BUACC3741 Auditing

1st semester 2016 assignment

ASSIGNMENT COVER SHEET (Group)

ATMC Melbourne
Assignment has to be submitted online on Moodle on or before the due date.
SUBJECT CODE: BUACC 3741

SUBJECT TITLE: AUDITING

ASSIGNMENT NUMBER GROUP ASSIGNMENT

AND TITILE: 1ST SEMESTER 2016

WORD COUNT 2020 words (Excluding Bibliography, Footnotes &

(IF APPLICABLE): Cover page)

DUE WEEK: WEEK 10

LECTURER: NEELIMA PADALA

TUTOR: NEELIMA PADALA

STUDENT ID STUDENT NAME

30120069 SANJEEV PARAJULI
30118581 BISMITA YOGI
30132041 UKASHA BIN MUHAMMAD

We declare that this is a group assignment and that no part of this submission has been copied
from any other student’s work or from any other source except where due acknowledgement is
made explicitly in the text, nor has any part been written for me by another person. We realize that
the penalties may ensure for late submission or any other breaches of assignments rules.
 BUACC3741 Auditing
1st semester 2016 assignment

Question no 1:
In the recent past, the accounting department has seen an increase in regulations

and standards. The major objective of this trend is to enhance the accounting as well as

he auditing sector. The trend is happening all over the globe and is affecting the

accounting profession. Standard setters on the international level believe that it is in the

public interest to maintain a set that is universal for financial accounting and reporting.

The underlying assumption behind this move is that there will be the establishment of

high-quality standards, which will improve the capital markets efficiently. Additionally, it is

believed that the standards will enhance the reduction of cost of capital incurred by

businesses, and hence economic growth in the global font. Most countries have adopted

the IFRS accounting standards, and these apply to the conduct of the accounting

profession worldwide (Greuning, & Koen, 2011). In spite of all the benefits accrued as a

result of the increment in the regulations, there are adverse effects on the profession. The

impacts are mostly experienced by accountants based on a global level.

In the US, for instance, accountants working for foreign-based registrants and

those working for US based companies expanding nationally are adversely affected. Such

a position is triggered by the decrease in relevance of KSAs based in the US GAAP

(Godfrey, & Chalmers, 2007). As such, the accountants are faced with the challenge of

the need to understand ISAB- based financial statements. They need, therefore, to read

the new standards thoroughly, as failure to comply leads to adverse impacts on their
 BUACC3741 Auditing
1st semester 2016 assignment
career. The accountants’ profession, in this case, will be affected since it will need to

keep shifting the concepts that are supposed to be followed by accountants (Godfrey, &

Chalmers, 2007). Additionally, the accountants who have already qualified will need to

keep refreshing their knowledge so as to stay relevant in the field. What’s more, there are

companies that hire accountants that are currently graduating from school, leaving the

old and experienced ones out.

The need to carry out this practice has been raised by the update of standards and

regulations done on a regular basis. The company, therefore, is forced to hire more

updated individuals, to ensure the new information is incorporated in reporting

(Oppermann, 2013). Moreover, a corporation which is seen to fail in compliance with the

reporting guidelines may adversely impact business operations. This is so because even

after receiving regulatory approval, the books of the company would be subject to the

existing laws (Di, McLeay, & Ronen, 2014). The act of hiring new accountants, therefore,

is mandatory, as businesses are concerned about their compliance. This, therefore, is a

huge blow, not only to the accountants but the profession at large. Moreover, the learning

of the new standards cropping out every day may be exhausting to the accountants, and

this may make individuals re-think the possibility of getting into the profession.

Question 2

The auditor’s main objective is to express an opinion on the preparation of the

financial statements of a company. He must report on the effectiveness of the internal

controls of the business and its effectiveness over the financial reporting. Before the
 BUACC3741 Auditing
1st semester 2016 assignment
auditor expresses the opinion, they have to plan and perform the audit on the books of

the corporation, so as to identify sufficient evidence (Cannon, 2011).However, in some

instances; auditors are known to act in manners that are not granted in the auditing

standards. The standards, therefore, are provided to mitigate such issues. In a case

where the auditor imposes their personal opinions on the clients financial statements,

they are required to explain how they arrived at that conclusion by providing the evidence

used, as per the ISA 500 (Cascarino, 2007). Where an auditor writes findings that are not

supported by objective evidence the report is not accepted by the company. Such is the

case because according to the international standards on auditing, an auditor is required

to not only provide evidence but objective evidence.

