Auditing, Assurance, And Compliance For Bio Sustainable Feeds Ltd

Steps Required Before Accepting an Audit

Discuss about the Auditing, Assurance, and Compliance for Bio Sustainable Feeds Ltd.

Auditing is the process adopted by the professional accountants in certifying the financial statements of an entity (Van Peursem et at., 2013). For the propose of certification, the professional accountant performs thorough verification of the financial statements and draws opinion as regards the true and fair of the state of affairs. The certification of the financial statements by the auditor (professional accountant) is important to enhance the credibility of the information depicted in such financial statements (Loughran, 2010). Further, the confidence of the financial statement’s users is also increased when the financial statements bear the stamp and signature of the auditor. All the users, either they are shareholders, prospective investors, or government relies on the auditor’s report. Thus, it becomes really important on the part of the auditor to perform the duties with integrity and in accordance with the laws and regulations (Loughran, 2010).   

In this context developed above, this report addresses the issues arising in the audit of Bio-sustainable Feeds (BSF) Ltd. Bio-sustainable Feeds (BSF) Ltd is a company listed on ASX and engaged in the research and development activities. Currently, the company is undertaking a research aimed at exploration of the sustainable aqua-culture feeds to be used in fishing operations. This report is primarily focused on the crucial areas of auditing such as acceptance of the audit engagement, risk assessment, preparing audit program, and verification of the special nature transactions. Further, the report also covers discussion on the auditor’s responsibilities in respect of certifying the issue of prospectus.

The acceptance of audit engagement is the first phase of audit process, which involves three other phases such as planning, performing, and reporting (Delaney & Whittington, 2012). Before accepting an audit engagement, the auditor is required to mandatorily comply with certain procedural requirements, which involves agreeing the terms of the engagement. Apart from the mandatory procedural requirements, the auditor is also required to comply with various ethical guidelines, which involves informing the previous auditor before accepting the audit engagement (Delaney & Whittington, 2012). The procedural requirements have been set to ensure the independence of the auditor and to ensure that the audit is performed smoothly without any conflict. However, the ethical requirements focus only on the independence of the auditor.

In regard to agreeing the terms of the audit, the auditor should ensure that all the duties and responsibilities of the auditor as well as of the management have been included in the engagement letter and agreed between the auditor and the management (ASA 210, 2015). In particular, the auditor should ensure that three pre-conditions of an audit are present in the engagement letter. The first among those three pre-conditions is to ensure that the financial reporting framework that the entity has applied in preparation of its financial statements is acceptable (ASA 210, 2015). The second pre-condition pertains to the management’s responsibility in respect of which the auditor needs to ensure that the management is fully aware of its responsibilities either it is related to the preparation of the financial statements or it relates to auditing. The other third pre-condition requires the auditor to ensure that the rights and powers of the auditor are reserved and acknowledged by the management (ASA 210, 2015).

Assessment of Audit Risk

In regard to the ethical considerations, the auditor should ensure that the previous auditor of the company is informed before accepting the audit engagement (Whittington, 2012). This requirement makes the auditor aware of any conflict between the previous auditor and the entity, which may be material for non-acceptance of the audit engagement by the auditor. Apart from these requirements, the auditor is also expected to get an overview of the company, its board, and the image of the company in the market. Thus, referring to the above discussed provisions, the auditor of Bio-sustainable Feeds (BSF) Ltd should take the following steps before accepting the audit:

• Get the terms of the audit agreed with the company through engagement letter (ASA 210, 2015).
• Get an overview of the company, legal environment, and company’s image in the market.
• Inform the previous auditor of the company in writing and seek from him reasons for not accepting the engagement if any (Whittington, 2012).
• Company with the legal formalities like submitting returns and forms with the regulatory bodies.

