Auditing Theory Business Inventors

Question: Describe about the Auditing Theory for Business Inventors. Answer: Part I The role of the auditor is manifold. It is the universal rule that an auditor is responsible to the client and the third parties linked to him. The letter of engagement clearly prescribes that the claim of damages can be done to him by the client and other parties. The level of mistakes, as well as unprofessionalism, is not acceptable in any scenario because the parties depend on the notion framed by the auditor and act accordingly. In the event of falsification, the client can claim for damages. The mistakes can be ignored to a certain extent and considering this the auditor must ensure a flawless act (Carcello, 2012). In the present scenario, King and Queen were appointed as the auditor of Impulse since 2005. Being the auditor from the very beginning they made an unqualified report. The scenario of the company was amidst difficulties and liquidity crunch was present. However, as per the favorable report of the auditor, EFL granted a big loan to Impulse. The poor situation was overlooked by the auditor and hence, was a major loophole. The major component of the current assets is debtors, as well as inventories and it projects the ability of the company to meet the claims. It is a common parlance that before granting a loan to the company, the financial position and the auditors report are considered. On the basis of the findings, the loan is granted to the party (Carcello, 2012). The main rational of the company was to procure funds in the form of loan considering the requirements of cash and the services of debt, the cash scenario of the company are altered to a huge extent. Hence, in all probability, the loan provided by EFL is difficult to be recovered. Hence, king and Queen are liable to EFL. The audited report of the company was prepared by King and Queen and since the loan was provided considering the audited statement, EFL can sue the auditor. In the past there have been many instances of the fraud conducted by the auditors like the settlement of claims by Deloitte for failure of Bear Stearns, trial faced by Ernst and Young in class action suit, etc. There is always a probability that the auditor provides an opinion that is unqualified in nature when the financial statement tends to be misstated. It is termed as the audit risk and it is important that the auditor must use the judgement on the same and the errors that is material to ensure restatement of the financial statements (Hoffelder, 2012). Therefore, material misstatements might lead to wrong decision-making and the consequences of it need to be borne by the auditors if a true and fair view is provided by them. The main act of an auditor is to carry on his duties effectively. Hence, it implies that the auditor needs to consider all the steps and ensure that the compliance is done as per the regulations. When an audit engagement is done, it implies that the auditor has performed the task with due diligence and provide an independent decision that will be free from all the influences of the third parties or any other force (Lapsley, 2012). In the present case, King and Queen is an audit professional and is guided by the code of conduct that a fair audit engagement will be done and express an independent view on the financial statements. The auditor needs to trace the frauds that might be undertaken by the employees and the organization. If the auditor fails to trace such activities then the very objective of conducting an audit might fail to produce a result. The notions and the result of the auditors being considered for the valuable decision-making process and hence, the auditor need to ens ure strong compliance so that the very objective of conducting an audit is justified (Mock et. al, 2013). There are various decisions that depend entirely on the auditors report and hence, an auditor needs to pay due regard to the preparation of an audit report else it might lead to big errors. The third parties take decisions depending on the auditor report and it is assumed that the auditor has traced the irregularities. In this scenario EFL depended on the audited report provided by King and Queen and therefore, they are responsible for civil and criminal liabilities. Since it is the duty of the auditor to provide a report that is free from any material defects and is entirely responsible for the problem that arises due to the report. Therefore, King and Queen are completely responsible for the damages and should be asked to compensate for the loss that EFL has to bear. The case study provides a sound knowledge of the acts and duties of an auditor. An auditor is moral, as well as socially responsible for the acts in terms of reporting and preparing the report (Holland Lane, 2012). He nce, it is imperative that the auditor must conduct an analysis to the best of his ability and provide an unbiased report. This will justify the very objective of conducting an audit. Part 2 An audit is done so that it provides a reliable opinion that is free from any material defects so that others can use the audited report to take a material decision or any important decision-making process. Auditor independence can be defined as the reference to the freedom of the auditors from the parties that are lined to the organization and have a financial pecuniary (Niemi Sundgren, 2012). In this regard, the auditor whether internal or external auditor needs to be free from any material interest and should have the independent capacity. The preparation of the