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AUDT317 Auditing Assignment Help
According to Hayes et al (2014), in every organisation the strategic and financial decision are based on the financial statement of the organisation. For example the operational strategies are based on the number of sales booked by an organisation in previous years of sources of finance is determines with the help of cash flow activities of the organisation. Hence it is very important the financial information contained in the financial statements is free from material misstatement and present true financial position of the organisation. Therefor it is very important that these financial statements are audited in accordance with the prescribed rules and regulations.In this report we will evaluated the importance of various aspects of auditing. We will also analyse various factors which could be disadvantageous for an organisation and how these could be managed.
Task 1- Legislative and ethical requirements in audit and assurance
Auditing and Assurance Standards Board (AASB) has issued The Institute’s code of conduct to bring a transparency in audit and assurance services in Australia. These codes of conduct include two basis components that are principles and rules of behavioural conduct.
These rules are applicable on both individual as well as corporations providing audit services. Any violation of these codes of conduct will be reported and dealt with in accordance with the by-laws of AASB. All the auditors registered in Australia are bound to follow these codes of conduct in their audit assignments.
Importance of codes of conduct
According to Prasad (2012), following code of ethics is becoming more and more important due to various frauds like Enron and WorldCom.These codes are very important as they seta parameter which is required to be followed by an organisation and auditor. These rules enable organisations and auditors to work effectively and efficiently.These codes of conducts help auditors to deal with extreme and ambiguous situations faced by him during an audit engagement. AASB issues regular guidelines and amendments to clear any issues faced by an auditor while following these rules.
Principles and rules applicable on an auditor
Following are the principles which are issued by AASB and required to be followed by the every practicing auditor in their audit engagement.
Integrity-A auditor should be honest in following all the accounting and auditing standards. He should comply with all the legal requirement which are prescribes by AASB. He should also determine all the legislatures which are applicable on the auditee and see whether these requirements are complied with (Kumar and Sharma, 2015).
Objectivity-An auditor should be objective in performing an audit engagement. It means that they should maintain a quality of work in all the audits. All the functions in an audit engagement should be performed by a person with adequate skills and knowledge.
Confidentiality-In course of an audit an auditor may come across some information which are very confidential and of critical nature for the organisation. It is responsibility of an auditor to keep these information confidential and do not disclose it. In case he comes across any fraud in the organisation then he should advice the owners to disclose it. In case he refused to disclose this information then he should disassociate himself from such audit engagement (Kumar and Sharma, 2015).
Competency-An auditor should apply his knowledge, skill and experience while providing auditing services.He should perform his functions with due diligence and should not be negligent.
Fair presentation-An auditor should present his reports and other documentations in accordance with the accounting and auditing standards. The communication through these reports must be clear, unambiguous and adequate.
Task 2- Risk assessment, audit planning, audit execution and the formulation of opinions
According to University of Vermont (2012), risk assessment can be defines as of potential factors which could potential negative impact on the financial performance or other aspects of the organisation. Risk assessment includes various processes like risk identification, risk analysis and risk evaluation and response.
Risk identification-In this process the organisation prepares a comprehensive list of all the potential risk factors that can affect the business environment. This is done after a detailed evaluation on business organisation.
Risk analysis-There are various risk factors which are essential for an organisation to take as they can be converted into fruitful opportunity for the company. Hence in this process an organisation has to determine whether the organisation should react to such risk or not.
Risk evaluation and response-in this step the organisation determine whether the existing risk factor has material impact on the financial position or not. These risks should be dealt with accordingly.
The main purpose and objective of audit of an organisation can only be achieved if the steps in an audit are pre planned. A proper audit plan should be prepared by an auditor before starting the audit procedure. Audit planning does not stop with the initialization actual audit procedure. It is continuous process which is done by the auditor throughout the duration of the audit. As any assumption according to which the audit plan was prepares changes, the auditor has to change the audit plan.
Formation of opinion
This is the last step in the process of audit in which the auditor explains and forms his opinion on the financial statements of the company.According to Banimahd et al (2013), there could be two types of audit opinion of the auditor. These are as follows-
Unmodified audit opinion-When the auditor finds that the financial statement of an organisation is free from material misstatements then he will form an unmodified audit opinion.
