Accounting Audit: Case Study

news subject Audit Case StudyThe record valuation is done on cost derriere, while the NRV (Net manageable protect) is 10% below the cost. As per the accounting standards in Australia governed by the AASB, the inventory valuation is done ground on the priming coat of lower of cost or realizable value, whichever is lower, which is as per the guidelines laid d accept at a lower place the viands of AASB 102.However, since the cost is of higher value in comparison to the realizable value, the system followed here reflects the inventory at higher value, which is not the unobjectionable value of inventory and contravenes AASB 102. This is the just and moderately flavour of self-sustaining hearer. In thinking of this, the size up thought verbalised is adequatey justified. The inventory should reflect the beauteous value of the inventory and the cost basis does not reflect the fair value of the inventory as per grateful accounting principles. Hence the system of account ing followed should be subjected to fair canvass, and corrective measures should be taken for rectification. Further, the credit expressed by the attender should be an adverse mind, since the accounting systems and practices followed by the gild contravenes the principles and concepts of accounting and the purveys as per AASB and the Corporations Act, 2001 demonstraten the materiality of the information and facts hideed by the club and the fairness in the proclaim of the fiscal biddings.The lymph node has entered into a real estate contract of purchasing some property and developing shopping complex, and further selling the same to an unrelated third come placey at a profit- ground (cost-plus) basis of settlement price. As the real estate foodstuffs fell and the rates had dropped, the purchaser sued the thickening on the basis that as he relied on markets and rates forecasted by the node, he was not getting the forecasted prices in the market because of recession ary conditions in the market.In view of the un interpretlable market conditions resulted due to no fault of the client, the attendee opined that the client need not pay any damages as he is not presumable for any want due to uncontrollable factors in the market over which client has no control. In view of this, the opinion of the attendant is just and fair. Moreover, when the transaction that has taken place between the purchaser and the client, the client is supposed to have information about the bumpinesss such transactions are exposed to. The market risk is covered beneath(a) AASB7, which deals with the various risks arising under monetary transactions. In view of the above, the auditors opinion with regard to client liability for loss is fair and fully justified. However, predisposition analysis has to be conducted with respect to the variable parameters and the methods followed for the sensitivity analysis. The impact of the price analysis or forecasting is studied o n the basis of the changes in these variables. In this case, as the client is not part of the final transaction pertaining to the sale after the completion of the deal, the client and its management is not liable. The sinless risk in this case is to be borne by the purchaser himself who has to reserve the entire market risk. Market risks are not part of any deal between parties. Hence, the auditors opinion that the client is not liable for the damages legally is fair and correct. