Background of Audit Procedures
An audit can be defined as official inspection of an organisation conducted by an independent auditor or audit firm. The requirement of the audit can be statutory or voluntary which varies business to business (Gaynor and et al., 2015). In accordance with audit provisions applicable in Australia; corporate entities are required to conduct on a compulsory basis. The present study is based on the description of audit procedures of Cloud 9 Pty Ltd to be conducted by Partners as per the given case scenario. Description will be supported by applicable Australian audit standards and provisions.
International Federation of Accountants (IFAC) Code of Ethics meant for Professional Accountants says that ‘before agreeing to the relationship of new client, a professional auditor engaged in public practices is required to identify whether an agreement could create an impact on compliance regarding the basic principles’ (West and Andrew, 2017).Same is cited under APES110 Code of Ethics for Professional Accounting and supported by Section 210. Possible threats to professional conduct or integrity might be produced from, such as questionable issues linked with the client like its owner, managerial activities etc. For the acceptance of audit of a new client, the company must examine the possible client (its owner, managerial activities) to determine if or if not there is the existence of any question regarding the potential client’s integrity, that creates offensive risk. Toy, Alan and David (2015) stated that this action of examination is generally conducted as knowing the client or customer due diligence, that can be performed so as to act in accordance with regulations of anti-money laundering. In respect to the cited provisions of concerned standard following audit issues is required to be considered by BUS306 Partners before determination of tendering for the audit of Cloud 9 Pty Ltd:
Reputation, background and history of Cloud 9 Pty Ltd: The auditor must collect all the information regarding the reputation of the client in order to ensure that the firm is not taking on risky clients (Andon and et al., 2015). Especially, the auditor is required to consider the integrity of management.
The divergence of interest: Ensuring that the client acceptance will not create any impact on the conflict of interest for the existing clients. Along with his, client acceptance must also not create any impact on the conflict or threat to freedom, integrity and auditor’s objectives.
Audit engagements: In case a company tends to replace its current auditor or to agree with a nomination as the auditor’s replacement. Further, the company is required to acquire the potential clients grant to interact with the existing accountant. In case the potential client is not providing a grant, then the Code states that company has to decline the nomination or the audit involvement. If the company gets the permission to interact with the existing accountant, the company must give in written that, requesting all the information which will allow the company to make better decisions in accepting the nomination or audit involvement (Moroney and Trotman, 2016). ASA 210 of auditing standard requires that the accountant must comply with the audit engagement with the company, which must be stated in written by the accountant and forwarded to the company. The accepted terms shall be stated in the letter of audit engagement or any other viable contractual form. The letter of audit engagement wherever reliable shall contain the arrangements to be made with the predecessor auditor, if any, in the case of an initial audit.
Considerations before Accepting the Client’s Engagement
Communication Cloud 9 Pty Ltd’s previous auditor: Before agreeing to any of the audit statement, the auditor must communicate with the predecessor auditor in order to make sure that there is no reason behind not agreeing the audit or there are no fair/legal problems. Nonetheless, the new or planned auditor will ask for client’s permission before communicating with predecessor auditor, and in case the client rejects it, the auditor shall be taken out from the appointment. Before giving a response to new auditors, the previous auditor will ask for client’s permission to give a response and in case the client does not permit; the new auditor must reject the nomination. Communication done with predecessor auditor is a compulsory necessity, and it has to be completed in a formal manner (Yoon and et al., 2015).
Audit engagement shall not be accepted if there is the presence of such situations:
- Restrictions on analytical procedures and workings to done for the purpose of collecting evidence
- Financial reporting structure is invalid
Management declines to offer acceptance which admits its duties regarding financial statements (Cefaratti and Bhattacharjee, 2013).
After considering all the above aspects, the auditor might make the decision to agree or refuse the client. In case auditor makes a decision to comply with the client, then these following procedures will be taken into account
- Verify whether the removal/acceptance of the previous auditor is performed under viable terms and requirement
- Ensuring that engagement of new auditor is according to the statutory requirement.
- Further Engagement Letter must be submitted
Audit planning engages the introduction of the total audit strategy regarding the appointment of an audit plan. Knechel and Steven (2016), specified that a proper planning procedure, gives advantage to the financial statements audit in many ways: such as identifying and devoting suitable devotion to significant areas of the audit, resolving prospective complications, managing audit engagements and facilitating the direction and supervision of engagement team members and the review of their work. Following audit issues are required to be considered while planning of Cloud 9 Pty Ltd by BUS306 Partners.