Modifies audit opinion-this opinion is formed by an auditor is he evaluate that financial statements are not free from material misstatements or the auditor has not been able to acquire sufficient evidence to support his findings. This type of opinion can be further classified into qualified opinion, adverse opinion and disclaimer of opinion.
Task 3- Auditing process
Audit can be described as a process of examining and evaluating and examining financial statements and other documents of the organisation. There can be two types of audits i.e. internal audit and external audit. Internal audit are conducted by people from the management of the organisation whereas external audits are conducted by a professional auditor having a certificate of practice (Moroney et.al, 2014). An auditor should follow following six steps for successful achievement of the purpose of audit engagement. These six steps are:
1. Engagement activities
3. Test of controls
4. Substantive procedures
First and foremost step in an audit procedure is to decide whether to accept a client of not. All the organisations prepare a checklist before deciding whether to select a client or not. Auditors tend to decline the audit engagement of clients which are likely to affect the basic principle rules of the auditing like independence and integrity. Because selection of such clients can lead to non-compliance of codes of conduct anddecrease the value of the audit firm among other auditees (Porter et. al, 2014).
There are various auditing standard which requires that audit are properly planned by the organisation so that such audits can be conducted efficiently. This step of the audit planning involves various steps like
1. Obtaining sufficient knowledge of the organisation.
2. Evaluation of internal controls of the organisation.
3. Determining material risk and fraud prone areas.
4. Determining the legislatures applicable on the organisation.
5. Evaluating whether the organisation has followed all the regulatory requirements.
6. Development of audit strategy for audit plan
Test of controls
Primary function of preventing an organisation from fraud and material misstatements lies with the management of the organisation. For this function management of the company applies various management and internal controls in the organisation. Test of control are performed to evaluate the controls applied by the organisation to prevent it from material misstatement and frauds. Complete reliance on these controls can lead to wrong opinion on financial statements.
Substantive procedures are performed by the organisation to arrive at an adequate audit opinion.Substantive procedures are the processes that are used by the auditor to obtain conclusive evidence regarding the adequacy of the financial statements. Audit always contains an inherent risk that means that the there is always a probability that auditor might not be able to evaluate all the risks in the business. Hence the auditor should maintain proper documentation of all the processes done by him during the audit engagement (Porter et. al, 2014).
Completion of audit
First step in completion of an audit engagement is collecting evidence regarding the working of the organisation. It includes evaluation and vouching of important and relevant documents of the organisation. An auditor cannot vouch all the documents prepared by an organisation over a whole year. therefore vouching process is done by the auditor on the basis of sampling.in the next step the auditor will evaluate whether the misstatements obtained by him in previous step are material or not. If they are material then he should report these misstatements in his audit report.
It is the final step of the audit process in which an audit report is formed by the auditor by following all the auditing and accounting standards. This report is addressed to the owner of the business organisation for example it is addressed to shareholders in case of a company.
Task 4- Weaknesses in the internal control procedures and potential risk factors
Internal Control procedures
These are the procedures which are implemented by an organisation to increase the reliability of the financial accounts prepared by the organisation. Inefficient internal controls can affect the management and strategic plans made by the organisation as the primary data is collected from the financial accounts. Internal controls help in identification of the material misstatements at an early stage beforeit could become major problem for the organisation (PricewaterhouseCoopers and Everson, 2013).
Some of the internal control procedures are as follows-
Allocation of duties-It is very important for an organisation for proper allocation and segregation of duties. For example an employee who is keeping record of the stock should not be assigned duty ofphysical verification of stock. This can result in misappropriation of authority by that employee. This problem arises in small organisations as they have limited human resource capital.
Access to financial accounts-it is very important to keep proper security on the systems of the organisation. These controls includePIN, passwords, security guards, biometric devices, locks etc.
Physical audits-These audits includes counting of cash, inventory check, physical check of assets etc. It is very important to perform such physical audits at regular interval of time. These audits can help the organisation in determining the internal frauds done by management and employees of that organisation.
Documentation-It is very important for an organisation to document all the important and relevant documents like invoices, material requisition, inventory receipts, financial reports of previous year’s etc.
