Auditing and Assurance Financial Analysis

Question: Discuss about the Auditing and Assurance forFinancial Analysis. Answer: Introduction In audit of financial analysis, the most common report prepared by the auditor is the unqualified report also known as the clean review. This review is used where there is invariably no significant constraints that affects the audit performance. Moreover, the audit evidence obtained in the financial statements and the working papers of the audit reveals insignificant deficiencies in the financial statements or any circumstances that unusually affects an independent auditors report. This is in accordance to ASA 700. Opinion with Exception According to the Declaration on rules and audit procedures in ASA 700, there are certain circumstances that do not allow the auditor issued an unqualified opinion (clean opinion) and on the contrary, must issue a qualified opinion or report. There are two important communications in this report. First, the auditor's opinion contains a qualification, which means that the auditor expresses an exception to the fair presentation of the financial position of the results of operations and cash movements in the auditor's report (Bromilow, Griggs and Olson, n.d.). Secondly, the auditor should normally indicate the monetary impact of the deviation on the financial statements to enable the reader to evaluate its effect on the financial statements. For example, it may be uncertain whether long-term assets should be revalued using a liquidation basis of accounting. Going Concern Issues An independent auditor can add an explanatory paragraph due to a significant litigation situation. The use of the auditor of a room explanatory paragraph to describe a significant uncertainty is substantially affected by the probability of a significant loss (Chorafas, 2001). The next three paragraphs illustrate the consideration that the auditor on the additional explanatory text. Probability of a significant loss Remote significance of loss leads the auditor to issue a standard unqualified opinion. Reasonably possible - The auditor's decision to add an explanatory paragraph depends on whether (1) the likelihood of an unfavourable outcome is closer to remote or probable, and (2) the magnitude of the loss in relation to the relative importance (Fraser and Ormiston, 2001). If a significant loss is probable and can be estimated, management must create the corresponding provision in the financial statements. If the loss is reflected in the financial statements, a standard unqualified opinion is issued. However, there are significant uncertainties that cannot be reasonably estimated by management or by the auditor. This additional explanatory paragraph highlights the uncertainty. After reading the notes to the financial statements, readers should reach their own conclusions on the possible effects of uncertainty on the financial position, results of operations and cash movements. Significant Uncertainties The auditor may wish to emphasize a matter relating to the financial statements and express an unqualified opinion. In this example, the auditor has chosen to highlight the note on related party transactions for readers of the financial statements parties. However, the financial statements are fairly presented in all material respects. As shown here, the scope of the audit and the opinion expressed by the auditor does not differ from the standard report. The auditor only emphasizes certain disclosures in the financial statements. Emphasis on an Issue The auditor issues this report when a significant portion of the audit work is performed by other auditors. This often occurs when another firm of independent public accountants conducted the audit of the financial statements of a subsidiary company (Hawker, 2000). This report provides users with specific information on the division of responsibilities between the principal auditor and the other auditor by indicating the size of the company audited by other independent accountants. An additional opinion paragraph to indicate that the opinion on the consolidated financial statements is based, in part, in the opinion of the other auditors explanatory paragraph is added. The opinion paragraph is modified only to reflect the accounting basis used to prepare the financial statements. In this example, the auditor issued an unqualified opinion on the fair presentation, in all material respects, the financial statements in accordance with accounting standards established by the regulatory body. Going Concern of Connor company Every company, at certain moments of its existence, will be affected by some type of crisis. In these circumstances it will emerge which is capable of overcome; the rest succumb or be enormously difficult survival (King, 2011). In times of financial and economic crisis, companies, particularly their owners and managers have to show their skills to overcome difficult situation, of course this involves using a lot of creativity andbased on respect for human rights of workers and the labor legislation.Companies often are forced to develop their operations faced by many adversities; some of them derived from economic decisions taken by successive boards and management, which are bad adaptations of the experiences of the companies goals. Adverse or Negative Opinion When the auditor realizes that there is substantial doubt about the customer's ability to move on as a going concern for a reasonable period of time an explanatory paragraph is included in the report (Moizer, 2005). This paragraph refers to the note to the financial statements where uncertainty about the ability of the entity to continue as a going concern and management plans with respect to such uncertainty, are treated. it is also uncertain whether the financial statements should be adjusted and in what amounts. For example, it may be uncertain whether long-term assets should be revalued using a liquidation basis of accounting (Wittsiepe, 2008). b) Inventory management system in auditors report Audit of inventories can lead to material effects to the companys financial statements. However, the difference between the two inventory management system LIFO and FIFO are used in the parent company and the subsidiary which is the local company. In order to record and control inventories, companies adopt the appropriate systems to value their stocks of goods and thus fix its possible volume of production and sales (Saxena et al., 2010). The effects of any changes in inventory management systems will be felt by the American Parent Company in preparation of the group or holdings financial reports. Inventory management systems will not adversely affect the preparation of the local company therefore no material or significant effect on the audited financial report. This will lead to the auditor issuing an unqualified report since the effect is not of material significance. When there had been a change in accounting principles or in the method of its application that significantly affect the comparability of