Auditing Theory And Practice Essay

Question:

Discuss about the Auditing Theory and Practice.

Answer:

Introduction

Bio sustainable Feeds (BSF Ltd) are an Australian Bio Research firm that is conducting the research on the use of bacteria to produce the fish. The firm is engaged in the research of the sustainable aqua culture feeds for two decades. The research firm has brought the issues relating to the conversion rate of low value fish into high value fish. The conversion of high value fish was actually related to the plant based wet feed. The benefit of such conversions are putting the poor’s at the risks of malnutrition and this diversion of growing the luxury fish by diverting the human quality food crops is at the costs of poor people health. The research conducted by BSF regarding this matter has costs the firm an expense of $ 160 million AUD and is expected to cost $ 200 million AUD in developing the alternative aqua culture feed. The government of the Australia (CSIRO) has made a provision of $ 500 million AUD for the BSF Ltd. However the firm has spent only $ 100 million AUD on alternative aquaculture feeds. The firm has committed to spend a total of $ 700 million AUD over the next year to develop the alternative aqua culture feed.

It is required to conduct the audit about the BSF research. The audit is conducted by looking into the company group whether it is large or small group. The engagement of the audit should be profitable to the firm being audited.

Steps needs to be considered before accepting to do an audit:

The audit firm needs to investigate the potential client, the related business activities and the owners. This is done to evaluate that there is any unacceptable risks associated with the client by seeing that the integrity of the client is questioned. This is performed by flowing the customer due diligence procedures. The audit firm should also look in for ethical threats such as is there any issues relating to the confidentiality or conflict of interest. In this context, the BSF Ltd is a research firm, so the structure of the business needs to be evaluated and whether the firm is competent enough to perform the potential work (Biggs et al. 2012).

However, the pre conditions of performing the audit of the firm can be listed down below:

  • The auditor has to determine that the framework for the financial reporting in the preparation of the financial statement is acceptable or not. The auditors have to perform several tasks in this regard. The auditor needs to evaluate the nature of the entity to be audited and whether the financial reporting framework is applicable and is prescribed by the rules and regulations.
  • The auditors should seek information about the business of the client and assess the standards which are relevant to the industry. The auditors has to ensure that the firm of the client to be audited has relevant expertise and skills and whether auditing such clients would not pose any problems or leads to conflict of interest of the existing client.
  • The auditors should consider the audit fee whether it is accordance with the level of the auditors work and the ethical requirement.
  • The agreement of management must be obtained by the auditors and the responsibility is understood by the management regarding the preparation of the financial statements according to the applicable framework. The auditor has to make sure that the management is providing him access to all the information, which is necessary to carry out the audit. The auditors have to be ensured that the management has prepared the financial statement, which is free from any material misstatement, which might happen due to fraud or errors.

The auditors should decline the audit engagement if the management is imposing the limitation on the work of audit regarding the proposed audit engagement. The limitation is resulting in disclaiming the financial statement opinion. The auditors have to reject the auditing proposals if the framework according to which the financial statements are prepared is not acceptable. However, as per the IFAC’s code, the decision to accept performing the audit cannot be considered as one off matter. The assessment of the client continuance is very important and it should be fully documented (Budescu et al. 2012).

Before accepting the audit of the potential client, the audit firm can obtained the information from the sources such as the financial statements, media, reports prepared by the financial analyst, credit rating by the rating agencies, third party enquiry. Now, if the auditors accept to do the auditing of the concerned firm, it needs to undertake the following procedure:

  • The auditors have to confirm that the previous auditor has been conducted in requirement with the legal and applicable framework.
  • The appointment of the proposed auditors has to be in accordance with the statutory requirements.
  • The last step would be to submit the engagement letter.

Audit risk is the risk associated with the opinion of the auditor that the auditor has made the inappropriate opinion on the financial misstatements of the concerned company or the organization. One of the objectives of the auditor is conduct the audit in a way that reduces the audit risks to appropriately low level.

The inherent risks of BSF limited stands at 90%

The control risk is estimated at 5%

The detection risk stands at 80%

Now, the audit risks are evaluated by using the Audit risk model. The auditors take into consideration the control risk and inherent risk and they are to make an audit engagement and the detection risk form the residual risk. The inherent and control risks are risk of entity and they are independent of the audit of the financial statements. The audit efforts are not sensitive to the changes in the control risks. However, the effort varies with the changes in the level of inherent risks (Contessotto and Moroney 2014).

