Audit and assurance final assignment

Audit and assurance final assignment

Introduction

The overall objectivity of an auditing study is to provide an informed auditor opinion and conclusion regarding the reliability of the disclosed fiscal statements. Therefore, an audit is an independent study carried to enhance quality, safety, and usefulness of financial documents (Bently- Goode, K. A, et al., 2017). The process of auditing, which is inspired by a series of International Standards on Auditing (ISAs) that provide guidelines on how conduction, collection, documentation, and representation of audit finding, should be done.

The assignment requirements

Section A

CASE 1

Idea7 is a website design company whose year-end was 31 December 20X7. The audit is almost complete and, the financial statements are due to be signed shortly. Profit before tax for the year is $3·8 million, and revenue is $11·2 million. The company has only required an audit for the last two years and, the board of directors has asked your audit firm to provide more detail concerning the form and content of the auditor’s report. During the audit, it has come to light that a critical customer, ITrust Consultants, with a receivables balance at the year-end of $285,000, has just notified Idea7 that they are experiencing cash flow difficulties and are therefore unable to make any payments for the foreseeable future. The finance director has announced the audit team that he will write this balance off as an irrecoverable debt in the 20X8 financial statements..

Question 1

The audit partner will explain to the Board of Directors the content of the audit report and has asked you to provide details as to why certain elements included within an unmodified report. Which of the following explains the purpose of the ADDRESSEE element (to whom the audit report addressed) of the unmodified audit report in line with ISA 700 Forming an Opinion and Reporting on Financial Statements?

1. It demonstrates the point at which sufficient appropriate evidence has obtained
2. It clarifies who may rely on the opinion included within the report
3. It explains the role and remit of the audit
4. It sets out the location where the auditor practices (5 marks)

The Answer is B- it clarifies who may rely on the opinion included within the report

Question 2

The audit assistant who was assigned to the audit of Idea7 wants a better understanding of the effect subsequent events have on the review and has made the following statements:

1. All subsequent material events require the numbers in the financial statements to be adjusted
2. A non-adjusting event is a subsequent event for which NO amendments to the current year financial statements are required
3. The auditor’s responsibilities for subsequent events which occur before the audit report being signed are different from their duties after the audit report has been issued
4. The auditor should request a written representation confirming that all relevant subsequent events have been disclosed

Which of the statements above in relation to subsequent events are true?

1. 1 and 3
2. 2, 3 and 4
3. 1, 2 and 4
4. 3 and 4 only (5 marks)

Answer D- 3and 4 only

Question 3

The audit engagement partner has asked you to make an initial assessment of the materiality of the issue with the outstanding receivables balance with ITrust Consultants and to consider the overall impact on the financial statements.

Which of the following correctly summarizes the effect of the outstanding balance with ITrust Consultants?

Answer is C- profit is overstated.

Question 4

The audit engagement partner requires you to perform additional procedures to conclude on the level of any adjustment needed with the outstanding balance with ITrust Consultants. Which TWO of the following audit procedures should be performed to form a conclusion as to whether the financial statements require amendment?

1. Discuss with management the reasons for not amending the financial statements
2. Review the cash book post-year-end for receipts from ITrust Consultants
3. Send a request to ITrust Consultants to confirm the outstanding balance
4. Agree on the outstanding balance to invoices and sales orders
5. 1 and 2
6. 1 and 4
7. 2 and 3
8. and 4. (5 marks)

The answer is A- 1 and 2

Question 5

The finance director has asked you to outline the appropriate audit opinions which will be provided depending on whether the company decides to amend or not amend the 20X7 financial statements for the issue identified regarding the recoverability of the balance with ITrust Consultants. Which of the following options correctly summarizes the audit opinions which will be issued depending on whether or not the 20X7 financial statements are amended?

The answer is D- financial statement amend (unmodified), financial statement not amended (qualified ‘except for’)

CASE 2

You are an audit manager of Carter & Co, and you have just been assigned the audit of Elvis & Priscilla Co (E&P) which is also a listed company. The audit engagement partner who is responsible for the audit of E&P, has been in place for approximately eight years and her son has just been offered a position with E&P as a sales manager. This role would entitle him to receive shares in E&P as part of his remuneration package. E&P’s board of directors is considering establishing an internal audit function, and the finance director has asked Carter & Co about the differences in the role of internal audit and external audit. If the internal audit function is established, the directors have suggested that they may wish to outsource this to Carter & Co. The finance director has indicated to the board that, if Carter & Co is appointed as internal as well as external auditors, then fees should be renegotiated with at least 20% of all internal and external audit fees being, based on the profit after tax of the company as this will align the interests of Carter & Co and E&P.

