A stakeholder that will be relying on the accounts to a large extent will be the bank, as they want a clear understanding as to the financial stability of the business if they are going to be lending them money. Which at this moment in time applies to ‘Ted Glenn’s handyman Stores’ as they are currently seeking the banks help through a loan.
If stakeholders are put in a position where they are unable to rely upon an audit of accounts to insure that they represent a true and fair view then they are likely to put pressure on both the company and the auditors. This pressure will be to part paths as it is essential to all stakeholders that they can rely on the accounts in order to extract the information, which they need. As well as this pressure stakeholders may also force an enquiry into the audited accounts to take place to insure that they have been audited correctly and if they have not been then that audit firm may be liable for the loss.
2.3 - Issues of independence
The value of the work done by ‘Ted Glen’s Handyman Stores’ exceeded the value of the audit by ‘Granny Goggins Auditing Firm’. This value could be seen as a gesture of thanks due to ‘Ted Glen’s Handyman Stores’ having a short term cash flow problem and ‘Granny Goggins Auditing Firm’ were allowing ‘Ted Glen’ to pay the audit fee off with the exchange of work done. The discrepancy of the value could have a more sinister motive in the form of a bribe. The bribe being in effect an exchange for ‘Granny Goggins Auditing Firm’ to overlook the window dressing of the accounts to cover up the cash flow problems ‘Ted Glen’s Handyman Stores’ is currently facing. This may allow ‘Ted Glen’s Handyman Stores’ to apply for a loan for example.
‘The objective of an audit of financial statements is to enable the auditor to express an opinion on whether those statements give a true and fair view (or are presented fairly, in all material respects)’ (PriceWaterHouseCoopers, Audit Requirements 2002)
‘Granny Goggins Auditing Firm’ are allowing the window dressing of the accounts to hide the cash flow problems and therefore are not presenting a true and fair view to the public, the bank in example of the loan and also to the shareholders who will have no knowledge of the cash flow problems. The shareholders like most third parties do not have access to all possible information and they have to have confidence in the auditors opinions and their financial well being relies on the fact that the auditors are independent and are not under any pressure from ‘Ted Glen’s Handyman Stores’ directors to hide problems within the company.
‘ISA 700 supplemented by APB Bulletin 2001/2002 – Revisions to the Wording of Auditors’ Reports which requires audit reports to include an expanded statement of auditors’ responsibilities and the title of the report to include the word independent.’
(ACCA Audit and Internal Review 2005)
This International Standard for Auditing sets out the basis of the audit report. Of which part is the confirmation to shareholders of firstly independence, which in this case is being compromised and also of compliance, with the Companies Act 1985 of a ‘true and fair view’ which has also not been upheld. Auditors should conduct an audit with integrity, independence and objectivity but accepting the ‘bribe’ contradicts all three of these terms. Although ‘Granny Goggins Auditing Firm’ may argue that the discrepancy in the value of work done was just a ‘thank you’ it depends on whether an informed third party would conclude their independence or objectivity was impaired.
During the period the work was proposed to be done on ‘Granny Goggins Auditing Firm’ offices members of ‘Ted Glen’s Handyman Stores’ will be able to access sensitive information of ‘Ted Glens’ and other companies accounts. This is a contentious issue not just because the employee’s of ‘Ted Glen’s Handyman Stores’ could see other company’s accounts allowing them to access private information about other local businesses or competitors but also it allows them to be able to liaise with staff members of ‘Granny Goggins Auditing Firm’ who were working on their accounts. This may have resulted in the possibility of members of staff from ‘Ted Glen’s Handyman Stores’ to be able to put pressure on ‘Granny Goggins Auditing Firm’ staff to adjust their audit report favorably. This is a major breach of independence.
According to ISA 200 Objectives and General Principles Governing an Audit of Financial Statement, the objective of an audit is ‘to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework’.
The audit firm has compromised the integrity of the accounts since discovery of a proposed substantial discount to be presented to ‘Ted Glen’s Handyman Stores’. The building work will have certain guarantees after refurbishment that will mean there will be need for continued relations between the audit firm and the builders. The continued relations between the audit firm and the builders may make the auditors compromise their independence when they are doing the auditing work for the builders. Also, If a ten year guarantee is given the audit firm will have a vested interest in the continued operation of the building company, meaning they will give a more positive view of the accounts given the companies current financial position and can be argued that the audit work may not be giving an overall true and fair view.
