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Critical Evaluation On Advice And Financial Audit Assignment

Question

Task: You are an experienced audit manager at Samway Baker Fitzgerald (SBF), an accounting firm with offices in Orange, Wagga Wagga, Tamworth, Port Macquarie and Albury in NSW, Toowoomba in Queensland and Ballarat in Victoria. Although a medium-sized firm by national standards, SBF includes Australia’s largest regionally-based auditing practice. Most of SBF’s audit clients are in the manufacturing and service industries.

It is a late summer afternoon in February 2019 and you are meeting with your audit team to discuss the 30 June 2019 year-end audit for Bletchington Limited, an innovative defence industry manufacturing company based in Orange, listed on the Australian Stock Exchange (ASX), and one of SBF’s largest clients by fee revenue. Bletchington often has to go through a competitive market tender process to win large government contracts and only does business with countries that have a recognised democratically elected government. Its main product is a highly specialised light armoured vehicle known as the Bush-Basher. Given the sensitive nature of its designs and clients, Bletchington maintains a highly secure environment.

William Albanese has been the engagement partner on the Bletchington audit for the last 5 years. Andrew is a specialist in the defence industry and intends to remain as the review partner when the audit is rotated next year to Skye Larke, who is to be promoted to partner in early 2020 to enable her to sign off on the 30 June 2020 Bletchington audit.

In September 2018, Bletchington installed an off the shelf costing system. The new system replaced a system that had been developed 'in-house' but could no longer keep up with the complex and detailed manufacturing costing process that provides tender costings. The old system also had difficulties with the company's broader reporting requirements. Bletchington's information technology (IT) department, together with the consultants from the software company, implemented the new manufacturing costing system. There were no customised modifications. Key operational staff and the internal audit team from Bletchington were heavily involved in the selection, testing, training, and implementation stages. 

Bletchington has a small internal audit department which is headed by an ex-partner of SBF, Kev Kevanna. Kev joined Bletchington after leaving SBF 6 years ago. He is assisted by three junior internal auditors, all of whom are completing Bachelor of Accounting studies at Charles Sturt University. 

Required
Write a memo to William Albanese, the current Bletchington engagement partner, that advises him on the following:

Question 1 (4%)
The expectations gap that could exist for the audit of Bletchington, including the existence of any special users of Bletchington's financial reports. 

Question 2 (6%)
With reference to relevant legislation and the auditing standards:

  • threats to independence for SBF in its audit of Bletchington
  • safeguards against any potential threats to SBF's independence. 

Answer

Introduction
The present report on financial audit assignment is focused on presenting a memo to William Albanese who is the current Bletchington engagement partner.

Letter of Advise
To,
Willian Albanese,
Bletchington Limited,
Dear Sir,
This is to inform you that, 30th June 2019 an audit procedure will start in your company, regarding this matter, an audit meeting was conducted in February 2019. It has been found that the company installed an off the shelf costing system and this system replaced 'in – house' costing system. New costing process has well developed and less complex in nature; instead, an old system had various difficulties for more extensive report requirements. Hence, the company's information technology department consul with software company and implement a new costing system (Axelsen, Green & Ridley, 2017). As there is no modification, excellent staffs and their internal audit team was involved in that system implementation stages. New costing system implementation has put an effect into various stakeholders of the company, company suppliers, managers, company employees, stockholders and company customers are the primary stakeholders of the company. After the change takes place in the costing system, these stakeholders are being affected. This is how it impacts on the stakeholders –

Impact on the Stakeholders
Company Suppliers: Company suppliers are one of the critical most essential stakeholders. While any change takes place in the company, whether it could be financially or technically, they will automatically be affected by these changes (Axelsen, Green & Ridley, 2017). Hence, herein financial audit assignment, the company changes its costing system. It means company cost will affect by this new system, and that change may be positive or negative. To compare it with the international auditing standard, the auditor can check the new costing system incurred expenses or after change revenue. According to that auditing result, company suppliers react to the company.

Company Managers
Managers are very much attached to the company; hence, they are being affected by changes taken place in the company. Changing in costing system managers are being impacted. After that, the costing system maybe moves to a better position compared to the previous one, or it can result adversely (Stubbs & Higgins, 2018). According to this result, the manager will have to manage the company work. More complexity will decrease manager’s efficiency. Hence, it can be stated in the context of financial audit assignment that managers can be affected by this change, in comparison to international audit standards auditor will check the reason behind less ability in work and that includes managers.

Customers of the Company
Customers are the primary source of revenue earning process for every company, so it is a critical issue to manage customers. Any structural, technological and financial changes deeply effect to the customers; without them, revenue earning will be paused (Stubbs & Higgins, 2018). Here costing system changes will affect customers directly and indirectly. If the result of this change will negative, then charging will increase, and the price of the product will also increase and its effect on the customers.

For this reason, many customers can be shifted to somewhere else. If it is resulted positively, then the customer will get the costing advantage, and more customer acquisition is possible here. According to international auditing standard, the auditor can ask the authority the reasons for a specific product price increase or decrease. For this reason, the customer can also be affected by any changes takes place in the company (Goode et al., 2017).

