Discuss about the Auditing and Assurance for Shareholders of Business.
There are different parties which make use of the financial statements of a company like its shareholders, creditors and potential investors. These three entities do not take part in the management of the company directly but they have an interest in the financial performance of the company. They rely on the information given in the audited financial statements to make many business decisions (Turner et al., 2010). There are regulatory bodies in Australia which have made it mandatory for companies to prepare their financial statements in accordance with the Australian Accounting Standards. The companies are required by law to get their financial statements audited by outside auditors and the released financial statements of companies also contain auditor’s report in which the auditor expresses its audit opinion regarding the financial statements (Caanz, 2016).
The auditor forms an audit opinion on the basis of the conclusions drawn by the person after examining the audit evidence. In this case the audit evidence consists of a sample of accounting entries made in the accounting records of the company and also any other document of the company collected by the auditor. An auditor would express in the audit opinion whether the financial statements of the company contain any material misstatements or not. In this case material misstatements are those which are significant enough to influence the economic decisions of the users of the financial statements.
The auditor would express in auditor’s report whether the financial statements of the company have been prepared in accordance with the requirements of the financial reporting framework which is applicable in the country. The companies have to keep a record of their business transactions according to certain accounting standards (Loftus et al., 2016). Moreover the auditor would mention in its report whether all the disclosures of information as required by law has been made in the financial statements. Further the auditor would give whether all the relevant information is contained in the financial statements and they have been prepared by following consistent accounting policies which have been mentioned by the company. The auditor would mention in its report if the accounting estimates made by the company are reasonable and the structure of the financial statements conforms to the requirements of the regulating bodies. The auditor would also give an assessment of the company as a going concern (Xu et al., 2011). If there are any significant risks that endanger the existence of the company in near future, the auditor would mention them. Further the auditor would mention in its report whether there are sufficient internal controls in the company to safeguard its assets and prevent frauds. A mention of audit risks would also be made in the report.
There are two major types of audit opinions, namely modified and unmodified opinion. An unmodified audit opinion by an auditor indicates that the financial statements of the company do not contain any material misstatements and they comply with all the requirements given in the financial framework as required by the regulating body of the government. A modified opinion can be of three types (Smallbusiness.chron.com, 2016). In the first case a modified opinion is given when auditor finds that financial statements contain material misstatements but they are not pervasive. In other words there is something wrong with a particular accounting item but rest of the accounting records are correct. In the second case the auditor would give a disclaimer of an opinion when the scope of the audit has imposed certain limitations on the auditor’s capacity or there are certain uncertainties relating to the business of the company. In the third case the auditor gives an adverse opinion when the company has not followed the accounting standards in accounting for business transactions or committed irregularities which could be the result of a fraud. This kind of audit opinion is given when there are material misstatements in the financial statements and they are also pervasive or widespread.
As given in the case, Connor Company was having problem in paying debts during the year. The company was paying its creditors by using bank overdraft. Now the bank wants repayment of bank draft within a month. The company is not able to procure additional funds as its cash flows do not cover its debts. In this case if the company is not able to pay its bank overdraft, the bank can initiate process for demanding winding up of the company in court of law (Accaglobal.com, 2016). Thus there exist adequate conditions that put in danger the continuance of the company as a going concern. In this case the directors and management of the company are required by law to make an assessment whether or not there are material uncertainties that put in doubt the ability of the company to continue as a going concern in a report in the financial statement.
As becomes clear from the given details there are material uncertainties that threaten the continuation of the company as a going concern. If the financial statements of the company have been prepared on a going concern basis and the auditor feels that adoption of going concern assumption, that is, the claim that firm would continue in future with no problems or risks threatening its existence, by the management, is inappropriate, the auditor would express an adverse opinion.
