Elevating Professional Judgment in Accounting and Auditing - Assignment Example

Auditing Assignment Student’s Name Affiliation Question 1(a) There is a definite level of gap between the auditor’s actual performance and Kim’s immediate expectations. It is important to understand that any given audit provides a significant level of reasonable assurance as not absolute assurance is guaranteed (Page, N.d). The fundamental task of an auditor is to ensure that aspects of both reliability and credibility are assured but will not assure the fairness of disclosed financial statements (Goldwasser, 2006). Also, the auditor is not positioned fairly to ascertain whether or not a company will fail or succeed due to the nature of financial reporting, which is focused on conducting judgments in regards to accounting estimates as well as the choice and application of numerous accounting methods. Most notably, there is no single solution for a company’s level of profits and thus, auditors are placed in a position to guarantee that the disclosed company profits are certain (Goldwasser, 2006). However, auditors will assure on the appropriateness of the selected accounting methods, accounting estimates as well as their immediate application. Another fundamental reason for why there fails to be absolute farness rests with the immediate nature of the audit process. This is because auditors will not be able to analyze each and every transaction conducted or the certainty of account balance and so, they embark on sampling, which increases the chances of some items not being selected for testing purposes (Goldwasser, 2006). Significantly, some of the transactions as well as account balances are challenging in regards to gathering reliable evidence hence there is a higher possibility of concealing evidence given that auditors are limited with time resource. Question 1(b) Dear Kim, Kindly, understand that auditors are required to uphold professional skepticism at all times. This is a concept under which they are required to exercise independence in regards to both its staff and clients (Glover and Prawitt, 2013). It allows them to question all evidence presented to them by clients. It does not necessarily mean that client’s information might be deceiving but it allows them to measure its validity (Glover and Prawitt, 2013). In most cases, under this scenario the client’s information possess confirmed evidence to statements presented that might include contracts or meeting minutes. Notably, evidence that is gathered from third parties is perceived to be more reliable to the auditor in comparison to information provided by the client. Thus, even though managers might be deceiving to auditors but rather they must take responsibility of gathering enough evidence in order to eliminate the element of possible uncertainties (Glover and Prawitt, 2013). Question 2(a) There is some element of truth for the assumption that by Elise working towards increasing a company’s profitability level will likely also improve on her reputation (Nelson, 2009). However, in the event that the resultant increase in revenues is marred with possible conflicts of interest or faces other ethical challenges it might led to reputation damage on her part. In accordance with the APES 110, s 290. 158, in the event that the provision of non-assurance leads to a threat to an auditor’s level of independence, safeguards would not be in a position to apply to eliminate or in other cases reduce the level of possible threat (ICAEW, 2014). Question 2(b) In regards to 290.159 of APES 110, it is postulated that auditors should at all times avoid the possibility of them playing executive role of a client’s firm (ICAEW, 2014). They should not be involved in the processes that are attributed to conducting transactions on the part of the firm, making decisions in regards to auditing of the company’s immediate recommendation, management of the firm’s report or act in the position of a manager within the previous two years. s. 290.161 stipulates the lesser levels of threats that can only be availed after a careful consideration given that they can led to the aspect of self-review or self-interest threats (ICAEW, 2014). These might involve such aspects as possessing the custody of a client’s immediate asset-base, the supervision of client’s employees and also, engaging in the preparation of source documents. This section also provides an analysis on safeguards that include the aspect of making arrangements of eliminating personnel from availing such services as participation in the audit process and gaining of additional advice on the possible impact of such services (Brazel, Carpenter and Jenkins, 2010). Question 2(c) It is affirmative that auditors can avail more non-audit services to a proprietary company that to a listed one. 290.170 states that a firm or a network of firm may go ahead to avail audit client that is not within a listed firm in regards to both accounting and book-keeping services, payroll services or mechanical mechanism only in the event that self-review threat developed is decreased to an acceptable level (ICAEW, 2014). Some of the notable examples of