Auditing and Assurance Service - Assignment Example

Audit Memorandum Auditing involves having an independent opinion on a financial statement in an organisation. It is also carried out to establish whether they portray a true and fair view and whether the internal controls of an organisation are working in accordance to the International Auditing standards. For an auditor to give such an independent opinion there is need for gathering reliable audit evidence. Such evidence can be collected from other auditing partners who are involved in the auditing of constituents of the group company. (Kirkos and Spathis 2007, P. 185) We hereby inform your Auditing firm that we are in the process of auditing XYZ’s Australian branches. We need to rely on your audit work in making our audit analysis. The following procedure will be followed to decide whether to rely on the audit work done by your firm: Independence of the auditing firm is quite essential. This directly determines reliability of the audit evidence. Evidence collected by an independent entity is more reliable than evidence collected with biasness and over dependence on the client’s based information. The auditing standards require an auditor to be independent and be free from any kind of influence in decision making. (Bainbridge and Paul 1986, P. 64) The source of the information used to make conclusion is also key in determining level of reliance. The evidence collected internally is more reliable than evidence collected from sources outside the client’s entity. After this, there will be general assessment on how the evidence was collected. Evidence collected by the auditor is more reliable than evidence gathered indirectly or by third parties. The other factors will be considered is the form in which the evidence exists. Documented evidence is more reliable than verbal and non documented evidence. The Auditing Standards require that audit report and management letter be done in writing and well documented specifying period under review, and the target user group. (Kirkos and Spathis 2007, P. 185) For evidence to be relied on we need to consider whether the information was gathered from original documents or done from secondary sources. Evidence will be more reliable if it is gathered from original document. Lastly we will also consider whether the evidence is consistent with other evidences from other sources obtained regarding the subject matter. (Bainbridge and Paul 1986, P. 64) Auditing procedures to verify carrying value of brand name This entails the analysis of the price tag of a company’s brand. This is usually measured by the financial benefits derived from the brand. The brand value is mostly related to the sales made and the profit generated. Accurate valuing of a brand name is very fundamental in making various strategic decisions such as mergers, brand licensing and decisions related to brand management. (Bainbridge and Paul 1986, P. 64) Auditing of the brand carrying value is also very useful especially when an organisation is being assessed for lending by banks and other financial institutions. It also reveals the loss or damage worth a brand and also in making licensing agreement decisions. It also justifies the value for partial disposal of assets and in mergers and acquisitions. There are various methods of ascertaining the brand value. These include Cost approach; Market based approach and financial approach. Cost Approach In this approach the auditor will assess the cost of replicating the brand in the market. The auditor will be interested in ascertaining the amount of money that can be used to replace a brand in the market. This will include analysing all advertising and promotion costs. The auditor will also be interested with costs related with product development both in monetary terms and in time basis. However when using this method, the auditor will face the challenge of quantifying historical costs that have accrued over the years. (Kirkos and Spathis 2007, P. 189) Market based approach In this method, the auditor will be required to establish the profits that would have been made if the product was not branded at all. The auditor will also calculate the additional expenditure required to build the brand. In a case scenario it has been noted that a branded product may sell few products but the value of the brand permits it to sell at a higher price. (Bainbridge and Paul 1986, P. 65) The auditor using this method will be required to gather information on prices and sales of branded and generic products and their respective branding costs. The auditor will at times be required to use a prototype product without brand, calculate its cost-benefit analysis and compare the same with brand name in question. Financial approach This is one of the reliable methods as recommended by Generally Accepted accounting Principles (GAAPS).In this method, the auditor is required to do a lot of financial analysis on both existing and future costs and cash flows. The auditor will use discounted value methods to predict the future out flow of a brand. The following procedure is used: (Kirkos and Spathis 2007, P. 190) i) The overall estimation of returns from intangibles. This is done by estimating the various costs in the brand sales, marketing costs, product overheads and deducting the same from the brand earnings. ii) Estimation of the proportion which is attributable to the brand value .The auditor will come up with brand contribution index which is approximated from various customer mind set parameters. These include brand image, awareness and brand recognition. iii) The auditor will finally come up with a discounting rate which will be used to calculate the expected future flows attributable to the brand. (a)Internal controls These refers to processes and measures set by management to provide realistic guarantee that its operations are efficient, financial reporting is reliable and that set rules and regulations are adhered to. (Bainbridge and Paul 1986, P. 66) Areas that require to be assessed to check on the reliability of internal controls include: i) Check whether there is separation and segregation of duties. For example cheque writing, deposit taking, banking of cash and bank statement reconciliation should be segregated. ii) Ensure access to cash and other valuables is limited, control