Auditing Practice: Tender Document Assessment Answers

Report for Tender Document

Introduction

An audit can be defined as an official inspection of accounts of business by an independent audit firm or individual. An audit can be external or internal based on the requirements and statutory compliance of business.

In accordance with the given case situation, Barry and Betty planning for conversion of partnership business into a corporate entity. Legal provisions for both these business formats is different in Australia. By considering this factor, Barry and Betty are required to comply norms of company law for operating B & B Co. Ltd.

Furthermore, the statement given by Jane is accurate that financial statements are required to be audited every year. All the shareholders are agreed to this but they require certain clarifications for the same. The present study is focused on the description of norms related to assisting shareholders of B & B Co. Ltd by considering audit provisions in Australia. 

Significance of Audit

The major objective of the audit is to provide a neutral opinion of true and fair view of financial statements of the company. This expression of opinion is provided by considering auditing principles and Companies Act of Australia. This process is essential to winning the trust of stakeholders by providing them assurance that information provided in the financial statement is reliable and accurate (Dedman, Kausar & Lennox, 2014). With audit procedure, company get to know about deficiencies and scope of improvement in internal management control. On the basis of this factor, they will be able to prevent the risk of material misstatement causing fraud or error. By making use audited financial statement, stakeholders will be able to make right decisions. B & B Co. Ltd is planning for expansion and for which they will require funds by public and financial institutions. Further, for this process they have the mandatory obligation of conducting an annual audit by appointing an independent auditor (Christensen, Kent & Stewart, 2010).

Issues Raised by Shareholders

What the audit would involve?

The audit is significant for corporate entity because it provides reasonable assurance that financial statements of company are free from material statements. However, it do not provide any guarantee regarding non-existence of fraud and error. An audit can be defined as a standard framework which checks accounting is done in an accurate manner or not. Main aspects involved in audit are enumerated as below:

• Inspection of financial statements
• Compliance of regulatory norms
• Checking of internal control
• Other activities as per requirements of business

Generally auditor visits three times for audit one during financial years, second for stock verification and third when accounts are completed. Further, On the basis of financial information of the company, auditors assist in computing tax liability to be paid by the company in a financial year. For this purpose, they look at client records and observe procedure to have discussion with management. In addition to this, an internal controls are observed to provide recommendations for improvement.

Who Could be the Auditor?

In accordance with the Sec324AA Corporations Act, a natural person or firm or audit company is entitled to make an application for the post of the auditor if they meet criteria cited by ASIC. For this aspect, they must be member of CPA or CAANZ. In addition to this, an individual must satisfy experience and identification requirements (Christensen, Kent & Stewart, 2010). For this purpose, they must be practitioner either on individual basis or firm basis offering audit services to the public. In accordance with the Certification Candidate Handbook, minimum experience must be 24 months but in the case where the individual is having a post-secondary degree then training of 12 months is also sufficient.

Would it be Wise to Allow a Third Party (the auditor) access to their Confidential Business Information?

In accordance with the Guidance Statement ASA 230 Third Party Access to Audit Working Papers, the auditor has a legal obligation to not make use of confidential business information in an ethical manner in order to earn an undue advantage (Arens, 2002). In the situation, where they are found guilty of the same they will be obliged to pay heavy penalties and in the case of severe offence their certification is relinquished (A guide to understanding auditing and assurance: listed companies, 2014). This factor shows that legislation of Australia had made the justified process to maintain the confidentiality of the business. By considering this fact, a third party (the auditor) can be allowed to access their confidential business information as if they act contradict to ethical code they will be penalised with severe charges.

What if They do not have the Accounts Audited?

Financial statements of a company are mandatory to be audited in Australia as per 327A of Corporations Act 2001. Furthermore S45A (3) states that if assets and revenue are more than $12.5Million and $50 million respectively then audit is mandatory unless relief is provided by ASIC. It is because; various stakeholders make their decisions by considering these statements (Gay & Simnett 2010). In a situation where financial statements of a company are not audited, they will not be allowed for public trading. However, in accordance with CORPORATIONS ACT 2001 - SECT 301, in a situation where B & B Co. Ltd is covered under provisions of Section 293 then they are not required to get their accounts audited. Although, the company will face difficulty in raising funds as financial institutions do not consider financial accounts if they are not certified by qualified practitioners. Thus, they are recommended to appoint an auditor for auditing of financial statements. Appointed auditor will also assist them in developing better strategies for enhancement of profitability along with controlled management.

Can Jane do the Audit Herself?

By considering guidance provided by CPA Australia, Jane is not eligible to become the auditor of the company. It is because she does not have a relevant qualification. Moreover, she holds major shareholding due to which she is not able to comply qualification of the independent auditor (Arens, 2007). Her appointment is contradictory to ASA 290 i.e. independence of mind and appreance. In accordance with Sec 324(CD (2)) shareholder/staff/related party cannot become auditor. Companies Act of Australia auditor must not be relative to management as opinion provided them will be biased and due to which decisions of shareholders will be adversely affected (A guide to understanding auditing and assurance: listed companies, 2014).

Why Should they consider the Particular Firm to Undertake the Audit?

By appointing our auditor firm, B & B Co. Ltd will be able to manage their financial affairs in a better manner. Our firm will consider norm of independence while conducting audit. In addition to this, they can comply statutory requirements of Australia appropriately to prevent obligation of penalties. Study depicts that Jane is not eligible for becoming the auditor of the company due to lack of qualification and having a major shareholding in the business. By considering this factor, B & B Co. Ltd will be required to recruit auditor to comply with the regulatory guidelines. Furthermore, our firm has the finest auditor who has extensive knowledge of legal norms and industry which they are operating. Due to this aspect, they will be able to assist the company in better tax planning, add credibility to accounts, and financial management to provide cost advantage and control procedures.

Conclusion

The present report shows the significance of audit for a corporate entity. On the basis of the present study, conclusion can be drawn that firm should recruit auditor instead of delivering this work to Jane. It is because; she is not eligible for same due to lack of qualification and having a major shareholding in the business.

References

A guide to understanding auditing and assurance: listed companies, (2014). [Online]. Available through<https://www.cpaaustralia.com.au/~/media/Corporate/AllFiles/Document/professional-resources/auditing-assurance/guide-understanding-audit-assurance.pdf?Division=Victoria&Segment=The+Rest>. [Accessed on 13^th August 2016].

Arens, A.A, (2002), Auditing in Australia. Routledge.

Arens, A.A, (2007), Auditing and assurance services in Australia: an integrated approach. Pearson Education Australia.

Christensen, J. Kent, P. & Stewart, J. (2010), ‘Corporate governance and company performance in Australia’, Australian Accounting Review, vol. 20 no.4, pp.372-386.

Dedman, E. Kausar, A. & Lennox, C. (2014), ‘The demand for audit in private firms: recent large-sample evidence’, European Accounting Review, vol. 23 no. , pp.1-23.

Gay, G.E. & Simnett, R. (2010), Auditing and assurance services in Australia. Mcgraw-hill.

Jones, P. (2016), ‘Internal audit: An integrated approach’, Company Director, vol. 32 no. 5, p.50.

Parker, R. H. (2013), Accounting in Australia (RLE Accounting): Historical Essays (Vol. 58). Routledge.