The audit risk means the risk that the auditor gives an inappropriate opinion on the financial statements. This implies that there exists a risk that the auditor may skip some material misstatements and certifying financial statements as giving true and fair view (Gray & Manson, 2007). There are three primary components that form part of the audit risk; these are inherent risk, control risk, and detection risk (ASA 315, 2011). The inherent risk and control risk relate to the organizational procedures and structures, but the detection risk relates to the auditor’s procedures. Thus, the auditor needs to assess the level of inherent and control risk and based on that decide the extent of verification of the books of accounts to reduce the detection risk. The auditor has to maintain adequate balance between the inherent and control risk and detection risk with the ultimate goal of reducing the overall audit risk to the appetite level (ASA 315, 2011).

As per the provisions of the auditing standards, the auditor is required to assess the audit risk at the initial level when planning the audit and to further review the level audit risk throughout the auditing process. The level of audit risk determines the depth of checking and the sufficiency and appropriateness of the audit evidences collected by the auditor, thus it is important to review the audit risk regularly (ASA 315, 2011). In respect of Bio-sustainable Feeds (BSF) Ltd, the audit risk has been computed as below:

S. No.	Particulars	Risk (%)
A	Inherent Risk	90.00%
B	Control Risk	5.00%
C	Detection Risk	80.00%
D	Audit Risk (A*B*C)	3.60%

The risk that the auditor arrives at inappropriate conclusion in respect of the audit of Bio-sustainable Feeds (BSF) Ltd is 3.60%. In this regard, it is important to note that the determination of the acceptable level of risk depends on the auditor’s judgment. Thus, if the auditor asserts that in the given circumstances, 3.60% risk is normal and acceptable, he can accept the audit engagement of Bio-sustainable Feeds (BSF) Ltd.

Audit Program for the BSF Ltd

In respect of a financial audit of an entity, the auditor should prepare an audit program listing out the audit extent and time of the procedures (Johnstone, Gramling & Rittenberg, 2015). Further, in order to allocate the resources and time in an appropriate manner, the auditor should list out the procedures by bifurcating the audit areas in to general and special category. The general category should cover the audit areas which are considered to be bearing normal risk, while the special category should cover the high risk areas. Segregating the audit areas in this way would assist the auditor to put the right amount of efforts in the right areas, which is necessary to reduce the audit risk (Ordelheide, 2016).

In respect of the audit of Bio-sustainable Feeds (BSF) Ltd, the areas such as verification of internal controls system and the financial statement items such as cash, revenues, and purchase of material, receivables, payables, and stock has been considered as normal risk audit areas. The audit program for verification of these normal risk audit areas is prepared as below:

Table 1: Audit Program Bio-sustainable Feeds (BSF) Ltd: General Risk Areas

Audit Area	Audit Procedures	Date	Responsible Personnel
Internal Control System	·         Inquire the management about standard operating procedures. ·         Take management assessment of internal control system. ·         Design a questionnaire and get it filled by the appropriate authorities (Auditorexchange.com, 2016). ·         Assess the level of adequacy.	September 23, 2016	Mr. A (Audit manager)
Cash	·         Check the receipts and payment vouchers on test basis. ·         Check physical cash available and match it with book balance (Cpaaustralia.com, 2016).	September 24, 2016	Mr. B (Senior audit trainee)
Revenues	·         Check sale invoices and tally it with entries in sale day book. ·         Cross check total monthly sales from Excise and sales tax records. (Auditorexchange.com, 2016)	September 25, 2016	Mr. C (Senior audit trainee)
Purchase of Materials	·         Check internal control for material purchase. ·         Test check purchase bills and orders placed.	September 26, 2016	Mr. D (Junior audit trainee)
Receivables	·         Take balance confirmations from parties. ·         Ledger scrutiny of the receivables having large balances and old balances.	September 27, 2016	Mr. D (Junior audit trainee)
Payables	·         Take balance confirmations from parties. ·         Ledger scrutiny of the payables having large balances and old balances.	September 28, 2016	Mr. D (Junior audit trainee)

Table 2: Audit Program of Bio-sustainable Feeds (BSF) Ltd: Special Consideration Items

