HI6026 Financial Report audit Process Assignment Sample

Subject Code : hi6026
University : Holmes Institute Gradesaviours is not sponsored or endorsed by this college or university.
Subject Name : Audit, Assurance and Compliance

Audit, Assurance and Compliance

Week 1

Working in the capacity of an audit manager at OEL, it is important to be clear with the types of engagements. An auditor could enter into reasonable assurance engagement or limited assurance engagement depending upon the need of the employer or the sensitivity of the task to be assured. In reasonable assurance engagement an auditor would require to perform more analytical procedures and conduct more sample test compared to limited assurance engagement

Regarding the first item being the management accounts of the year ended 30 June 2017, Wendy the CEO of OEL doesn’t require a lot of procedures to be conducted in giving assurance, which means a limited assurance engagement would then be used in this case. Limited assurance engagement is used where assurance is given stating that the risk is up to the acceptable level (ASQC1). Wendy has made a wise decision as management accounts is of use to the internal users and as such not published to third parties which means it is relatively less significant compared to the other items. A lower level of assurance will be needed in this case where sample testing could done for larger sizes. The figures used need not be of day to day level but weekly or monthly figures could be tested.

For the next item that has to be tested to provide assurance for are the transactions occurring from the negotiation date to the transaction date. Wendy has expressed that these transactions are very important so a reasonable assurance engagement would be needed and a higher level of assurance would be needed which means that rigorous testing would be needed to be able to provide such confidence to the individual that the risk of material misstatements is significantly decreased (ASQC1). These acquisition figures will form a part of purchase consideration leading to the measurement of goodwill and these figures will be used in the financial statement of OEL and so high level of assurance regarding these transaction are very important. One could get independent third party valuer’s involved in the estimation of the Fair value of the assets of Local Pty Ltd.

The last item is the financial report of Local Pty prepared at the date of 30 June 2018. Since this is also made available to public that is if OEL is public company, it would need a reasonable assurance engagement and also because Wendy has stressed that these reports are important(ASQC1). A high level of assurance would be needed even if the company is not public as it is a Limited liability company and there could be various other users of the financial statements such as financial institutions and banks who need assurance regarding the figures in the statements. Substantive procedures would need to be designed and appropriate test of controls needed. It could be checked if the accountants responsible for preparing the financial statements were competent with the accounting standards. Signature could be attainted from the accountants as to confirming that the entries has been done as per the relevant accounting standards.

Week 2

Our firm has been auditing Data Ltd. for the past two years. This year it gave an unmodified opinion on the financial statements of Data Ltd. stating that in its view the financial statements represented a true and fair view of the Company.

It is important to understand that the external auditors has a duty of care. It is also essential that our auditing team possessed the essential skills to evaluate the accounting entries and that we are able to apply the skills with reasonable care. It should also be noted that we have the responsibility to undertake tasks with full integrity however a complete accuracy still can’t be expected as auditing wouldn’t mean assessing every item, but sample tests are taken place. There is an unfortunate possibility of the sample test not representing the full class of items. Auditor is also responsible for any negligence and dishonesty but can’t be held responsible if there were certain small errors made in judgement.

Our team was responsible for the audit of financial statements of year ended 30th June 2018, which was carried with full integrity and was done by very competent auditors. It was our responsibility to ensure Data Ltd. was reporting as per the correct evaluation criteria which are the accounting standards(ASA700) and that there were no material misstatements in this reporting and if there was any then it be bought to light in the report. Better bank issued a loan in August 2018 and company went into liquidation in December 2018, which is six months after the audit report was given.

There is a possibility that the conditions of liquidation did not exist prior to six months and these arose only after 30th June 2018. If this is the case then error is due to unfortunate situation and is not falling in the scope of the responsibility of the auditors. Auditor as such in not responsible for making sure that the company is going to continue for an unforeseeable period. However, it was important to bring out any going concern issues identified at the year end 30th June 2018, but like mentioned earlier these issues must have emerged only after 30th June 2018 and so does not fall in our scope.

Week 3

A.As a part of Assurance team auditing CGL and working in the capacity of Audit manager at Hall & Associates I was able to identify many threats (APES110), however I still have listed three of the key threats faced by Hall & Associates. APES 110 Code is used as it is required that members in Australia shall comply with these code of ethics.

Firstly, Hall & Associates other than providing auditing services for the year ended 30th June 2013 has been responsible for providing various non assurance services also. One such assignment under taken by Hall & Associates last year was designing of the accounting software that ultimately ensured accurate accounting of the revenue for the internet sales. This poses a self-review threat(APES110), as Hall & associate will be responsible for auditing the revenue figure in financial statements while Hall & Associates has designed internal controls to ensure that this revenue figure was appropriately recorded as per the relevant accounting standard.

