Audit 2016 (a).docx

Auditing and Financial Reporting

Question 1) (I) Essentially, suggestion by Mr. Nastase regarding reduction in chargeable amount of fees for external audit is a practice that is not permitted under most ethical and professional guidelines that apply to the audit professionals (Lubo, 2013). In fact, if Borg Co proceeds to offer such a discount it may be considered to be against ethical guidelines of audit firms in the UK and action may be initiated by professional bodies such as ACCA or even ICAEW because it may indicate an unfair business practice. It may also indicate that Borg Co has compromise on its independence as an audit company through the compromise just to get the audit contract (Finley, 2015). The action on part of Borg Co needs to be that of communicating with Mr. Nastase that first it is against ethical guidelines of the accountancy profession to offer such a discount and second the audit firm should clarify that fees are fixed depending upon audit time, resources such as staff and expenses regarding the audit and so on.

(II) Removal regarding any company auditors is only permitted to be done and carried out in the United Kingdom as per guidelines and regulations given in “Companies Act 2006” (Lubo, 2013). The key principle being that since only the shareholders of a given enterprise are authorized to engage in appointment of the company’s shareholders therefore it will only be the shareholders who are permitted to take up the activity of removing or replacement of the persons appointed as the auditors. Therefore, the procedure to be initiated on part of Navratilova Enterprises for the removal of the auditor are as follows: 

Navratilova would necessarily require to ensure that an ordinary resolution that they are seeking the replacement of Wade Austin will require to be given out and also at

the same time Navratilova needs to ensure special notice is also accompanied along with the resolution which specifically should mention the point about replacement of Wade Austin (Lubo, 2013). 

Only the shareholders of Navratilova will be permitted to exercise the decision on a collective basis whether or not they wish to remove Wade Austin.

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However, Wade Austin being the current legal auditor of Navratilova will be given a specific chance and opportunity to make their own representations about being removed to the existing shareholders of Navratilova.

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Navratilova will have to ensure all of the payments due to Wade Austin in terms of compensation or damages are fully cleared before they are terminated.

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Finally, if the judgement is to remove the current auditors who are Wade Austin then it is also mandatory for Navratilova to give specific instruction to registrar in the United Kingdom about removal of the auditors and possible new appointment.

Regarding appointment of the new set of auditors for Navratilova as per the new conditions then the procedure includes; 

Navratilova requires an ordinary resolution so that Borg Co can be appointed and take the place of the previous auditors.

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The appointment of Borg Co should be supported by a majority of the shareholders of Navratilova.

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Since the appointment is one of a permanent audit company to audit the work of Navratilova, it will not be possible for the current directors of the company to participate in the action of appointing Borg Co. Because under company law it is only possible that directors will be involved in any casual or temporary filling of audit company and not a permanent one such as Borg Co.

Therefore, in the given case the statement made by Mr. Nastase that since he has allowed appointment of the company they should give 50% of the fee as a discount is not valid or correct because Mr. Nastase does not have any power or authority to perform such an action on behalf of Navratilova.

(III) Wade Austin, is the current auditor who is working and handling the external audit of Navratilova. Since they are officially appointed by the shareholders of Navratilova, they should not worry or be concerned about what Mr. Nastase is planning to do because he does not have the authority or power to perform the action of removal of Wade Austin. He may only have the authority to recommend that Wade Austin be replaced but he cannot actually perform this activity (Lubo, 2013). Therefore, Wade Austin should not bow down and resign from the appointment until and unless the shareholders of Navratilova approved the termination of current auditors and their replacement. Importantly, the audit company of Wade Austin will be provided with an opportunity to even make certain representations to shareholders of Borg Co and therefore taking the route of resignation is not recommended since there is no lapse or issue on part of Wade Austin but rather it is only Mr. Nastase who is requesting for their replacement (Finley, 2015).

Question 2) A) (I) Under circumstances wherein auditors themselves procure requisite evidence regarding conditions or assertions contained within documents or reports being audited it is said to comprise ‘Auditor Originated Evidence’ (Yoon et al. 2015). Often, such evidence may be procured either by the auditors engaging in interview processes, taking up different surveys or even examining documents and paper trail. Since, such category of evidence is one wherein auditor has complete and full control over evidence gathering procedures and techniques therefore it is considered a highly reliable. Moreover, the auditor would be in a good position to gauge or measure relevance and also sufficiency as per his audit experience therefore collectively enhancing the dimension of quality of such related evidences (Trotman & Wright, 2012). For example, auditors may prepare financial ratios for two or more years and use these to examine any unusual variations in computed ratios for the enterprise. Secondly, auditors may enforce physical presence at important events such as the enterprise’s aggregation of stock count. (II) Under circumstances where auditors procure “third party” sources of evidence to aid in the audit processes the case of the audit quality will depend on intrinsic characteristics of third party involved, although the general view is that this category of externally generated audit information is much more reliable when contrasted with information gained from internal sources (Pittman, 2013). In particular, certain set of third parties such as banking institutions may be considered to be largely valid and reliable as compared to 3rd parties such as a large debtor or a large credit are associated with the given corporation which may be considered to be to a certain extent unreliable because large potential for influence clearly exists.

