Company Auditing

Group appointee HBC614B participation Auditing PART 1 THE INTERNATIONAL AUDITING STANDARDS BOARD AND ITS IMPORTANCE TO THE DEVELOPMENT OF AUDITING STANDARDS IN AUSTRALIA AND NEW ZEALAND The world(prenominal)ist Auditing and Assurance Standards Board (IAASB) is an independent standard setting body inside the world(prenominal) Federation of Accountants (IFAC). Established in 1978, originally known as International Auditing Practices Committee (IAPC), it changed its name to IAASB in early 2001 and was then better by IFAC in 2003.IAASB puts public interest first and aims to improve the timber and uniformity of practice throughout the world and to strengthen public pledge in the global canvasing and assurance avocation by facilitating the convergence of international and national standards. IAASB is committed to achieve its objectives through the following escapes exploitation Standards establish high woodland visiting, surveil, other assurance, tone experience and ce rebrate services standards, such as International Standards on Auditing (ISAs). Global word meaning & crossing promote the acceptance and adoption of IAASB pronouncements throughout the world and aver a strong and solid international cipherancy profession by coordinating with IFAC member bodies, regional organisations and national standard setters. Communication push debate and present papers on a variety of study and assurance lie withs and join on the public image and aw atomic tote up 18ness of the activities of the IAASB. To date, the IAASB has earned change magnitude recognition for the property of its standards and the credibility of its standard setting process.This has contributed to the increasing utilisation of its standards worldwide. Over 100 countries atomic number 18 now apply or are in the process of adopting ISAs into their national scrutiniseing standards. For investors in international dandy securities manufactures, the fictional character o f analyse bailiwicks and inspect opinions on monetary reports are crucial when they invite decisions about capital allocation. Audits, working within internationally accepted auditing standards, augment the credibility and reli capacity of the financial information provided in the financial reports.As Australian capital markets are increasingly linked with overseas markets, it is important to cast a globally standardised financial reporting framework that is back up by globally accepted auditing standards. The Australian Auditing and Assurance Standards Board (AUASB) make the conformity with IAASB standards easier via a long-standing policy of convergence and harmonisation with ISAs. The AUASB applys ISAs as a base to develop Australian Standards on Auditing (ASA).For all revision and sweetening of ISAs initiated by the IAASB, the AUASB give make appropriate consequential amendments to ASA. The AUASB and IAASB generally issue an exposure draft of a proposed auditing and assurance standard concurrently for servant by interested parties. In innovative Zealand, New Zealand Auditing Standards (AS) and Audit advocate Statements (AGS) are also based on ISAs and International Auditing Practice Statements (IAPS). The New Zealand auditing permit adopts the IFAC documents and amends them only as necessary to achieve its 1 of 11 Group assigning HBC614B Company Auditing objectives. Amendments to the IFAC documents whitethorn be do to reflect proper(postnominal) New Zealand legislative requirements or to reflect specific audit practising arrangements within New Zealand. As we can see, for years since IAPC or IAASB was established, it has played a really important role in enhancing and standardizing the quality of auditing and assurance services around the world. ============================= 2 of 11 Group Assignment HBC614B Company Auditing PART 2 CO-REGULATION OF AUDITING PRACTICE IN AUSTRALIAIn most actual countries, including Australia, th e auditing regulatory framework is provided, at least to some tip, by regime through legislation and government agencies. In the past, however, the auditing profession in Australia was by and overlarge self-regulated through the rules and requirements self-imposed by the principal players in the field, i. e. auditing firms and auditing passkey bodies. As a result of the Corporate Law Economic Reform platform (CLERP) 9, the Auditing and Assurance Standards Board (AUASB) became a statutory (government) body.Since April 28th 2006, the Australian Auditing Standards (ASAs), which earn been released by AUASB for purposes of section 336 of Corporation Act 2001, deem Force of Law. The pecuniary Reporting Council (FRC), a statutory body below the Australian Securities and Investments deputation Act 2001 (ASIC Act), is responsible for providing broad oversight of the process for setting report and auditing standards as well as monitoring the effectiveness of meeter independency re quirements in Australia.Yet the control and enforcement mechanism of these standards is also supported by the auditing profession represented by dickens primary professional chronicle organisations certified public accountant Australia and the Institute of Chartered Accountants in Australia (ICAA). Although the membership in these two organizations is voluntarily, it is equable a necessary condition to get registration as a Company auditor or a Liquidator. slightly methods of control of quality of the auditing services imposed by these professional organisations include peer limited freshen ups, go on professional development and periodical rotation of the attendants.There are also disciplinary procedures in place to encourage improved ethical behaviour and quality of service provided. This particular model of co- universe of discourse of government regulation and labor self-regulation in Australia is called co-regulation of auditing practice. Co-regulation provides inter actions that produce pressures for the re finement of regulatory expressions in terms of openness, consultation, independence and festinate of response to urgent accounting problems Malcolm C. Miller. ============================= 3 of 11 Group Assignment HBC614B Company Auditing PART 3 QUESTION 6. 