It is of the utmost importance that the auditors are completely independent from the company that they are auditing. It is essential that every auditor’s integrity, objectivity and independence be beyond contestation. If an auditor cannot give an independent opinion on the financial statements, then it goes against the fundamental reasons for the audit.
For this reason the Auditing Practices Board (APB) has established quality control, auditing and ethical standards to provide a framework for audit practice. The APB Ethical Standards are concerned with the integrity, objectivity, and independence of auditors.
‘ Independence is freedom from situations and relationships which make it probable that a reasonable and informed third party would conclude that objectivity either is impaired or could be impaired. Independence is related behavioral characteristic concerning the auditor’s state of mind, independence relates to the circumstances surrounding the audit, including the financial, employment, business and personal relationships between the auditors and their client.’
Therefore, this is a serious matter and some questions must be asked in order to make a decision whether or not to carry out the audit.
2.4 - Pat’s Alternatives for Resolving the Dilemma
Pat Basically has three viable options; each in turn will have its own strengths and weaknesses. The three options are:
- To go ahead with the proposed plans;
- ‘Granny Goggins Auditing Firm’ give a discount to ‘Ted Glen’s Handyman Stores’
- ‘Granny Goggins Auditing Firm’ receive work from ‘Ted Glenn’s Handyman Stores’
- Continue with the Audit but;
- ‘Granny Goggins Auditing Firm’ is to give ‘Ted Glenns Handyman Stores’ no type of discount.
- ‘Granny Goggins Auditing Firm’ is to find another builder and supplier to undertake the work ‘Ted Glenn’s Handyman Stores’ were planned to do.
- ‘Granny Goggins Auditing Firm’ is to resign from ‘Ted Glenn’s Handyman Stores’ employment.
2.5 - Evaluation to the viability of the options set out above
- Go Ahead with the Proposed Plans
The proposed plans outlined above containing the transaction between the ‘Granny Goggins Auditing Firm’ and ‘Ted Glenn’s Handyman Stores’ may have been devised in the best interests of all concerned parties. This however does not stop other parties who hear of the transaction having their own opinion which will bring life to allegations of several ethical issues concerning the independence of the auditor; these issues were discussed earlier in the text.
The advantages of this transaction can be clearly identified, firstly the key reasons for the arrangement to improve ‘Ted Glenn’s’ cash flow problems. From the improvement of the shortfall of cash further advantages arise for a number of stakeholders examples of which are ‘Ted Glenn’s’ will have a greater chance of survival meaning jobs for staff and another client for the audit firm and the bank. Also suppliers who rely on ‘Ted Glenn’s’ such as ‘Bob the Builder’ and the many customers whose current operations rely upon their service. From the number of advantages this seems to be a very viable choice for Pat to consider, but for every advantage there is indeed a disadvantage.
Due to the nature of the auditor’s role and duties this proposed transaction will be seen to breach the independence of the auditor as discussed above, in the ethical issues. This will put the company’s accounts and the audit firm under much scrutiny and debate as to the reliability of the work performed. The consequences of this, even without proof of any wrong doing from both parties, will be very damaging. The audit firm will stand to lose much of the confidence clients have in them, this will cause them the potential loss of new and existing customers. So each partner in the firm could stand to have their reputation damaged, this is very important as an auditor’s career is built upon trust and reputation.
In the case of ‘Ted Glenn’s’ the parties who rely upon the company’s accounts will lose confidence in the accuracy of the accounts. The effect of this could cause the company to lose financial backing from their bank, higher interest charged on loans, as they will be seen as a risky investment. The suppliers to whom, ‘Ted Glenn’s’ are relying upon credit terms for purchases may reduce credit terms or demand cash payment for goods. This will seriously jeopardise the survival of the store.
Taking all available information in to account, to go ahead with the proposed plans will, in the short-term will be advantageous for both ‘Ted Glenn’s Handyman Stores’, and for ‘Granny Goggins Auditing Firm’. However looking ahead it is hard to see how either party will truly benefit from the transaction, in-fact it will be highly damaging to both.