For example, a third party of a “bank” may be approached to obtain documentation of loan and interest payments or otherwise even the bank balances of the given enterprise and as such the third party involved would be the bank. The quality however while dealing with bank would be quite high and reliable from evidence point of view to serve audit. Secondly, “professional valuation reports” may also be procured, however it is essential that the auditor should necessarily measure experience and independence of such professional valuation agent (Beasley, 2010). (III) Under circumstances where the management solely provides evidence of transactions or assertions many important implications arise for audit quality (Cosserat, 2009). This is because, the evidence comes from the party or the entity which is directly being evaluated or audited and so the auditor needs to carefully examine circumstances of reliability that would become applicable to the collated evidence procure directly from managers (Beasley, 2010). To be sure, auditors will need to reconfirm or established validity

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controls/effectiveness. In contrast to all about all other possible sources that include those from “third parties” and those from the “auditor” themselves, those produced by the enterprise’s “management” are most certainly lowest in qualitative terms (Cosserat, 2009). For example, the enterprises own monthly accounting records for statements that are being used for internal company circulation having appropriate endorsement from its top managers may be considered as one such important source. Secondly, evidence of a verbal form gained through queries made directly to the given entity’s management on certain audit points that necessitate clarification (Pittman, 2013).

(B) All auditors as part of their compliance with SAS 400 as a mandatory component to be applied across all auditing activities need to ensure three distinct characteristics are evident across any collated evidence. These three elements comprise the requirement of being sufficient, that of being relevant or appropriate and similarly that of possessing reliability. Cosserat (2009) contends that evidence will have the quality of being “relevant” under circumstances wherein there is a clear logical straightforward interrelationship with the element of the audit being measured. On the other hand, the characteristic of “reliability” which is considered to be crucial considering the nature of audit given that it needs to itself provide some degree of reliability assurance (Trotman & Wright, 2010). This characteristic trait of reliability means the same outcome from computed audit evidence can be created or generated when a given test or measure is being repeated. Likewise, “sufficiency” is intrinsically connected to the amount and quantity of the audit evidence being able to substantiate that all the data will exhibit the same characteristic or quality. For example, the amount of credit transactions that are checked by the auditor need to be of such quantity that the general viewpoint about the credit transactions can be gained. For example, it will not be sufficient for auditor to only consider two or three transactions out of 500 transactions it needs to be at least 30 or 40% (Beasley, 2010).

Question 3)

The Managing Director, Oman Co Ltd, Al Khoud, Oman

Dear Sir, Subject: Internal control review on stock and digital components. Our audit company, XYZ auditors, conducted an inspection and detailed evaluation of procedures being used for the stock and digital components. We have noted two crucial deficiencies at your company and we present our recommendations to assist in correcting the flaws in stocking and digital components. Weakness 1; Although, the storage room is currently locked and secure, its key is merely kept in the drawer system of Miss Florence which in itself is not adequately secured. Moreover, the room itself is being shared by 10 other staff members of your company meaning that it is highly probable that a possible chance does exist whereby in the absence of miss Florence from the room that the key may be accessed by an unauthorized person who may then be able to gain access to the valuable digital items. This augments possibility that digital components may be stolen or used for unauthorized practices and therefore it will cause a loss to your company (Paterson, 2015). Recommendation: the key to the stockroom is highly valuable and so it should specially secure at all times wherein even the drawer system of Miss Florence should be specifically locked up at all times irrespective of whether she is present at a location or not. Moreover, it may be important to improve storage in a simple drawer system and

what may be required may be some fireproof container or compartment. Any duplication of stockroom key should be carefully controlled and noted by senior management. Weakness 2; Currently, Miss Florence permits access to the stockroom on a verbal basis, wherein any of the company staff may get an approval verbally from a supervisor or member from the production department of your organization. This practice causes to challenges at your enterprise, first unauthorized use of valuable digital components may occur which in itself may cause damage and other financial losses. Secondly, there is no proof or a trail of who had access to the stockroom and by whom it was approved. This therefore negates any vital paper trail at your enterprise (Paterson, 2015). Recommendations: a strict provision and policy regarding written documentation being the only way that stockroom can be accessed should be mandated. There should be a written form which has to be signed upon by the supervisor allowing stockroom access and each of these forms should be numbered and miss Florence should keep a track of these. When any form is presented to miss Florence, careful attention to the date, to the approval authority and to the quantity should be maintained and if any doubt she should follow up with the person who approved the request for stockroom access (Beasley, 2010). We trust that our findings on stock and digital components based access procedures will be honestly considered by your entity. Please feel free to discuss internal control procedures or rational as suggested by us by calling the undersigned

