Auditing is the process of checking and inspecting all the books of accounts in order to find errors and manipulations in them if any and to make an assurance about the true and fair view of the financial statements. There are various types of audit according to its functions and objectives and an individual person having competent knowledge can be appointed for such audit. In the given case study, it can be observed that the Overseas Explorer Ltd has acquired the business of the Local Pty Ltd at an agreed price of $5million. The Local Pty Ltd is a small property company has not prepared any financial statements properly. Before making a decision of acquisition of any business the acquirer company must investigate and evaluate the financial feasibility and financial performance of the target company. In the given case study, as the Local Pty Ltd is small company and has not prepared any financial statements properly, it is quite difficult the check and evaluate the financial performance, financial position and management efficiency of the Local Pty Ltd. Hence, the audit firm of the Overseas Explorer Ltd can be appointed to check the management accounting records, financial transactions and the financial reports (Appelbaum Kogan and Vasarhelyi 2017).
While the acquisition was negotiated with the target company Local Pty Ltd, the acquiring company Overseas Explorer Ltd must check all the management accounting records and activities, all the transactions that have been occurred from the negotiation of the acquisition till the date of settlement and the financial reports as at the date of acquisition. Therefore, to complete the task and based on the level of assurance in each of these task, the type of engagement of auditors would be different (Appelbaum Kogan and Vasarhelyi 2017).
Checking of the management accounting records and reports would take a considerable period of time, and it mainly focuses on the management efficiency of the company. It analyses and assesses the management culture and management accounting system of the company. Hence, for assurance on the management accounts of the Local Pty Ltd as on 30 June 2017, the Management Audit ngagement would be more preferable.
Checking and scrutinising all the transactions for a given period of time would require a longer period of time and intense study and analysis of all the transactions. Generally, internal audit is applied while such detail inspection and checking is required. In the given case study, the internal audit engagement can be applied for making assurance on the transactions of the Local Pty Ltd form the date of negotiation till the date of settlement. It would help the auditor to check all the transactions for that period with the suspect that the target company might have involved in such unfair transactions so that the value of the business gets inflated. Therefore, for checking all the transactions for that period the Internal Audit engagement would be preferred (Appelbaum Kogan and Vasarhelyi 2017).
Lastly for checking and giving assurance on the final financial reports of the Local Pty Ltd as on 30 June 2018, the Compliance Audit engagement can be more preferred. Compliance audit engagement focuses on the sound and true representation of the financial performance and financial position of a company following the respective accounting and reporting standards. In the given case study, reporting true financial position of the Local Pty Ltd is very significant as all the assets and liabilities will be incorporate in the parent company’s books based on the financial statement as on 30 June 2018. Hence, a compliance audit engagement could give more assurance on the true and fair representation of the financial performance and financial position of the Local Pty Ltd in their financial reports as on 30 June 2018 (Appelbaum Kogan and Vasarhelyi 2017).
Auditing is the process of checking financial records and reports of a company and making a comment about the true and fair representation of the financial performance and financial position of a company as on a particular date. In an organisation numerous transactions are occurring and all are being recorded in the financial books of accounts. While conducting the auditing process, it might not be possible for the auditor for checking all the transaction on a hundred percent basis (Popescu and Popescu 2018). They have to check such transactions on a sample basis. Moreover, the management of the company is responsible for disclosing all the information and records to the auditor and if any such information is hided from the auditor then the management of the company would be responsible. After checking and inspecting all these financial records and reports if the auditor becomes satisfied about the true and fairness of the financial reports then the auditors gives assurance about the true and faire representation of the financial performance and financial position of the company in the audit report. Therefore, the auditor is never responsible for any future downfall in the company’s financial performance or financial position and as he makes the comment based on the information provided by the management, in no such cases the company can make the auditor liable for future downfall in financial performance and financial position of a company (Popescu and Popescu 2018).
The first threat to the Hall & Associates is that they have to understand the accounting process and the company policies properly first. They had not audited the company’s financial system and financial record previously, if that would have been done, there would be no difficulty in understanding the financial information requirement of the company. Secondly, they have to collect all the papers and contracts related with such loan agreements which might be very difficult for them to check the transaction independently. Lastly, as the audit fees will be paid through the issue of share, there would be some issues relating to the related party transaction, the auditor might not be able to accept such proposal.