Secondly, it is evident that CGL is currently in trouble regarding its finance arrangement with one of the fund providers. After ratio analysis, it has been observed that one of the clauses of the contract that requires quick ratio to be maintained at a particular level has been breached and the contract gives the fund provider that is Easy Money Ltd the right to demand entire repayment. This might lead to major going concern issue for CGL as it is already short of liquid assets. However as per section 200.8, Hall & Associates is facing intimidation threat here as it is under pressure to not reveal the actual quick ratio as it might end up losing certain other assignments from CGL.

Lastly, according to (APES110), Hall & Associates also faces self-interest threat as the payment of fee is in the form of shares in the client company. B.Hall and associates (APES110), have an action plan in place to encounter the various threats it is exposed to with this assurance engagement. Hall and associates would first need to evaluate the threat and then it can either reduce the threat level to appropriate level or could also terminate the engagement depending on the significance of the threat.

As listed that Hall & associates is facing a self-review threat for auditing items which it has been involved in producing. Hall & Associates to reduce the level of threat ensure that the audit team assigned to CGL should not consist of any individual who was responsible for the designing of the internal control system responsible to produce accurate revenue figures. This way threat could be reduced to a little extent. It could also consider engaging a 3rd party to review the revenue figure.

Hall and associates was also facing intimidation threat. Hall & Associates has to bring to the notice of the users of the financial statements of the breach of covenant that has took place. This is a significant threat as the company might end up going in to liquidation in order to be able to pay back the borrowed funds. However because there is pressure to not disclose the actual figures, Hall and associates could first go approach those charged with governance. Mostly the audit company responsible for enabling smooth auditing for the external auditors would be able to take the appropriate action to be able to stop the pressure for hiding the actual quick ratio. If the audit committee is not able to help Hall & associates in this regard then Hall & associates can also consider terminating the audit.

CGL won’t be able to influence the share price based on the assignment fee as the basis of share price calculation involves parameters which cannot be manipulated or tweaked as per company’s requirements. CGL could offer shares whose number would depend on the fee of audit as price couldn’t be changed. But this creates self-interest threat as Hall & Associates would want the client company to have better looking audit report as it will enjoy benefit from shooting up of price of the shares. To avoid this Hall & Associates could insist on cash payment or payment not linked with company’s performance.

Week 4

As an Audit senior of Sampson Limited Company it was important to analyze the various risk components of the overall Audit risk of the company in the planning stage itself so that the team is able to design the audit procedures more diligently.

(i) The company is under immense work load which implies that there is an inherent risk(ASA315) of material misstatement because of the enormous transactions taking place in a day leading to misstatements in recording and reporting. A new treasurer has been appointed too and financial controller who was earlier responsible for few of the tasks now delegated to the treasurer has become very confident about the treasurer as he earned a small profit for the company. Controller still should be very alert of the tasks done by the treasurer and should cross verify them as treasurer is in a key position where he is in control of the assets of the company and as such has the potential to bring great loss.

A small profit made by him now should not become a reason of negligence and proper controls should be in place so that any control risk(ASA315) is avoided at every level. It is also stated the foreign exchange is involved which makes calculations complicated and it is already mentioned that company has work load which means there are possibility of errors going undetected if the level of the procedures carried out are not significant enough and if sample size batch is not small leading to significant detection risk(ASA315) by the team.

(ii) Sampson has closed one of the factory in the year which will now be considered as a discontinued operation during the year which will have its own procedures of accounting. Discontinuing would involve valuation of every asset, measurement of the losses and transfer of various assets to continuing business etc. Too many tasks involved in the discontinuation of operation would pose an inherent risk(ASA315) to Simpson for not accounting the transactions accurately or might also lead to Sampson taking a hit or loss for the various protocols required on discontinuing an operation.

As mentioned closing a line in itself has a set of accounting treatments to be followed and if Sampson doesn’t have efficient and competent team of accountants in place then there could be material misstatements due the weak controls in place leading to control risk(ASA315). As the accountants at Sampson needs be well equipped with the standards and treatment relating to the closure of a operation or a line, so does the audit team else there are chances of many errors in reporting of any gains or losses on re-measurement of assets going undetected. The accounting standards also requires that the profit or loss be disclosed separately and if accounting team is not competent then there could be detection risks(ASA315).

(iii) Incentives for the sales personnel was linked with the performance which leads to and inherent risk(ASA315) of manipulation. It becomes crucial that the recording of the sales transaction and making sales is done by different individuals. If the separation of duties is not placed efficiently then this weak control will lead to significant control risk(ASA315) and revenue could be materially misstated. There is also a risk of the detection of any fraud here going undetected as it is difficult to very if the sales very genuine sales or not if the sales team and accounts team are working together in manipulation.

(iv) Sampson adopted a new general ledger software in the year which means this was the transition year for them and so there is an inherent risk(ASA315) of transfer of data from the previous system to this new software. It is also very essential that staff is trained on using the new accounting software and even though now everything is automated, human intervention is there when data is being entered in the system, and so effective controls for the segregation of duties would still be needed. Individuals at factory level that is the managers or executives should not be allowed to punch in data into the system unless verified by the team in the head office after consulting the customers or vendors. This could lead to avoiding the control risk(ASA315). The audit team also faces a significant amount of detection risk(ASA315) as the shift to new system would also pose a challenge to the team in detecting frauds and errors leading to material misstatements.