and safe guarded from unauthorised access. Ensure there is established code of ethics and use of access codes and passwords to access various valuables. iii) Confirm proper use of authority especially on use of documents used in making payment .For example Use of authorised signatures for cheques or other authorizations in the organisation should be documented and approved only by relevant authorities. (Kirkos and Spathis 2007, P. 192) iv) Ensure proper documentation of organisation’s transactions. All transactions should be documented in line with the organisation’s operations and procedures. Use of original documents in the business transaction should also be confirmed. v) Check whether employees in high risk department are entitled to leave days and whether their jobs are held on rotational basis to allow for vacations and leaves. vi) Confirm existence of code of ethics which guides on employee’s conduct and behaviour in the work place. The code of ethics should cover on areas related to drugs, emotional differences and conflict resolution methods. (Bainbridge and Paul 1986, P. 67) (b)Internal controls on purchases require that all payments to suppliers should only be made after delivery. Proforma invoices should never be used as the basis for making the payments. To rectify such a problem, the auditor should establish that internal controls on segregation of duties on the processing of invoices and payment of the deliveries. The auditor should carry out compliance checks having in mind the previous auditor’s findings. If the same problem is noted, the auditor should indicate the same in the management letter. He should afterward request a sitting with the management to explain to them on the risks and frauds which can erupt from such trends of non compliance. (Kirkos and Spathis 2007, P. 195) Weaknesses in the internal control can really cause great loss to an organisation. Use of password in the pay roll processing is one of the safety measures ensuring restricted salary payment. However where the same user name and password is used by all the staff it poses some risk of fraud and a lot of mistakes may not be traced to a specific payroll entrant. The control procedure should ensure that each staff to possess own user name and password which should always be kept in secret and often changed especially when there is suspicion of other people’s knowledge. (Bainbridge and Paul 1986, P. 66) Part B After the audit evidence has been well analysed the auditor is required to issue an audit report. The auditor can either issue qualified report, unqualified report, disclaimer or an adverse report. In the case of I-Tech Ltd the circumstances for unqualified report to uncertainty on whether the company will continue as an on going concern include: Disclosures made after the end of financial reports explaining and elaborating on exceptional items such as contingent liabilities and post balance sheet items. These disclosures may allow the auditor to disqualify an otherwise qualified report. (Bainbridge and Paul 1986, P. 65) The directors involved in the strategising and laying down of long-term strategies may influence the audit report. The directors’ commitment on change of approach and objectives can allow the auditor to present an unqualified report. The parent entity’s commitment to support the subsidiary firms can also influence the nature of report presented by the auditor. The strength of the parent entity can boost the hopes for the affected subsidiary firms. (Kirkos and Spathis 2007, P. 189) The auditor may also consider the firm’s subsidiaries before qualifying an audit report. The subsidiary may have brighter future than the main company. The auditor should not qualify a report based on evidence collected only from one subsidiary without considering the whole group of companies. The parent company’s ability to provide support to ensure continued operation can be identified from the financial statements. The funds set aside to support the re- launch of its products in the market will be a key factor in this decision. Provision of expertise to expand the market and introduce more staff in the exercise will reveal the commitment of the parent entity. Engaging in market research and gathering of market intelligence will also reveal intention of giving support to the Australian firm. (Kirkos and Spathis 2007, P. 198) Where it is impossible to ascertain the parent’s entity’s ability and intention and as a going concern to give support the auditor should present a disclaimer report. This where the auditor is unable or not willing to give a report on client’s entity being audited. This report is presented where there is lack of independence, material conflict between auditor and client or there is an existing uncertainty on the existence of the entity. Other disclosures that would be expected from a financial report includes Accounting policies applied Contingent liabilities at the time of preparing the financial statements Number of shares outstanding at the close of financial period Directors’ remuneration Post balance sheet events Conclusion Auditing involves general evaluation of an organisation, its accounts, processes and systems. These are carried out to find out the degree of soundness and reliability of the provided information. This also includes an overall assessment all that pertains to internal control systems in the organisation. All this enables auditor to give an assurance that financial statements or the information give has errors that could be intentional or unintentional. Various auditing procedures are usually incorporated to verify the value of a brand name. This is trough use of financial, market based and cost approach. This includes analysis of the price tag of a company’s brand in terms of the financial benefits accrued from the brand. There are also various areas that are checked for reliability of internal controls. They include analysis of job descriptions of different people in the organisation. This helps to find out whether there is separation of duties. There is also analysis of documentation of all transactions and documents within the organisation. After analysis the auditor gives report which can either be disclaimer, unqualified or qualified. All these are carried out to enhance success in an organisation. Read More