such services include; the activity involved with the recording of transactions under which audit client has been able to approve on matters related to account classification, activities that involve coded-focused transactions of general ledgers that belong to audit client, preparation of financial statements that is focused on information within the firm’s trial balance and also, in activities that involves the posting of audit client approval entries to the trial balances (ICAEW, 2014). Consequently, this section goes ahead to expound that the significance of any given level of threat should be evaluated and in the event that the threat falls within the clearly insignificant level, necessary safeguards should be taken into consideration and also, applied on a necessity basis in order to reduce the impending threat to an acceptable level (ICAEW, 2014). Question 3(a) i) Entity Level (See para A23-A27 of ASA 315). Under this level, the main factors to consider include; first, the level of business operations that involves aspects related to revenue-base, products, product markets, the activity of production, the outsourcing, geographic, the level of employment arrangements, activities related to R&D as well as imminent transactions with other related parties to a business. Second, the levels of financing under which such aspects as the level of debt, beneficial owners and derivates are analyzed. It also includes the aspects attributed to financial reporting like the imminent items of principles and practices that are applied, the level of revenue-growth and costs recognition (Bazerman and Moore, 2009). Significantly, it involves analysis of such elements as fair value accounting prospects, foreign currency application strategies as well as the possibility of complex transaction of accounting nature. ii) Industry and economic-based effects, which are expounded within para A17-A22 of ASA 315. Under this item, the main factors to be analyzed include; the relationships between suppliers and customers, possibility of technological prowess, costs related to energy consumption, the immediate level of competitive environment, applied accounting rules and regulations, aspects related to taxations and government policies as well as interest rates (Bazerman and Moore, 2009). Other notable factors to review include; currency revaluations activities, underlying economic conditions under which the firm operates as well as the levels of inflation. Question 3(b) The underlying Principle 4 of the ASX recommendations is attributed to the aspect of safeguarding the level of integrity in relation to the financial reporting of a given firm. Subsequently, it recommends that the firm should establish an audit committee that should only be comprised of non-executive directors, with major members consisting of independent directors and thereby chaired by an independent auditor that is not present in the board of the company (Glover, Prawitt and KPMG, 2011). Notwithstanding, the audit committee should at least consist of 3 members and operate within a formal charter for that matter. In the question provided, it is ascertained that there are four members comprising the audit committee that are also independent directors of the entity. In addition to this, the chair of the committee also acts in the capacity of an independent director (Glover, Prawitt and KPMG, 2011). However, it is not ascertained whether or not this chair is a chair of the firm’s board or whether the committee operates under a formal charter. In the event that the aforementioned conditions are met fully and also, the disclosure made fully, it can be ascertained that the firm indeed complies with Principle 4. On the contrary, the subsequent lack of the information cannot allow us to conclude anything. References Bazerman, M.H., and Moore. D. (2009). Judgment in managerial decision making, 7th ed. Hoboken, NJ: John Wiley & Sons. Brazel, J., Carpenter T., and Jenkins, G. (2010). “Auditors’ use of brainstorming in the consideration of fraud: Reports from the field.” The Accounting Review, 85(4), 1273–1301. Goldwasser, L., D. (2006). The past and future of reasonable assurance. CPA Journal. Retrieved from http://www.nysscpa.org/cpajournal/2005/1105/special_issue/essentials/p28.htm Glover, S, M and Prawitt, D, F. (2013). Enhancing auditor professional skepticism. Retrieved from http://www.thecaq.org/docs/research/skepticismreport.pdf Glover, S.M., D.F. Prawitt, and KPMG, (2011), Elevating Professional judgment in accounting and auditing: The KPMG professional judgment framework ICAEW. (2014). The provision of non-audit services to audit clients. Retrieved from http://www.icaew.com/en/technical/ethics/auditor-independence/provision-of-non-audit-services-to-audit-clients Nelson, M.W. (2009). “A model and literature review of professional skepticism in auditing.” Auditing: A Journal of Practice & Theory 28(2), 1–34 Page, M. (N.d). What do auditors in the UK mean by reasonable assurance? Retrieved from https://www.icaew.com/~/media/Files/Technical/Audit-and-assurance/audit-quality/audit-quality-forum/what-do-auditors-in-the-uk-mean-by-reasonable-assurance.pdf Read More