Potential risk factors in an organisation
According to Knechel and Salterio (2016), there are various factors that can increase the risk factors in the organisation. As a team member of an audit team we have analysed various factors which can affect the working of the organisation. Due to advancement in the technology has introduces various other factors which can increase risk factor of an organisation. Some of these factors are as follow-
People-It is very difficult for an auditor to understand human behaviour of each and every person working as an employee in the organisation. Hence it increases the potential risk of an organisation.
Processes-there are various processes undertaken by an organisation like manufacturing, sales, promotional, fiancé, information technology. Implementation of internal controls on each of these processes is very difficult.
Outside parties like creditors, suppliers, lenders etc.-It is very difficult for an organisation to implement controls on the outside parties of the organisation. There can be various situations which can increase unseen risk factors like increasing price rates of raw material.
Task 5- Auditing related technologies, techniques and tools
These are various tools which are used by auditors for audit of an organisation. Due to extensive use of technology and advancement in the working of an organisation, auditors were bound to use these techniques. These tools are majorly used by internal auditors to keep a continuous track of the working of the organisation. These tools are commonly called as Computer assisted audit techniques(CAAT’s).
According to Bierstaker et al (2014), CAAT’s are used by the internal auditors of the organisationto keep a continuous check on the working of the organisation and correcting any material misstatements immediately. But these tools are used only by large scale organisations as the cost of these software’s are very high.These software's are very user friendly and all these come with their user manuals for the ease of auditor.
Benefits of CAAT’s
1. With the help of using these software an auditor can save a lot of time and efforts which can be applied by him in determining other material misstatements and fraud prone areas.
2. These are not only beneficial to the auditors but also beneficial to the company. CAAT’s can help an organisation to analyse large quantity of data in a short period of time with better accuracy.
3. It enables an auditor to reduce inherent risk involved in the audit process.
4. It enables the auditor to select sample on a logical basis which reduces the risk of ignoring material misstatements.
Disadvantages of using CAAT’s
1. Costs of these software are very high. It is very difficult for a small and medium size organisation to implement these software.
2. Time involved in setting up of these softwares is very much.
3. These softwares can be very complex for first time user; this could result in high training cost of the organisation.
4. Lower decreased privacy.
5. Restriction on data storage.
Types of CAAT’s
1. Generalised audit software tools
2. Specialised audit software tools
3. Utility software
4. Embedded audit procedures
Among all these software most used software by the auditors is generalised audit software tool. The main reason behind using this software is that all the organisations use systems with different hardware and software. Generalised audit software tool is compatible with all such requirements(Mahzan and Lymer, 2014).
From the above report we could conclude that there are various factors which could affect the working of an organisation. An organisation should have an effective and efficient risk management system in an organisation to cope up with these risk factors. This risk management system should be prepared keeping in mind various vulnerabilities introduced with the introduction on information system in the organisation.
Banimahd, B., Noorifard, Y. and Davoudabadi, A. 2013, “Auditor-management alignment and audit opinion: Evidence from Iran”. Management Science Letters, 3(4), pp.1217-1222.
Bierstaker, J., Janvrin, D. and Lowe, D.J. 2014, “What factors influence auditors' use of computer-assisted audit techniques?”, Advances in Accounting, 30(1), pp.67-74.
Hayes, R.,Wallage, P. and Gortemaker, H., 2014, “Principles of auditing: an introduction to international standards on auditing”, Pearson Higher Ed.
Knechel, W.R. and Salterio, S.E. 2016, “Auditing: assurance and risk”. Routledge.
PHI Learning Pvt. Kumar, R. and Sharma, V., 2015, “Auditing: Principles and practice”.Ltd..
Mahzan, N. and Lymer, A., 2014, “Examining the adoption of computer-assisted audit tools and techniques: Cases of generalized audit softwareuseby internal auditors”, Managerial Auditing Journal, 29(4), pp.327-349.
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Prasad, V.H., 2012, “Ethics and Auditing: An International Perspective”, International Journal of Finance and Accounting, 1(4), pp.63-68.
PricewaterhouseCoopers and Everson, M.E., 2013, “Internal control:Integratedframework”, Committee of Sponsoring Organizations of the Treadway Commission.
University of Vermont, 2012, “Guide to Risk Assessment & Response”, Enterprise Risk Management Program.