BUACC 5935 Auditing and Assurance Services Assignment Sample

Part A

Letter

Audit manager,

Mr. Bobby Brown

There are management and accountability obligations in respect to fraud prevention and identification. Managers are liable for a specific plan on fraud detection, which is to be conveyed to the other staff leaders. Intentional misconduct is a illegal practice in the accounting report. This should therefore be properly communicated to all team members and, ideally, the organizations should have a zero tolerance policy for any such action. In fact, they will also include SOPs built to insure that there is no opportunity to steal or abuse. When fraud becomes a investigator, the managers must quickly ensure a proper review of the injury (Zager et al., 2016).

On the other hand, it is up to an auditor who conducts an audit under the Australian audit standards to obtain reasonable assurance, whether caused by fraud or error, that the financial report as a whole is free from material mistakes. Due to the inherent limitations of an audit, some material errors in the financial report can not be detected although the audit is planned and conducted properly according to the Australian auditing standards. Furthermore, there is an increased risk of the auditor not detecting material fraud errors than employee fraud, because management is often in a situation in which accounting records can be directly or indirectly manipulated, financial information fraud is available, or control procedures are overridden to prevent such frauds on the part of other staff.

If reasonable assurance is obtained, then the auditor shall maintain professional skepticism throughout the audit, take into account management overrides and recognize that audit procedures effective in the detection of fraud may not be effective. The specifications of this audit standard are designed to help the auditor recognize and evaluate the risks of material mistakes due to fraud and to develop procedures for the identification of such a mistake (Zager et al., 2016). The auditor will have specific legislative , administrative and ethical obligations in terms of non-compliance by an individual with legislation and regulations, like bribery, and may vary or go beyond this and other Australian audit procedure.

The most prevalent misconception is that the annual statements are made by the auditors. There are several misconceptions regarding an auditor's role in a corporation as the purpose of the audit is to identify inactive activities, auditors check any or all transactions in a business to insure the financial reports are accurate, the audit of the financial report relieves management of its planning to presentation and auditors will conduct an audit if appropriate. The American Institute of CPAs has released the audit guidelines AU Section 110, "Neutral Auditor's Duties and Characteristics," which distinguishes between auditing roles and management: "The accounts are the responsibility of the manager.

The auditor is responsible for expressing his opinion on the accounts. While the external auditor might provide recommendations or better practice about the material, report on the manager's details to generate such divulgations or even draft parts of even the financial results, the financial statements must be the duty of the management eventually. Another myth is that auditors are supposed to detect errors or theft. This form of thinking will render workers reluctant to cooperate with auditors. They may be concerned that anything they haven't achieved or making a small error would be kept responsible (Velentzas et al., 2017).

This understanding may also slow the flow of information, while it is understandable. Auditors are simply trying to help and have an opinion on the sums reported. Furthermore, audits of financial statements do not ensure that any or all fraud is detected in a company. The process of performing an audit calls for a skeptical mindset, objectivity and objective judgement and can often require technical fraud cynicism.

In May 2014 a Collaborative Accounting Framework on Revenue Recognition was developed by the International Accounting Standards Board ( IASB) and FASB to resolve a range of issues relating to difficulties and disparities in revenue accounting (Messier et al., 2018).

Management overthrow of the controls of a corporation over the recovery of income- The errors arised as a consequence of misappropriation of funds (sometimes referred to as robbery or defalcation) entail robbery of funds of an institution where the impact of robbery implies that, in other material ways, the financial results are not reported in compliance with GAAP. Misappropriation may be accomplished in several ways: receipts of misappropriation, asset robbery or payment of goods or services which have not been received by a company. Missuasive assets can be accompanied by false , misleading or possibly circumventing control records or documents. Intentional misconceptions or omissions in the financial statements or reports intended to mislead consumers of financial documents resulting from false financial reporting, when these mistakes trigger financial document not to be issued, in certain content, in accordance with GAAP (Ma et al., 2020).

Collisions- The conspiracy within the government, staff or third parties can often mask fraud. Collusion can lead to a conclusion that the auditor who correctly conducted the audit is convincing when, actually, it is wrong. For example, by deception, the auditor may provide false proof that controls are successfully working, or more than one person in the company may provide clear deceptive explanations to justify to the auditor an unintended outcome of an analytical process. Another instance is that a third party that has collusion with management can provide the auditor with a false confirmation.