- Cancel transaction and still go ahead with the audit
A very viable option would be to cancel the transaction and still carry out the audit, this would mean ‘Granny Goggins Auditing Firm’ will need to find another building firm for their refurbishment.
The advantages of this are the ethical issues concerning the transaction are no longer applicable so the reputation of the audit firm will not be jeopardised from undertaking the audit. The accounts will also benefit from the cancellation of the transaction, as there will be no reason for people to scrutinise and lose faith in the view presented.
The disadvantages this decision will bring are the possibility of tension between the audit firm and client, damaging their relationship. The reason for this is that ‘Ted Glenns’ will suffer adverse consequences from the decision, i.e. through having to pay their audit fee with the sparse amount of cash they have, hence building to their cash-flow problems. There is the possibility that resentment could come from ‘Ted Glenns’ due to this decision and they may terminate the use of ‘Granny Goggins Auditing Firm’. This could cause the Auditing Firms’ reputation to be threatened as people will want to know why their services were terminated; this, ‘Granny Goggins Auditing Firm’ would want to keep away from the public eye.
On top of this there is the chance ‘Ted Glenn’s’ may go in to liquidation bringing more resentment.
- Resign as Auditor
Perhaps the best option for the situation, from the point of view of the auditor, as there is no way they will have their reputation damaged and it may even strengthen it. As other customers will see that they have a strong commitment to keeping their independence. There are a number of other reasons, as this may seem a drastic approach to rectifying the situation.
If the discrepancies of value of materials and discount in favour of the audit firm are an attempt of bribery from ‘Ted Glenns’, as evidence suggests they may have wanted to change their accounts, there is nothing to suggest that they have not committed fraudulent practices in other areas. This will increase the audit risk, and if completing the audit, the risk of the audit firm being sued, so it seems the only option is to resign. Also with option 2 there is the possibility of the services of the audit firm being terminated so they may as well stop the services themselves hence upholding their reputation.
2.6 - Conclusion
Taking present knowledge of the situation in to account it is relatively clear that the best option for ‘Granny Groggin’s Auditing Firm would be to Resign from being ‘Ted Glenn’s Handyman Stores’ auditor. This would eliminate any chance of recompense that would come from the ethical issues raised if either of the other two decisions were chosen. It will show a very professional stance to new and existing customers by showing the lengths and sacrifices, through loss of a customer, the firm will take to keep their independence. Pat should now, after the decision process, discover how this situation came to existence and take the appropriate steps through internal controls to prevent any form of future occurrence.
3.1 - Group Summary
On receiving the coursework outline in the first week of the semester we proceeded to form a group. Members Iain Seedhouse and James Ingram had previously worked together before on other group assignments so formed a partnership. Lee Harbour, Craig Colins and Yunman (Jason) Wong had also worked on projects together before, so in the seminar an agreement was made that we would all work together in a group of five enabling us to answer all five individual questions set.
Our first group meeting happened in the third week of the semester after a Thursday afternoon seminar. Members Craig and Jason were not present on this occasion due to the fact Craig was ill and Jason attends the morning seminar. During this brief meeting we swapped contact details, such a phone numbers and email addresses allowing future contact between the group. We also initially discussed ideas for the case study and talked about our preferences for the individual questions. The following week we came up with five potential ethical situations for the case study. After another brief discussion after a seminar we decided on the ethical issue of independence. We were to then all go away and work on how we could fit it into a scenario. During this meeting we decided on who was going to do what individual assignments. Jason was kept informed of developments and kept contact through email and was present for brief talks we had during other lectures, where we were all in attendance.
The following week we had a case study drawn up and each member had carried out some research by making notes on the lecture handouts, reading the course book or from the internet. The first group meeting took place on Wednesday 15th March where we were all in attendance. We met in the computer annex and discussed our ideas on how we were going to address answering the case study. After long discussions an action plan was drawn up (which is included appendices 6.1) on how we were going to tackle writing the report. We used the ethical decision model as a way to spilt the work into five sections in order so we could all write some of the report and then bring it together at a later stage. We emailed the notes we had all made on each section in order to write the report fully. We gave ourselves a five day deadline to complete the necessary parts of the group work. Some members at this stage had already completed their individual question but others had only just started. We set ourselves a slightly longer deadline to complete these.
