Question 1
A.1 (a) Auditor can provide various assurance services to clients. We hire auditor just to get assured that the accounts are being maintained as per statutory compliances and all statutory compliances are being completed. Some of the auditor assurance services which we can hire are as follows:
- Internal auditor services: Internal auditor assures us that all the accounts and all the statutory compliances are being complied of timely and there is no fraudulent activities going on in the company.
- Financial services: Auditor can also provide financial services to clients like all the banking requirements i.e. loans & Advances, etc. are being provided by auditor.
- Statutory Audit: In this Audit, an auditor provides reasonable assurance that the accounts are being maintained as per companies act and all the provisions of companies act has been complied of.
- Tax Audit: This Audit has to be done keeping in mind income tax act. This audit gives assurance that the accounts present true and fair view of the performance of the company through Profit & Loss account and position of the company through Balance sheet.
(b) From Client perspective it is very important that there should be different auditors for Audit and non- audit purpose. If they are same then client will not be able to come across the deficiencies in each department because the one who is performing same person is judging. No results and no observation will come out in front of the eyes of the management. All the pendency and discrepancy will be dumped. If they are different, then accounts department will have fear in mind that the audit department will check their work and will present to management
So, with this the performance of the company will increase. There should be concept of Maker and Checker in every organization and these both persons should be different.
A.2 Inherent risks are as follows:
i) Foreign Exchange Fluctuations: As the company purchases its raw material outside Australia in US dollars and total sales is in Australia which will be in AUS$. So there will definitely be impact on the transactions of foreign exchange fluctuations. So, this can heavily impact the profitability of the company.
ii) Quality of imported steel: The quality of imported steel is of sub-standard quality which will surely hamper the quality of finished products. If quality of finished product is of sub-standard then definitely its sales price will be lower.
iii) Closure of one sales point: As the place where company’s sale was 40% that has closed. This has reduced the sales by 40%. This can also be point of concern of the auditor because this will hamper the future profits of the company.
iv) Outdated of Nuts & Bolts: The main finished products of company got outdated because of which there will be no sales in the company. If no sales then payment to the creditors will be there. In other words the company will be on the line of liquidation. There is risk of liquidation. The auditor may include this point in their audit report because they have to report on the going concern of the company. This will have very effect on the stakeholders.
Following are the risks of material misstatement:
(i) For Foreign exchange fluctuations: The Credit balance of importers in the books can be an account for risk for material misstatement. As the exchange rate used in valuation of importers can having great impact in the value of importers balance. There can be chances to improve the current ratio, the balance of importers are reduced.
(ii) For quality of imported steel: There can be risk that the value of closing stock is not valued correctly. It can be overvalued to show high profits. This should be checked by the auditors and if possible, they can also take declaration from the management.
Question 2
(iii) Closure of one sales point: There can be risk that the segment reporting is not correct and also the audit report may not contain the qualification of the going concern of the company as almost 40% of the company sales have dropped down.
(iv) Outdated of Nuts & Bolts: The main finished products of the company got outdated. This is the main concern of the auditor as the company get into liquidation.
(C ) Following are the audit assertions of the above risk of material misstatement:
- Foreign Exchange Fluctuations:An auditor may give assertions that the amount of imported creditors may vary when paid as it has been valued at the rate on the closing date of the year but when paid exchange rate may vary and payment might has to be paid more than what was recorded in the balance sheet.
- Quality of imported steel:Auditor may write that as the quality of raw material was of sub-standard quality due to which finished products would also be of sub-standard due to which there can be chances of rejection of material and thereof Debtors becoming bad debt.
- Closure of one sales point:An Auditor may write that due to drop in sales by 40% then can be chances of lowering of business in the coming few years as it may take some time to develop new market.
- Outdated Nuts & Bolts: Auditor should give assertion of danger of going concern as the finished products of the company has become outdated due to which there will be very less business in the company.
A3. Control risk is the risk that material misstatements occur in organization which is not being detected and controlled by controls applied in the organization. Following are controls risks in the charitable organization:
- All donations are not being supported with receipts: As the donations of raffle ticket sales and fund raising dinner are not being supported with receipts which can create chances of fraud in the organization. There can be situation that some people have given donation to the organization for which receipts are not being issued and the cash was used for personal purpose of employee which is employee of CEO. So such type of loopholes should be filled if organization wants that all the donation should be applied for that purpose which is required.
- Cash expenditure: As most of the expenditure is being made in cash not through cheque or credit card. This can also results in unwanted expenditure. There can be situation that the invoice of the expenditure is over billed for which higher payment has been shown but in actual lower amount has been given to the supplier and the difference is used for personal purpose. This can be avoided if payment is made through cheque and the bill is approved from higher authority.
- CEO and employee from same family: As the wife of CEO is involved in fund raising activities of the organization. There can be chances of misappropriation of cash as rising of funds of raffle tickets is in cash. There can be a situation that any personal expenditure prepared by employee which to be incurred gets approved from CEO as it will be for his family’s benefit.
