The Types of Audit Reports and Their Significance
Dsicuss about the Innovation And Practice Of Continuous Auditing.
This study deals with analysing the annual report of Retail Food Group Limited for evaluating the different aspects of the groups as connected to the audit programs (Yu et al. 2015). There are several aspects that need to be taken into consideration that include elements like type of audit report issued by the auditor as well as assessing the internal control of the business entity. The study highlights the business risks faced by Retail Food Group Limited in relation with the operating entity as well as different ethical considerations in respect of identifying the deficiency in the given system. In order to determine the factors, it is important to critically analyse the annual of Retail Food Group Limited for the year 2016 and 2017. Based on the findings, a conclusion had been conducted at the end in respect to the audit practices as well as appropriateness of the audit report that is being issued for given period of time (William Jr, Glover and Prawitt2016).
There are different audit reports that are being issued by the auditor and these can be further classified into four parts and these are mentioned below with proper justification:
This audit report explain that the business enterprise has prepared their financial statements where they have followed the statutory requirements as well as guidelines as issued by the different Governing Authorities. Furthermore, the financial statement of the company shows true as well as fair view to the financial performance and even the financial position of the business entity (Wang, Li and Li 2015). However, the management need to cooperate with the auditor and it should be excellent and there should be no restrictions present for whatever reasons was placed on the independence of the auditor.
This type of audit report explain that the financial statements of the business enterprise had some misstatements as well as management of the business had refused to rectify it for the same. It means that there are several elements of the financial statements of the company that failed to reflect true and fair view of the financial performance as well as financial position of the business enterprise (Wang, Li and Li 2014). However, it shows that some of the restrictions were placed on the independence of the auditor while they are performing their respective duties.
This type of audit report as issued by the auditor shows that the financial statement of the business enterprise failed to show true and fair view of the company and there is detected material misstated figures in the financial statements. Furthermore, it even shows that there had been significant restriction posed on the independence of the auditor at the time when auditors are performing their duties (Sookhak et al. 2015).
Deloitte and PWC Audit Reports
This type of audit report can be treated as the worst one as compared to any of which is explained above. It means that that the financial statements were prepared in given way were the auditor could not able to authenticate most of the transaction of the business enterprise. Furthermore, the management even failed to cooperate with the auditor while auditor was performing their duties. Furthermore, there was no significant as well as useful information shared with the auditor. Because of that, it was not practically feasible for the auditor to conduct the audit as there was no proper information shared by the management (Sookhak et al. 2017). Therefore, the auditor in this case refuses to place any comment on the financial statement of the business enterprise.
Deloitte being one of the company from Big 4 audit firms had conducted the audit report for Retail Food Group Limited. The auditor had provided opinion by referring the financial statements prepared by Retail Food Group Limited for the year 2016 and 2017.
The auditor had placed an opinion where:
- The preparation of financial reports by Retail Food Group Limited is fully complaint with the regulations as mentioned the Corporation Act 2001. In addition to that, the compliance of the audit report takes into account following criteria that had been explained below with proper justification:
- The Financial Statement of Retail Food Group Limited reflects true as well as fair view of the financial position of the business entity as on 30th of June 2016 and the level of performance had been recorded by the company for the year ending on that date (Rezaee et al. 2018).
- The financial statement of Retail Food Group Limited had been prepared by the entity that was complied with the Australian Accounting Standards as well as the Corporations Regulations Act 2001.
- The Financial Statement of Retail Food Group Limited had been prepared by the business entity need to be in full compliance with the guidelines as issued by the International Financial Reporting Standards.
PWC being one of the audit company from Big 4 Audit Firms had conducted audit report for Retail Food Group Limited for the year 2017. The auditor had provided opinion by referring the financial statements prepared by Retail Food Group Limited for the year 2016 and 2017.
The auditor had placed an opinion where:
- The Financial Statement of Retail Food Group Limited as well as its different business entities had been controlled and abided in full compliance with the guidelines of the Corporation Act 2001.
