Answers To Tutorial Questions On Accounting And Auditing

Assurance Engagements

1. Providing advice on accounting policies and accounting services, is a part of the assurance engagement, as it is the responsibility of the auditor to check whether the books of the company have been prepared based on the standard accounting and auditing practices and in case there are any errors than the auditor should state the same in their audit report and also discuss with management of the company on how they can improve it.
2. Auditing annual financial reports is part of the assurance engagement, as it is the main part of the auditing books of the company by the auditor. The need to check whether the books of the company have been prepared accurately and correct information is being reflected.
3. Providing advice on strengthening internal controls and corporate governance practices, do not form part of the assurance engagement, as internal controls are managed by the company and the external auditors are hired to check the authenticity and correctness of the same and state the same in their audit report. It therefore does not form part of the audit engagement
4. Provide assistance with the establishment and providing training to the internal audit team, this does not form part of the audit engagement and hence is not a part of assurance services. It is not a part of the duties that the auditor needs to fulfil in his role. It is a part of the services that the management needs to take care of and acquire external help to suffice it.
5. Checking compliance with legislative requirements of the company is a part of the audit services and hence forms a part of the assurance engagements. The auditor needs to check whether all the regulatory requirements have been fulfilled and accordingly state the same in their audit report.

The two primary threats to independence of SKM are –

1. In the given case it can be seen that the audit firm is undertaking various accounts receivable management system and is actively working to implement them and is looking for more opportunity to perform this kind of work. And in this case it has been seen that the auditor has submitted a proposal to implement such system in Mass. This is a threat to the independence of the auditor as their personal interests are involved. The management of the company can influence the decision of the auditor in lieu of implementing their accounts manageable system.
2. There is also a threat to the flow of data within the system, as the new accounts manageable system if implemented by SKM will be influenced by the decision of management. So there is a threat to the data management of the company.

The above issues can be safeguarded by the following method:

1. The auditor should not offer non-audit services to the company and there should be proper audit engagement in place that can regulate the same. The overall terms of the audit engagement should be clear and precise.
2. The management should refrain from accepting the offer of Mass, as they are new in this field of system implementation and thus should look for trained firms that can do the job better. This will also help in safeguarding the interest of the stakeholders involved.

• In the first scenario we see that there is a case of detection risk, because the treasurer has been able to identify the small amount of profit in such a small time, which the financial controller was not able to do. Detection risk is a risk that exists when the auditor is unable to detect few of the errors in the system due to lack of audit trails.
• In the second scenario the company wants to close an inefficient factory in NewSouth wales, though the closure of the accounts will not be completed before a month, but the finance controller is confident that he will be able to do. This is a case of inherent risk as the internal control of the management is weak.
• In the third scenario the manager is introducing bonuses for the sales staff. This is a case of control risk as there is no check of the decision taken by the controller and that needs to be regulated.
• In the fourth scenario a new system is introduced with minimum efforts and it is a case of control risk as proper check is not done before implementing the new system and neither the staff is adequately trained. This might lead to failure of the same in the future and hence needs to be checked and controlled.
• In the fifth scenario it was seen that the new position was opened for system administrator that was given all the responsibility to perform various tasks and that was done by accountant before. So we see that this a control risk as there is no proper segregation of duty and responsibility and thus it affects the audit risk. Segregation of duty and responsibility is important.

As a part of the analytical procedure, ratio analysis has been performed for Easy Fit Pty Limited and the same has been compared with the industry averages as well.

Current ratio shows the ability of the company to pay off the short-term obligations with current assets – it is a measure of liquidity of the firm and the same has declined from 2.34 times in 20X6 to 1.89 times in 20X7. The industry average is 3.27 times in 20X6 and 2.84 times in 20X7 respectively which clearly shows that Easy fit is having comparatively lower current assets when compared with peers.

The receivables turnover ratio shows how many times the receivables are being churned or collected during the year. More the RTR, better it is for the company from working capital perspective. The same has declined from 7 times to 6.3 times (Industry: 4.9 times), which shows that the collection days have increased.

The inventory turnover ratio shows how many times the inventory is being rotated to COGS every year and this again has decreased from 5.5 times to 5 times in 20X7 (Industry: 3.7 times). Though it is better than the industry but the decrease shows that the company is facing issues in converting COGS to sales.

The return on total assets shows the profits made by employing all the assets of business and it has increased from 11% to 13% (industry 7%). This shows that the business is making good profits and employing assets efficiently and effectively.

The net profit ratio shows the net profit earned on sales and it has remained constant at 4% as against the industry average of 6%, which clearly shows that the costs have increased, and sales might have decreased during the period.

Some potential audit risks which need to be investigated further include vouching the sales and COGS account as both have had substantial changes – impacting turnover ratios. Secondly the working capital components also need to be checked as to what is the reason of decline. Lastly, few of the cost and expenses accounts where there are substantial increased needs to be audited.

The overall weakness in the internal control of the purchases and payments function of the company are-

1. There are multiple copies formed for the same purchase requisition and thus we see that this can cause more work on part of the management and can data is distributed in multiple department twice.
2. There is no proper segregation of duty and responsibility as can be seen that the accounts payable department is having all the responsibility to check the various receipts from the entire department and approve the same and then approve it for payment. The voucher is also prepared by the accounts payable department and than that is given to the financial accountant. The financial accountant makes the payment and then prepares the bank reconciliation accordingly.

1. b) This is a weakness as this can lead to fraud as there is no proper check on the action of the professionals and there is no proper check by higher authorities. This can be taken care by proper segregation of duty and responsibility by the management and also keeping a check on the work done by the employees. Data should not be recorded in multiple locations and work should be more streamlined with the overall process of data management by the company. The vouchers should not be sending to various departments and segregation of the same should be done accordingly. All this will help in reduction of risk and help in protection of data by the company.

References

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