Question 1

From a review of the information above, your audit assistant has highlighted some of the potential risks to independence in respect of the audit of E&P:

1. Audit partner has been in the position for eight years
2. E&P has asked for advice regarding role of internal audit
3. E&P has asked Carter & Co to carry out internal audit work
4. Fees will be based on 20% of profit after tax

Which of the following options correctly identifies the valid threats to independence and allocates the threat to the appropriate category?

 The answer is D- self- interest (D only), self-review (3only), and familiarity (1 only)

Question 2

In relation to the audit engagement partner holding the role for eight years and her son’s offer of employment with E&P: Which of the following safeguards should be implemented in order to comply with ACCA’s Code of Ethics and Conduct?

1. The audit partner should be removed from the audit team
2. An independent review partner should be appointed
3. The audit partner should be removed if her son accepts the position
4. Carter & Co should resign from the audit (5 marks)

The answer is A- the audit partner should be removed from the audit team

Question 3

In line with ACCA’s Code of Ethics and Conduct, which of the following factors must be considered before the internal audit engagement should be accepted?

1. Whether the external audit team has the expertise to carry out the internal audit work
2. If the assignments will relate to the internal controls over financial reporting
3. If management will accept responsibility for implementing appropriate recommendations
4. The probable timescale for the outsourcing of the internal audit function
5. 1, 2 and 3
6. 2 and 3 only
7. 1 and 4 only
8. 1, 3 and 4. (5 marks)

The answer is B- 2 and 3 only

Question 4

Following management’s request for information regarding the different roles of internal and external audit, you have compiled a list of critical characteristics.

1. Appointed by an audit committee
2. Reports are publicly available to shareholders
3. Review efficiency and effectiveness of operations to improve operations
4. Express an opinion on the truth and fairness of the financial statements

Which of the following options correctly allocates the above statements to the relevant

Auditor?

The answer is C- internal (2 and 4), internal audit ( 1 and 3)

Question 5

If  internal and external audit assignments are accepted, what safeguards, if any, are needed in relation to the basis for the fee?

1. As long as the total fee received from E&P is less than 15% of the firm’s total fee income, no safeguards are needed
2. The client should be informed that only the internal audit fee can be based on profit after tax
3. The fees should be based on E&P’s profit before tax
4. No safeguards can be applied and this basis for fee determination should be

rejected (5 marks)

The answer is D- No safeguards can be applied and this basis for fee determination should be rejected

Section B

CASE 3: Kids Clothes Ltd has been trading for over 25 years, selling children’s clothing. They sell to a wide variety of customers including large and small clothes retailers across the country. The company’s year-end is 31 May 2013.The Company has a large manufacturing plant, four large warehouses and a head office. Upon manufacture, the clothes are stored in one of the warehouses until they are dispatched to customers. The company does not have an internal audit department.

Sales ordering, goods dispatched and invoicing

Each customer has a unique customer account number and this is used to enter sales orders when they are received in writing from customers. The orders are entered by an order clerk and the system automatically checks that the goods are available and that the order will not take the customer over their credit limit. For new customers, a sales manager completes a credit application; this is checked through a credit agency and a credit limit entered into the system by the credit controller. The company has a price list, which is updated twice a year. Larger customers are entitled to a discount; this is agreed by the sales director and set up within the customer master file. Once the order is entered an acceptance is automatically sent to the customer by mail/email confirming the goods ordered and a likely dispatch date. The order is then sorted by address of customer. The warehouse closest to the customer receives the order electronically and a dispatch list and sequentially numbered goods dispatch notes (GDNs) are automatically generated. The warehouse team packs the goods from the dispatch list and, before they are sent out, a second member of the team double checks the dispatch list to the GDN, which accompanies the goods.Once dispatched, a copy of the GDN is sent to the accounts team at head office and a sequentially numbered sales invoice is raised and checked to the GDN. Periodically a computer sequence check is performed for any missing sales invoice numbers.

Fraud

During the year a material fraud was uncovered. It involved cash/cheque receipts from customers being diverted into employees’ personal accounts. In order to cover up the fraud, receipts from subsequent unrelated customers would then be recorded against the earlier outstanding receivable balances and this cycle of fraud would continue. The fraud occurred because two members of staff ‘who were related’ colluded. One processed cash receipts and prepared the weekly bank reconciliation; the other employee recorded customer receipts in the sales ledger. An unrelated sales ledger clerk was supposed to send out monthly customer statements but this was not performed. The bank reconciliations each had a small un-reconciled amount but no-one reviewed the reconciliations after they were prepared. The fraud was only uncovered when the two employees went on holiday at the same time and it was discovered that cash receipts from different customers were being applied to older receivable balances to hide the earlier sums stolen.