As previously had been agreed we all emailed the parts of the report we were meant to do to each other by the evening on Monday 20th March. This enabled us all to have a read of the work so far and make notes on any changes we wanted to make and any other points we needed to discuss. We then had a brief discussion on the Tuesday via email and then had a proper meeting on the Thursday. During this meeting we began to bring all the work together into one flowing report, after all the sections were in place we all had a read and made suggestions on what changes needed to be made. It was at this stage parts of the report that items such as the bibliography, contents and the final conclusion were produced. Other important details to make the report look professional such as page numbering and ensuring the same font is used throughout the report were achieved.
After this meeting we agreed to all take some time to read the report through fully to see if we were happy with the finished report. We then decided that we would meet on Monday 27th March where we would put the individual assignments into the overall report and have it ready to be handed in by that afternoon at the latest as members James Ingram and Iain Seedhouse were due to go to Dublin the next day as part of another module.
During this meeting the final report was completed, a paper copy was printed off and an electronic copy was submitted.
4.1 – Bibliography
PriceWaterhouseCoopers Website
(accessed 17th March 2006)
ACCA Audit and Internal Review 2005, Swift House Berkshire, FTC Foulks Lynch
5.1 - Should auditors be responsible for detecting fraud in companies’ accounts?
ISA 240 is the auditing standard that mainly addresses this issue; it states that an auditor has a responsibility to consider fraud when auditing financial statements. It does not however say that it is an auditor’s responsibility to detect fraud only to consider it. This is the current position on this issue but is it the correct one? The Institute of Chartered Accountants in England and Wales believes that it is, in a recent report they stated that, ‘Auditors are not, and indeed should not be, held responsible for detecting all fraud, but we must play our part to improve the overall detection rate to help maintain public trust in published accounts following the recent spate of US accounting scandals’ . These US scandals include such large multinational companies as Enron and WorldCom, both costing investors millions of dollars.
This is not a surprising stance by the ICAEW in the slightest; accepting responsibility for detecting fraud would undoubtedly result in numerous law suits, being bought against auditing firms for negligence. Where an auditing firm has failed to detect fraud when it has been present, and shareholders have lost money as a result. The second issue bought up by this statement, is that of public trust. This is an important issue for auditing firms, as it is this public trust that partly keeps them in work, if there is no faith in their ability to asses accounts, then it significantly reduces the need for their services. It may be this pressure that in the future changes auditor’s responsibilities to include being responsible for detecting fraud.
Detecting fraud is currently the responsibility of management but may require the refined skills of accountants and auditors, therefore it could be highly practical to employee internal auditors that can offer the skills of external auditors on an internal basis. Not only would internal auditors be able to detect fraud but they would also be able to implement internal controls to help prevent fraud before it can begin. However, internal auditors have the issue of subjectivity to deal with as those people they are assessing are the ones paying their wages and they don’t have the luxury of being protected behind the ability to write a statement of circumstances. This is a statement that explains why the auditor has left detailing all problems such as suspected fraud.
It is an auditor’s job to insure that the accounts represent a true and fair view of the companies’ financial position, this does not mean that the accounts must be 100% accurate but that they must not contain any material misstatements. This effectively already puts the responsibility of detecting fraud into the hands of the auditors as any substantial fraud should create a material misstatement within the accounts. It could be argued that if it is the job of the auditor to detect these misstatements then it must be the job of the auditor to detect these frauds.
Changing an auditor’s responsibility to include detecting fraud could have downsides as well as the upsides of helping to eliminate fraud. If an emphasis is put on detecting fraud then it would mean that an audit would last longer as auditors would want to insure that there wasn’t any to prevent any law suits. This would increase audit fees and also result in more qualifying audit reports (saying that the accounts don’t represent a true and fair view) as auditors would be looking for any misstatement to cover their backs rather than just looking for material misstatements. This would result in a shortage of auditors as audits would then take longer, further driving up the costs of an audit due to scarcity of the service.
In conclusion, making it an auditor’s responsibility to detect fraud will simply result in larger audit fees and less willingness on behalf of auditors to commit themselves to an unqualified report. So is there really any need to put in writing what an auditor effectively already does by reporting on any material misstatement just so that shareholders have somebody to blame if fraud is committed. Surely fraud is the fault of the people committing it and it is them that should be punished more severely. A world without fraud is idealistic and making auditors responsible for its detection will not prevent it from happening, it will just shift the burden of responsibility from management to auditors. It is management that is paid to run the company to the best of its ability, if fraud is being committed within it then it cannot be running to the best of its ability. So maybe it should be the management that is sued for not completing their contractual duties.