Audit Area	Audit Procedures	Date	Responsible Personnel
Research and development expenditure	·         Check compliance with AASB 1011, “ Accounting for research and development (AASB 1011, 2016) ·         Check status of activities completed in respect of research. ·         Measure amount to be capitalized (Cpaaustralia.com, 2016).	September 25, 2016 to September 28, 2016.	Mr. P (Engagement partner )
Government Grant	·         Check compliance with AASB 120.	September 29, 2016	Mr. P (Engagement partner )

In regard to the verification of the research and development expenses the auditor should maintain high level of professional skepticism because the major part of the operations of the company comprises of research and development activities. The auditor has to ensure that the entity has complied with the provisions of AASB 1011 in accounting for the research and development expenses (AASB 1011, 2016). The major concern for the auditor in verifying the research and development expenditure is to ensure that the expenses have been classified into revenue and capital nature appropriately. The provisions as regards classification of the research and development expenses into revenue and capital are listed in the AASB 1011.

As per the accounting standard 1011, the revenues nature expense incurred on the research and development activities is charged to the profit and loss account in the period in which it is incurred. Whereas, the capital nature expenses incurred on the research and development activities are capitalized in the books as intangible asset such as patent (AASB 1011, 2016). The standard provides that there are two phases in the research and development activities such as research phase and development phase. The expenses of the research phase are charged to the profit and loss account considering the same as of revenue nature. However, the expenses of the development phase are qualified for capitalization in the books (AASB 1011, 2016). Thus, the auditor should ensure that the activities of the research have entered into the development phase for being qualified to be capitalized and recognition as an asset in the financial statements (PWC, 2015).

In the present case of Bio-sustainable Feeds (BSF) Ltd, the research activities of the company has not yet entered the development phase, thus, the auditor should ensure that the company does not recognize patent in the financial statements. Further, the auditor should also ensure that the profit and loss account has been debited for a sum of $520 million ($360+$160 million), which were incurred by the company on the research activities. Further, the company has received grant from CSIRO for an amount of $500 million, which should be give treatment as per the AASB 120 (AASB 120, 2015). The auditor should ensure that the grant has been credited to the profit and loss account in the same proportion in which the research expense has been debited.

The triple bottom line addendum is given to the general purpose financial statements to describe the impact of organizational activities on the people, planet, and profit. Here people represent society, planet represents environment, and profit represent economy (Henriques & Richardson, 2013). Every organization has to take into consideration the social, environmental, and economic impact of its activities to maintain sustainability in the operations. Thus, the overall aim of the triple bottom line addendum is to analyze and communicate the sustainability of the operations to the stakeholders (Henriques & Richardson, 2013).

Therefore, while certifying the triple bottom line addendum, the auditor should analyze the impact of company’s activities on the society, environment, and the economy (Savitz, 2012). In case of BSF Ltd, it has been observed that the company is carrying on the research activities to find out the sustainable aqua-culture feeds. For this purpose, the company undertook plant based feed research earlier, which the environmentalists found questionable. The environmentalists viewed that the plant based feed research of the company was hazardous to the environment and society as well. They asserted that the plant based feed would cause diversion of the human food to the production of fishes. Due to this diversion, the poor people would get poorer and the rich is expected to get richer. This phenomenon would create imbalance in the economy as well. Thus, in the opinion of the environmentalists, the plant based feed research of the company is not promoting sustainability.

However, the company responded quickly to the concerns of the environmentalists and stitched to bacteria based feed research stopping the plant based feed research. The bacteria based feed research is focused on exploration of the fish feed which can be produced by utilizing the wood chips, sugar cane residue, and methane gas so that good quality human food could be saved. This research seems to be promoting sustainability from the social, environmental, and economic perspective. Thus, in the light of the discussion done above, it could be articulated that the auditor of the company can not issue neat and clean report on the triple bottom line. Therefore, the triple bottom line addendum, which states that the research of the company has been socially responsible and environment friendly, should not be signed by the auditor.                          

