Discuss about the Assurance Services Guidelines and Procedures.
ASA-700 ‘Forming an Opinion and Reporting on a Financial Report’ is framed by the AUASB and is framed in the context of general purpose financial statements of companies. It lays down the manner in which auditors form their opinion on the financial statements of the company and the manner in which auditors are held responsible for forming an opinion on the financial report. ASA 700 covers the form and the content of the independent auditor’s report and expresses he auditor’s unmodified opinion on financial statements of the company. This standard ensures the company’s compliance with the appropriate financial reporting framework. Auditor’s modified opinion is now covered under a different standard, i.e. ASA 705. This accounting standard brings about consistency and thereby improves credibility of the financial audit report.
ASA 700 deals only with unmodified auditor’s opinion. The auditor shall be obliged to form an unmodified opinion when he concludes that the financial statements are prepared, in all material respects, as per the applicable financial reporting framework. The auditor is obliged to obtain some reasonable assurance that the financial statements are free from any present or potential misstatements. Misstatements may arise either due to frauds or errors.
The different types of audit opinion that may be provided in the audit report are Qualified opinion, Adverse opinion and Disclaimer. If the auditor on acceptance of the audit engagement finds that the management has imposed some scope limitation which restrains the auditor from an efficient and effective conduct of audit, then, such a limitation shall result in a qualified opinion or disclaimer. Also, if such limitation is discussed by the auditor from those charged with governance, and the management refuses to alter the same, then, the auditor should ascertain whether he is able to obtain sufficient and appropriate audit evidence and analyze the possible effect of such misstatements on the financial statements. If such effect is material, but, not pervasive, then the auditor shall give a qualified opinion but, if such effect of material misstatement on the financial statements is material and pervasive, then, he should immediately resign if possible or communicate with those charged with governance.
In case of a disclaimer of opinion, the auditor should clearly state in his audit report that he has failed to obtain sufficient and appropriate evidence for the complete conduct of the audit, which imposes a limitation on the scope of the audit. In case of a qualified or adverse opinion, the auditor is required to state that he has obtained all the required information and obtained all the appropriate evidences for conduct of the audit.
The company, as the question states relies mainly on the bank overdraft for repayment of all its debts. The company seems to be very reliant on the bank loan and as a result the bank may be very reluctant to offer any further financial assistance to the firm. It shall therefore be very crucial for the auditor to obtain the detailed balance statements of the bank loans and overdrafts taken by the company as it may considerably affect the going concern principle of the firm. Due to an excess of the firm’s future obligations over the present and probable cash inflows, the liabilities of the firm would exceed the current receivables of the firm, and this may lead the company into liquidation.
In such a case, when the firm follows the going concern assumption but there exists a material uncertainty that the firm may not be able to carry on its business operations in the foreseeable future, then, the firm should compulsorily make adequate disclosures in this regard. It is then the auditor’s responsibility to consider the adequacy of the disclosures and form his opinion accordingly. If the disclosures are found adequate, the auditor should give a modified opinion by including a paragraph on emphasis of matter. But, if these disclosures are found inadequate and the management refuses to alter the disclosures, then, the audit opinion would be qualified or adverse.
The local company stated in the question is a subsidiary of an Australian company, which follows Last in first out (LIFO) method of stock valuation rather than First in first out (FIFO) method required by the Australian laws. Since the parent company is an American company, so, it is very reasonable for the subsidiary to value its stock on the basis of LIFO method, for convenience in maintaining the quantitative details of the stock and also its consolidated financial statements. Also, the difference between the stock valuation in both the LIFO and FIFO methods materially affect only the inventory and not rest of the financial statements.
Hence, the effect of such stock valuation is not material for the financial statements and hence, there arises no question of its pervasiveness. Hence, the auditor shall form a modified opinion including a separate paragraph stating the emphasis of matter.
As per IAS 16 ‘Property, plant & equipment’, the fixed assets of a company should either be valued at its cost less accumulated depreciation, or, its revalued amount. In the given case, the Victorian manufacturing company records its factories at market values less accumulated depreciation, which does not comply with IAS 16 requirements.