- No formal approval of cash expenditure: As there is no approval from BOD of cash expenditure in the organization. This may result in excess expenditure which may also result into fraud. There should be prescribed Sop through which the expenditure should be approved from higher authority. More there should be limit of making cash expenditure. An expenditure exceeding a prescribed limit should be made through cheque.
(B) Strengths And Weakness In Corporate Governance In Company:
Corporate governance means that everything should be transparent to the public whose amount has been invested in the company. Now a days, corporate governance is very important for running of company. If corporate governance is missing in the working of the company then the government does not allow company to continue.
Following are the strength & weakness of corporate governance:
Strengths:
- Donations are backed by receipts: All the donations which are received in cash are backed by receipt which gives proof about the quantum of cash collected. As the company has also started taking donations through credit card which is more transparent as all the donations will get reflected in the bank account of the company.
- Monthly Review of financial reports by BOD: As Board of directors, themselves, review financial reports every month. This can have very strong check on the working of the company. Anything which requires deep dive can be figured out and accordingly action can be taken.
- Qualified directors: As the company has engaged qualified directors which are having experience of working in charitable organizations. That can lead company to great heights because if directors are not qualified, the employees will not work.
- Same family: As the CEO and employee belongs to same family. So, there can be manipulation in cash or something else as the authority and the responsibility is in same hand.
- Cash expense: As most of the expense incurred by the company is incurred in cash. So, there are much chances of fraudulent entries in the company accounts. So this should be avoided.
Audit risk: Audit risk is that risk that an auditor will issue unqualified audit report and still there will be some detection risk. There will remain risk of material misstatement and auditor issues unqualified report. In other words there may be risk that an auditor gives an incorrect opinion on financial statements
Detection Risk: It is that risk that a risk still exists in organization and an auditor will not be able to detect that and issue unqualified report. An Auditor must apply audit procedures to detect material misstatement in financial statements whether due to fraud or error. Detection risk arises due to either misapplication of some audit techniques or omission of critical audit procedures. This can be reduced if an auditor uses in-depth sampling technique.
Control Risk: This risk is that risk which arises due to lack of internal controls in the company or if controls are there they are not being applied appropriately. An organization must have internal controls to detect risk of material misstatements. Control risk is high in that companies in which internal controls are weak or not working because if internal controls are not there no risk can be detected and there are more chances that an auditor misses some important observations.
Inherent Risk: It is that risk that is not due to any failure of controls. This risk is embedded in the functioning of the company. This is not due to any internal controls. This risk is mainly due to the high projections and estimations involved in the company.
Audit Risk= Inherent Risk* Control Risk* Detectionn Risk.
(b) Detection risk is a risk which auditor will not be able to detect which auditing. This risk should be calculated. Detection risk arises because of using of lower sampling techniques and not getting into depth of the investigation. Detection risk is risk of not detecting the error or omission. This can be reduced if an auditor goes for deep checking instead of sampling.
(C) Materiality is a professional judgement. It varies from professional to professional. Every professional has its own experience and attitude. So it is very difficult to measure in amount. As, total assets amounted to $ 10000500 which is very high, so all the assets amount are material amount.
A5. (a) Role of Audit committee is as follows:
- Audit committee comprise of directors and other independent directors whose role is to provide independence to the auditors so that an auditor can provide independent without any influence of others.
- Mostly audit committees comprises of those directors who are not into the management of the company
- This committee is an independent committee which does not work under any influence.Ex
(b) More than 51% of members of audit committee are independent. In other words majority of members are independent.
(C) Name of the company is QBE group insurance ltd and its financial year ends on 31st December. Price Water house Coopers are their external auditors.
(D) The partner who has signed Audit report is R.J Clark and the date of signing of report is 24 th feb, 2017. The opinion of auditor is that the financial statements of company give true and fair view of the Group’s financial position as at 31st December, 2016 and its financial performance for the year ended and also complied up with the Australian Accounting Standards and Corporations Regulations 2001.
(E) An Auditor discussed about Corporations Act, 2001 and Accounting Professional and Ethical Standard Board ‘s APES 110
(F) Expectation gap is the gap between the expectations of the public from the auditor that an auditor should also perform such activities. In other words difference between what the public and the financial statements users believe auditors are responsible for and what auditors believe they are responsible for.
An auditor should define its responsibilities which are mentioned in the corporations act and the code of ethics of auditor. General public should be made aware of the responsibilities of an auditor.
References
EY, Audit Services & Assurance, viewed 26 April 2017, https://www.ey.com/in/en/services/assurance.
Accounting Simplified.com, Audit Risk Model, Inherent risk, Control risk, & Detection risk, viewed 27 April 2017,https://accounting-simplified.com/audit/risk-assessment/audit-risk.html.
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