Fictional revenue reporting- Revenue not belonging to the corporation, but intentionally inserted into the profit portion, is considered fictional revenue (Mansur et al., 2018). Employees are motivated to increase revenue and they want to meet their performance goals that might help in their promotions. Such transactions may be rendered either to actual business clients or to fake buyers who already have abuse history for the employees. Accountants with fictitious sales choose to first record an asset purchase entry. By canceling the account receivable at year end, the amount credited for acquisition of the asset is reversed.

As a result , the amount of purchases continues to remain the same, while the evidence to receive money against the sale is destroyed while the accountants repay the cash against the receivable account (Kassem et al., 2016). The consequences are now seen in excessively higher assets and revenues. In addition, there are some factors that need to be considered, such as increasing the scope of audit procedures where transactions are high in volume and are unusual. It may also include spending a reasonable amount of time on sales that is high and also takes place near the end of the year.

Case examples of revenue misstatements that have been reported in the media-

Case 1- Monsanto has payed $80 million in penalty for infringements of accounts. Washington D.C., Feb. 9, 2016—The Securities and Exchange Commission today announced that the St. Louis-based agribusiness company Monsanto has agreed to pay a penalty of $80 million and retains an independent compliance consultant to settle charges that have violated accounting rules and misstated company earnings in relation to its flagship product Roundup (Jeppesen, 2019). Three accounting and sales managers also agreed to pay penalties to settle charges against them.

The SEC report concluded that Monsanto has inadequate internal accounting procedures to adequately account for millions of dollars in rebates given to Roundup suppliers and dealers because generic competition has reduced Monsanto 's costs and resulting in a substantial loss in market share for the firm (Ionescu, 2017). Monsanto recorded substantial amounts of revenue from sales stimulated by the rebate programs, but failed to recognize all related program costs at the same time. Monsanto therefore materially missed its consolidated earnings in corporate filings over a three-year period.

Case 2- NutraCea faced difficulties in reporting numbers meeting its goals of revenues by the second quarter of 2007. The company stopped at nothing to make the figures it wanted, owing to a strong desire for achieving these goals handed down from the top by Bradley Edson, CEO. Due to Perry-Smith 's refusal to grant them revenue recognition and to demand reverse of the entries, NutraCea tried to recognize € 2.6 million in sales to several customers over a first quarter of 2007, but failed to do so (DeZoort et al., 2018). As a result, sales targets for the first quarter fell by almost 50%.

Edson determined that extra steps would be required to make up this deficit and not be able to persuade Perry-Smith that the sales needed to be reserved. Edson contacted Bi-Coastal Pharmacy Corp in the second quarter of 2007 and requested the President of Edson to grant a $2.6 million drug purchasing order (DeZoort et al., 2018). The company had no chance of purchasing products from NutraCea, and Edson promised BiCoastal that "he had several avenues of potential distribution for these products and that [BiCoastal] would never take possession of them and that [Edson] would later sell the products to third parties" (DeZoort et al., 2018). Through such book sales, the purchases will enable the organization to disclose the required income to reach its goal earnings of four targets and not create any red flags for independent auditors. The President of Bi-Coastal agreed to create false purchase orders and laid the foundations for the fraudulent scheme.

Regards

XYZ

Part B

Four Major Risks

Ratio Analysis and Trend Analysis

The financial situations in a organization are seen and outlined by the key statistical ratios. Main indicators draw details from the financial report of the business involved including the balance sheet, sales statement and cash flow analysis. Themes contained in these declarations are compared with other items to produce ratios that represent key financial aspects of the company, such as cash, profitability, debt utilization and income gain (Baum et al., 2017).

Core statistics may be used to gain an understanding of the financial condition of a business quickly. Organizations in strong financial health should have higher percentages than firms with bad results. There are some main indicators that investors use to determine the financial position of a business. The allocation of debt to the interest price, the gross loan volume assets available, the liquidity arrangement and several other measures where included. These formulas specifically calculate various specific facets of the properties, liabilities and cash flow of a business.