- The Financial Statement of Retail Food Group Limited reflects true as well as fair view of the financial position of the business entity as on 30th of June 2016 and the level of performance had been recorded by the company for the year ending on that date.
- The financial statement of Retail Food Group Limited had been prepared by the entity that was complied with the Australian Accounting Standards as well as the Corporations Regulations Act 2001.
The above audit report issued by both the auditors are clear and easy to understand. In addition to that, the report that are presented by both the auditors are proper and appropriate at the same time. Retail Food Group Limited had been working in compliance with the guidelines of Australian Accounting Standards as well as Corporation Act 2001.
It is important to understand the fact that the internal control can be treated as one of the important factor for the proper and legitimate functioning of any business enterprise. The available resources that are present with any company is always limited by nature (Martinov- Bennie, Roebuck and Soh 2014). In that case, the companies had to see that the resources are made available at proper time as well as there is optimum utilization of the same. There can be significant amount of leakage taking place for most of the vital resources used in the companies provided that the internal control mechanism of the entity is very weak. It may happen that the leakage takes place because of theft, or any of the inappropriate operation took place and there is leak of vital information to third parties. Furthermore, Retail Food Group Limited need to make sure that they conduct optimum utilization of resources that is present with them and should be involved at the time of incorporating different internal control measures within the framework of its operations. Some of the internal control weakness had been mentioned below with proper justification:
Internal Control Weaknesses and Recommendations
The companies need to understand the fact that the cash balance as per the system as well as present cash in the cash box should be tallied on everyday basis. Cash being one of the most crucial internal control that is faced by any business enterprise. If there is no cash, it would be difficult to make the payments and carry out daily expenses. The situation can lead to serious cash outflow that need check by the company. Furthermore, the business entity need to make reconciliation statements that should be matching with the cash in hand of the business entity with that of passbook and bank of the company as well (Leung et al. 2015).
Automated generation had been done for the payroll system that are used for making the payments to the employees. In addition to that, the bank account of each of the employees are linked with the system of the business enterprise. Cash is directly transferred to the employee immediately after the due payment through wire transfer in their bank accounts. Therefore, the main underlying reason is that the extra form of money paid to the employees by the HR manager as well as other officer in exchange of commission that needs to be stopped in every possible way (Kogan, Sudit and Vasarhelyi 2018).
The right to get the access to the system of the company can be given to only qualified as well as skilful employees of the business enterprise. It is really hard to operate the complex installed software that is fully automated with key operations of the business and it will be difficult for any individual to handle this software who is not trained and do not possess enough knowledge regarding the same.
There are several weakness that are already present in the internal control system as applicable by the Business Enterprise and these are mentioned below with proper justification:
As far as cash is concerned, it is recommended to the companies to keep a check when the person is counting the drawer at night as well as person who is responsible to make the deposit in the morning. It is necessary for the companies to ensure that the person making the bank reconciliation statements as well as person involving in conducting deposits in the bank are quite different by nature (Knechel and Salterio 2016). There will be complete violation in that case if purpose of preparation of bank reconciliation statement is not known or conducted.
Types of Audit Risks
Presently, it will be essential for the CFO as well as HR manager of the business enterprise to enter influence the payroll system through fabricating the details of an employees who are actually non-existence by nature. There had been given terms of operations of the business so that companies should not install a system where the payment made to the employees are directly linked with the responsibility (Knapp 2018).
Presently, it is quite possible that the person who has the access to the system controls of the business enterprise become answerable to the accounting cycle as well as operations within the business. In addition to that, the employee who had got complete access to the full system should be overriding any segregation that had been checked by the management and linked with their duties as dedicated by the individuals.
