Auditing And Assurance For Transparency And Accountability: Steps In Planning The New Client’s Audit

Steps in planning the new clients audit

Discuss about the Auditing and Assurance for Transparency and Accountability.

Auditing and assurance is a very critical aspect in development and accountability of any company or a firm. It is a key aspect in management of all undertakings in achieving a complete firm in terms of transparency and accountability. The purpose of this report is to critically analyze key steps in planning the new client of one of the company listed under Australian security exchange. According to the standards set by auditing and assurance requirements, financial records and data need to be fully scrutinized in order to assess the viability and vulnerability of a particular company in terms of financial management and resource allocations. This is typically done by calculation of financial ratios of a company. The present and most recent financial recorded documented in annual reports are very useful in audit process. As a senior auditor in the firm of NY partners aim at forming a team of auditors to assess the new client’s audit by use research analysis and computation of financial ratios. This report aim at critically analyzing AFT Pharmaceuticals Limited(Chopra, 2012). This is one of the companies listed under Australian Security Exchange with ASX code ACW and GICS industry group of pharmaceuticals, biotechnology and life science. Therefore my team of auditors aims at analyzing annual reports of this company so as to scrutinize the new client’s audit.

Typically, there are four main steps in planning the new client’s audit. These procedures will form a clear base of an audit process in relation to client’s expectations for his or her company or firm for this case. These steps include acceptance of client and performance of initial audit process, understanding the business and industry of the client, assessment of client business risk and performance of preliminaries analytical procedures. Auditing process involves audit planning, control and recording (ISO 300) that will form basis of these four steps.

This is a very crucial procedure in audit planning. The main reason for this step involves accepting the client need for conducting auditing process. It is a fact that many companies limit the auditing of their companies for no apparent reasons. They fear auditing their companies as if they are anticipating some irregular and illegal undertakings within their firms that need not be revealed. Therefore accepting the clients wish to audit their companies is a very great progress for auditing firms.

Acceptance of client and performance of initial audit planning

An initial audit planning need to be performed to as to form as base line of what to be anticipated in the entire audit process of the company(Nickels, 2015).

For the purpose of this report, audit planning typically means development of a general strategy with highly documented approach for anticipated nature, timing and expected extent of the audit. For this case, the senior auditor need to brief his team so as to plan their work to enable the team in conducting effective audit in a timely manner with a lot of efficiency. This step will be included in auditing AFT Pharmaceuticals Limited. In addition, the form and nature of performance of initial audit planning will be affected highly by the complexity and size of the company (Bragg, 2015). AFT Pharmaceuticals Limited is a complex company with huge commercial environment of operation. Therefore, performance of initial audit planning process involves well established methods of processing transactions and significant reporting of requirements to which AFT Pharmaceuticals limited or the new clients is subjected to.

Advantages of accepting the client and performance of initial audit planning.

• A good audit planning enhances proper division of labor and specialization between the interim and the final audit. This is very important in eliminating any repetition of tasks that have been done.
• It also put into consideration times in which information is needed for audit plan(Saloner, 2009). This will promote cooperation by limiting disruptions of client’s work.
• Again, it assists in completion of work via efficient use of time and acute allocation of tasks to audit team.
• It enhances devotion of attention to crucial audit areas by identification of potential problematic areas within the audit affecting a particular client.
• It also helps ion active utilization of junior auditors in coordination of tasks done by senior auditor and other team members.
• It helps in control and direction of audit tasks by senior auditor.
• Lastly, it brings forth the anticipated channels of attaining the objectives of the audit.

This step is crucial in audit planning. To have proper scrutinization of audit of any client, the business enterprise and industry ventured is of great importance. This will help the audit team in understanding the various terminologies in preparation of annual reports to avoid any loophole during the actual audit process(Wild, 2014). It is also important in understanding the standard rules and regulations bidding that particular business or industry. This will enable audit team to understand quality control and to conduct peer review.

For the purpose of this step, quality control is described as procedures and policies that are critically put into consideration by the auditor to make sure that the audit conducted by the audit team adheres to the quality standards established by the accounting profession as well as quality standards of audit firm. Like in this case AFT Pharmaceuticals Limited deals with biotechnology and pharmaceuticals. Therefore the auditor will prepare on that field. Therefore, by knowing quality control and peer review concerning the client business and industry, an independent review based on auditing practices and accounting standards will be conducted by audit firm (Miller, 2015). This section also indicates the various sources of information on client’s nature of business and industry.