Mr Abdullah Al Hooti Senior Auditor KPMG Oman

Question 4) “Independence” is a characteristic trait and element that is strongly associated and interrelated with the audit and accountancy field and practice (Schmidt, 2012). Given that independence characteristically refers to the circumstance of the auditor showing “intellectual honesty” which in turn reflects the condition wherein the auditor functions and carries out duties without considering any external factor or element which is not directly associated with performance of the audit function and rather it behaves in a straightforward and objective manner. Therefore, independence of auditor is highly crucial to perform the key task of expressing assurance or objective view on the elements being audited. For this reason, independence is present in almost every professional as well as ethical framework connected to accountancy and audit (Tepalagul & Lin, 2015). Moving on, the statement regarding auditor independence can further be bifurcated into two separate and differentiable elements. First, there is the independence to be shown in actual performance of audit work or rather independence associated with auditor mindset in terms of objectivity. Secondly, arguably there is also the element of auditor behavior and action in terms of showing some form of independence. Both of these elements of independence are extremely important and should be present “together” in order to fully validate independence (Schmidt, 2012). In other words, it is becoming increasingly necessary that auditors should show both forms of independence the first being actual form of independence connected to their mindset and second being that of actually appearing to be doing their audit work and tasks in an independent manner. Failure on part of any auditor to ensure they appear to be independent to external parties or people will have strong negative implications because the external parties or people do not have first-hand knowledge of practices or systems being implemented by any auditor but rather the only are able to see the behavior and action of the auditor. So therefore, if any auditor does not appear to be independent, then the external parties and people will not be able to place their reliance or trust on the documents audited or

work done by the auditor because in their mind they are holding the opinion that the auditor is not independent as they have seen from his behavior and actions (Blay & Geiger, 2013). Commonly, there are certain safeguards to promote auditor mindset and appearance to be independent and these comprise actions of not being beneficial owner of any company shares, not taking or accepting gifts whether in kind or weather in cash from any of the audit-related clients, not having personal family relationships with any members from the given enterprise or even not accepting any form of excessive gifts or excessive positive treatments from the clients (Tepalagul & Lin, 2015). In short, every auditor to protect sanctity of the audit profession as well as their own reputation needs to show independence from mindset and also in actual appearance and dealings.

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References Books Beasley, S. 2010. Auditing and assurance services. Fourth Edition. London: Prentice. Cosserat, G. 2009. Modern Auditing Practices. Fifth Edition. New York: Wiley. Paterson, J.2015. Internal Audit Practices and Principles. Fifth edition. Ohio: New York Pittman, C. 2013. Fundamentals of Auditing. Fourth edition. New York: Wiley Journal Blay, D., & Geiger, A. 2013. Auditor Fees and Auditor Independence: Evidence from Going Concern Reporting Decisions*. Contemporary Accounting Research, 30(2), 579606. Schmidt, J. 2012. Perceived auditor independence and audit litigation: The role of nonaudit services fees. The Accounting Review, 87(3), 1033-1065. Trotman, T., & Wright, F. 2012. Triangulation of audit evidence in fraud risk assessments. Accounting, Organizations and Society, 37(1), 41-53. Yoon, K., Hoogduin, L., & Zhang, L. 2015. Big Data as complementary audit evidence. Accounting Horizons, 29(2), 431-438. Tepalagul, N., & Lin, L. 2015. Auditor Independence and Audit Quality A Literature Review. Journal of Accounting, Auditing & Finance, 30(1), 101-121. Websites Finley, S. 2015 Auditor liability and audit standards. Available at: http://www.accaglobal.com/middle-east/en/student/exam-support/auditor-liability.html (Accessed: 2 June 2016).

Lubo, C. 2013 Auditors: Appointment, resignation or removal. Available at: http://www.corplaw.ie/blog/bid/343834/Auditors-Appointment-Resignation-Or-Removal (Accessed: 2 June 2016).