The Australian accounting standards lay down that cost of inventories should be determined by the Australian companies using FIFO method (Chartered Accountants Australia New Zealand, 2016). In the given case the local Australian company which has an American parent company has used the LIFO method for ascertaining cost of inventories. In other words the given local company has not followed the accounting standard it needs to follow under the Australian law. Moreover, the cost of goods sold and ending inventory would differ in cases where FIFO and LIFO are used and the prices of materials or inventories are rising or falling continuously (Accounting Tools, 2016). Thus profit shown in the financial statements would also differ under the two methods. In FIFO it is assumed that inventories are sold or used in the order they arrive. The inventories that come first are used first. Under LIFO the inventories which have arrived in the company recently are used first.
As the given company has used LIFO instead of FIFO there would be material impact on the financial statements which would not show the true picture of the financial positions and performance of the company as required by the financial reporting framework in Australia. Therefore the auditor would give an adverse audit opinion in its audit report.
Audit opinion in case of Victorian Manufacturing Company
The financial statements of Victorian Manufacturing Company contain misstatements which are material in nature. The auditor would give an adverse audit opinion in its audit report. According to the accounting standards laid down by the Australian Accounting Standards Board which Australian companies have to follow, the asset like plant and machinery are to be shown or carried in the balance sheet at their original cost at which they were acquired less accumulated depreciation (Aasb.gov.au, 2016). Another method is revaluation model where the fair value of the asset is determined through an appraisal done by a professionally qualified person. This fair value is determined after collecting information about the prevailing market price of the asset. The asset is shown at this fair value in the balance sheet and any subsequent depreciation is deducted. If this method is followed revaluation of the asst takes place at reasonable intervals of time. But as becomes apparent Victorian Manufacturing Company has not followed either of the above two methods for arriving at the value of factories that should have been shown in its balance sheet. Thus the auditor would give an adverse opinion in its audit report.
The following are the internal control weaknesses in the procedures of Adel manufacturing company.
Firstly, it is given that when a worker is hired by the foreman of Adel manufacturing company, the worker gives an income tax installment declaration form to the foreman. The foreman of the company writes in the corner of the income tax declaration forms given by the hired workers about their hourly rates of pay and then sends these forms to the pay roll clerk (Indigenous Business Australia, 2016). This is inadequate procedure. The foreman in this case is not left with any record of the workers that the individual has hired. There might be a case when all the income declaration forms of workers do not reach the pay roll clerk or the individual loses some of these forms. In this case the company would have no records of those workers left.
Secondly, the foreman writes the hourly rate of pay of a worker hired in the corner of the income declaration form given by the worker and sends it to the pay roll clerk. The foreman should also write on the each form that the particular worker has been hired with the specific hourly rate of pay to be paid to the worker. The foreman should put the individual’s signature to authorize the recruitment. The foreman should give these details in separate documents signed by the individual and send these documents to the payroll clerk and the senior officer of the payroll department (Romney et al., 2013). At present the foreman is not doing so which is a shortcoming.
Thirdly, it is given that workers are free to fill their timesheets and deposit them without any supervision by any official of the company. This is complete lack of control. The workers should fill the time sheets in the presence of a company official and they should not be allowed to carry time sheets with them. The official should check if each worker is filling the times of arrival and departure correctly. Moreover the box in which time sheets are deposited by workers should be looked after by an official of the company so that time sheets do not get lost leading to inadequate records (University Of Washington, 2016).
Fourthly, computation of salaries of workers is being done by a junior payroll clerk, which is wrong. The knowledgeable officers of accounts department should compute the salaries on the basis of information received from the personnel department (Hart, Fergus and Wilson, 2012).
Fifthly, the chief accountant of the company should fill the cheques that are to be forwarded to workers as compensation after considering the statement showing the computed salaries of the workers as prepared by the accounts officer of the company. At present the payroll clerk is filling details in the checks. This person is very junior official and should not be given the custody of even the blank cheques.
Sixthly, cheques are sent by the chief accountant to the foreman for distribution among workers. This is a faulty system. The cheques should be sent to a senior official in the personnel or accounting department other than the foreman and workers should collect their cheques from the individual.
Finally, payroll bank account is reconciled by the Chief Accountant who also prepares various tax reports. This work should be done by other officers under the Chief Accountant. As more officials are made responsible for different types of work, for a fraud to happen, collusion of more people would be required. By giving too much work to an individual without any checks by others, a company increases the chances of a fraud or mistake happening (Romney et al., 2013).
