In this scenario, limited assurance can be given for the accounts that pertain to the year 2017 as the company did not maintain any financial report or the audit report hence the data are missing in this scenario. The audit will be undertaken in the light of a deficit of information and hence reasonable assurance applies.
In this case, reasonable assurance will be given because once the negotiation happens there will be complete maintenance of data and records and this will help the auditors in getting a clear picture of the deal. Hence, the auditor can conduct an audit of this period with ease.
On the date of acquisition, the auditor will provide a limited assurance as the data is lacking for Pty Limited. No financial record or audit report for the past period is present hence, it leads to immense issues for the auditor to give a clear picture. Thereby, as no prior information is present hence limited assurance will be given.
1. If the auditor does his audit using acceptable accounting standards and other regulatory requirements for a designated period. The auditor can't be held responsible for any trading difficulties faced by the company post his audit period.
2. The auditor can’t predict future events and also not required to estimate funds requirements by the company in the future. Funds requirements and means of its procurement is the subject matter of the management.
3. The utilization of loan proceeds for business and its repayment is the responsibility of the management. The auditor is not required to interfere in the business operations of the company.
1. The auditors face various threats while conducting an audit of a firm. These threats may be deliberate or non-deliberately imposed on the auditor by the management. As per the provisions of APES 110, following key threats can arise for Auditors, Hall & Associates
2. Self Interest or personal benefits: The auditor's independence is violated if the auditor holds any financial interest, cash, or in-kind (like shares in this case) directly or indirectly through any person in the business operations of his client (Gay & Simnett 2018). He can’t express a fair opinion on the nature of financial statements.
3. Compelling pressure by management: if the auditor does not raise his voice & report any misstatements or any wrongdoing of the management, he may face negligence charges against him for not- reporting of misstatements of frauds (Cernusca, L and Balaciu 2015).
4. Non-compliance: If the auditor fails to report non-compliance with statutes, rules, standards, and other law requirements and does not comment on it, he may be charged with negligence charges and may also be compelled to pay the losses (Cernusca, L and Balaciu 2015). Example: ASX compliances in regards to the appointment of independent and non-executive directors in the Board of directors.
5. For above-mentioned threats, the following course of action should be adopted by the auditors:
6. The auditors should quote his professional fees at the start of his audit engagement, in no case; the auditor should accept his fees in kind or any other amount other than his fees.
7. In case the auditor is compelled or intimidated by the client or management to do the audit in a particular manner which is against the auditing practices or there is any limitation to the conduct of the audit, the auditor should not accept the audit engagement or should give a disclaimer of opinion (Matthew 2015).
8. In case the auditor finds out that there is non- compliance of any statute or any law, he should discuss it first with the management for its compliance and if the client is not for compliance, the auditor should disclose the extent of non-compliance & its amount in his audit report. Non-compliance with the statutory requirement is an offense and should be reported by the auditor.
1. In this case, there exists a chance of detection risk of whether the data submitted by the treasurer is free from misstatements or not. The finance controller should have appointed the treasurer at year-end. Now the auditor has to separately employ audit procedures for foreign exchange profit earned by the treasurer in his first two months itself. It creates an audit suspicion.
2. In this case, the finance controller contention is wrong because when the factory's assets have not been disposed of till December 2017, the finance controller can't determine closing transactions, its related amounts, taxes, and amortization. Hence the auditor should mention and disclose this fact in his audit report. This is a detection & control risk.
3. Here again, it is the case of detection and control risk involvement, the employee in the want of bonus will try to inflate sales. The credit sales may also increase in this period. The auditor has to employ additional audit procedures to check sales figures in this period. The bonus amount should also be correlated and approved by the senior management in the company.
4. The use of software contains chances of capturing the wrong data at times; the reports are also dependent upon the quality of data feeding. There always exists a chance of inherent risk involved that some misstatements may remain undetected despite all control features in place. There can errors of detection as well if the data entered in the software is wrong.
5. An accountant is not competent to perform the duties of a system administrator; here exists a major loophole in the company operations. This is a detection risk involved in this event that the misstatement may get undetected. The control risk also exists due to the failure of control features. The auditor should immediately correct this matter & disclose this matter in his audit report also (Grayston 2019).
i. Current ratio: this ratio is current assets divided by current liabilities. The ideal current ratio is around 1.33 to 1.50. In our case, all the current ratios are on a higher side like that of actual data, last year data, and industry averages. This suggests that the company and its industry have a tendency of higher current ratio and require a higher working capital in the business.
ii. Quick asset ratio: this is the ratio of liquid assets (like cash, short term investments & short term receivables) divided by current liabilities. This ratio is almost the same for actual and budgeted data. However, the industry averages are a bit higher which suggests that the company should maintain a bit higher ratio than current levels.
iii. Inventory turnover ratio: This ratio shows the efficiency of the company to convert its stock of finished goods into actual sales. Higher the ratio is better for the company. The company has missed its budgeted targets which suggest that the company has higher stock levels (Kim 2013). The company should try to achieve a higher Inventory turnover ratio for better stock management.
iv. Net profit ratio: The Company can better its budgeted target in this ratio. The company is also able to achieve a ratio better than the industry averages. The company should try to maintain this efficiency levels in future years as well.
v. Gross profit ratio: The Company has achieved the targeted gross margin profits. The company has performed exceptionally well in this area and bettered industry averages also. The auditor should, however, be cautious and verify stock levels in this case because both gross and net profits are higher of the company.
Cernusca, L and Balaciu, D.E 2015, The Perception of the Accounting Students on the Image of the Accountant and the Accounting Profession. Journal of Economics and Business Research, vol. 21, no. 1, pp. 7-24.
Gay, G., & Simnett, R 2018, Auditing and Assurance Service in Australia, McGraw-Hill Education (Australia)
Grayston, C 2019, Audit quality: is it time for a different approach? Available from: https://www.intheblack.com/articles/2019/02/01/audit-quality-time-for-new-approach [Accessed 14 May 2020]
Kim, S 2013, Accounting quality, corporate acquisition, and financing decisions, The University of North Carolina
Matthew, S. E 2015, Does Internal Audit Function Quality Deter Management Misconduct?. The Accounting Review vol. 90, no. 2, pp. 495-527.
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