AUDIT, ASSURANCE AND COMPLIANCE HI6026
Describe the kinds of engagement consider for three tasks with levels of assurance
In the given case of OEL ltd, the three tasks of the management are justified by considering an appropriate kind of audit engagement for the firm. The engagement kind determines the scope of the checking of books and accounts of an entity.
Internal audit engagement is considering for the current case, where the auditor is related to OEL ltd and this will consider as an internal auditor. The results of the same are free from any kind of business. The auditor will check the entire books of account to give a true and fair view or opinion in the audit report. The internal auditor checks all the transactions and analyzes the internal control to track any arithmetical inaccuracy in the financial reports.
The auditing of the OEL ltd will perform who have acquired small sole trader business on an agreed consideration of $5 million. The acquired company has no financial reports from the year of its incorporation. There are no authorized financial statements of the company from 2016 to 2020 year.
Reasonable assurance level is used for considering the above mention three tasks in the current case. This approach is used to reduce the audit risk by collecting more appropriate evidence to avoid material misstatements in the financial reports. As, the acquired firm’s financial reports are not there, so the auditor will collect the vouchers and the transaction details to match them with the entries passed in the books of accounts of the acquirer.
Third-party evidence is also considered to justify the transactions of the local ltd company whose statutory financial reports are not there. This assurance level of an auditor helps in avoiding material misstatements and arithmetical inaccuracy.
Outline the defensive steps for an audit firm
An audit firm handles the auditing of data ltd for the two years and gave a clean chit to the company but giving an unmodified report. This report shows that the books of account of an entity are true and fair and the financial position is good.
After subsequent years, the data ltd took a loan from better bank ltd and went bankrupt as they are not able to pay back the amount of the loan.
Considering the above case, there are some of the points that prove the innocence of the audit firm from the default made by data Ltd are given as below:
1. The data and the evidence supplied by the management are considered in giving the true and fair view opinion in the report.
2. Internal controls and the financial evidence of the company till the two years of the auditing were appropriate and there is some manipulation of data by the company.
3. Reasonable assurance level is considering while analyzing the transactions and the financial reports of Data Ltd.
a) Explain three key threats to hall and associates under APES 110
Integrity threat- As per the integrity principle of independence, the auditor should be honest about their work while auditing the firm to generate unbiased results. In the given case, the audit manager of the hall and associates breaches this principle which is a threat to independence as per the law. Regardless of the low quick ratio of the CGL company, the auditor considers the same just in the saying of the management of the company.
Objectivity threat- It is another principle of this regulation that reflects that the opinion of the auditor's report should be free from biases and with no conflict of interest. This principle gets breached in this case where CGL company offers shares in the company to pay its audit fees. This will affect the quality of its opinion about the company as they get biased as they become the shareholder.
Professional behavior threat- Lastly, this says that professional skills and the level of assurance are used by an auditor in the auditing procedure to assess the correctness of an item. But in this case, the auditor disregards the truthfulness of the lower quick ratio of CGI and just agreed to give the report.
b) Describe the course of action for each independent threat
The above independence to threats for halls and associates need an appropriate course of action to get rid of these threats:
The third-party evidence method is considered in cross-checking all the information supplied by the management to know its quality. After testing the information, the same is considered for giving the final audit report.
Demanding an authorized engagement letter consisting of the details about the audit fees, nature, scope, and the extent of the entire audit procedures. This thing will avoid the rule of independence to perform an audit.
The reasonable level of assurance is considered in collecting sufficient evidence to check its correctness before adding in the audit report.
Explain how components of audit risk affect various situations
i) In the given case, the treasure generates a small profit to the company from the foreign exchange transactions incurred in yen is an example of inherent risk. The foreign currency rates are not in the control of an individual.
ii) This is the case of control risk, in which the risk arises in the material misstatements in the financial reports creates difficulties. The situation of the current case will be controlled by the financial controller by identifying the cause root of the issues.
iii) The bonus is given to the salesperson on the gross sales made by them in the assessment year. This shows the detection risk. To get the bonus, the salesperson can manipulate the figure of the gross sales.
iv) It also denotes the detection risk where the budget of an entity gets affected by the increasing cost of the software. The frauds and ommissions in the budget will affect the costs incurred to an entity.
v) The administration of an accountant about the data backup and changes shows the detection risk where the commission of one component leads to severe complications for an entity.
Give interpretations of the ratio of solar ltd and its impact on audit
Current ratio- The current ratio is higher than the industry average and the budgeted results show the ability of an entity in paying off its short-term obligations. This positively affects the auditing as this shows the higher financial position of an entity.
Quick asset ratio- There are no changes witnessed in the actual results in comparison to the previous and the budget measures. This is less than the industry average showing the importance of inventory in the company. Auditors get skeptical about the decreasing value of quick assets by showing their inability to pay off the liabilities.
Inventory turnover ratio- The inventory turnover is less than the industry average showing the low efficiency of an entity is generating enough revenues. An auditor needs to physically observe the stock to verify this position.
Net profit ratio- Net profit shows a higher position that shows the higher potential of an entity in paying off all the expenses. The auditor will check the revenues by assessing other documents to verify its accuracy.
Gross margin- The gross margin ratio is less than the industry average that shows the higher gross profit with less than the cost of goods sold. The auditor gets alert in analyzing the value of the cost of goods sold to know its impact on the gross profit.
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