The detection risks of BSF Ltd are high at 80% which indicate that the auditors would not be able to detect the material misstatement. It shows the effectiveness of the auditors in conducting the audit procedures. Therefore is a high chance that the auditor would not be able to detect the materiality in the financial statements. However, the detection risk cannot be reduced to zero because the auditors cannot inspect the accounts of balances on 100%. The risk can be reduced if the auditors perform their task very efficiently. The detection risk should be reduced that is the auditors should try to reduce the detection risks in face of control and inherent risk (Boritz and Huo 2013).

The acceptance of the audit firm in performing the role of the audit of the BSF Limited depends on the overall risks, which would be given by the Audit risk model (Srivastava and Shafer 2012). The formula for calculating the audit risk is given by:

Audit risk = inherent risk * detection risk * control risk

= 0.9 * 0.8 * 0.05 = .036

The audit risk came out to be 3.6 % . The audit risk is below 10% and the firm generally tries to keep the audit risks below this. The audit risk computed for the BSF ltd is 3.6 %, which is, much less than the accepted level. Therefore, the auditors should accept the role of conducting the audit of the research firm.

The auditors develop the audit programs so that the operations and the control system of the firm to be audited are checked. In order for the auditors to obtain the sufficient information and evidence, the audit staffs perform the audit program, which include list of the audit procedures. After the accounting systems are understood and the strategy is developed, the individual audit procedures are developed. The audit program would include the substantive tests and the other test of control, which the auditors intend to perform. In order for the auditors to justify the audit opinion, the auditors prepare the auditors program and it forms a significant part of the auditors working paper. The audit program is conducted to assist the planning and performance of the audit carried out. It forms the mean to review the audit works and to record and control the execution of the audit work conducted (Tabor 2013).

The auditors should document such things, which help in providing the evidence to support his opinion in the audit work. The following items is to be included in the audit program

  • The work of the audit banks and the detailed information of their work should be provided in the audit program. The audit program is prepared by considering the nature of the client. The auditors should prepare the work assigned to the assistant separately.
  • The auditors need to prepare the working papers, as it would help in retaining the connection with the audit performance. However, the working papers are prepared in the current and permanent audit files (Kumar and Sharma 2015). The permanent audit file should contain the matters, which would continuously affect the performance of the audit. In this regard, it would include the following:
  • Copy of memorandum of association of BSF Ltd
  • Extracts of important legal documents, minutes and agreements of the BSF Ltd
  • Information about the internal control system and accounting of the BSF Ltd
  • The organizational structure of BSF Ltd should be provided
  • Information about the legal adviser of the BSF Ltd
  • Bankers of the entity
  • Letter of engagement

The above listed information and the documents would pertain to more than one financial year. However, the documents pertaining to the current financial year are prepared in the current audit file.

  • The timing, nature and extent of the audit procedures performed by the auditors and the consequences of such procedures on the BSF Ltd
  • Analysis of the accounts of balances of the BSF Ltd
  • The financial statement of BSF Ltd if audited by another auditor, the details of the same has to be provided.
  • The file should also contain the understanding of the auditors regarding the internal control system and accounting of BSF Ltd

Working papers form a part of audit programs conducted by the auditors.

  • The performance indicators and the key ratios would help in identifying the trend of the business and this would provide the auditors the information regarding the types of ratio to consider in identifying the trend and analyzing the review.
  • The constitutional documents of BSF Ltd such as the line of business that is here in this context is research firm, structure of the capital , address of the BSF Ltd and its objective are also to be accounted for.
  • The audit program should also identify the time involved in the completion of the job, which would be assigned to the assistant, and this needs to be signed by them after job completion (Griffith et al. 2012).

The auditors shall have many issues regarding the recording of the financial transactions for the business entity. These include the authenticity as well as transparency for the transactions for the business entity. Arens et al. (2012) mentioned that such financial transactions have to be recorded earlier in the books of accounts. However, there remains a time lag between the actual occurrence of the financial transactions and the recording of the financial transactions in the books of accounts. This leads to discrepancies in the recording of the journal entries as well results in financial discrepancies. The full set of journal entries in the year 2013 to 2016 shall have an impact on the operational policies of the business entity. The journal entries shall have to be recorded as per the job roles and the operational policies of the business entity. According to Furnham and Gunter (2015), the auditors need to have an intensive study of the organizational policies of the business entity to evaluate the operational strategies of the business entity. This would help the auditors to have a proper understanding of the financial situation of the business entity. The primary responsibility of the auditors relates to the treatment of the CISRO grant. The CISRO grant shall have to be measured as per the needs of the business entity. As such, it remains necessary to evaluate that the grant of CISRO is utilized in the bests possible manner for the business entity. Thus, the expenses which are allocated for production and distribution have to be investigated thoroughly. In regard to this, the vouchers have to be examined thoroughly to prevent any manipulation.