3 ASA 315 UNDERSTANDING THE ENTITY AND ITS surround AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT HOMECHEF PTY LTD. A first and very important step of the audit process involves the auditor doning an early judgement and knowledge of the clients work. In fact, ASA 315 requires that this step is carried out during the audit intentionning stage. The auditor essential obtain or update their understanding of the clients trading operations and circumstances, including its organisational structure, caution policies, the keep federation position in its assiduity, the economy and its efficacious obligations.ASA 315 provides considerable guidance on matters related to obtainin g an understanding of the entity and its environment, which may be categorise into three briny categories (1) Internal control / organisational structure (2) Operational and judicial structure (3) Industry and economic conditions An understanding of these three elements helps the auditor treasure the clients course try and identify the events, legal proceeding and practices that may energise a significant effect on its financial report. This report presents a recent review of the operations and circumstances of one of our clients, HomeChef Pty Ltd. in accordance with the requirements of ASA 315. The main objective was to identify the events and developments at HomeChef which may deliver a significant bearing on the familiaritys occupation take chances and consequently affect our audit. This understanding go out help us plan and perform the audit more(prenominal) efficiently and effectively and bequeath ultimately improve the services we provide to our client. HomeChef Pty Ltd has been the market attractor in the boutique food and beverage industry for the operate two years.The troupe manufactures, supplies and retails quality ingredients for use in the home kitchen and small restaurant market. During the review our audit team identified a number of study(ip) events/ exertions that may have a significant impact on the wrinkle and affect our audit process. Below is a brief talk aboution on each of these events/transactions 1) New products and services Recently, HomeChef introduced pre-packaged meals suitable to be served at a dinner party. Preparation of the ready to serve meals would require unembellished steps to produce the final product.This would involve more processing facilities, more staff and more advertising. One potential related business stake might be the plusd product liability. There may be extra compliance requirements from the Food Safety Regulators. There could also be risk that the demand has not been precisely estimate d. The smart sets capital and current expense may adjoin significantly because of the launch of the unfermented product. This side tends to increase our audit risk. The auditor, therefore, should carefully consider how this changing direct characteristic may affect his/her auditing process.For example, he/she may need to review some Food Safety Regulation requirements to evaluate that correct follows of expenditure is attributed to this particular type of compliance or refer to some industry literature to get a better understanding of the niche market for this type of product. Reviewing 4 of 11 Group Assignment HBC614B Company Auditing gross gross revenue figures and sale forecasts may also help to pass judgment to what degree the associations business risk may be affected by this sore development. 2) New lines of business HomeChef has recently opened a number of small cafe where customers can sample the s companys product range.By doing so, the company is venturing i nto unfamiliar territory. In addition, the notes of HomeChefs draft financial report reveal that the company has entered into agreements for building and developing a invigorated entertainment complex. These events indicate not only changes in the companys operational structure, but also those relating to its environment. New opportunities bring in the raw risks. As this is HomeChefs first venture into a new business area, neglect of expertise and experience could be a real caution. The hospitality industry operates quite unalikely from the food manufacturing.There could be many more warlike forces and regulations in place. This move could change the organisational/operational structure of the company drastically. For example, new divisions may need to be established and the company hierarchy changed. apart(predicate) from the potential risks of increase product liability and inaccurate demand estimates, comparable to the case of all new products, this could introduce new r isks associated with the companys home(a) control. Also, the companys potential business risk would increase its inherent risk. In general, this event is likely to increase our audit risk.It is very important that the auditor familiarises him/herself with the companys new operational structure, the industry conditions and regulatory environment related to this new line of business. Reviewing the hospitality industry publications and significant industry legislation may assist with basic understanding of how the company business risk is affected by this move. Aggressive merchandising