Various sources of information on client’s nature of business and industry.

It is important for audit team to obtain an understanding concerning the information systems of any client. This would include the related business and industry process as well as all the relevant financial reports in annual report. This is clearly asserted by ISA 315. Therefore, in order to perform an audit of financial records, audit team need to obtain knowledge on client’s business and industry so as to understand transactions, events and practices that brings significant effects on those financial records or audit report generated from audit team judgment(McGregor, 2016). Before accepting an engagement, it is very important for audit team to obtain a preliminary knowledge of the industry ventured by the client and any management, ownership as well as operations of business entity under audit. To fully understand client’s business and industry, the following sources are very important and relevant.

• Business and industry experience in the previous proceedings.
• Engaging into discussion with community within the business.
• Researching information from other auditors and legal advisors who have provided services to the business previously.
• Scrutinizing publications and various journals of the industry and the business entity.
• Visits to plant facilities and any other relevant places of business.
• Scrutinizing all relevant documents including budgets, operations and system manuals, annual financial reports as well as minutes of meeting conducted within the auditing timing.

Advantages of accepting the client and performance of initial audit planning

Finally, it is a duty of senior auditor to ensure that audit assistants obtain any relevant and enough knowledge of client’s industry and business entity so as to carry out delegated tasks.

It is important to assess the business risks of clients in planning audit process so as to include those risks in the audit report. In assessing the client’s business risk, senior auditor needs to set out audit approach to indicate how financial records need to be audited within the budget of audit work. It is important to get a summary indicating full terms of engagements that are highly needed to set out the nature of audit to be conducted by audit team(Arens, 2016). Again, a time schedule needs to be provided indicating preferred dates of the timing of the audit.

In that case, risks need to be assesses by recording any changes concerning a particular client since the last audit was conducted. The AFT Pharmaceuticals Limited will be subjected to risks of medical regulations and diagnosis of various terminal illnesses. There will be financial report on the same by AFT Pharmaceuticals Limited.  Audit assistant need to gather information about the client and details of client’s contracts. In assessing client’s business risk, there are difficulties faced in implementation of audit plan.

• The firm may have numerous clients with corresponding year ends. This risk makes allocation of audit team difficult as well as timing required.
• Any abrupt shifts in the business and industry of the client need more allocation of time that need to allocate outside the planned time.
• Some clients lack co-operation by declining to offer necessary information and explanations in appropriate time(Loughran, 2010). This will place the client’s business in risks.
• Lastly, there could be shortages of audit staffs due to low turnover during the actual audit process. This will affect the timing of the arranged audit thus putting the client’s business into risks.

This is the very last step in planning a new client’s audit. However, it is very crucial as well. In carrying out preliminary analytical procedures and in planning audit of a new client, the senior auditor together with his audit team needs to carry out a set of procedures(Fletcher, 2012). They are analyzed into detailed chronological ways.

• The auditor and his time should carry out a preliminary review of the client and his business entity. This procedure will involve gathering a clear understanding of the nature of the client’s industry and business entities.
• The audit team need to engage into a discussion with management with an aim of obtaining an understanding of their structure and a clear realization of the current circumstances in operations of the client and other aspects that would critically impact the internal control system and accounting standards of the new client.
• There should be appropriate and effective communication with previous auditor of the client so as to gather information that seems relevant to the audit of the new client.
• It is also good to gather preliminary understanding of the nature of the client’s accounting and internal control system(Whittington, 2015). This will highly help in finding out the level by which the auditor will depend on the internal control system of the client.
• The audit team needs to put into considerations any legislations and accounting standards that could have implications towards the new client’s audit.
• The senior auditor needs to scrutinize the nature and timing of reports and relevant communications of the client so as to accommodate the timings in the audit plan.
• The senior auditor needs to find out the number of audit team members need and the timing of the audit visit.
• Lastly, the senior auditor need to prepare an audit planning memorandum that sum up the scope of the tasks under the engagement and the strategic plan to be cultivated so as to meet the client’s requirements.

The company under analysis in this section is AFT Pharmaceuticals Limited. This is one of the companies listed under Australian Security Exchange with ASX code ACW and GICS industry group of pharmaceuticals, biotechnology and life science(Daft, 2015). Therefore my team of auditors aims at analyzing annual reports of this company so as to scrutinize the new client’s audit.