The auditor is duty bound to ensure that the statements made in the prospectus are genuine before singing it off and authorizing for issue in the public (Gaeremynck & Vermoesen, 2009). Thus, the auditor should go through the prospectus carefully and collect corroborative evidences in respect of each and every assertion made in the prospectus. In the current case of BSF Ltd, it has been observed that the company is bringing public issue for which it is considering issuing prospectus. The prospectus of the company contains a statement that the company has exclusive control over the bacteria based feed and thus, the company could show patent in the books of accounts. The auditor needs to verify the veracity of this statement by going through in depth verification process.   

In this regard, it may be noted that till now the company has undertaken only the research phase activities in relation to the bacteria based feed research. On the research phase activities, the company has incurred $160 million till now and it is expected that a sum of $200 million will also be incurred on the development phase to be undertaken in the upcoming years. Thus, it can be observed that the company has not begun the activities of the development phase in respect of bacteria based feed research. As per the provisions of AASB 1011, an entity could recognize intangible assets such as patent only when the substantial part of the development phase is complete and it is assured that the future economic benefits will flow the entity from the research (AASB 1011, 2016).

In the case of BSF Ltd, since the company has not yet initiated the development phase, therefore, patent could not be recognized. In the absence of any patent, the company could not hold the exclusive control over the bacteria based feed technology. Thus, the statement made by the company in the prospectus is clearly untrue, unfair, and erroneous. Based on this overall discussion, it could be interpreted that the auditor should not sign off the prospectus as contains an untrue, unfair, and erroneous statement.

References

AASB 1011. (2016). Accounting For Research and Development Costs. Retrieved September 23, 2016, from https://www.aasb.gov.au/admin/file/content102/c3/AASB1011_5-87.pdf

AASB 120. (2015). Accounting for Government Grants and Disclosure of Government Assistance. Retrieved September 24, 2016, from https://www.aasb.gov.au/admin/file/content105/c9/AASB120_08-15.pdf

ASA 210. (2015). Agreeing the Terms of Audit Engagements. Retrieved September 23, 2016, from https://www.auasb.gov.au/admin/file/content102/c3/12-15_AI_5.39_Compiled_ASA_210_(mark-up)_electronic.pdf

ASA 315. (2011). Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. Retrieved September 23, 2016, from file:///C:/Users/Abasus%20Solution/Downloads/F2011C00629.pdf

Auditorexchange.com. (2016). Audit Program Sample. Retrieved September 23, 2016, from https://www.auditorexchange.com/ddata/25.pdf

Cpaaustralia.com. (2016). Sample audit program. Retrieved September 24, 2016, from https://www.cpaaustralia.com.au/~/media/Corporate/AllFiles/Document/professional-resources/practice-management/sample-audit-programs-manual.pdf

Delaney, P.R. & Whittington, O.R. (2012). Wiley CPA examination review, outlines and study guides. John Wiley & Sons.

Gaeremynck, A. & Vermoesen. R. (2009). Guidelines to the auditor in prospectus and other related engagements. Maklu.

Garczynski, M.F. (2008). Knowledge-based audits of health care entities. CCH.

Gray, I. & Manson, S. (2007). The audit process: principles, practice and cases. Cengage Learning EMEA.

Henriques, A. & Richardson, J. (2013). The triple bottom line: does it all add up. Earthscan.

Johnstone, K., Gramling, A., & Rittenberg, L.E. (2015). Auditing: a risk based-approach to conducting a quality audit. Cengage Learning.

Loughran, M. (2010). Auditing For dummies. John Wiley & Sons.

Ordelheide, D. (2016). Transnational Accounting. Springer.

PWC. (2015). PwC Reporting Perspectives October 2015. Retrieved September 23, 2016, from https://www.pwc.in/assets/pdfs/publications/2015/pwc-reportingperspectives-october-2015.pdf

Savitz, A. (2012). The triple bottom line: how today’s best-run companies are achieving economic, social and environmental success — and how you can too. John Wiley & Sons.

Van Peursem, K.A., Monk, E.A., Wilson, R.M.S., & Adler, R.W. (2013). Audit Education. Routledge.

Whittington, O.R. (2012). Wiley CPA exam review 2013, auditing and attestation. John Wiley & Sons.