Requirements:

1. Recommend SIX tests of controls the auditor would normally carry out on the sales system of Kids Clothes Ltd, and explain the objective for each test. (12 marks)

The overall goal of test control procedures is to check on how strong and reliable the client sales and other functional units are in assuring conveniences and openness (Pratt, S., & Peters, E., 2017). In order to determine origins and extents of misstatements on sales circulation mechanisms within the Kids Clothes Ltd, an auditor should base their test control mechanisms on;

1. Investigating individual sales transactions

Through the above approach, the auditor would be able to obtain the authenticity and correctness of sales invoices by relying on confirmation communications from customers and buyer to ascertain whether sales invoices and the dispatched orders are reconciled.

1. Observation of business transactions

In the bid to understand the execution of Kids Clothes Ltd.’s sales transactions, an auditor should embark on observing processes for entries and processing of documents such as sales invoices and the dispatched orders. By doing so, an auditor may acquire information regarding several misstatements on financial declarations.

1. Through inspection

An auditor may opt for clear analysis of sales circulation documents to confirm on their authenticity. Auditors should look for; approval stamps and seals, investigation of check marks.

4. Re-performance

Through this method, an auditor should opt on reperfoming sales transactions at individual levels and attempt to identify the controls under each elements of the transactions. Reperformance may provide a chance to identify loopholes for fraud.

5. Recalculations

An auditor tasked to audit the sales transactions and circulations of Kids Clothes Ltd may encourage the recalculations of sales invoices and compare their entries to the ledger accounts. By doing so, there possibilities to address misstatements and fluctuations.

6. Periodic procedural analysis

Constant analysis of procedures and frameworks within the Kids Clothes Ltd may provide an entry point to identification of loopholes used to conceal fraudulent activities within the company. By employing periodic analysis, the control mechanisms remain on toes to ensure that sales procedures are safe from future potential fraud.

2. Describe substantive procedures the auditor should perform to confirm Kids Clothes Ltd year-end receivables Balance. (10 marks)

The conduction of substantive procedures aim at determining the reliability and authenticity of monetary declarations. Basically, substantive procedures serve as significant information and evidence to confirm that all declared fiscal statements are reliable and correct (Levy, H.B, 2019). For the purpose of confirming the reliability of receivable balances in the context of the Kids Clothes Ltd, several substantive measures inform the activities of an auditor. They include;

1. The process of issuing bank confirmation statements to evaluate final monetary balances and reconciling ending balances and bank statements to enhance and determine their correctness.
2. The process of contacting customers to confirm that all receivable balances are correct as indicated in sales invoices and financial documents. By doing so, there are potentials of highlighting deficiencies and misstatements while indicating receivable balances.
3. The process of calculating record valuations and comparing them with the declaration statement. An auditor should employ proper tools and mechanisms to sample for unit documents and analyze to asserting the correctness of year- end balances.
4. The process of observing the year- end physical record counts. By directly counting physical documents including sales invoices, clerk ledger, and

Final financial statements, an auditor may reach out for discrepancies available in computed year-end receivable balances.

3. Identify and explain controls Kids Clothes should implement to reduce the risk of fraud occurring again and, for each control, describe how it would mitigate the risk. (10 marks)

The overall objectivity of any control mechanism at company level should ensure validity and applicability of business goals. Alongside upholding company’s goals, control systems enhance and promote transactional security and assurance (Rahman, N. H. A, et. all, 2019). For the case of the Kids Clothes Ltd, the applicable control mechanisms to avoid future fraud are Integra table into three fronts. Namely;

1. Boosting environmental control systems

Environment control aspects involve, impacting employees attitudes, and alertness of the management toward comprehension of sensitive responsibilities regarding the business. Through boosting their attitudes, future fraud cases may be mitigated in the thinking that positive attitudes may limit incidences of negative thought of cooperating to fraud. Impacting on employees understanding on their responsibilities would promote virtues of timely financial reporting and other positive bearing to daily functions.

2. Accounting system security

For the purposes of fostering security of the company’s system. It is primarily important to harness accounting system security. Accounting systems may include, documentation of company’s transactions, timely review of inventories and presentation of financial document at the correct time. By doing so, incidences of delays in presenting ledgers and other important monetary communications would be mitigated and thus reducing incidences of fraud in future.

3. Boosting overall control procedure

The process of boosting control procedure may involve aspects of; proper delegation of powers, training on roles, training on interpretation of financial documents, and mainstreaming of appropriate security approaches to ensure protection of documents and customer relations. By adopting measures to boost control procedures may provide an avenue whereby other employees rather than the financial expert can interpret financial statement and thus reducing incidences of fraud arising from misinformation’s and fluctuations of data.

