Auditing - Assurance and Compliance Involves Systematic Examination

Question: Describe about the Auditing, Assurance and Compliance for Involves Systematic Examination. Answer: 1 (a) Auditing is a procedure that involves systematic examination of the organizational documents, statutory records and accounting books to determine the true and fair view. Auditors are required to perform substantive and analytical procedures to check the accountability and transparency of the financial information of the organization for the benefit of stakeholders. Auditors occupy the reasonable responsibility to present the financial statements and other business records in true and fair view however the absolute responsibility lies on the management of the organization (Leuz and Wysocki 2016). Accordingly, the auditors are liable on presentment of the business information in transparent form but the auditors are nor responsible for wrong or unfair business decisions including the transactions with third parties. Auditors negligence is considered with respect to the presentment of the business information as per the courts decision in Candler v Crane, Christmas Co. According to the case decision, the judgment formed as liability of the auditors towards third party as well as third party solicitors being non- clients (Abed et al. 2016). In the given situation, King and Queen audit firm had been notified by the third party i.e. the solicitors of client companys financers on the grounds of inadequate measurement of provisions and decline in inventory value. It has been noted that Impulse Pty Limited suffered liquidity problems as well as the valuation of inventory declined, which was not considered by the auditor. Further, the company acquired big amount of loan from a financing company in order to accumulate additional working capital. According to the legal regulations of auditing, King Queen audit firm was responsible to verify the true and fairness view while reporting the debtors value, inventory value and other financial information. Disclosure of material discrepancies in the latest financial statements and other relevant business documents helps the users to measure the performance of the organization as well as the financial position (Baldauf, Steller and Steckel 2015). Considering the case of Hill v Van Erp (1997) 188 CLR 159, it had been opined that the duty of the auditor towards the third party or clients solicitor is reasonable subjected to the principles and professional standards. Since the appropriate disclosure of financial information provides impact on the organizational performance, investment decision, financing decision and other business decision is affected. In the present case, decision on acquisition of finance for working capital could not be the obligation of audit firm King Queen. How ever, appropriate disclosure liquidity problems, fall in inventory value and debtors value in the relevant documents by the auditors would have given a clear information to the finance company. Hence, it can be concluded that King Queen was not directly liable to EFL but the firm was reasonably liable for inappropriate and incomplete disclosure of companys financial information (Martin and Van Linden 2015). 1 (b) The financial statements of Impulse Pty Ltd for the financial year 2012 were audited by King Queen audit firm who provided an unqualified audit report. However, the organization had liquidity problems including the fall in debtors turnover and valuation of inventory. During the year 2012 the company had trading problems and acquired big amount of loan from EFL finance company to support the working capital. Unqualified report refers the opinion of auditor on companys financial statements to be true and fair including the appropriate disclosure and compliance of all the relevant accounting principles. The audit report of Impulse Ltd disclosed as unqualified report while the company was facing several financial problems in real (Chan, Lo and Mo 2015). Accordingly, disclosure of appropriate and material financial information affects several business and investment decisions by the users of financial statements. Similarly, in case of Impulse Limited the loan was provided by the finance company on the basis of audited report of the financial year 2012. The report was unqualified however, in actual the financial position of the company was not sound and appropriate. Further, according to the auditing standards and principles, auditor is responsible and liable to examine the financial information of the company to determine the true and fairness presentation for the benefit of stakeholders (Cheung 2015). Hence, in the present case, King Queen audit firm was held liable for performing and presenting the audit report with integrity and professional competence. Therefore, in case EFL had provided a written application for intending to provide loan to Impulse based on the financial report 2012, then King Queen would have had absolute obl igation. However, the liability of the audit firm had occurred only if the written form was accepted by King Queen firm for the purpose of reliance on the audited financial statements. Moreover, in general terms auditors responsibility on disclosure of companys financial statements is considered to be perceived independence and the users of such report utilize the same for making decisions. Hence, the answer would remain partially same on absolute responsibility of audit firm if EFL obtains the application on reliance on financial reports in the written form (Cohen et al. 2015). 