According to ISA 26, an auditor is required to communicate with individuals

responsible for governance in the firm (Cascarino, 2007). Therefore, in a case where an

auditor blindly ticks items without thinking about what is significant, they are answerable

to the board. The standards also provide for the follow-up of the happenings on the ground

and ensure that reports given by auditors who believe paperwork and ignore the incidents

at the ground as inappropriate. An auditor cannot allow their individual prejudice to blind

them, but should rather give a report according to the financial statements of the firm

(Cascarino, 2007). In a case where this happens, the report cannot be used in showing

the state of the company. The auditor must also follow best practice in auditing, where

they are required to follow five key steps in auditing: Schedule the process, establish a

detailed plan, manage the overall process, report the observations, and finally verify the

report. Failure to do this, the report is said to be misleading, and the auditor is required to

report the process and give new observations.

 BUACC3741 Auditing
1st semester 2016 assignment
The standards on auditing specify that the writings done by auditor must be based

on facts, and not on generalizations. As such, an auditor who engages in this form of

reporting is required to provide the basis for the writings, and explain the facts used

(Cascarino, 2007). An auditor may also feel obliged to find something wrong, even where

everything is okay. They lack objectivity and are biased due to some external factors.

Such an auditor should be advised to apply objectivity, and issue the correct report, as

per ISA 580 (Cloet, Gaeremynck, & Vermoesen, 2009). For proper auditing, an auditor

should use adequate resources, and one who is seen to cut costs may be required to

repeat the entire process and carry it out effectively. In some instances, the audit

committee undertaking an audit in a company may secretly work with the management

to manipulate the nature of the report. Such cases may include where the committee

support managers who set objectives that are SMART, but not achievable, or when they

are not SMART. They may also forge a close relationship with the management team so

as o write disingenuous auditing reports which may lead to consultancy business, and at

times this is done at the expense of people’s jobs (Dauber, 2009). Such acts are serious

offenses because they are aimed at defrauding the shareholders, as well as other

stakeholders in the company. As such, the registration of the auditors may be revoked,

and the management fired. The standards providing for the practice of ethical standards

provide for acting with integrity. The standards, therefore, demand that internal auditing

is done effectively, and by separate individuals from the external auditor. This is efficient

where auditing is done by a committee.

 BUACC3741 Auditing
1st semester 2016 assignment
Question 3

The management is responsible for providing information to the auditor, to enable

him to write an opinion about the preparation of statements of the company.

Management’s responsibility is the underlying foundation on which audits are conducted

(Chambers, & Rand, 2011). Where the management is not adequately prepared for the

assessment, it becomes very hard for the auditor to write his report. The auditor requests

the management to communicate the responsibility of the financial statements in a

representation letter (Fountain, 2016). However, the auditor can not require the

representation letter to be written, and the management has the duty to make certain that

it is done to get an unqualified opinion from the auditor. The auditor then gathers

additional information from other sources including observation of the physical inventory

count (Fountain, 2016). In addition to this, the auditor confirms the accounts receivable

and accounts payable with a third party, and also evaluates the understanding of the

internal control systems. He may also perform some analytical procedures on the forecast

amounts of accounts payables and receivables.

On completion of the process, the auditor may offer advice on the financial

reporting, as well as the internal controls, and the manner the company can maximize its

performance. The management is then left with the role of addressing the

implementations recommended (Parker, 2005). It involves itself with the establishment of

corrective plans. It also provides a formal report based on the audit to make appropriate

recommendations. In a case where the management is not in a position to give

information usable to the auditor, the auditor may be required to take some steps (Ridley,

2008). In our case, for instance, the auditors state that the representation is concise but
 BUACC3741 Auditing
1st semester 2016 assignment
lacks something to report. The directors, on the other hand, declare that they intend to

rectify the situation, seeing that it is risky. The auditor, in this case, does not have

adequate information, to give a report on the preparation of the company’s financial

statements (Wealleans, 2004). He, therefore, can opt to give a qualified report, or a

disclaimer of opinion, stating that he could not get adequate information to write a report.

He can then give recommendations to be followed by the management to reverse the

situation of the company.

Question 4

Directors are elected to protect the shareholders, and to maximize the

stakeholder’s benefits since the shareholders cannot lead the organizations. The

directors play a significant role in balancing the stakeholder’s interests and the business

needs. They are given the mandate to trade and sign contracts on behalf of the

stakeholders. Although the management is seen to possess more powers than other

stakeholders, the shareholders are the owners of the company, and are, therefore, the

principles, and management the agents (Das, 2010). As such, all activities carried out the

management are binding to the shareholders, as they are seen to act on behalf of the

shareholders. Where the directors decide to get into business with other partners and

invest some resources in other activities, they should perform with the welfare of the

shareholders at heart (Fernando, 2009). This, however, is not the case in most

companies, as the directors become greedy, and carry out activities that maximize their

return, at the expense of the shareholders (Das, 2010). Such a case is as seen above,
 BUACC3741 Auditing
1st semester 2016 assignment
where the management decides to work with the auditor, with the aim of defrauding the

company. Such cases are common, and this explains the need for the implementation of

some measures to protect the shareholders.

