a. The provision of advice on accounting policies and accounting standards is an assurance engagement. This is because the accountants give their conclusions which are meant to improve the trust of the intended users on a subject of interest.
b. The auditing annual financial reports is an assurance engagement. This is because it allows the independent firms and the professionals to do their works and open up about their opinions. The expression of the opinions is based on the status of the assurance that they are getting attached to. The example given above is a reasonable assurance which is demonstrated in a positive way. The auditors permit the demonstration of suggestions which have their basis on the outcomes of the examinations performed whereby the opinions given are based on the positive method.
c. The provision assistance to management and the board in strengthening internal controls and corporate governance practices is an assurance engagement. The reason is that the auditors need a huge and strong support from the management to assist in the doing of the everyday works. The support given during the management is useful in the preparation of the financial statements and reports to the firms. The assistance with the internal control helps with the creation of a good response to the necessary businesses, financial and sticking to the objectives to manage the potential risks.
d. The provision of the assistance with the establishment and training of internal audit teams for example checking compliance with the company policies and legislative regulations is an assurance engagement. The reason is that the internal auditors help in the provision of the necessary help in certain circumstances and to ensure that the roles and responsibilities of the auditor are set out clearly.
a. Threat 1:
One of the threats is self-interest. The auditor may be having some interests in the company concerned or apart from the financial interests. The financial interest may either be directly or indirectly. Also the auditor may be reliant on one client to get some huge percentages of fee which could be outstanding. An example of a self-interest as a potential threat is where the auditor possesses some shares or even gives funds to the organization in terms of loans.
The other threat to the independence of auditor company is self-review. This is a threat that happens when the auditor chooses to review their own performance or the work which is being done by others in the same company. An example of a self-review as a threat to the independence of audit company is where the auditor establishes a payroll system which evaluates it during the auditing process.
b. Safeguard 1:
The self-interest can be reduced through asking for a notification from the individuals when any serious employment agreement is being made with an assurance client. The other safeguard is the eradication of the individual from the assurance engagement. Also, the threat can be reduced through undertaking an individual review of the important judgements that are made when someone is on the engagement.
The self-review threat may be reduced through offering other services to the audit client. The temporary staffs should not be part of the audit team. The staff are only allowed if there is no role that they will undertake in the management level. The audit client should be liable for supervising and directing the activities done by the loaned staffs. In an incidence where an individual has been on a recent service with the audit client, the individual should be removed from the team. The process can work when the individual worked at the client in the year being audited at a position to implement some influence on the matter being discussed.
Every business thrives and survives by making informed and smart decisions. Audit risk model is a model that helps smart accounting of all risks by identifying problems that can occur in auditing.
The employment of new treasurer might affect the components of audit risk in the following ways; first, the treasurer is relying on internal data for reporting which may already be associated with poor internal controls and eventually lead to auditing being based on wrong figures. Secondly, being a new employee, the treasurer may not have sufficient understanding of the company’s problems which might lead to detection risk in the audit report. Finally, inherent risk is hardest component of the audit risk, employment of new treasurer might not have any effect on the inherent risk component.
Closure of inefficient factory by the company and that they have till the following year to dispose and deployment affects the auditing risk components as follows; first it will be difficult to determine reasonably accurate closure provisions because of inherent risk. Maybe by the time of publishing the audit report the approaches used have been rendered unviable. Since they have up to the following year to make provisions, to avoid control risk needs the company to have a good internal control. Besides, disposal and deployment there is random errors and so detection risk.
Introducing bonuses for sales persons may cause rampant control risk in auditing from misreporting, also, the detection risk increases because it might be difficult to account for external problems from the sales agents. Introducing bonuses will make the company business system more complex and hence inherent risk.
General ledger software package enhances the interior data control in the company and thus help to minimize control risk. In addition, there will be less human and random errors and in turn less detection and inherent risks in auditing data.
Systems administrator will enhance internal data control through centralization of data management. They can easily detect various problems in the company and therefore avoid detection risk. Despite the complex nature of the company, systems administrator will help in capturing and storage of all audit data in one repository which will to avoid control and inherent risks.
Current ratio: It is the balance-sheet showing the performance financially and is done through measuring the liquidity of the company.
Receivables turnover ratio: It provides the company with an idea with how to effectively gather its debts with the aim of fulfilling the credit extended with a minimal value indicating some higher efficiency.
Inventory turn ratio: it shows the number of times that the company has sold and replaced an inventory over a certain period of time. A low value indicates that the ratio is good and the sales made are high while the inventory levels are less.
Return on total assets: it measures the ability of the company to create some profits from the total assets.
Net profit ratio: it shows how much profit a company will get or the net income that is created as a percentage of revenue.
The conclusion drawn from the EasyFit Pty Limited is that the company is less likely to settle its debts due to its low current ratio. Collection of its debts is also likely to create a challenge due to its high value of receivables turnover ratio when compared with industry average value. The sales of the company are also low meaning that it could land into future problems. However, the company is at a position where it can create maximum profits if all its assets are to be sold.
The other potential audit risks include;
Current acknowledgement of the sales revenue on an approximation basis where the estimate could be biased and not according to the realistic assumptions on the sales price.
The financial outcomes maybe manipulated to suit the market value of the shares before the transactions on sales were made.
The other possible risk is the overstatement of the evaluated company’s assets due to the unfair exploratory whose charges are expensed on the income statement.
Finally, the other risk is where the liabilities of the company are understated due to lack of the acknowledgement of the provision in regard to the litigation.
a) Weaknesses in Super Savers’ internal control corning the payment and purchases functions
Lack of proper review and reconciliation
Receiving department just stamps order received on its two copies of the purchase order. In this case the receiving department does not check the items supplied nor if the prices are in line with the purchase order.
Receiving all invoices centrally in accounts department then oversight is carried out by matching the documentation of the transaction to the appropriate records. Assembling the supplier invoice, receiving report, authorized purchase order then matching items in the supplier’s invoice to those in purchase order will ensure receipt of the goods procured. It helps to avoid double entry, checking for correct prices and specifics of the items. In addition, helps in checking the accuracy of the invoice calculations and verify if the supplier exists.
Assistant accountant undertakes a sequence check of all pre-numbered documents while financial accountant receives monthly bank statements for investigating any reconciling items through bank reconciliation. These review and reconciliation process may involve errors. From definition in accounting perspective, reconciliation is the process of comparative analysis of transactions through comparing activity to supporting documentation then resolving any discrepancies found. It will ensure that there were no unauthorized or improper transaction changes that may have occurred during the process as well as ensure validity and accuracy of the financial documents
Ensuring all transactions have been properly authorized by critical scrutinizing the source documents and comparing to the bank statement to review if there any potential changes to the process between approval and processing of the transactions. In the case report, review of the pre-numbered source documents is done by the assistant accountant separately from the reconciliation process. The reconciliation process is done after end month. Discrepancies and errors should be detected and resolved in appropriate timeliness. This process is then documented properly for verification that a thorough review was carried out. In case of errors a proper procedure for error correction should be clearly outlined.
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