Quick Ratio = (Current Assets – Inventories) / Current Liabilities. It indicates the bond fund's position in terms of equities. A high ratio implies the investors are less secure. Net income + Non-Cash Financial Expenses + Non-Operational changes requires "Debt obligation sales.” Their financial results would be withdrawn to produce core ratios of Woodside Petroleum LTD (Baum et al., 2017). The effects of Woodside Petroleum LTD 's productivity in the control of its costs to produce income and quantify any Woodside Petroleum LTD gain. Statistics on net profits, net revenue, operating benefit and total assets and productivity factors such as returns on investments and gross margin factors will be estimated. The statistics will be determined.

Ratio analysis:

Current assets/ current liability = 4647/1131

Ratio = 4.108

Net debt/Equity = 2791/16617

Ratio = 0.167

In the corporate and financial industries, pattern analysis is relevant. In order to assess how the business can function in the future, the financial analysts analyze the previous success and the existing financial conditions. Trend forecasting is a quantitative study of the situation of the industry in order to predict demand or prediction of the potential depending on past findings. This is an effort, relying on the outcomes of research carried out, to make the right choices.

Trend Analysis of Woodside Petroleum LTD:

Woodside Oil LTD's Uptrend reveals. This ensures this, in accordance with the broader economy, the capital markets and assets move upwards, retaining rising equity values or properties, or even the scale of the economy throughout the time. It is a prosperous period as the world transitions towards a competitive environment, investor sentiments are optimistic and the investment process is starting.

Expenditure lines details were analyzed to assess if an ongoing audit involved irregular spending in the reporting period. In fact, sales and expense line lines foreseen for upcoming budgeting and projected outcomes have to be calculated. For a certain amount of time the Woodside Petroleum LTD business is leading (Baum et al., 2017). As a consequence, the rise in bearish markets is rising. There are no guidelines for deciding how long the cycle lasts, since Woodside Petroleum LTD is more accurate in the longer direction. Based on practice and other scientific studies, certain metrics have been established and standard duration is retained for metrics such as average period of 14 days, 50 days, 200 days.

Inherent Risks

The implicit danger is the possibility of a major error in the financial report of a business without taking into consideration internal controls. The vulnerability is intrinsic to a reason other than a lack in internal regulation, and is triggered by mistake or omission of a financial statement. When deals are complicated or circumstances that involve a high degree of evaluation of financial forecasts, an intrinsic danger is most probable in the financial audit. The vulnerability is intrinsic to a reason other than a lack in internal regulation, and is triggered by mistake or omission of a financial statement. When deals are complicated or circumstances that involve a high degree of evaluation of financial forecasts, an intrinsic danger is most probable in the financial audit (Kim et al., 2017). By combining the market effect and the hazard environment interest, intrinsic risk factor was estimated and consequently divided by 5. According to this the inherent risks of Woodside Petroleum LTD include

1. Inherently more likely to be incorrect than straightforward estimates are financial transactions involving complicated calculations.

2. Cash at hand is more likely by nature to be robbed than a large stock.

3. The competitive motivation for Woodside Petroleum LTD becomes more likely to contribute to financial failures to conform with those deals.

4. Woodside Petroleum LTD has in the past wrongly stated a certain balance that may potentially distort it again (Kim et al., 2017).

The inherent risk implicit in the statement applies to the possibility of a content error that may not require relevant internal controls. The auditors can not, however, "reduce" the intrinsic liabilities because they occur independently of the auditors. The inherent risk present in the financial report is the possibility of a factual loss related to an accident or omission due to circumstances outside of the management failure. In order to reduce the risk of the inspector, thus, the intrinsic danger must be that.

Materiality

The materiality of preparation basically relates to the error made by the auditors at the preparing stage in a financial report audit (Mark et al., 2019). Project materiality used by an investigator for the intent of determining if the error in the financial report was seriously misunderstood as entity or composite. The first estimate of materiality, often referred to as planning materiality, is the maximum amount to be taken by auditors as to the possible mistake of the statement, whether by known or unknown error or fraud, and still does not affect the decisions of the users of reasonable financial statements (Kim et al., 2017).