financial statements, the auditor should express mention in the opinion paragraph of its report that there is a caveat to the uniform application of accounting principles and standards. The opinion paragraph should be written by the auditor in this format, except for the effects of any adjustments that might be necessary if the final outcome of the uncertainty described in the above. The provision is known. the financial statements are presented fairly, in all aspects significant fairly the current assets that is the inventory level and financial position of the local company. c) Factory building valuation in auditors report Balance sheet valuation is based on the initial cost of the factory building less the accumulated depreciation over a period of five years and the annual depreciation (Tracy, 2008). Therefore if the Victorian Manufacturing Company includes the value of the factory buildings at market value then this is a material misstatement. This will greatly affect the final valuation of the company in the balance sheet even though the directors are adamant that the valuation has remained relatively the same over the course of the five years. The independent auditor can issue an unqualified report to the company but with an exception paragraph for his disclaimer of opinion. Identify the Internal Control Weaknesses in the Adel Companys Procedures Adel Company has a lot of weaknesses in the internal control procedures in recruitment, payment and dismissal of the workers they are hiring. Control environment should not be weak to avoid massive loss of company and fraud. Strong internal controls also leads to efficiencies in both time management and resources allocation. The following are the issues that I have identified that lead to weakening of the internal control procedures; 1 ) The company foreman employs the workers single handedly. He interview and hands the job to the qualified people. He has no assistance and this can lead to a flawed hiring process, recruitment of unqualified of personnel, favoritism, bribery and hiring of ghost worker. 2 ) After the hiring process, the interviewee feels his or her tax installment declaration form and hand it back to the foreman. This can lead to collusion between the foreman and the employee to defraud the company. 3) Manual entry of the hourly rate of work by the foreman who hand over the form to the clerks. This is to notify the clerk that the person has been employed. 4) The foreman verbally instructs and advises the payroll clerk on any adjustment in the payroll changes 5) At the entrance is the timesheets are kept for the workers to pick at any time freely without any checks. 6 ) Upon arrival and departure, the workers fill their hourly work attended with a pensil and submits the same at the end of the week. 7) It takes some days for the payroll clerk to take the timesheets for verification 8) The timesheets are divided alphabetically and equally allotted to the two payroll clerks and each clerk is responsible for her section. The clerks do not even check each others work as the two know what alphabetical order they have to work with. 9) Employees are automatically removed from the payroll if they do not submit the timesheets while each payroll clerk prepares her payroll cheques. This will definitely lead to overcharging the company and collusion as the clerk may collude with the workers. 10) The chief accountant manually signs the payroll cheques and is given to the foreman. There is no automation of the accounting procedures and systems are manual. 11) The foreman is also responsible for distribution of the cheques and delivery of the cheques to absent workers. This will lead to unaccounted money and fraud due to absent workers. 12) The payroll bank account is prepared by the chief accountant without verification of the physical details of the workers as well as preparation of the payroll tax report. With this process, there is total breakdown of internal control systems. There are no checks, balances and verifications in the system which will lead to massive loss of cash resources of Adel Company. This system needs an effective checking system to detect and capture fraud, theft and embezzlement of company resources. Identification of Test Control for Each of the Errors Identified Substantive controls procedures should be identified and implemented as follows; 1) The hiring process should be conducted by at least 3 people checking and verification of the workers and to ascertain the correct number hired (Wittsiepe, 2008). The foreman should hire with the help of two others. 2) Automatic systems should be employed rather than manual systems where the workers feel their own tax installment form. Additionally, someone should be hired to fill the forms for the workers to avoid over declaration. 3) The foreman role should end at the hiring stage. An independent person should hand over the forms to the payroll clerks 4) The foreman should have a written entry timesheet for any adjustments in payroll and avoid verbal instructions for record keeping 5) Workers should not feel the timesheet with a pencil as the entries can be easily changed. They should use marked ink pens or a computerized system for checking that cannot be manipulated. 6) Verification should be done on the last day of work by the payroll clerk 7) The payroll clerks should work together, one to verify while the other checks the payroll rather than dividing the timesheets alphabetically. This will lead to transparency of the payroll. 8) Changing the payroll system from manual entry to an automatic computerized system will reduce theft or fraud by the payroll clerks, the chief accountant and the foreman. 9) After manually signing the payroll check, the chief accountant should pay the workers himself while retaining the cheques for absent workers to collect them after verification and proper identification. 10) The foremans work should be only to oversee the workers work and not any cash related to avoid colluding, theft and embezzlement of companies cash. Recommendation and Conclusion The auditor should use professional judgment in conjunction with their knowledge of the specific circumstances of the Company to determine what tests to apply, when to apply and how be tested and what type of report to give in accordance to ASA 700. Opinion Paragraph In conclusion, the Independent Accountant does not express any warranty. An auditor's opinion is based on professional judgment and is reasonably sure of their conclusions. Here it emphasizes the relative importance. An auditor checks the internal control systems of a company and gives a report based on the systems (Wittsiepe, 2008). These systems need an effective checking system to detect and capture fraud, theft and embezzlement of company resources. References Audit and assurance (United Kingdom). (2007). London: BPP Learning Media. Bromilow, C., Griggs, L. and Olson, J. (n.d.). Audit committees and financial reporting, 2016. Chorafas, D. (2001). 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