By use of most recent annual reports, the team wishes to calculate the financial ratios under consideration. The assessment of the new firm by researching information from academic sources, news, and newspaper and industry magazine will be used to generate the annual reports of AFT Pharmaceuticals Limited. The team has extracted the financial record of AFT Pharmaceuticals Limited so as to calculate the related financial ratios.

Item	Amount
Current assets	400,000
Current liabilities	320,000
Stock	200,000
Total long term debt	320,000
Capital employed	650,000
Gross profit	280,000
Sales	1,200,000
Earnings attributed to equity shareholders	960,600
Equity	1,460,000
Credit sales	840,000
Average debtors	360,000
Credit purchases	720,000
Average creditors	260,000

From the above entries extracted from annual report of AFT Pharmaceuticals Limited, the following ratios are calculated.

Understanding the client’s business and industry

Current ratio = current assets÷current liabilities. 400,000÷320,000 = 1.17647059. The interpretation of this ratio is that AFT Pharmaceuticals Limited has more current assets than liabilities thus high ability to meet short term maturity obligations as and when they fall due.

Acid test ratio = (current asset – stock) ÷current liabilities = (400,000-200,000) ÷ 320,000

= 0.625. The interpretation of this ratio indicates that the company is in poor liquidity position when stocks form most of the total current assets.

Debt ratio = (total long term debt ÷ capital employed) × 100 = (320,000 ÷ 650,000) × 100 = 49%. A company is highly geared if the debt ratio is more than 50%. The 49% indicate that the company is partly geared.

Gross profit margin = (gross profit ÷ sales) × 100 = (280,000 ÷1,200,000) × 100 = 23.3333. The interpretation indicates that the company cost of production has been controlled perfectly in relation to distribution and administration costs.

Return on equity = (earning attributed to equity shareholder ÷ equity) ×100

= (960,600 ÷1,460,000) ×100 = 65.79. This value indicates high efficiency by which AFT company other supplier’s funds generate returns to shareholders.

Debtors turnover = credit sales ÷ average debtors = 840,000 ÷ 360,000 = 2.3333. This ratio indicates number of times debtors pay within the year. There is high efficient management of credit by the company.

Creditors turnover = credit purchases ÷ average creditors = 720,000 ÷ 260,000 = 2.769. The interpretation of the ratio shows that creditors are paid approximately three times by the company during the year.

The above represent the required financial ratios as at 31^st December 2016 extracted from AFT Pharmaceuticals Limited annual reports.

There are audit tests that need to be performed when handling audit and evidence collection.

• Inspection: this involves examination of tangible assets, documents and financial and annual records for purpose of audit process.
• Observation: this is based on analyzing procedures that are performed by other auditors such as counting of stock of client personnel.
• Inquiry and confirmation: this involves gathering information from the company such as debtor circularization.
• Recalculation and re-performance: it is concerned on scrutinization of arithmetic accuracy of accounting records by performance of independent calculations.
• Analytical procedure: this indicates consistency between financial data and anticipated patterns under investigation.

Conclusion.

In conclusion, the audit team is now in a position to plan the new client audit. This process is very important in ascertaining the accountability of companies and firms on maintaining tenacity in their methods of operation and promote adherence to the set accounting and auditing and assurance standards altogether.

References.

Arens, A.A. (2016). Auditing and Assurance Services, Student Value Edition. Pearson.

Bragg, S.M. (2015). Accounting for Inventory. Accounting Tools.

Chopra, S. (2012). Supply Chain Management. Pearson Education.

Daft, R.L. (2015). Management. South Western College Pub.

Fletcher, F. (2012). Business Problem Solving. Routledge.

Loughran, M. (2010). Auditing For Dummies. For Dummies.

McGregor, D. (2016). The Human Side of Enterprise. McGraw-Hill Education.

Miller, T.L. (2015). Horngren’s Financial and Management Accounting. Pearson.

Nickels, G.W. (2015). Understanding Business (Irwin Introduction to Business). McGraw-Hill Education.

Saloner, G. (2009). Strategic Management. Wiley Publishers.

Whittington, R. (2015). Principles of Auditing & Other Assurance Services (Irwin Accounting). Rental Book. McGraw-Hill Education.

Wild, J.J. (2014). Fundamental Accounting Principles Handcover. McGraw-Hill Education.