Gaps in compare to international auditing standard
International audit standards are elementary, not complex at all. For any changes in the company structural, technological and financial reforms, it is their responsibility to inform it to the respective affected authorities. These gaps arise from that change – 

  • In an international auditing standard, it is stated that required changes will be made only after informed and take permission from the stakeholders.
  • International auditing standard says system implementation cost should be considered as managerial expenses, the company should find it in their financial statements.
  • The company should consider asset revaluation method or in case of depreciation charging company should adopt a written down value depreciation method (Osunkoya, Froese & Nicol, 2019). If any fixed asset installed or uninstalled at the time of this change, this international auditing standard needed to be applied.
  • According to international auditing standard, the company should mention all consolidated and accrued revenues in their financial statements along with the implementation date of new system implementation (Bryce, Ali & Mather, 2015). In this case, post-implementation and pre-implementation cost should be present separately.
  • International auditing standard stated that the internal auditor is liable for any specific activity or operations and the auditor should mention the critical objective of that particular operation (in this case, implementation of the new system).

Threats to independence for SBF on its audit of Bletchington
To conduct an inspection, some specific issues may be faced by an auditor. These risks are called audit risk; in every audit procedure, these risks are involved with the system, an independent auditor needs to overcome these threats. Legislation and auditing standards on independence issues during the audit process influenced the dangers related to the audit procedure. Because of these threats, an auditor expresses inappropriate opinions. These are the major threats or risks involves in audit procedure –

Inherent Threat
This is prevalent threats to an independent auditor; these threats include in with the audit procedure permanently. Misstatements in the financial statements are arisen due to these threats, also results omission is being done for this reason. Distortions of material and failure in audit control are the best example of inherent risks (Goode et al, 2017). The newly formed company are not able to manage all required documents or proper financial statement preparation planning. Here natural threats to an independent auditor automatically take place. These threats create barriers in the independence of an auditor (Miglani, Ahmed & Henry, 2015). The auditor should have to overcome these threats by solving the problems caused by these threats.

Control Threat
The financial audit assignment signifies that this threat is related to the misstatement of material in the financial statements due to operation failure in the company. It means the company does not have that much capability in controlling various operations. This failure control in action can make inappropriate auditor opinion. The company should have to adequate all the control channels, means internal control and external control collaboratively should redesign to maintain proper control over the operations (Bryce, Ali & Mather, 2015). These threats are liable to harm auditor independency, and it mainly increases because of the lack of power in the organization. Maximum small-sized companies are not aware of their internal control, and they prepare financial statements by individuals who do not have proper knowledge in finance and accounting.

Detection Threat
This threat mentioned in this section of financial audit assignment is relating to the auditor's detection process in case of material misstatement process. Mainly when auditor independency got hampered, then the auditor will fail to detect various material misstatements in financial statements. If there any fraud or error of materials takes place in financial statements and the auditor was unable to recognize that scam for these threats. Lack of cooperation from the other employees of the company, keeping secret of information is the primary examples of this kind of risks (Yang & Simnett, 2019). Here in the case scenario of financial audit assignment, inherent dangers are involved because the newly formed company has not appropriate financial statements in most of the cases, here company can hide or adjust their unusual amount, then it will difficult to detect by an auditor. Hence these inherent limitations are also liable for put an effect in auditor's independence.

What are the safeguards against potential threats identifies in the segments of financial audit assignment?
Audit threats can be eliminated with auditor's efficiency and the company's initiative, where these threats can be reduced by implementing the proper method. For eliminating of inherent risks identified in this aspect of financial audit assignment, company should adopt financial statement maintain policy properly, according to international auditing standard financial statements need to be represented. Though natural threats cannot be eliminated, it can be reduced up to a specific limit. For eliminating control risk, the company need to appoint the appropriate workforce to the proper position to capture standard control. It will reduce control threats. Detection risk depends on the auditor's efficiency (Yang & Simnett, 2019). If the efficient auditor is implementing, then detection threat will eliminate and cooperation and provision information needed to be managed by the company.

These are the safeguards company can implement against threats, and the company should maintain international auditing standards. Though, several gaps are being identified in comparison with the international auditing standard (Miglani, Ahmed & Henry, 2015). These gaps needed to be covered as soon as possible. By considering the above discussion on the case of financial audit assignment, it is advised to the company to maintain international auditing standards in case of any changes take place within the company to secure financial statements.

Reference:
Axelsen, M., Green, P., & Ridley, G. (2017). Explaining the information systems auditor role in the public sector financial audit. Financial audit assignment International Journal of Accounting Information Systems, 24, 15-31.

Bryce, M., Ali, M. J., & Mather, P. R. (2015). Accounting quality in the pre-/post-IFRS adoption periods and the impact on audit committee effectiveness—Evidence from Australia. Pacific-Basin Finance Journal, 35, 163-181.

Goode, N., Salmon, P. M., Spencer, C., McArdle, D., & Archer, F. (2017). Defining disaster resilience: comparisons from key stakeholders involved in emergency management in Victoria, Australia. Disasters, 41(1), 171-193.

Miglani, S., Ahmed, K., & Henry, D. (2015). Voluntary corporate governance structure and financial distress: Evidence from Australia. Financial audit assignment Journal of Contemporary Accounting & Economics, 11(1), 18-30.

Osunkoya, O. O., Froese, J. G., & Nicol, S. (2019). Management feasibility of established invasive plant species in Queensland, Australia: A stakeholders’ perspective. Journal of environmental management, 246, 484-495.

Stubbs, W., & Higgins, C. (2018). Stakeholders’ perspectives on the role of regulatory reform in integrated reporting. Journal of Business Ethics, 147(3), 489-508.

Yang, Y. J., & Simnett, R. (2019). Large Charities' Financial Reporting Framework Choice in Australia. Financial audit assignment Available at SSRN 3412617.

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