If it represents our significant economic , environmental and social implications or significantly affects the judgments and actions of our parties concerned, Woodside sees sustainability concerns as critical. Every year, it analyses the value of sustainability concerns and recognizes them with its main stakeholders and our companies. The assessment of the materiality guides the elaboration of this study and ensures that we respond appropriately to issues that are important for our stakeholders. In the process of the 2020 Substances Evaluation, four issues were listed, of which items were considered: health and protection, social and cultural consequences for the public, climate change, greenhouse gas pollution and crime, anti-bribery and corruption.

Increasing concern in our development initiatives and broader community on how local societies benefit from company operations was expressed in this collection of social and cultural effects on neighbourhoods (Doyle., 2017). While material was no longer considered material by external stakeholders in 2019, it remains a focus for Woodside, as were important incident prevention and response.

Materiality = 0.5% of total assets

0.5% of $29,353 = $0.146765

The base is cumulative assets (earnings / net income). A general approach by auditors is to use 1 percent of the greater total or total revenues in determining a preliminary assessment of materiality. In many businesses earnings before taxes are an unsuitable basis as they can fluctuate too much to be useful in audit planning. As the risk level is too high, the auditor must conduct additional procedures to reduce the risk to an acceptable level. When the level of control risk and inherent risk is high, the auditor must increase the sample size for audit testing, thereby reducing detection risk. The percentages range are usually between 5 and 10% (e.g., < 5%= immaterial, > 10% material and 5-10% requires an assessment) (Baum et al., 2017). The management burden is large as the audit agency may not provide sufficient internal monitoring of the financial records of order to deter and diagnose abuse and mistake.

References

Baum, C. F., Caglayan, M., & Rashid, A. (2017). Capital structure adjustments: do macroeconomic and business risks matter?. Empirical Economics, 53(4), 1463-1502.

Doyle, R. A. (2017). Process safety management at Woodside–creating a sustainable global approach. The APPEA Journal, 57(2), 430-433.

DeZoort, F. T., & Harrison, P. D. (2018). Understanding auditors’ sense of responsibility for detecting fraud within organizations. Journal of Business Ethics, 149(4), 857-874.

Ionescu, L. (2017). The Communicative Role of Audit In Fighting Against Corruption And Fraud. Analele Universităţii Spiru Haret. Seria Jurnalism, 18(2), 56-59.

Jeppesen, K. K. (2019). The role of auditing in the fight against corruption. The British Accounting Review, 51(5), 100798.

Kassem, R., & Higson, A. W. (2016). External auditors and corporate corruption: implications for external audit regulators. Current Issues in Auditing, 10(1), P1-P10.

Kim, H. J., Luo, J., Chen, H. S., Green, D., Buckman, D., Byrne, J., & Feuer, E. J. (2017). Improved confidence interval for average annual percent change in trend analysis. Statistics in medicine, 36(19), 3059-3074.

Mark-Moser, M., Rose, K., Bauer, J., Wingo, P., & Suhag, A. (2019). Integrating artificial intelligence with the Subsurface Trend Analysis method to predict porous media properties. AGUFM, 2019, H34B-03.

Ma, C., Li, B., & Lobo, G. J. (2020). Are Geographical Dispersion and Institutional Dispersion Related to Accounting Misstatements?. European Accounting Review, 1-26.

Messier Jr, W. F., & Schmidt, M. (2018). Offsetting misstatements: The effect of misstatement distribution, quantitative materiality, and client pressure on auditors' judgments. The Accounting Review, 93(4), 335-357.

Mansur, H., & Tangl, A. (2018). The Perceptions of Credit Officers towards External Auditors: A Case Study from Jordan. Accounting and Finance Research, 7(1), 237.

Velentzas, J., Broni, G., & Kartalis, N. (2017). Deterrence, Detection, and Investigation of Economic Fraud and Auditor’s Responsibilities Relating to Audit of Financial Statements According to International Standards. In Advances in Applied Economic Research (pp. 719-742). Cham, Springer.

Zolfani, S. H., Yazdani, M., & Zavadskas, E. K. (2018). An extended stepwise weight assessment ratio analysis (SWARA) method for improving criteria prioritization process. Soft Computing, 22(22), 7399-7405.

Zager, L., Malis, S. S., & Novak, A. (2016). The role and responsibility of auditors in prevention and detection of fraudulent financial reporting. Procedia Economics and Finance, 39(2), 693-700.

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