There can be different tests that can be applied to bring to light the deficiencies in the current procedures being followed by Adel manufacturing company. Firstly, information can be obtained from the payroll clerk and number of information declaration forms of workers that the individual has can be ascertained. Then the foreman would be asked how many workers the individual has hired so far. The foreman might not be having any record or the individual might not even remember the exact number hired by the person.
Secondly, the number of time sheets with the payroll clerk can be compared with the actual number of workers in the company as shown by the worker income declaration forms or according to the information given by the foreman. This would indicate if time sheet of any worker is missing.
Thirdly the computations of salaries of different workers by the payroll clerk can be checked by an accounts officer to find if the calculations have been done properly (Hart, Fergus, and Wilson, 2012).
Fourthly, the amounts filled in the cheques by payroll clerk can be checked by an accounts officer.
Fifthly, if a worker does not get a salary and complains to the company this would be an indication that internal controls are inadequate.
References
Aasb.gov.au (2016) Property, Plant and Equipment AASB 116. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun09_07-09.pdf (Accessed: 16 September 2016).
Accaglobal.com (2016) Audit And Insolvency. Available at: https://www.accaglobal.com/in/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/audit-insolvency.html (Accessed: 16 September 2016).
Accounting Tools (2016) FIFO Vs LIFO Accounting. Available at: https://www.accountingtools.com/fifo-vs-lifo-accounting (Accessed: 16 September 2016).
Auasb.gov.au (2016) Auditing Standard ASA 700: Forming An Opinion And Reporting On A Financial Report. Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_700_2015.pdf (Accessed: 16 September 2016).
Caanz, S. (2016). Auditing And Assurance Handbook 2016 Australia. Australia: John Wiley And Sons.
Chartered Accountants Australia New Zealand (2016) AASB 102 Inventories. Available at: https://www.charteredaccountants.com.au/Industry-Topics/Reporting/Australian-accounting-standards/Analysis-of-AASB-standards/AASB-102–Inventories?standard= (Accessed: 16 September 2016).
Hart, J. , Fergus, C. and Wilson, C. (2012) Management Accounting: Principles And Applications. 5th (edn.) Australia: Pearson Australia.
Indigenous Business Australia (2016) Payroll Procedures. Available at: https://www.iba.gov.au/wp-content/uploads/Template-Commercial-Capability-Toolkit-Payroll-Procedures.pdf (Accessed: 17 September 2016).
Loftus, J. , Leo, K. , Clark, K. , Picker, R. and Wise, V. (2012). Understanding Australian Accounting Standards. Australia: John Wiley And Sons Australia Limited.
Rodgers, R. and Lucas, P. (2012). Bookkeeping And Accounting Essentials. Australia: Cengage Learning Australia Pty Limited.
Romney, M. , Steinbart, P. , Mula, J. , McNamara, R. and Tonkin, T. (2013) Accounting Information Systems. Pearson Australia: Australia.
Smallbusiness.chron.com (2016) What Is A Modified Audit Opinion. Available at: https://smallbusiness.chron.com/modified-audit-opinion-26322.html (Accessed: 16 September 2016).
Turner, J., Mock, T., Coram, P., and Gray, G. (2010) Improving Transparency and Relevance of Auditor Communications with Financial Statement Users, Current Issues in Auditing, 4(1), pp. A1-A8, [Online]. Available at: https://www.aaajournals.org/doi/abs/10.2308/ciia.2010.4.1.A1 (Accessed: 16 September 2016).
University Of Washington (2016) Internal Controls. Available at: https://f2.washington.edu/fm/fr/internal-controls (Accessed: 16 September 2016).
Xu, Y. , Jiang, A. , Fargher, N. and Carson, E. (2011) Audit Reports in Australia during the Global Financial Crisis, Australian Accounting Review, 21(1), pp. 22-31, [Online]. Available at : https://onlinelibrary.wiley.com/doi/10.1111/j.1835-2561.2010.00118.x/full (Accessed: 16 September 2016).
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