It is important to understand the fact that the audit risk can be treated as one of the phenomenon where the auditor involve in forming the opinion by making sure that the financial statement of the company have been prepared based on statutory requirements as it is applicable by the business that takes into account several applicable standards. In addition to that, there are several material misstated figures present in the financial statement of the company (Jubb et al. 2012). Furthermore, the audit risk can be treated as sampling of data that had been conducted at the time of audit activities as presented by the auditors. Based on the auditing principles, it is seen that the auditor has the responsibility to look at each of the transaction at the time of performing his substantive procedures. Two types of detected audit risks are detection risks as well as materiality risk. As far as detection risk is concerned, there is high possibility that the auditor may be involved in locating the presence of the material misstated figures. The other audit risk named as materiality risk actually get linked with the fact possibility where the auditor may treated material item as non-significant part of the financial statements in any business enterprise.
There are several business risks that can help in influencing the audit for the business enterprise and works for Retail Food Group Limited. Some of the business risks had been mentioned below with proper justification:
- Supply Chain Risks- One of the business risks that are faced by Retail Food Group Limited is supply chain risks. The company had been facing this risk of incapacity where they cannot deliver value addition to their immediate or target customers. Due to this, the company recognizes the generated revenue from the sale of goods as well as services to the customers before there is substantial transfer of risks and rewards as linked with the products. Therefore, the auditor in that case might have failed to identify the proprietary of the sale made by Retail Food Group Limited
- Changes in the market trends as well as consumer demand- One of the business risk that are faced by Retail Food Group Limited is changes in the market trends as well as consumer demand. This business risk can sufficiently affect the inventory valuation of Retail Food Group Limited as well as inventory ratio for the company. It is the work of the auditor to act cautiously at the time of evaluating the real value of the closing stock of Retail Food Group Limited as well as keep a note if there had been any irrelevant or unnecessary change in the valuation method of inventory present within Retail Food Group Limited (Hayes, Wallage and Gortemaker 2014). Therefore, this business risk might be an effort to show the negative impact of the trends on the closing stock of the Retail Food Group Limited.
- Food Safety- One of the business risk that are faced by Retail Food Group Limited is risk from food safety. The efforts conducted by Retail Food Group Limited in terms of its manufacturing actually had been quite inadequate by nature. Furthermore, the mentioned inadequacy can lead to bring significant impact on the health as well as safety incidents for the customers of Retail Food Group Limited. It is the responsibility of the auditor to evaluate whether the company is making an effort in aligning with the concern and understanding about the safety as well as well-being of their customers (Groomer and Murthy 2018). Therefore, the auditor should be recognizing the impact of the inefficiencies as portrayed by Retail Food Group Limited in this respect on the financial statement of the business enterprise.
- Margin Risk- The auditor will have to objectively observe the changes in the inputs used byte companies and its respective franchises. The inputs include labour, supply inputs, rents, utilities and other costs. The reason being that the increase in the prices of these inputs can directly lead to the reduction in the margin earned by the company.
- People and Culture- There are several mergers and acquisition implemented by the company in the recent times. The auditor must determine the impact of these mergers on the human resource complement and the internal environment of the company. The auditor must determine that the changes that are taking place are in alignment to the long-term strategies of the company and are not resulting in the company’s failure to achieve the same (Gay and Simnett 2015).
- Geo-political- There are several regulatory changes and interventions taking place in respect of the operations carried out by the company. Some of these changes include taxation of sugar, changes in the legislation relating to workplace law and instability in the political situations in certain areas. The auditor will have to assess the impact of the same on the financial statements of the company.
It is necessary to consider the fact that the ethical principles in the activities of the business should be taken into account in an objective way (Auditing, Assurance and ethics handbook 2017). It is important for the company to make sure that the resources depicts the financial operations where the society can be entrusted on it and it provides value to the shareholders of the business enterprise. Company who show no interest or is completely negligent in following the ethical standards in their operations had to face the consequences later (DeFond and Zhang 2014). These companies will not be able to generate enough value for its stakeholders because of the undertaken actions against it by the statute as well as other governing bodies that overlooked the operations. Below is mentioned some of the ethical issues that are faced by Retail Food Group Limited with proper justification:
- Retail Food Group Limited provides alcohol to their customers. This can lead to situation of drink and driving, domestic abuse as well as other types of malpractices. Retail Food Group Limited had faced several ethical issues where they were told to how much alcohol should be served, whom to serve.