Hall & Associates first check the financial information requirement and understand the accounting process and company policies. They must carefully asses the information requirement and accordingly advice about the financial information system. Lastly, they have to check all the loan agreements and papers and their records in the financial statement to give assurance about the compliance on the same.
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In the first case the risk involved is an inherent risk as the transaction involves foreign exchange. It depends on the fluctuation in the foreign exchange rate and the individual treasurer has no influence on that.
In the second case, the inherent risk is that the time bound of the closure of the inefficient factory, while the control risk is that the financial controller has to determine the reasonably accurate closure provision for the factory, if he makes any mistake in that then the provision created for the closure of the factory might be affecting the financial position of the company (DeFond and Zhang 2014).
In the third case the control risk will be reduced as the automated software would help the professionals to record financial transactions more efficiently and correctly. The inherent risk will be increase as any malfunction in the software may create a complete data loss for the company.
The control risk and the inherent risk both are high in the last case. As in the process of date backup there is a chance of complete data loss and inefficient control may lead to a loss of data.
It can be observed that the current ratio was 1.87 in the previous year which was much near to the industry average. In the current year the current ratio has been increased to 1.97 over and above the budgeted figure of 1.92. There might be over stacking of inventory resulting into the increase in current ratio. Another reason behind increase in current ratio could be increased trade receivables of increased credit terms allowed to the debtors. It can also be assumed that the cash management of the company have become so efficient that they are able to realise cash in a very shorter period of time from their debtors (Popescu and Popescu 2018).
The quick ratio represents the short term debt paying ability of the company using readily available assets. It can be observed that the company is having a quick ratio same in the previous year as well as in the current year. There is no change in the quick ratio in both the years and the budget figures was also the same. Hence, it can be suspected that some of the information might be manipulated by the management to hide the actual current financial position of the company.
Inventory turnover of the company has been decreased for 4.86 in the previous year to 4.21 in the current year. As the current assets have been increased, the inventory of the company has also been increased. Hence, with the increase in inventory the inventory turnover has been fallen further.
Net profit margin of the company was same as the industry average in the previous year, but in the current year it has been increased by 2%. Increase in net profit margin might be due to decreased operating cost of the company or some information might have been manipulated by the company to show a better financial performance.
Lastly, it can be observed that the gross profit margin of the company have been increased significantly and it has increased beyond the budgeted figure as well as the industry average. Increased efficiency in operations or decreased cost of inputs might be the reason behind increase in gross profit margin.
References:
Appelbaum, D., Kogan, A. and Vasarhelyi, M.A., 2017. Big Data and analytics in the modern audit engagement: Research needs. Auditing: A Journal of Practice & Theory, 36(4), pp.1-27.
Chi, W., Myers, L.A., Omer, T.C. and Xie, H., 2017. The effects of audit partner pre-client and client-specific experience on audit quality and on perceptions of audit quality. Review of Accounting Studies, 22(1), pp.361-391.
Coetzee, P. and Lubbe, D., 2014. Improving the efficiency and effectiveness of risk?based internal audit engagements. International journal of auditing, 18(2), pp.115-125.
De Villiers, C., Hay, D. and Zhang, Z.J., 2014. Audit fee stickiness. Managerial Auditing Journal.
DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of accounting and economics, 58(2-3), pp.275-326.
Guénin-Paracini, H., Malsch, B. and Paillé, A.M., 2014. Fear and risk in the audit process. Accounting, Organizations and Society, 39(4), pp.264-288.
Ladda, R.L., 2014. Nature of the Audit. Lulu. com.
Minnis, M. and Shroff, N., 2017. Why regulate private firm disclosure and auditing?. Accounting and Business Research, 47(5), pp.473-502.
Pham, H., Amaria, P., Bui, T. and Tran, S., 2014. A STUDY OF AUDIT QUALITY IN VIETNAM. International Journal of Business, Accounting, & Finance, 8(2).
Popescu, C.R.G. and Popescu, G.N., 2018. Risks of cyber attacks on financial audit activity. The Audit Financiar journal, 16(149), pp.140-140.
Salleh, K. and Jasmani, H., 2014. Audit rotation and audit report: Empirical evidence from Malaysian PLCs over the period of ten years. Procedia-Social and Behavioral Sciences, 145, pp.40-50.
Vovchenko, N.G., Holina, M.G., Orobinskiy, A.S. and Sichev, R., 2017. Ensuring financial stability of companies on the basis of international experience in construction of risks maps, internal control and audit.
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