loan advancement made on the basis of the audited report prepared by the auditor. In this case, it is required to consider two different situation where the answer will be different based on the audited party consent. There is a need to maintain the confidentiality between the auditor and the audited party. The auditors cannot disclose any information to the third party as per the policy concerning confidentiality (Hayes et al. 2014). However, in special case, the auditors can disclose the information to the third party if it is instructed by the company being audited. The report of the auditor forms the basis of receiving the loan.

The King and queen would be held liable to EFL if the Impulse has instructed the auditors to disclose the audited information. If the King and Queen do not disclose the information, then they would not held liable to EFL. On the other hand, if the King and Queen was not instructed to disclose any of its confidential information to the third party, then the auditing company cannot be held liable to the third party (Louwers et al. 2013). If the King and queen do not disclose the information about the financial position of the company as instructed by impulse Pty Ltd, then it cannot be held liable to EFL. The disclosing of the internal information would also be against the GAAP regulations and in this regard, Kind and Queen would not be held liable to EFL.

The independence of the external and internal auditors from the parties having the financial interest in the business of firm which is being audited refers to the auditor’s independence. Independence is regarded as the cornerstone of every audit being conducted. An auditor is regarded as an independent when he does not have any dependency on the clients and is not under any undue influence. There are two types of auditor’s independence that is discussed below:

Actual independence

Actual independence is the real independence and it mainly concern the way of dealing in the specific situation and the state of mind of auditors. The auditors who are actually independent is capable of making the independent decisions even if the auditors is placed in a comprising situation by the directors of the company there is a perceived lack of independence. The auditors might face many situations where if would have to compromise with the principle of effective auditing. The actual independence will help the auditors in taking the effective decisions in many compromising situation. The actual independence is essential to achieve the goal of independence (Messier 2016). The independence is needed to assure and validate the reliability and credibility of the financial statements that are being audited. The principle of actual independence needs to be maintained to value the opinion made on the financial statements by the auditors. Actual independence is regarded to be straight forward for the accountant who is across the requirements. This helps the auditors to perform the task in a very objective manner. The opinion of the audit would not be influenced as the actual independence are expected to give an unbiased and honest opinion on the financial statements (Moroney et al. 2014).

Perceived independence

Perceived independence is the perception of the auditors in solving and tackling with the different problems of the process of auditing. In other words, it can be said that it is the view point of the auditors and the way the auditors perceive various kinds of problems of the audit process. The perceived independence helps in arriving at the optimal solution as the auditors perceives different solutions to a single problems. The perceived independence cannot be judged using any particular process because the perception varies from auditors to auditors.

It is the area where the shade of grey creeps into the world of audit. The professional judgment comes to the fore where the arrangement are perceive differently by users. As per the guiding principle, perceived independence is the consideration of the auditor independent form the client by the third party looking into the arrangement (Reding et al. 2013). The auditors facing the issue of the perceive independence, then materiality is the appropriate consideration.

In the scenario one, Bob is an audit assistant of Club Casino and at the same time he is undertaking university studies. Bob needs to complete the assignment of University and he came across certain financial information which would assist him in completing the assignment. The act of copying the information by Bob and using in the assignment by removing all the references is an act of breaching the fundamental principles of confidentiality. According to the confidentiality principle, the auditor should respect the confidentiality of information which is acquired as a result of business relationship and it should not be disclosed without any specific authority (Redmayne 2013). By using the financial information of Club casino, Bob has disclosed the information and thus he has breached the principle of confidentiality and integrity. Bob should know the regulation of confidentiality and maintain it.

In the second case, Wendy has been the audit partner of Ace limited for quite long time. In the absence of permanent company secretary, Wendy was asked to perform the duties of company secretary for a period of six month. According to the establishes regulations, the entity is required to maintain the professional behavior and it needs to comply with the rules and regulations and should avoid doing any action that would discredits profession (Stuart 2012). As per the section 130, which requires to maintain professional competence and due care. The principles of professional competence imposes the obligation on members to act diligently in accordance with the professional standards when providing the professional services. The entity needs to maintain the skills and professional knowledge to provide the clients with the competent professional service. Appointment of Wendy as the temporary company secretary of the Ace limited audit is breaching the principles of maintaining the professional competence (Thibodeau and Freier 2013). The entity is not complying with the fundamental principles and as per the guideline, the act is considered as the offense. Wendy should be immediately removed from the profession of the company secretary.