Chandler and Edwards (2014) mentioned that the primary issue concerning the job role of auditors is misleading information. As such, it remains essential that there is full cooperation between the audit team and the management of the organization to facilitate authenticity as well as transparency in the books of accounts. In addition, the auditors have to identify the discrepancies in the management of the organization. According to Evetts (2014) this is a major obstacle to the growing business sustainability of the organization in the international market.

The auditor has to possess the responsibility to allocate the Research and the development expenses as per the production and the operational department of the organization in an adequate manner. The auditor has to investigate the possible expense that has remained unaccounted. These expenses can lead to the embezzlement of funds as well as the discrepancies in the financial recording of the shareholders of the organization. As such, this shall be necessary for the auditors to develop relevant auditing measures for organizational growth and sustainability.

The BSF ltd research has been stated as socially responsible and environmental friendly. As such, the business entity has adhered to the necessary social as well as environmental measures in executing its daily business functionalities. Besides this, it has a strong internal auditing system implemented that to enable frequent monitoring of the environmental processes in the organization. In regard to this, it can be said that the brand has implemented stringent business operational policies. This shall help the workers involved in the production as well as the distribution to get all the aids and amenities to deliver their daily work. According to Hayes et al. (2014), the human resource department of BSF Ltd has to play a major role in the well – being of the workers. Thus, the auditing processes that are implemented in the business organization have to be fair and transparent and shall not be biased to any particular party. This has been one of the reasons due to which the BSF research can be called socially responsible. In addition, BSF ltd invested substantially in the research procedure to attain the research objectives However, it can be said that the research procedures has been implemented in the business organization to attain the long term goals and the objectives of the business entity.

The research procedure has been subjected to environmental laws as well as regulations in the research work. As such, the society has not been hampered in any manner. Regular consumer feedback was taken from the clients relating to the research procedure. Lenz and Sarens (2012) mentioned that the grant from Commonwealth Scientific and Industrial Research Organization (CSIRO, Federal Government of Australia has enabled BSF Lt to implement advanced technology mechanisms in the research procedure. The brand has developed an alternative aquaculture feed to assess the research procedure and take appropriate measures for organizational growth.

BSF Ltd has the patent over the bacteria –based feed technology. As such this has assisted the business entity to gain a distinctive brand identity in the domestic as well as the international market. As such, the brand possesses the ownership over the patent based technology in the international market. This has ensured that the productivity as well as the level of customer satisfaction for the brand. The brand has made considerable investments for the development of such technology to aid organizational growth (CBC 2016). In this regard, it can be stated that the bacteria –based feed technology has been solely the innovation of BSF ltd that has brought considerable enhancements in this sector. The research process has been on the use of bacteria to produce fish feeds from wood chips, sugar cane residue as well as methane gas. Thus these required considerable usage of time as well resources on the part of BSF technology. The research process has cost BSF $ 160 million AUD in the recent years. In addition, the research process is expected to cost more $ 200 million in the research expenses for the business entity (Rust et al. 2011). Thus, the research process is expected to contribute enormously to the development of newer technology mechanisms. In addition, BSF limited has developed strategically alliances with similar brands operating in the same product and service line. As such, this has brought enormous innovation to that field.

Thus, the sharing of technology as well as the financial and the operational processes of the business entity has brought about new innovation in the workplace. Lothe (2013) stated that the BSF Ltd has been the leading business unit that has been able to match the expectations of the consumer through the help of technology. Besides this, BSF ltd has been extensively using the bacteria feed technology in its manufacturing process. As such, this has assisted the business entity to survive in an intensely competitive market. Sarker et al. (2016) mentioned that the bacterial feed technology has been widely used to obtain fish feed from the wood chips as well as the sugar cane residue. The research from the past decade indicates towards the growing need of fish feed for the production of fish. Thus, this innovation from BSF ltd has made it easier for the development and the supply of fish products to the market. As such, BSF Ltd has played a pivotal role in the development in meeting the demand of the market and making the industry productive. Therefore, BSF Limited should have exclusive rights and control over the patent feed technology.

References

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Working papers form a part of audit programs conducted by the auditors.

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