Investors are one of the groups of people that can ensure the protection of the

interests of the shareholder. Furthermore, the investor has a similar goal with the

shareholder, which is the maximization of returns (Kothari, 2010). Each investor,

therefore, can follow up on the activities of the board of directors, and report bad decisions

and intentions to defraud the company. The investor may apply regulations that govern

the directors, to determine whether they act by the provisions. Other than this, the

corporate governance is put in place to ensure the company complies with the satisfaction

of the interests of all its stakeholders. When evaluating corporate governance, one must

identify whether the directors are accountable in carrying out their operations (Thomas,

& Hill, 2015). Financial disclosures and controls must also be done, and an audit

committee should be present. The audit committee should also have the mandate to hire

and fire auditors so as to ensure that the auditor does not become too familiar with the

management.

The compensation f the directors should be determined by the use of measurable

performance goals, and should be set by an independent committee. The corporate

governance requirements also provide for the protection of shareholder rights (Yocam, &

Choi, 2008). This is most especially important in a company which has dual-class stocks.

Class A and B shares can put some constraint on shareholder’s rights, giving insider the

opportunity to accumulate power by voting in voting shares titled B. The voting process

should take place during significant decision-making periods like mergers, equity-based
 BUACC3741 Auditing
1st semester 2016 assignment
compensation, or even in restructuring. All these precautions are necessary to ensure the

management does not engage in defrauding activities (Martin, 2006). They also ensure

that the directors act while looking to maximizing returns for the company, and meeting

the interests of all stakeholders.

 BUACC3741 Auditing
1st semester 2016 assignment
References

Cascarino, R. (2007). Auditor's guide to information systems auditing. Hoboken, N.J: John Wiley

& Sons.

Cannon, D. L. (2011). CISA: Certified information systems auditor study guide. San Francisco,

Calif: Sybex

Chambers, A. D., & Rand, G. K. (2011). The Operational Auditing Handbook: Auditing

Business and IT Processes. Hoboken [N.J.: John Wiley & Sons.

Cloet, S., Gaeremynck, A., & Vermoesen, R. (2009). Guidelines to the auditor in prospectus and

other related engagements. Antwerpen: Maklu

Das, S. C. (2010). Corporate governance: Codes, systems, standards and practices. New Delhi:

PHI Learning.

Dauber, N. A. (2009). The complete guide to auditing standards, and other professional

standards for accountants, 2009. Somerset, N.J: Wiley

Di, P. R., In McLeay, S., & In Ronen, J. (2014). Accounting and regulation: New insights on

Governance, markets and institutions.

Fountain, L. (2016). Leading the internal audit function. Boca Raton, Fla: CRC Press.

Fernando, A. C. (2009). Corporate governance: Principles, policies and practices. New Delhi:

Pearson Education.

Gupta, K. (2005). Contemporary auditing. New Delhi: Tata McGraw-Hill.

Godfrey, J. M., & Chalmers, K. (2007). Globalization of accounting standards. Cheltenham,

UK: Edward Elgar.

Greuning, & Koen, M. (2011). International accounting standards: A practical guide.

Washington, DC: World Bank.

 BUACC3741 Auditing
1st semester 2016 assignment
Kothari, V. B., (2010). Executive greed: Examining business failures that contributed to the

economic crisis. New York: Palgrave Macmillan.

Martin, D. (2006). Corporate governance: Practical guidance on accountability requirements :

A specially commissioned report. London: Thorogood

Oppermann, H. R. B. (2013). Accounting standards in brief. Lansdowne [South Africa: Juta.

Parker, G. W. (2005). The internal auditing of management systems. Aldershot, Hampshire,

England: Gower.

Ridley, J. (2008). Cutting edge internal auditing. Chichester, England: Wiley.

Thomas, R. S., & In Hill, J. G. (2015). Research handbook on shareholder power.

Wealleans, D. (2004). The quality audit for ISO 9001:2000: A practical guide. Burlington, Vt:

Gower.

Yocam, E., & Choi, A. (2008). Corporate governance: A board director's pocket guide:

Leadership, diligence, and wisdom. Washington, D.C: Yocam Publishing LLC.