The paper "Differences between a Financial Report Audit, an Environmental Audit and an Efficiency Audit" is a good example of a finance and accounting assignment. Financial reports audit involve a close examination of the financial reports of an organization by an independent organization. The objective is to ascertain whether the presented annual reports represent the financial position of the company in a true and fair manner. The financial reports will include the: balance sheet, income statement, statement of changes in equity, cash flow statement, and the reports’ accompanying notes” . Auditing seeks to find if there is a material difference between the reported and actual financial position (PwC Australia, 2013). The management does environmental auditing.
It involves a systematic and periodic examination of the financial statements. The objective is to ascertain whether the organization or a system of management and processes is designed to protect the environment with the aim of ensuring management control and checking compliance with organizational policies. Efficiency audit also involves a periodic examination of the organization’ s statements, focusing on the recorded resources and practices of a department or a program. It analyses procurement, using and acquiring resources and identify areas, which are weak.
The objective is to ascertain whether organizational plans are executed as planned, or if they executed in a way that benefits the organization. It, therefore, takes note of variances between planned and actual performance (Demald, 2013). What is the difference between Reasonable Assurance and Limited Assurance? Reasonable assurance involves a practitioner compiling sufficient evidence to support the formation of a positive opinion that the subject matter is true and fair (Moroney, Campbell, & Hamilton, 2011). It also means that the subject matter in all material respects conforms to the appropriate criteria.
In this level, ‘ sufficient’ is referring to the quantity of evidence available. Evidence compiled after collection has to be enough. The right quantity will depend on the practitioner's risk profile. It will also depend on circumstances in the engagement at that time. An aggressive auditor may need lesser evidence to inspire the sought confidence. On the other hand, conservative auditors would collect more evidence with which to draw an opinion. Limited assurance engagement is where the auditing practitioner collects insufficient appropriate evidence to enable him to draw a conclusion that the subject matter is plausible, giving the report in the form of negative assurance.
This provides a moderate level of assurance. A compared to reasonable assurance, the quality, and quantity of evidence gathered would below. The objective is not to find how all the material respects (Arens, 2005). Why would Chip ask that Ron have the Financial Report for McLellan's Shoes Audited rather than review? Chip wanted audited statements in order to verify and analyze the historical performance and forecasted profitability that the preliminary purchase price was based on.
Buyers who are strategic, who are looking for growth will be interested in audited financial statements so as to uncover the true value of the company they are interested in. Many businesses these days are opting for reviewed statements rather than audited statements. The main attraction to reviewed statements is the low cost – businesses will be saving on financial reporting. That is not as convenient and cost-effective as it sounds because it presents the risk of having inaccurate financial statements.
Wrong financial statements may lead to wrong pricing of the company. Chip was worried about the possibility of overcasting the price of McLellan. Ron could also benefit in case they had under-cast the price. Due diligence audit is therefore very important for both the exiting company and the incoming buyer. Due diligence audit could bring forth adjustments in revenue recognition, accounts receivable, stock costing, unrecorded liabilities and stock obsolesce (Shaw, 2011). The other obvious reason for Chip to require audited financial statements is he come is as a third party, outside the management of McLellan, so he needed the audit for him to pin his trust on the statements.
Based on trust, Ron did not need an audit because he ran the business himself.
Arens, A. (2005). Auditing and Assurance services in Australia. Pearson Education Australia.
Demald, M. (2013). Defination of Program Audit Vs Efficiency Audit. Retrieved from http://www.smallbusiness.chron.com/defination-program-audit-vs-efficiency-audit-36746
Drira, M. (2011). Game theory and auditing - impact on client acceptance division. Retrieved from http://www.unb.ca/fredericton/business/ideas_with_impact/drira_auditing.html
Moroney, R., Campbell, F., & Hamilton, J. (2011). Auditing: A practical approach. Wiley.
PwC Australia. (2013). Assuarance, Financial Assurance. Retrieved from http://www.pwc.com.au/assurance/financial/statements/audit.htm
Shaw, G. D. (2011). Reviewed financial statements vs. Audited. Retrieved from http://www.dgccpa.com/2011/10/reviewed-financial-statements-vs-audited/