In the third case, Leo is the eldest son of a factor foreman of Precision Machinery Limited and he has been assigned to the auditing of the company. Leo is entitled to test the internal control of the system of cash payments. As per the guidelines of auditing, the employee, son, daughter and relatives of the company cannot become the audit partner of the same company. Precision machinery Limited has breached the regulation. The course of action that needs to be taken is that Leo immediately needs to be removed from the position of the internal auditor (William et al. 2016). Another remedial action that can be taken in the interest of the Precision machinery limited is the removal of father of Leo who is also a member of the entity.

Classic Reproduction have not been paying their audit fees to their auditors, Chan and associates. The organization received threat from the audit company if they would not pay their audit fees. The classic reproduction in an attempt to clear off their fees offered new furniture to the Chan and Associates. The furniture was worth only 50% of the outstanding amount of fees and despite this fact, the Chan and Associates accepted the offer. The act of accepting the fees in kind is not morally acceptable on the part of the audit firms. The Classic reproduction also offered 25% of shareholding in an unrelated listed company. The acceptance of shares and being the partner of their client is not considered to be acceptable as this would represent that the audit company has some special interest in the Classic production which might lead to bias judgment. The audit firm would breach the established principles concerning the audit fees and acceptance of furniture and shares would be regarded as unethical and breaching of the fundamental principles (Arens et al. 2013). The course of action that could be taken is that Chan and Associates should not accept furniture as the replacement of fees. The audit firm should not accept the shares of the unrelated listed company.

Reference:

Alvin A.. Arens, Randal J.. Elder and Mark S.. Beasley, 2014. Auditing and Assurance Services: An Integrated Approach. Pearson education Limited.

Arens, A.A., Elder, R.J. and Beasley, M.S., 2012. Auditing and assurance services: an integrated approach. Prentice Hall.

Arens, A.A., Elder, R.J. and Beasley, M.S., 2013. Auditing and Assurance Services Plus NEW MyAccountingLab with Pearson EText: Access Card Package. Prentice-Hall.

Beasley, M., Elder, R. and Arens, A., 2012. Auditing and assurance services.

Crous, C., Lamprecht, J., Eilifsen, A., Messier, W., Glover, S. and Douglas, P., 2012. Auditing and Assurance Services. Berkshire: McGraw-Hill.

Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance

Glover, S.M., Prawitt, D.F. and Messier, W.F., 2014. Auditing & assurance services: a systematic approach. McGraw-Hill Education.

Hayes, R., Wallage, P. and Gortemaker, H., 2014. Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.

Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2013. Auditing and assurance services. New York, NY: McGraw-Hill/Irwin.

Messier Jr, W., 2016. Auditing & assurance services: A systematic approach. McGraw-Hill Higher Education.

Moroney, R., Campbell, F., Hamilton, J. and Warren, V., 2014. Auditing: A Practical Approach. Wiley Global Education.

Reding, K.R., Sobel, P.J., Anderson, U.L., Head, M.J., Ramamoorti, S., Salamasick, M. and Riddle, C., 2013. Internal Auditing: Assurance & Advisory Services.

Redmayne, N.B., 2013. Auditing and Assurance Services and Ethics in Australia: An Integrated Approach. Journal of Accounting & Organizational Change.

Stuart, I., 2012. Auditing and assurance services: an applied approach. McGraw-Hill/Irwin.

Thibodeau, J. and Freier, D., 2013. Auditing and accounting cases: Investigating issues of fraud and professional ethics. McGraw-Hill Higher Education.

William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and Assurance Services: A Systematic Approach. Auditing and Assurance Services: A Systematic Approach.