Bibliography
Books:
ACCA Audit and Internal Review 2005, Swift House Berkshire, FTC Foulks Lynch
Website:
5.2 - Should Auditors Rely on Management Representations?
Financial Statements of companies contain an enormous amount of often very complicated information. This information is compiled by the managers, directors and accountants working on behalf of the company. Together they have a legal obligation to make sure the overall accounts give a ‘true and fair view’ of the company’s current financial situation. It is then the responsibility of an external auditor to give their opinion whether the accounts do give a ‘true and fair view’ or not, based on their findings through management representations and tests.
The auditors job requires them firstly to gain an understanding of the company and its environment to assess the risk of material misstatement, ISA 315, and secondly to have procedures in place to respond to potential material misstatement, ISA 330. This can only be done by gathering substantial audit evidence, which will come from a number of sources. Auditors will have to liaise with management and other staff in order to get knowledge of internal control procedures as well as gathering their own primary information by carrying out a number of planned tests.
The management team deal with the day to day running of the organisation so have knowledge and control over the way the organisation is run. However the management team are chosen by the directors so the directors have control over them, but the shareholders, who are the owners of the company ultimately have overall control. This disparity in control, knowledge and ownership brings about a situation known as the ‘Agency Theory’. This is when someone is working on behalf of another person to achieve their objectives but sometimes a conflict of interests occurs. The general objective of any company should be to maximise shareholder wealth. To achieve this, a number of long and short term strategies should be in place, but how these strategies are implemented by management can be of significant importance.
Managers may be driven by personal objectives, such as achieving bonuses or going for pay rises so therefore do not act in the shareholders best interests. The management may achieve their objectives by ‘window dressing’ the accounts or colluding with other employees to commit fraud, which has the overall effect of creating material misstatement in the accounts. Although it is not necessarily the auditor’s job to uncover fraud, when it creates material misstatement in the accounts it is their duty to discover and disclose it to the shareholders.
As seen in recent large frauds in the U.S. such as Enron, managers, directors, accountants and even auditors will go to any lengths to cover up sinister activities. This includes making false representations to the auditors. There are several ‘Statements of Auditing Standards’ (SAS’s) in place to provide guidance when using management representations as part of the audit evidence. Management representations may come in two forms either written or spoken. In order to later rely on these representations “auditors should obtain written confirmation of appropriate representations from management before their report if issued, (SAS 440.1)”. This reduces the risk of any misunderstanding and means there is a documented statement of what the manager actually said. Management representations can often be integral in forming the auditors opinion.
When the representation is material it is vital the auditor discusses the matter at length and is certain the person making it is in a well informed position to do so. Especially when the representation made is of opinion or of future intentions and cannot be backed up by evidence. However when there is evidence available, “If a representation appears to be contradicted by other audit evidence, the auditors should investigate the circumstances to resolve the matter and consider whether it casts doubt on the reliability of other representations. (SAS 440.4)”.
Pre audit planning should highlight potential risks of accuracy of management representations. However “under Section 389A of the Companies Act 1985, it is an offence to mislead the auditors.” So it becomes difficult for auditors to question the integrity of the management. If they refuse to make or confirm representations then obviously the auditors should instinctively be wary and suspicious of the management. Auditors must also be wary of management representations if they appear to be incompetent. Human errors or lack of controls may lead to material misstatements throughout the company, so tests and gathering evidence is essential.
Either way audit evidence that the auditors actually gather themselves becomes very important. This can be done through ‘live’ or ‘dummy’ tests of both computer systems and internal control processes. Auditors can then check figures produced and cross reference them to what actually appears in the accounts.
Ideally auditors would be able to fully rely on management representations. However in the real world managers do lie and try to cover up fraud and errors, so it is essential auditors go as far as necessary and financially worth while to find material misstatements. Once the auditors give their verdict, if they have just relied on management representations, which later are found out to be false, their reputation will be on the line and they will be leaving themselves open to legal action from stakeholders who have relied on the accounts.