Hence, such a recognition in the financial statements deviate from the international accounting standards laid down by the relevant authority. If the directors believed that the market prices were quite stable over the five years, then, the difference between the cost and the market value should have been recorded as revaluation profits or loss and it shall have effect on the profit and loss account of the company. This recognition of the factories by the Victorian manufacturing company is material and pervasive and hence, the auditor should form a modified opinion in the audit report. The auditor should communicate about the matter with those charged with governance and if the management agrees to make the desired changes, he should give a qualified opinion, else, an adverse opinion must be given.
In the given case of Adel Manufacturing Company, the factory foreman interviews the applicants alone and then determines his eligibility to join the company as a worker. In such a case, the sole responsibility of the appointment of workers is given to the foreman who may be prejudicial in selection of the workers. He might consider his personal benefits ahead of the company’s objectives and goals. So, while setting up a recruitment channel, the sole responsibility should not be given to one particular individual, rather a group of individuals representing different levels of the management. This would ensure a fair and unbiased recruitment process.
Moreover, after the hiring of the worker is completed, the income tax installment declaration form is also handed over by the new worker to the foreman. In such a case, the foreman becomes the sole responsible person for both the recruitment process as well as post recruitment activities. But, these two activities should be handled over by separate individuals, so as to avoid any chances of misstatements in the nature of frauds as well as errors.
Once the declaration forms are submitted, the foreman manually writes the hourly rates of the workers. Firstly, foreman should not be shouldered with the entire responsibility of the selection and recruitment of workers and the hourly wages of the workers should be specified and noted by personnel, higher in post than the foreman. Also, manually writing the hourly wages attracts higher degrees of misstatements both due to errors and frauds and hence, electronic typing of such sensitive details should be encouraged.
After the completion of the above mentioned formalities, the individual workers themselves take their timesheets and record their work timings, which attract higher degree of fraud by the workers. Hence, there should be a proper reporting authority, who would be in charge of maintaining the time sheets of all the workers, as these would the risks of inaccurate reporting of time by the workers and would minimize the chances of misstatements in the financial statements.
Also, the timesheets maintained by the proper reporting authority, should be filled by pen, as pencil filled timesheets could be easily manipulated by the workers. Also, the availability of timesheets openly should be restricted, to prevent any unauthorized use.
Furthermore, the company distributes payroll cheques to its workers, which should be replaced with electronic fund transfer, so as to ensure greater safety and security of the payments. There would then be no chances of lost cheques or absentees.
Automatic removal of the workers from the payroll in the absence of the timesheet should not be encouraged as the timesheet may have been misplaced either intentionally or unintentionally. Hence, thorough check should be done before removing a worker from the payroll.
Lastly, the payroll bank accounts should not be managed by the person preparing the annual tax reports of the company.
References
ISACA- Serving IT Governance Professionals (2009), IS standards, guidelines and procedures for auditing and control professionals, USA.
Gay G, R, Simnett “Auditing and assurance services in Australia”, McGraw-Hill, revised 5th edition, 2012.
Auditing and assurance standards board, Australian auditing standards, Australian government
Available: https://www.auasb.gov.au/Pronouncements/Australian-Auditing-Standards.aspx.
American Accounting Association , EvansIII, Harry John‘ Australian accounting review’.
Kimmel, Paul D. , Jerry J. Weygandt and Donald E. Kieso ‘ Financial Accounting : Tools for Business Decision Making’, 6th ed. Hoboken, 2011.
Simeon Solomon, Accounting for audit of property, plant and equipment, Peak professional services, Nigeria
Arens, A.A. (2003). Auditing an assurance services: An integrated approach. United States: Addison Wesley Longman.
Nicholas M Hodson (2007). Why Auditors Don’t Find Fraud. Private Equity, Corporate Governance and the Dynamics of Capital Market Regulation.
Lonescu, L. (2009). Internal control and auditing procedures. United States: Addleton Academic Publishers.
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