and acquisition strategy Rapid growth Over the last two years HomeChef has acquired a number of smaller competitors and become the market leader in its industry.This is an indication of the companys aggressive approach to elaboration and growth. In such stances, it is often noticed that a companys infrastructure is likely to lag behind in the process. In a hurry to expand, the organisational structure of the company may be changing too fast. There could be staff members with insufficient experience, the IT system may not cope well under the new conditions as new procedures and processes are added in. This significant and rapid expansion of operations could create strain and increase the risk of a break raft in controls.The auditor needs to discuss with the senior management and gather evidence from the companys documents to assess this risk. He/she may need further understanding of the current troll in the industry, to assess how this acquisition spree could affect HomeChefs business risk, and consequently the audit risk. Reviewing government statistics, trend forecasts, trade journals and financial newspapers may help improve the auditors understanding of the industry in general and the business in particular.Changes in key personnel The divergency of a key executive (HomeChefs finance director), probably with a significant loss of corporate history and experience, may also have an impact on the business. The new finance manager has been with the company for little than a month and may take some time to gain the knowledge and understanding of the business. He may have a different centre or 3) 4) 5 of 11 Group Assignment HBC614B Company Auditing understanding of the companys midland control.The auditor should take this performer into account when assessing the risks of misstatements associated with the companys financial report which, possibly, has been induced under the instructions of the new finance director. 5) Newly-established internal audit group HomeChef started victimization the service of an internal audit group for the first time this year. Generally, the existence and operation of an internal audit group indicate the commitment and terrible consideration given to maintaining high standards of internal control by the management. This would unremarkably reduce the control risk in a business and subsequently reduce the audit risk.In addition, the external auditor could, to some extent, use the work of an internal auditor, after having gained knowledge of and satisfied with the scope of internal auditing and the audit teams technical competence and professional care. However, in this case, as HomeChefs audit team is new, careful considerations are required if the auditor is to rely on the internal teams audit work. foundation of a significant new IT system related to financial reporting HomeChef switched to a new computer system early this year. The system was installed by a professional computer company and the old and new systems were get outlet parallel for 3 months.Some new functions/modules have been introduced in the new system, including the ability to process stocktake results, account payable invoices and payments at the store level. This event highlighted a major change in one of the companys internal control components. It calculates that the new system is rather reliable as a systematic scruti nying plan and an integrity checking process were carried out by the professional computer company and there have been no major problems with the system so far. The use of this new system could potentially pass the companys control risk. The audit strategy could focus on test of control.A proper and systematic testing plan on the new system is recommended, especially on the new modules for stocktake and accounts payable process. Significant measuring of non-routine/non-systematic transactions HomeChefs draft Income Statement includes an extraordinary item of $231 billion without any notes or explanations attached to it. The existence of this extraordinary loss would veritablely have a significant impact on the business and would increase the audit risk considerably. This particular transaction requires a significant amount of attention by the auditor.Enquiries should be made to understand the nature and extent of all relevant details of this transaction. This would help the audi tor assess if the transaction is legal, not dismissing the possibility of fraud, or errors, such as transactions save without substance, intentional misapplication of accounting policies, mathematical mistakes, oversight or misapprehension of facts. The auditor should also examine if the valuation and allocation of the amounts have been make correctly. Company records and legal documents will need to be reviewed. An extensive crucial audit approach would be suitable for this particular area of the audit.Debt structure Covenant agreement Note (e) to the draft Financial Report reveals that a covenant agreement exists between HomeChef and its bank. The bank loans are secured against the companys remaining property, plant and equipment. This agreement specifies that the company should maintain a 6) 7) 8) 6 of 11 Group Assignment HBC614B Company Auditing positive net evident asset ratio and a positive current ratio. Given the large amount at stake, there is a great incentive for the company to falsify, alter and manipulate figures to achieve these positive ratios at any cost.This situation would increase HomeChefs business risk significantly and consequently increase our audit risk. The audit plan could focus on hearty testing of the accounts related to the current ratio and net asset ratio. The auditor must exercise reasonable