Auditors should assess the risks before they even take on an audit. If they believe they cannot rely on management representations they should decline to take on the audit and state this as their reason. After all auditors are not obliged to carry out any audit they do not feel they could carry out professionally within the legal requirements.
Bibliography
Issued: March 1995
Title: Management Representations 440
5.3 - Should an external audit be the price to pay for limited liability?
There are two sides of the argument to answering this question, the benefits of an audit and the hindrance of an audit.
For small companies the cost of an annual audit may be a very unwelcome expense some may struggle to pay. The money spent on the audit is money taken away from the owners of the business, this is why many partnerships and sole traders may choose not to participate in an audit. This decision is acceptable, as there are not many people, excluding the owners, who would stand to loose substantial sums of money if the accounts were to be misstated.
As small companies expand and take part in riskier business decisions the owners may choose to form a private limited company, making the business a separate legal entity responsible for its own losses. Thus taking the risk to pay debts away from the owners. The risk however is not lost it is transferred to those who have invested money in to the company (stakeholders).
These stakeholders will take the form of the bank, suppliers and shareholders. Each of these will have money invested into the company or have money owing to them. The bank will no doubt have given the company an overdraft and more than likely some form of loan. Most transactions between business’ are credit not cash terms so the supplier will be owed payment for goods supplied. The shareholders will have invested money in to the company through the purchase of shares and will be owed remuneration by way of dividends.
Due to the reliance on the company limited liability brings there is added pressure for the accounts to present a true and fair view. This will allow the stakeholders to make the best decision for them based on the information presented in the accounts. This stresses the importance of an external audit on the companies accounts as it is simply unacceptable for a company to believe and assume people will invest without the security it brings.
As the sums of money being invested or lent to a business increase the risk for the stakeholders will increase, this puts further reliance upon the accounts. So any misstatement of the accounts may cause people to loose large sums of their money. As with all investments there is always risk of losing money but having the security of an external audit can prevent this happening because of a mathematical error or fraudulent practices.
The side of the argument in favour of the stakeholders is very strong and clearly shows the audit to be beneficial. From the point of view of the company, as said before, some may see it to be an unnecessary cost. But how can this be if it is so beneficial to those willing to hand money over to them? If the stakeholders are confident as to the stability of the company and believe the accounts reliably show this they will be willing to offer better credit terms and invest more money, hence benefiting the company. It doesn’t take much to see that the benefits the audit can bring to a company by way of extra financing and more favourable credit terms outweighs the cost of the audit itself.
When companies reach the size of public limited the financial backing needed to operate can be huge, this simply may not be possible without the accounts being audited. Reasons being banks and other money lending facilities may make it a term for the lending. So this is an example where the benefit largely outweighs the cost.
Conclusion
It is clear that the benefit of an audit for medium to large sized companies outweighs the cost, as without audited accounts these companies may struggle to raise finance and be unable to operate. This benefit for much smaller firms however is not so clear cut and investors will not be handing over such large sums of money. This will mean that it is less likely that any investor will demand the accounts to be audited, as they don’t stand to lose as much. However as these businesses expand, which is theoretically the plan, the investors of the business will come to a point where they want audited accounts. A business having a good audit history will gain greater confidence from a lender or investor than that of a business undertaking their first audit. So this is a clear advantage of having accounts audited when still being a small business.
The key point really is that business’ should not expect investors and lenders to hand them money, baring in mind they are doing so due to the information available in the accounts, if there in no guarantee the information is correct. The precise guarantee that an audit will bring. So to answer the question I do believe that an external audit should indeed be the price to pay for limited liability.
5.4 - Should auditors liaise with non-executive directors about the audit strategy?
Obtaining knowledge of the business is an important part of planning the work. The auditor’s knowledge of the business will help in identifying events, transactions and practices which may have a material effect on the financial statements. In order to develop the audit strategy, the auditors need to have obtained the understanding of the accounting and internal control systems and control environment, assessed inherent risk both for the entity and for the specific transactions and balances, and assessed control risk based on the results of the test of control.
ISA 300 Planning and audit of financial statements, as revised in June 2004, states that ‘ the auditor should plan audit so that engagement will be performed in an effective manner’.
The auditors may wish to discuss elements of the overall audit plan and certain audit procedures with the entity’s audit committee, management and staff to improve the effectiveness and efficiency of the audit and to co-ordinate audit procedures with work of the entity’s personnel.
