Discuss about the Equity Incentives and Internal Control Weaknesses.
As opinioned by Mitra et al. (2015), in accordance with the law as stated in ASA700 it is compulsory for a public listed company to prepare the external audit of its financial statements. This proves to an effective measure of improving the internal controls of the company and provides the required assessment for finding out the sources of fund for the purpose of investment by the company. The company’s external auditor forms his opinion regarding the appropriateness of the company’s financial statements after framing an audit report based on the evidences of audit. The four basic audit opinions rendered by an auditor of any particular company are as follows:
In the words of Christensen et al. (2014), the term unqualified opinion refers to the auditor claiming the financial statements and data of the company to be clean. The following expression is made by the auditor of the company after ascertaining that the financial statement of the business organization are presented in a fair way and are providing a fair as well as true view of the operation of the organization. According to Munsif et al. (2012), many economists have compared an unqualified opinion of the auditor regarding a company with that of a clean health bill of a patient. Here, it may also be noted that there are certain limitations in this regard as the audit report made by the auditors provide reasonable assurance and not absolute assurance.
The following opinion is concluded by the auditor at times that they are unable to express the report of the company as unqualified opinion. The limitation of scope as well as the organization’s management is not that per vasive and in therefore require to have an adversity in opinion. The detection of risk involving the potentiality of mis statements is difficult to analyze by the auditor of the company.
As stated by Knechel and Sharma (2012), as and when the auditor of a company faces difficulty and is not able to draw an outcome and express an opinion in this regard, then it becomes a case of disclaimer. The following situation may occur when the organization puts a limitation on the approach of the auditors. Here, the company may stop the auditors from undertaking any particular specific procedure of audit. If the situation of the business organization goes out of control of the auditors then the auditor of that company may refrain from providing an opinion.
As said by Blankley et al. (2014), in case of nay conflict in between the company’s management and the auditor of the company in association with the audit report that may pose a bad impact on the users’ decision of the financial statements of the same. The auditor is authorized to take a firm step rather than giving out a qualified opinion. The adverse opinion of the financial statements by the auditor may also result from the misleading financial statements of the company. This signifies about the financial statements not being the actual representative of the firm’s financial position. The following conflict occurs as a result of the unacceptable accounting policies adopted by the business organization for the preparation of the financial statements.
In this situation, the auditor is unable to give a clean chit to the financial performance of the Connor Company. This is mainly because of the fact that the company was solely dependent on its ban overdraft facility to pay-off its debts and now that the bank asking for repayment of the bank overdraft, the company is in deep trouble. The company should have arranged the funds from other sources to meet debt obligations but the company has failed in this regard.
The changes in the inventory valuation method from LIFO to FIFO has been calculated and reported by the company. However, impact of the change in inventory valuation is limited to the inventory only and thus the auditor would resort to disclaimer opinion in this regard.
In present context, the company has properly shown the value of the asset at historic cost in the balance sheet. The company believes that there is no need for revaluation of the assets as there has been no major change in the market value of the asset. In addition, the company has also been showing the value of the asset after deducting the amount of accumulated depreciation. Hence, the auditor would issue an unqualified audit opinion in this case.
The recent era of computerization system of payroll have posed a good impact on the payroll functions by making it automatic as well as easy. However, it also has a number of weaknesses that may be illustrated as follows:
In the words of Feng et al. (2014), the following system makes use of specific codes for the employees for the purpose of employee recognition. However, these codes can be shared by the employees among themselves that may result in one employee using the codes of another employee. This may give rise to occurrences of entering false payroll information. In this regard, the consequences of using the codes of other employees must clearly be stated in the employee handbooks so that the employees may refrain from engaging in such practices.
According to Rice and Weber (2012), it has often been witnessed that the human resources are often held responsible for the duties of distributing the pay checks, entering in the pay roll system as well as processing the data of pay roll. This often leads to dishonesty or false maintenance of data and record time. Therefore allocating the stated work to only one department may weaken the system of internal control.
As opinioned by Li et al. (2012), in context of the preparation of the internal audit of the payroll the employees require to be trained in order to maintain it efficiently. The employees emblazing huge amounts of money are doing so on the basis of over time. The employee in such a case may set up a plan to defraud the employer with the help of publicized audits associated with the functions of accounting as well as pay roll. In this context, the employer can engage the employee in the preparation n of the internal pay roll audit on a quarterly basis to reduce the chances of such occurrences.
In this context, with the view of reducing the weaknesses regarding the internal control the company may undertake the following steps.
Segregation of duties
The employer may separate and divide the duties between the departments and employees regarding the works done for the preparation of the internal audit. According to Balsam et al. (2014), the work may be split in between the human resources and the accounting in order to make sure that the entire pay roll cycle is not completed any one employee or department as it may reduce the chances of falsification in the internal audit pay roll of the company.
The employees can sign the time sheets and the time cards in the presence of a supervisor who will then verify it and ensure the truthfulness of the same. As observed by Newton et al. (2015), on being assured of the authenticity of the time sheets the supervisor would then sign and approve it. The time of absence and the time off of every individual employee also require to be mentioned in the time sheets to ensure the authenticity of the internal pay roll audit.
Reference List
Balsam, S., Jiang, W. and Lu, B., 2014. Equity incentives and internal control weaknesses. Contemporary Accounting Research, 31(1), pp.178-201.
Blankley, A.I., Hurtt, D.N. and MacGregor, J.E., 2014. The relationship between audit report lags and future restatements. Auditing: A Journal of Practice & Theory, 33(2), pp.27-57.
Christensen, B.E., Glover, S.M. and Wolfe, C.J., 2014. Do critical audit matter paragraphs in the audit report change nonprofessional investors’ decision to invest?. Auditing: A Journal of Practice & Theory, 33(4), pp.71-93.
Feng, M., Li, C., McVay, S.E. and Skaife, H., 2014. Does ineffective internal control over financial reporting affect a firm’s operations? Evidence from firms’ inventory management. The Accounting Review, 90(2), pp.529-557.
Knechel, W.R. and Sharma, D.S., 2012. Auditor-provided nonaudit services and audit effectiveness and efficiency: Evidence from pre-and post-SOX audit report lags. Auditing: A Journal of Practice & Theory, 31(4), pp.85-114.
Li, C., Peters, G.F., Richardson, V.J. and Watson, M.W., 2012. The consequences of information technology control weaknesses on management information systems: The case of Sarbanes-Oxley internal control reports. Mis Quarterly, 36(1), pp.179-203.
Mitra, S., Song, H. and Yang, J.S., 2015. The Effect of Auditing Standard No. 5 on Audit Report Lags. Accounting Horizons, 29(3), pp.507-527.
Munsif, V., Raghunandan, K. and Rama, D.V., 2012. Internal control reporting and audit report lags: Further evidence. Auditing: A Journal of Practice & Theory, 31(3), pp.203-218.
Newton, N.J., Persellin, J.S., Wang, D. and Wilkins, M.S., 2015. Internal control opinion shopping and audit market competition. The Accounting Review, 91(2), pp.603-623.
Rice, S.C. and Weber, D.P., 2012. How effective is internal control reporting under SOX 404? Determinants of the (nonâ€Â) disclosure of existing material weaknesses. Journal of Accounting Research, 50(3), pp.811-843.
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