care and skill and maintain an attitude of professional scepticism throughout the audit. Based on HomeChefs financial ratios beingness adverse and the subsequent difficulty in complying with the terms of loan agreements, the auditor may need to raise a going doctor issue.It would be necessary for the auditor to discuss this problem with HomeChefs management so that appropriate measures could be taken by the company to overcome this situation. As a result of reviewing HomeChefs operations and environment, including its financial and marketing position, using the precepts of ASA 315, our audit team has been able to update our know ledge of the companys situation and assess our audit risk accordingly. This understanding and assessment will direct the development of our strategy and plan for the audit of HomeChef. ============================ 7 of 11 Group Assignment HBC614B Company Auditing PART 4 QUESTION 6. 22 IMPACT OF BUSINESS RISK ASSESSMENT ON AUDIT scheme This report presents a short case study of wrap restrict. The main purpose of the case study is to look at how assembly line endangerment impacts on Audit guess, and consequently, on Audit Strategy and Plan. fluctuate Limited is a closely held private company, manufacturing high-quality woollen cloth. It has been in operation for most 60 years and the CEO of the company is also its major shareholder.Currently, the company is under a great financial stress due to increase competition and falling sales volume. Three years ago the company was sued for dumping chemical pollutants into the local river. As a result, a blockage was signed with th e environmental Protection theatrical providing that Weave construct a water preaching facility within five years. Our Audit securely has been auditing Weave for the last ten years, and the current year interim audit revealed that there has been virtually no activity in the Water preaching Facility Construction account in the current financial year.To prepare for this year audit we need to take the following steps (1) review the companys business risk i. e. the risk that Weaves business objectives will not be attained due to the above-named pressures and, ultimately, the risk associated with its profitability and survival. (2) assess the implications of the companys business risk on our audit risk (3) develop our audit strategy and audit program in response to the assessed risks. In order to assess Weaves business risk, we felt that a PEST analysis would be the most appropriate approach.It involves identifying the political/legal, economic, social and technological influences o n an entity. Environmental Protection Laws may have a heavy toll on the business. Compliance with these Laws (such as building a water treatment facility) may be very expensive, but non-compliance may actually have a suicidal effect on the company. Economic risk should also be taken into account. Increased competition and limited market for Weaves high quality and possibly expensive products could pose a dear threat to the companys profitability and ultimately its very survival. social risk component is also present in this case. The surrounding area is poor and unemployment rate is high. The companys management may get hold a social pressure to provide employment at any cost. The obligation to build a water treatment facility could be very expensive and resource-consuming. It is not an easy task to estimate or to make provisions for the resources required to meet this obligation. It is even harder to estimate the cost of not meeting this obligation. This adds unusual pressure on the management.Potential incentives could arise for management to understate the companys profit/cash come down to use as an excuse in an attempt to avoid fulfilling this particular liability. This situation is likely to increase Weaves inherent risks. 8 of 11 Group Assignment HBC614B Company Auditing In assessing the companys control risks, certain observations and issues have come to our attention which suggest an unsatisfactory internal control system The companys CEO is also its major shareholder who searchs to be a strong character that has the overriding authority and decision making power. The CEO does not seem to take the compliance with the conditions imposed by the disposals Environmental Protection Agency seriously. He decided to stop work on the water treatment facility as he thought that the State would not fine or close the company down for non-compliance. The company does not seem to have any risk assessment policies or procedures for dealing with business risk. Based on the above findings, the audit team agreed that Weaves business/inherent risks and control risks could be assessed as high.This remnant has had an impact on our audit strategy and audit plan. As we gestate that the control risks are high, an audit strategy of a predominantly substantive approach has been adopted. We do not plan to obtain a gross(a) understanding of the companys internal control or to feed out tests of control. Instead, we plan extensive substantive audit procedures based on a low to medium acceptable level of detection risk (depending whether the assertions under examination are at risk).In response to the high level of inherent risks, we decided to assign more experienced audit personnel and to conduct the audit with a heightened degree of professional scepticism. As mentioned earlier, an accurate assessment of the extent of liability related to the breach of the environmental laws is not easy to achieve. As the companys management does not seem t o recognise the seriousness of this risk or to respond to it properly, we decided to employ environmental and technical