report should be done considering the principles of integrity, transparency, fairness, honesty and methods that vouch for objectivity and should not compromise on any of the matter that affects the judgment in a negative manner. As a matter of fact, this independence can be tagged as actual or perceived in nature (Holland Lane, 2012). The major principles that are linked to the independence of audit are integrity, compet ence, objectivity, confidentiality and professional manner. These features influence the auditor independence. When it comes to actual independence it is simple in nature and related to the accounts only. This leads to a general notion that the entire focus is one the accounts and is not linked with any other factors. This actual independence is affected when any financial transaction is traced apart from payment of fees for services of audit or in a link to any personal relationship (Gray et. al, 2011). On the contrary, perceived independence peers into the link between eh auditor, as well as client and strives to find that whether the auditor doing the audit is independent. It stresses on a direct connection with the other factors and the connection provides the main cause of discussion (Kalpan Williams, 2013). When an evaluation of the materiality concept is done, a member available in public or firm projects on the feature of qualitative or quantitative and whether it will have an adverse appeal on the objectivity of the firm. B (i). Bob is the audit assistant of Club Casino and uses the financial information for conducting an audit. In this scenario, client information that is confidential in nature is breached as material information is disclosed without any power that is specific in nature. In this scenario, it was of prime importance that the audit assistant should have taken the approval of the client while disclosing such information. A client might not be at ease if the information is used elsewhere without the consent even considering the fact that such disclosure might not harm him (Gilbert et. al, 2005). As per the confidential client information rules, a limitation is provided when and how to utilize the information. However, if the information is treated as confidential it might lead to the breach of the rules. Hence, the consent of the client plays an important part and influences the discharge of the responsibilities. (ii). The given case states that Wendy is the engagement partner on the audit of the Ace Limited for various years that and has effectively performed the secretarial function for six months as the role was vested by the organization due to the retirement of the company secretary who was holding office for a long time. As per the concerned rules that are section 90(2) of the companies Act 2008, an auditor who is appointed should not engage in any secretarial work as it might lead to the contravention. (iii). The given case study presents a question that whether Leo, assigned for the Precision Machinery testing in terms of internal control of the system of cash payment is in the status of providing an opinion that is impartial in nature because he is the eldest son of the clients factory foreman. It is the matter of audit independence and this attracts guidelines on the provision of services (non-audit in nature) by the companys auditor (Pepper, 2014). The guidelines denote that the auditor should not be related to the person who is in the employment of the company. Problems like that of evaluation and familiarity might arise on account of close link ups and that might spoil the entire audit process (Blay et. al, 2011). Therefore, when an auditor is linked to the external parties, the independent decision making is affected and hence cannot be treated to be totally accurate. (iv). In this scenario, professional ethics that is related to the auditor independence is a major concern. in this scenario, there might be the threat of self-interest on the auditors part of Chan Associates because of Furniture of Classic Reproductions Pvt. Limited are accepted that is a huge furniture wholesaler and is facing acute financial difficulties. Chan Associates was even provided a shareholding pattern of 25% of a listed company that is unrelated. The furniture worth comprises of 50% of the balance. It should be evaluated that the audit fees settlement should be in tune with the audit fee that is actual in nature and not higher than it. As a matter of fact, an area that is prone to risk comprises of financial interest that may influence the opinion of the audit (Klaus Martin, 2014). As per the regulations, it is imperative that the auditor should have any financial pecuniary because it damages the fair decision of the auditor and hence brings results that are error imp acted. Hence, it is the general notion and practice that the auditor should not be related to any external parties that have an interest in the report (Tepalagul Lin, 2015). This is an area of risk and needs to be tackled with greater precision as it might lead to immense problems. References Blay, A. D., Geiger, M. A. North, D.S 2011, The Auditor's Going-Concern Opinion as a Communication of Risk, Auditing: A Journal of Practice Theory, vol. 30, no. 2, pp. 77- 102. Carcello, J 2012, What do investors want from the standard audit report?, CPA Journal, vol. 82, no. 12, pp. 12-23. Gilbert, W. Joseph J Terry J. E 2005, The Use of Control Self-Assessment by Independent Auditors, The CPA Journal, vol.3, pp. 66-92 Gray, G. L., Turner, J. L., Coram, P. J. Mock, T. 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