(v) As a new personnel is appointed he will lack the required experience for maintaining the backups and their modification leading to significant inherent risks(ASA315). Separating the role of recording and maintaining the data divides the work load so reduces the control risk(ASA315) in that manner, however the new administrator has been assigned the maintenance of all the systems and it is not necessary that he possesses the skills to maintain every system and each system in itself will have its own set of procedures and protocols. This increases the control risk of errors being committed in maintaining and modification of data. The audit team will also face difficulty in detection of any errors in modification as the transactions are enormous, and the understanding of underlying basis behind the modifications would require experience and knowledge related to the industry in which Sampson operates.

Week 5

Nova Ltd.’s current ratio, net profit ratio and gross ratio is better than is better than industry average, last year’s results and budgeted results. However quick ratio and inventory turnover ratios is not as expected. The possible reason could be as follows:

Current ratio is much better than industry, previous year and budgeted figures, where one of the reasons could be company has performed better than last year and better than anticipation leading to a rise in cash profits and therefore rise in cash balance of the Co. This can also be further proved by the increase in Net profit and gross margin ratio. Gross margin is 4% more than the industry average signally that Nova Ltd enjoys better trade terms with its suppliers or there is a possibility that Nova Ltd is not able to charge a premium price for its products for the quality it offers and the goodwill it has maintained compared to its competitor companies.

Quick Acid test ratio is lesser than industry average, this might be because Nova Ltd must have increased its scale of operations in the current year anticipating higher sales leading to increased inventory unsold at the year-end compared to previous year. Also the premium pricing policy plays a role in the increase in inventory as not all customers would be satisfied with the new prices charged by Nova Ltd.

The inventory turnover ratio has also deteriorated from last year further pointing that the increase in operations was not met by same level of increase in sales leading to higher inventory being unsold. Also assuming that we introduced the premium policy this year, it might have led to a certain loss of customer base from last year. This is hit was taken only by Nova Ltd. as it has only changed its policy while competitor firms still maintaining same pricing levels and having maintained customer base. However Nova Ltd had not anticipated such fall in revenue and that is why it was not able to incorporate this in its budgeted ratio.

Even though Nova makes a significant gross margin, same is not reflected by net profit margin indicating that much of the benefited is lost in the indirect expensed. However it doesn’t remain much cause of concern as is typical for the industry in which Nova Ltd operates to have higher indirect expenses. Probably it is an industry which needs a lot of back end operations and has significant distribution costs. When further analyzed gross profit has increased only by 7% ((65-61)/61) while the net profit has increased by 67% ((5-3)/3).

This is an indication that Nova Ltd. was able to get better control over its overheads this year compared to last year and also compared to its competitors. This could be due to introduction of new management systems whereby employees are kept highly satisfied compensating for not giving hike in the current year and probably ways were identified in better utilization of assets leading to lesser depreciation. There could be a possibility of new work systems introduced like work from home saving much of the rent, electricity and other resources.

Implications on Audit:

Audit team will have to investigate the increase the current ratio, as indicated above the reason being increase in significant cash balance, which would be easy for audit team to verify from the various bank accounts Nova Ltd. hold.

The other important implication on audit would be the high levels of inventory, it would become essential that the valuation of this inventory was done accurately, and the team now will have to design procedures to verify the same as a misstatement here could lead to material misstatement in financial statements.

If Nova Ltd. is able to earn higher than its competitors and if its performance has been much better than anticipated figures and last year, this also causes concern for the auditors as to how Nova Ltd is able to charge premium price or why the suppliers are giving better terms to Nova Ltd. There is a risk of manipulation as how the company has outperformed itself and competitors. Nova Ltd. will have to design substantive procedures(ASA520) to verify that these are not inflated and artificial figures by contact the suppliers for verification of trade terms.

Also there has been a significant improvement in the way overheads are managed this year. It is important to identify the various reasons as to how overheads were controlled this year to such a great extent and what strategies were adopted. The accountant in charge for reporting the overheads should be able to provide evidence for the decrease for which extensive questionnaire would be needed to extract evidence that no correct and genuine figures were used and no manipulation had occurred.

References for Audit, Assurance and Compliance

Auditing Standard ASQC1(May 2017). Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, Other Assurance Engagements and Related Services Engagement. Retrieved from

APES (Dec 2010), Code of ethics for Professional Accountants. Threats and Safeguards. Section 200.3-200.8, 24 – 25.

Auditing Standards ASA 315.(n.d.).Identifying and Assessing the Risks of Material Misstatement. Para2 – A36, 7 -27.

Auditing Standard ASA 520(Oct 2009). Analytical Procedures. Para 5. 8.

Auditing Standard ASA700(Dec 2015). Forming an Opinion and Reporting on a Financial Report. Para 28, 12.