experts to assist by providing us with legal/environmental opinion and estimates.The engagement of an environmental consultant will be plan to happen before the year end audit. Weaves increased inherent risk and control risk increase our audit risk. Some assertions in the companys financial reports have been identified as the key audit assertions as they tend to be more at risk. These assertions will be examined closely (please refer to the matrix below) and more efforts will be focused on obtaining sufficient and appropriate evidence to test these assertions.Financial Acct Liability Acct (provision for water treatment facility) Contingent Liabilties Valuation of the provision gross sales Acct (Income Statement Assertions) Completeness all sales recorded Accuracy of recorded sales amounts Correct accounting period cut-off Inherent assay Control Risk Debtors con firmation Assertions at risk (Balance Sheet Assertions) Completeness of all liabilities Inherent Risk Engagement of environmental expert/consultant Quotation / project estimations are recorded properly with appropriate amounts Audit Risk Procedures/Evidence 9 of 11 Group Assignment HBC614B Company Auditing To test if the liability account for the water treatment facility contains any material misstatement we will focus on whether the account has included all liabilities as per the environmental specialists advice and the amounts are properly estimated and recorded (completeness and valuation). We could do this by pursuit confirmation from the environmental specialist and checking estimates/quotations for the project.To support the companys birdsong of low sales volume and low level of cash operate, we will test if all sales transactions pertaining to the company have been included in the income statement (completeness) and all sales occurred during the current accounting perio d have been properly recorded with the correct amounts (accuracy and cut-off). Collecting debtors confirmations could be the approach to carry out this test. As our team has audited the company for the last ten years, it is assumed that there must be a certain degree of familiarity and complacency.However, due to the new developments in the company situation, more specifically, higher(prenominal) level of business risk, this years audit strategy and plan have been revised accordingly. Apart from supererogatory audit procedures and probably a larger sample size, our team will need to maintain a higher level of professional scepticism to make sure that the companys accounts contain no material misstatements. It should be noted that had this audit been undertaken in the seventh year after the signing of the cloture with the governings Environmental Protection Agency, the situation would be different.As the condition of the dependency to build a water treatment facility would have b een breached by now, there is an imminent threat of the company being closed down by the government. A going concern assessment at the readiness stage (as required by ASA 570) would provide the following going concern problem indications (1) increased competition and falling sales, (2) noncompliance with statutory requirements, and (3) legal proceedings against the entity. In cases where going concern is related to cash flow or solvency problems, some mitigating factors could be considered (such as sale of assets or additional contributions by owners).However, in this case, it could be judged that a going concern can is not appropriate as the business is now subject to closedown by government regulation enforcement. We, as the auditors, would need to discuss slipway to deal with the problem with the companys management. The possible outcomes could range from renegotiating the settlement agreement to making the decision to liquidate. In the latter case, the auditors would have to assess the impact that a forced sale of assets would have on the accommodate values and the classifications of assets.The auditors would also need to assess the amount and classification of liabilities, including any provision for staff termination payments and other closing-down expenses. In any way, if going concern is an issue it should be adequately reflected (disclosed) in the Financial Reports. The Auditors Report should also include an emphasis of matter ASA701. 09 & ASA570, understandably stating that there is a significant uncertainty regarding a going concern problem. ============================= 10 of 11 Group Assignment HBC614B Company Auditing REFERENCES 1. 2.Australian Auditing and Assurance Handbook, 2007 Edition, certified public accountant Australia Australian Governments Financial Reporting Council 2005, Australian Governments Financial Reporting Council, viewed 20 May 2008, http//www. frc. gov. au/about 3. Brief History 2008, International Auditing and Assur ance Standards Board, IAS Plus, Deloitte, viewed 18 May 2008, http//www. iasplus. com/ifac/iaasb. htm 4. Chris Pearce, parliamentary Secretary to the Treasury, 22 November 2004, The future of governance regulation in Australia, contend to the 21st National Conference of Chartered Secretaries Australia, viewed 19 May 2008, http//www. reasurer. gov. au/DisplayDocs. aspx? doc=speeches/2004/001. htm=005=cjp=20 04=1 5. Gay & Simnett, 2007, Chapter 6 Planning, Knowledge of the Business and Evaluating Business Risk, Auditing and Assurance Services in Australia, revised edn 3, McGraw-Hill Australia Pty Ltd. 6. International Auditing and Assurance Standards Board 2008, IFAC, viewed 18 May 2008, http//www. ifac. org/IAASB/ 7. James M. Sylph, January 14, 2005, Global Convergence Near or Far? , American Accounting Association Auditing part 2005 Mid Year Conference