Taking into account the internal and accounting control systems: auditor shall request to understand the policies of accountancy implemented by the company and same with its changes. The increasing understanding of about the internal and accounting control system and the relative emphasis expected to be placed on tests of control and substantive procedures (Mohamed and Abdel-Aziz, 2015). Overviewing the issues occurred in last year’s audit, which might contain long-term relevance in the present year. This can be completed by assessing last year’s working paper. The auditor must determine the areas having poor control over accounting issues. Giving proper concentration must be provided to those areas in the audit procedures. Considering the impacts of changes in accounting policies or legislation impacting the company’s financial statement. The audit plan must be inclusive of reviewing changes and is or if not the client is conducting according to viable requirements (Ratzinger-Sakel and et al., 2013).
Audit Planning
The auditor must ask with managerial authorities regarding the existing circumstances of trading or any other considerable business change conducted and the company’s management. For example, management changes can create a great impact on the internal con troll system by weakening it. Determine any of the considerable change in the accounting policies of a client like installation of a new computer information system. Any modification in the computer system can lead to weaker controls. Circumstances are needing more focus like the presence of associated parties. Assess future or current financial complexity, which could face the company. For example lack of raw materials or incapability raising operating capital
The auditor is required to investigate the nature of communication and reports with the customer; further, the audit plan lodges the nature and timing (Feng and Chan, 2014). For example, the auditor should assess the timings of yearly meetings, inventory taking, and availability of dates for management reports. Berglund and et al., (2015), asserted that setting levels of materiality regarding the purpose of the audit, particularly for determining areas having material communications. Moreover, the auditor must identify the amount of audit members needed, speciality, experience and the dates of the audit visits.
AASB 107 ‘Statement of cash flow’ is applied to attain the main objective of providing information relating ability of an entity to generate cash and cash equivalent and application of same as cash flows. Cash flow statements are continuously monitored and assessed by management so that it can be ascertained that whether sufficient funds are available with the company for accomplishing its daily operations. The circumstances which led an auditor to believe that cash flow issue exists in a company are late payments or non-payments or liabilities, symbols relating to inadequate cash flow, excess dependency on finance for long-term requirements as well as daily operations. Assessment of entity’s ability to meet out dividend obligation out of operating cash flow is also assessed to ascertain whether the issues relating to cash flow exist in the entity or not (Asare and Devin, 2014).
It has been assessed through financial statements of Cloud 9 Pty, that cash flow issues exist in the company. As the company is spending more in comparison to its charges or fees taken for providing services, thus for satisfying the customers more amount is borrowed which eventually leads to a loss for the company. A fact which cannot be denied is that a business cannot survive for a long period in case of absence of appropriate cash.
Review of Cash Flow Statement as per AASB 107
AASB 107 provides separate disclosure for operating, financing and investing activities in order to assess all the operation of these activities in an appropriate manner. An auditor can assess the quantum of the amount which has been availed by the company through its main operating by analyzing cash flow from operating activities. Thus it can be ascertained whether the Cloud9 Pty is dependable on outer sources or is able to generate appropriate or required amount of cash through its operations. Financing activities provide details relating to the amount which has been borrowed and the amount paid back to financers (Sundgren and Tobias, 2014). Late payments, reduced payments to lenders; this kind of situation might exist in case of Cloud 9 Pty which led auditors to assess in detail relating to issues of cash flow.
ASA 500 provides provision relating to audit evidence which is required to be attained prior to forming an opinion relating to the entity. In the present case of Cloud 9Pty Ltd. substantial and analytical procedures have been applied to the cash flow statement and it has been ascertained that balance of saving account has been declined in comparison to previous year statement. Moreover, the reason behind the same is cost relating to new store, trucks and marketing campaigns. Due to the same discussion has been done with management and requested finance director to compare cash flow with budgeted figures in order to ascertain the issue in detail.
The auditor came to this conclusion due to above-specified reason and was sure about the same after assessing latest available interim report. The auditor also considered budgets, cash flow forecast and other reports provided by the management. Significant changes in working capital; journal and other accounting records relating to non-compliance with a term of the loan; a transaction which has been occurred subsequent to the date of a report by the auditors of Cloud 9 Pty Ltd in order to be sure regarding their opinion relating to issues in cash flow statement.
ASA 570 Going concern
The assumption of going concern is applicable if Cloud9 stays in business for the predictable future. As per this assumption, valuations of assets are based on their continuous utilization on the operating activities of the business. Further liabilities are recorded and sorted as non-current and current liabilities, by considering the client’s ability to pay off the debts which are due in the upcoming years. It is Cloud9 management responsibility to consider if or if not their management is able to stay in a going concern.