4. Describe substantive procedures the auditor should perform to confirm Kids Clothes revenue.

The overall objectivity on conducting a substantive analysis on revenue of a certain company is to determine the reliability and correctness of disclosed revenues relevant in financial statements (Smith, J.L., & Stephens, N.M., 2020). For purposes of revealing the authenticity of revenue declarations, several procedures are instrumental;

1. The process of establishing a profound comparison between revenue against the documented revenues of past years and the overall expenditure to find out potential or present crucial fluctuations and changes. The procedure of reconciliation between revenue and that of prior year may be vital in explaining relevant estimations and fluctuations within revenue declarations.
2. The process of computing a before- tax revenue and drafting a proper comparison with gross revenues of past years to identify aspects of effect of tax compliance on gross revenue and identify any potential incidences of overstatement of taxable revenues that may hinder correctness of revenue declarations.
3. An endeavor to randomly sample available or processed customer orders and provide a comparison with processed draft notes and invoices of sales as well as sales ledgers to provide for the reconciliation of the above vital documents that may impact on final revenue statement.
4. Analysis of selected sample units of invoices and setting the price rates back to the contracted costs to determine the reliability of the sales invoices. Any overstatement in the invoices is identifiable.
5. The process of selecting dispatch notes from before and after the end of the year and conduction of reflective study for sales to confirm that sales invoices are of appropriate computation time and the effective application of cut offs.
6. State and explain FIVE procedures for obtaining evidence and for each procedure, describe an example relevant to the audit of purchases and other expenses. (10 marks)

Evidences for audit provide for information that final conclusions and modified opinions of an auditor (Qayumov, B., 2017). An auditor may embark on diversified approaches in collection of information regarding an audit study. Several applicable methods of obtaining audit evidences include;

1. Inspection practices

An auditor may opt to inspect and investigate financial documents with an eye on getting incidences of potential misstatements to the final financial statements. For example, an auditor may inspect the reconciliation of placed orders, sales invoices, and the dispatch notes to ensure their agreement.

2. Through observation

Observation entails physical witnessing of financial transactions within an entity. Observation is vital in ensuring familiarization to the relevant available controls within an organization. For example an auditor may prefer to observe the handling of invoice and sales entries to the system in the bid to promote correctness.

3. Recalculation and reperformance practices

Recalculating and reperforming transactions may provide an insight to the auditor on how transactions were valued and performed respectively. Through recalculations and reperforming, there are possibilities that misstatements are identified. For example, an auditor may embark on recalculating amounts recorded in sales invoices against the amount placed on customer orders.

4. through analytical approach

Analytical procedures involve keep studies and investigations on overtime trends in terms of monetary fluctuations and trends. An independent investigation would be helpful in providing appropriate information regarding fiscal traits. For example an auditor may employ a separate study to investigate the relationships and trends in reconciliation of dispatch notes and sales invoice ledgers to bring about omissions and misstatements on the final financial statements.

5. Through inquiries and cooperation methods.

Proper inquiries provide appropriate evidence regarding business transactions at the client level and stakeholders’ contexts. Both internal employees and external communities involving customers, partners, and lenders provide crucial information to the auditor. For example, an auditor may encourage use of customer contacts to confirm that the accounted receivable balances are reliable.

Conclusion

To sum up, an auditing study involves different approaches ranging from collection of auditing evidences, documentation of findings, and reporting of the auditor opinions. All the discussed endeavors aim at impacting on the authenticity and reliability of the financial declarations. Apart from enhancing the correctness of financial statements, auditing is a marketing strategy to promote customer confidence, prevention of fraud at business levels, and enhancing profitability through increased investments from external investors and partners.

References

Bentley-Goode, K. A., Newton, N. J., & Thompson, A. M. (2017). Business strategy, internal control over financial reporting, and audit reporting quality. Auditing: A Journal of Practice & Theory, 36(4), 49-69.

Levy, H. B. (2019). The Essence of Effective Analytical Procedures. The CPA Journal, 89(10), 58-60.

Pratt, S., & Peters, E. (2017). Internal audit: Raising the bar in auditing financial crime risk. Journal of Financial Compliance, 1(3), 237-244.

Qayumov, B. (2017). How to apply international standards at obtaining audit evidences. International Journal of Research in Social Sciences, 7(10), 76-86.

Rahman, N. H. A., Jamaluddin, A., Hamzah, N., & Aziz, K. A. (2019). ESTABLISHING AN EFFECTIVE INTERNAL CONTROL SYSTEM FOR FRAUD PREVENTION: A STRUCTURED LITERATURE REVIEW. Asia-Pacific Management Accounting Journal, 14(3), 19-48.

Smith, J. L., & Stephens, N. M. (2020). The Reel Wheel: Using Analytical Procedures as Substantive Tests of Account Balances. Issues in Accounting Education Teaching Notes, 35(1), 1-8.