- Retail Food Group Limited serves food that is likely by the customers. This can lead to situation where the food contains high amount of sugar, salt as well as fat and too many calories associated to it (Alles, Kogan and Vasarhelyi 2018).
- Retail Food Group Limited needs to be fully honest on matters relating to the used ingredients for the food that is being served to their customers. Furthermore, it may happen that the ingredients served are not natural by nature. Furthermore, it may happen that the company make use of artificial ingredients in place of natural ones. Therefore, companies should be confessing honestly regarding the same otherwise it will surely hurt the customer footprint in such ways (Chan and Vasarhelyi 2018).
- Retail Food Group Limited should start following the principles of composting as well as recycling and proper disposal of oil. The company should also involve in reducing the moon-food waste component as well as consumed reduction of power.
- Retail Food Group Limited need to take proper care about the safety of the consumer through utilization of different methods like not storing the flammables within the premises of outlets as well as installation of emergency exists that is done for the customers if there is any incident takes place
- Retail Food Group Limited faced several ethical issue where they were involved in the personal issues of the customers within the premises of the restaurant. The company should get not get involved in any such issue that can hurt the sentiments of the customer
- Retail Food Group Limited should be making an effort to host VIPs and provide them attention in every possible way. The company should not involve in any misbehaved action by VIPs as it will disturb the reputation of the company as a whole.
- Retail Food Group Limited faced several ethical issue where they are confused on whether projecting the image of the company as a niche place for the rich people or it can be accessible by once and all (Cannon and Bedard 2016).
- Retail Food Group Limited faced several ethical at the time of employing immigrants who have no proper documents. It had been done by the company just to save the cost as well as make ways to remain competitive in the marketplace. Furthermore, Retail Food Group Limited need to understand the implication of its actions on the domestic population of the country as a whole (Beasley et al. 2014)
- Retail Food Group Limited need to hire the employee who will be performing menial jobs even if it is known to the company that they are addicts or have record of conducting criminal offence. This activity is actually against the principles of Retail Food Group Limited, but again it may save cost. This is the reason why the company had kept these employee and faced serious problems in the near future (Arens et al. 2016)
- It is very important for the auditor to recognise the ethical situations face by the company because the implication so the actions taken up by the company in respect of the ethical issues faced by it have direct bearing on the financials of the company. The presence of several ethical violations on the part of the company result in the culmination of audit risks within the financial statements of the company. for instance if the company is hiring people with the records of theft and crimes in the past, the risk of embezzlement of cash increases significantly in respect of the company. Similarly, if the company fails to address the issue of reduction for waste generated by it via its operations it may result nine direct interference in its operations by the government authorities. Any actions that is undertaken to curb the malpractices of the company is ultimately borne by the stakeholders of the company as the share prices of the company goes down the goodwill of the company falls and thereby reducing its customers and the cash flow generated. Hence, it is of utmost importance for the auditors to factor in the impact of ethical principles while examining the financial statements of the company (Arens et al. 2017)
Conclusion
At the end of the study, it is concluded that Retail Food Group Limited had been able to prepare its financial statement by abiding with Australian Accounting Standards as well as other legal obligations. Based on the opinion of the auditors, the company had presented clear report to the auditor. In addition to that, threat had been detected by conducting numerous audits in the structure of the business enterprises. Furthermore, the above analysis had highlighted the business risks faced by Retail Food Group Limited. The company had even faced ethical issues presently in areas such as food and dining offered by the company. Therefore, Retail Food Group Limited should be addressing the identified issues so that they can avoid such actions that had been taken against the regulatory bodies of the country.
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