2 (a) Independence of auditors means the independence of internal auditor of the organization or statutory auditor of the organization against the financial interest in the audited company. It involves the integrity and ethical behavior in performing the process of audit including the maintenance of objectivity, due diligence and confidentiality of the auditing company. Actual independence refers to the independence that is followed by the auditors in performing audit procedures in order to examine the accountability, transparency and true and fairness of the financial information disclosures. On the contrary, perceived independence refers to the independence deemed to be followed by the auditors while auditing the companys financial and statutory records. It involves conducting of auditing procedures by means of integrity and confidentiality of the auditing company as per the requirements of auditing standards (Earley 2015). Both actual and perceived independence forms essential part of the auditors independence in order to achieve the independence targets. In general, actual independence means the independence of auditors state of mind in order to deal with the particular situation. It refers to the capability of the auditor to make decisions independently stating the accountability of the organizations financial statements and other statutory documents. On the contrary, perceived independence means the consideration of independence by the auditors during the compromising situation by maintain the professional integrity (Funnell, Wade and Jupe 2016). Independence of auditors is important while performing the audit procedures for the organization in order to form the audit opinion against the examination of the financial statements and other documents. Independence of auditors is essential so the opinion and judgments of the auditors are not influenced by the relationship between the auditors and the management of the client company. Independence should be followed to form unbiased and direct judgment on the verification of the books of accounts for the benefits of the stakeholders. Since financial statements are prepared and presented for the use of organizational stakeholders, it is important to disclose all the material information with true and fair view. Therefore, the auditor of the organization is responsible to form independent opinion for the accountability of the financial information. Further, auditing also requires as due diligence for the purpose of business acquisition, diversification hence the auditor is required t o have independence to form correct valuation and honest opinion of the business activity. Additionally, independence of auditors refers to the charge of audit fees irrespective of any substantial interest and there should not be any collection of audit fees as a part of clients business income (Parida et al. 2015). In case of first situation, independence of auditor with respect to copying the financial information of the client company for completion of assignment has been maintained since the auditor the companys references. In the second situation, Wendy performed the duties of company secretary due to absence of the organizational secretary, which does not affect independence of the auditor if the duties are performed by maintaining integrity. It is important follow the independence while performing the audit work for the auditing company. As the secretarial work involves several confidential work of the company, it is the auditors duty to perform the work independently and maintain the confidentiality (Rikhardsson and Dull 2016). 2 (b) Auditing standards forms requirements of principles and ethical standards to perform the audit procedures by maintaining integrity and professional ethics. Australian Auditing Standards provides principles for the auditors that are required to be followed from the audit engagement, examination of books of accounts, statutory books and financial statements. There are several standards that have been established by the auditing boards to review on audit engagements, assurance engagements and audit on related services, which were issued before 1 July 2004 (Soh and Martinov-Bennie 2015). In the first situation, Bob, an audit assistant as well as a university student utilized the financial information of the auditing company Club Casino in order to complete the university assignment. However, Bob used the information by removing the references of the auditing company to maintain the confidentiality. According to Auditing Standard 102 on Compliance with ethical requirements when performing audits, reviews and other assurance engagements, auditor is required to maintain the independence, professional ethics and confidentiality for verification of financial information and other documents. The auditor is required to follow the conceptual framework to maintain the quality control and other regulatory compliance by following professional competence (Therisa and Sony 2016). It states that the auditor should not disclose the clients financial information or any other organizational details that affects the confidentiality and personal information. In the present case, even t hough Bob did not use the companys reference he is said breach the auditing standard on 102 as well as 200 on objectives of the Independent auditor. This is because Bob used the financial information of the company to complete the university assignment, which would be circulated out of the companys premises and without the knowledge of organizational management. Second situation represents the divergence of auditors work in the company that involves performance of company secretarial duties. Wendy performed the secretarial duties because the secretary of the Ace Company was not retired and the company took six months time to replace the position. According to the Auditing standards 210 on audit engagement states that certain services that an auditor can perform other than the audit work of the company. However, such services should not include the day to day business or if the services involves confidential information (Williams 2015). Moreover, Wendy was engagement partner in the Ace Limited audit hence, there was no breach of standards performed on conducting the secretarial services. Third situation involves the audit work of the individual for a firm, Precision Machinery Limited in order to test the internal controls of the cash payments system. The auditor was a temporary auditor and was the eldest son of the factory foreman. As per the auditing standards, audit work or audit procedures are conducted by professional auditors or by the audit assistant working under the auditors (Ismail and Mustapha 2015). Accordingly, Leo is eligible to conduct internal control test only if he either is a professional auditor or employed as an audit assistant of the firms auditor. In the fourth case, default in audit fees for three years have been paid by the company to the auditors Chan and Associates in terms of new office furniture which was worth 50% of the balance. According to the standards on auditing for discharge of audit fees, it states that the audit fees should not form part of organizational products and organizational issued shares. 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