Risk of going concern:
For cloud9, BUS306 Partners are required to use professional judgement in order to consider if or if not the assumption of going concern is valid. There are numerous indicators that can recommend that the assumption of going concern might face risk or not. Under ASA 570 (ISA 570, there is a complete record of conditions and measures placing doubt regarding the assumption of going concern. Indicators are inclusive of losing a considerable customer, an important debt to equity ratio, high-staff turnover, long-standing losses, incapable of forfeiting outstanding debts, loss of key managerial personnel, and overdependence on certain customers or dealers, long-term loans getting matured, reluctance by suppliers for providing goods on credit.
Mitigating factors of going concern risk: Mitigating factors helps in reducing risks when the assumption of going concern might be in a doubt of risk (Seyam and Sharon, 2016). For instance, in case a client faces an immense shortage of cash, however, has a letter offered by a bank stating that they will provide further financing, the letter reduces the risk but not eliminates it the risk that the going concern assumption may be invalid. Other mitigating factors are inclusive of a guarantee letter received from parent company, noncore assets accessibility that can be put on sale to offer required cash without interrupting the company’s operating capacity, capability to increase extra finance through selling shares or borrowings, ability to put into sale an unprofitable business segment (Saha and Mitrendu , 2017).
After assessing the financial statement of Cloud 9 Pty Ltd, the mitigating factors which are available which provide the surety to the auditor that the company will operate in future has been discussed below:
It has been assessed through financial statements that even though appropriate assets are available with the company in case the company requires urgent cash and that too without interrupting operating activities of the company. The company is paying its liabilities on time in most of the case, and reasonable extension is provided by the supplier in case the company requires the same. Another mitigating factor which exists is the ability to raise additional funds through financing or other option such as the sale of shares. Further, for being sure regarding the payment to third parties, the letter has been attained from them in which it has been provided that the company is paying on time to third parties.
From above mitigating factors it can be assessed that the company will continue to operate well in future; as it has not stopped its main operations; letter has been received from third parties that company is appropriately paying off its liabilities. Further, the internal control and other available details from the financial statement as well as management provide that going concern assumption is appropriate for the company.
ASA 700 deals with the formation of opinion and manner of reporting on a financial report of an entity. Krishnan and Changjiang (2014), stated that the standard specifies the manner in which auditor has to provide the opinion relating to financial statements of an entity. It has been provided that auditor’s opinion has to be provided in the first section of the audit report. Further, details relating to opinion paragraph, i.e. the basis on which the opinion has been formed, an i.e. statement relating to sufficiency and appropriateness of audit evidence. ASA 701 provides assistance relating to Key Audit matters in Independent Auditor’s Report. After specifying the base of opinion, i.e. procedures through which audit evidence has been attained by the entity details if any relating to key audit matters is provided in the audit report.
Responsibilities of management for preparation of financial statement and ensure that the information provided in the financial statement is relevant, reliable, understandable and true and fair. ASA 705 and ASA 706 are applied in case auditor modifies the opinion or emphasis on matter paragraph in auditor’s report. As the auditor has attained reasonable assurance relating to a financial statement that they are free from a material statement from fraud and error; it can be said as a reference that appropriate procedures have been applied for attaining audit evidence.
As the opinion has been formed in accordance with ASA 330 after attaining sufficient appropriate audit evidence, audit is assure that no material misstatement either individually or in aggregate exits in the financial statements; it specifies that appropriate research effort has been made by the auditor of Cloud 9 Pty in order to conclude appropriate opinion of the financial statement. The auditor also requires too assure that reasonable accounting estimate have been prepared by the management (Coetzee and Dave, 2014). Further, the auditor has assured that financial report is relevant, comparable and reliable information relating to an entity has been provided through same. As the audit report of Cloud 9 has been prepared in the format provided in ASA700 after attaining sufficiency audit evidence as per ASA300; it can be said that the report has appropriate research effort, referencing and format. Further, even the opinion has been made by auditor after conducting substantial and analytical procedure in order to attain substantial adequate evidence. These procedures ensure the statement relating to the appropriateness of research effort, referencing and format in the audit report of Cloud 9 Pty.
Conclusion
The above study depicts that auditing standards provide assistance and support to auditors to conduct their duties and obligation in more appropriate manner. Risk assessment and reporting phases are two main variants of an auditor’s obligation. The auditor adopts a broad view in order to ascertain the same as a whole industry to which the organization operates. The audit plan of an auditor is in accordance with the risk relating to the existence of extent of material misstatement, i.e. more time and detail checking is done in case of higher risk. In the present case of Cloud9 Pty, the auditor has applied appropriate auditing standard in order to conclude opinion of the financial statement. Further, the final opinion has been concluded after application of substantial and analytical procedures in order to attain substantial adequate audit evidence for the formation of opinion relating to truth and fairness of financial statements.
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