In the mix of tests of control and substantive procedures applied in the audit,
There are few main determinants should be considered:
- Materiality and inherent risk
- Ethical Background and philosophy of management
- Organisation structure
- Is these an internal audit department and or non executive directors
- Preliminary risk assessment
Consider possible misstatements:
- The level of control risk approach
- Changes in personnel, systems, technology, management or control structures
In some cases, when auditors are planning an audit, they need to be aware of any areas within the audit which may require the use of expert, and take necessary steps to ensure that such persons are used in a controlled manner and their work can be relied upon e.g. non-executive director. Non-executive director is a director who is not an employee of the company and who only dictates part of his available time of the company. A director usually holds a seat on the board with particular experience or skills to exercise a steadying influence on the board decision.
‘The auditor should obtain an understanding of the entity and its environment, including its internal control, sufficient to identify and assess the risks of material misstatement of the financial statements whether due to fraud or error, and sufficient to design and perform further audit procedures. ‘
The auditor needs to use his/her professional judgment to determine the extent of the understanding required of the entity and its environment, including its internal control. The auditor’s primary consideration is whether the understanding that has been obtained is sufficient to assess the risks of material misstatement of the financial statements and to design and perform further audit procedures.
Although the auditor may require the use of expert or discussion with management team, it can be argued that the auditor loss independence and true and fair view on the strategy works if they liaise too close with non-executive director.
‘ISA 700 supplemented by APB Bulletin 2001/2002 – Revisions to the Wording of Auditors’ Reports which requires audit reports to include an expanded statement of auditors’ responsibilities and the title of the report to include the word independent.’
It is importance that the auditors are completely independent from the company that they are auditing. It is essential that every auditor’s integrity, objectivity and independence be beyond contestation. If an auditor cannot give an independent opinion on the financial statements, then it goes against the fundamental reasons for the audit. For this reason the Auditing Practices Board (APB) has established quality control, auditing and ethical standards to provide a framework for audit practice. The APB Ethical Standards are concerned with the integrity, objectivity, and independence of auditors.
Therefore, it depends what extent or how close the auditor liaises with non-executive director when carrying out the audit strategy. The auditor may liaise with non-executive in order to increase the efficiency on the work, but it can be argued the work loss its true and fair view and the auditor loss independence of work. In order to maintain an attitude of professional, the auditor should keep a reasonable distance with the entire stakeholder to avoid the breach of independence.
Bibliography
Books
ACCA Study text (2005), 2.6 Audit and Internal Review (International Standard), FTC Foulks Lynch
Cosserat Graham, W. (2004), Modern Auditing, 2nd edition, John Wiley & Sons Ltd
Woolf, E. (1997), Auditing Today, 6th edition, Prentice Hall
Reports
APB, (2006), Audit of Financial Statements of Public Sector Bodies in the United Kingdom
Websites
http://www.apb.org.uk/
http://www.accountancyage.com/
http://www.iaasb.org.
http://www.ifac.org/Guidance/EXD-CommentDL.php?EDCID=00965
http://www.ifac.org/Members/Source_Files/Auditing_Related_Services/A120_ISA_315.pdf
5.5 - Should Audit Working Papers be standardised?
The point of Setting standards is to ensure high quality, confidence of third parties and increased similarities between national and international companies to make them more comparable.
The IAASB (International Auditing and Assurance Standards Board) says:
‘The IAASB’s goal is to serve the public interest by setting high-quality auditing, assurance, quality control and related services standards and by facilitating the convergence of international and national standards, thereby enhancing the quality and uniformity of practice throughout the world and strengthening public confidence in the global auditing and assurance profession.’
The IAASB is trying to, via standards increase the confidence of 3rd parties, be it; shareholders, banks or any other party that may have a vested interest in a companies accounts. This allows these 3rd parties to make financial decisions using the accounts with a larger degree of satisfaction that what they are seeing in the accounts is a ‘True and Fair view’ of the financial position of that company. The standards set out for auditing; ISA’s (International Standards for Accounting) are there to achieve quality control, comparability and to strengthen public confidence in the profession. Having these standards in place means when an audit is conducted there is a set of rules to follow to make the sure the audit is undertaken correctly, without fraud and completed ethically with integrity, objectivity and independence.
The components of an audit are set out by three main boards; ISQC’s (International Standards on Quality Control), The Auditor’s Code which is the fundamental principles governing the conduct of audits and the APB ethical standards for audits which is ensuring the independence, objectivity and integrity of audits. All the standards set out by these boards are there not only to govern auditors but also to assist them. Having the standards in place allows auditors to refer to the rules to make sure that when they are performing an audit they are meeting their statutory obligations and therefore they are completing their work correctly. Auditors must make sure they are completing their work correctly as any mistakes made and the auditor can be liable and with unlimited liability. As previously mentioned having standards in place means that audited accounts are made more comparable, this being due to the fact that any accounts using ISA’s as their set standards which is all companies in the UK with a statutory audit will be judging items in the same way. This allows straight account to account comparison although this is still an assumption and caution must be taken into account when comparing company’s accounts.
Having auditing working papers standardised does mean the profession becomes quite rigid and due to every audit being different auditors still need to use professional judgement in certain situations. Certain circumstances or industries can throw problems to an auditor that they may have not encountered before or are not covered in the ISA’s to combat this there are practice notes and bulletins.
‘Practice notes give guidance to assist auditors in applying standards in particular circumstances and industries’. (ACCA Audit and Internal Review 2005)
As stated here practice notes are used to judge certain situations not specifically covered under ISA’s and apply them to standards. Also there are bulletins that provide auditors with guidance on new or emerging issues. Both practice notes and bulletins are acceptance to the fact that there is a flaw in standardising auditing as there are many variations of situations or new situations emerging and it is impossible to cover all of these with standards. Practice notes and bulletins though are put into place and help auditors to work in conjunction with existing standards.
To set a standard is to agree on a level of quality. Standards are used to achieve high quality and in a profession such as auditing where quality of opinion is vital to so many people standards are of up most importance. Standardising auditing papers brings a level of quality that allows confidence when viewing accounts, it brings uniformity to national companies to allow comparability and it brings auditors to, on the majority of occasions act ethically. Without standardisation of audit working papers the financial markets would be a corrupt and impossible place to work in. Standardisation of auditing is vital and will continue to be as long as there are people willing to invest their money, without these standards 3rd party confidence would be null and void and the auditing profession would be a useless commodity.
Bibliography
Books:
ACCA Audit and Internal Review 2005, Swift House Berkshire, FTC Foulks Lynch
Websites:
(accessed 26th March 2006)
6.1 - Appendices
Email group work to each other by Monday night.
Lee
Iain
James
Jason
Alternatives, specify and evaluate (d)(e) - LEE
Ethical Issues 1 Craig
Ethical Issues 2 Jason
Main issues James
Stakeholders Iain
The main issues:
- Trading with an audit client
- Proposed discount
- Discount given to give Ted glens help with their cash flow problem
- Discrepancy between worth of work and discount given
Issues of independence:
Craig
- The discrepancy of value could be seen as a bribe to pass audit
- Window dressing the accounts to get a bank loan (trying to cover up cash flow problems)
- Access to sensitive information of Ted Glens accounts and other companies
- Ted Glens employees will be working in Granny Goggins offices for three weeks so will therefore be able to liaise with staff and could have access to sensitive files.
Jason
- Taking an active role in helping to manage the company with trading of material and labour for audit fee payment
- Giving advice for alternative payment, auditing their own ideas and suggestions. May not be giving an overall true and fair view.
- The building work will have certain guarantees that will mean there will be need for continued relations between the audit firm and the builders, if there are problems or corrections that nee to be made.
- If a ten year guarantee is given the audit firm will have a vested interest in the continued operation of the building company, meaning they will give a more positive view of the accounts given the companies current financial position.
Need to be backed up with auditing standards ISA’s
Stakeholders:
Partners
Employees – both companies
Suppliers – bob the builder
Shareholders
Future clients
Directors
Bank
Alternatives Pat’s decisions:
- Go ahead with audit but not discount change building company
Decision to ethical dilemma:
Evaluate risks of the potential bribe
Credit worthiness of the company for future audits
http://www.ifac.org/Members/Source_Files/Auditing_Related_Services/A120_ISA_315.pdf
ACCA Study text (2005), 2.6 Audit and Internal Review (International Standard), FTC Foulks Lynch
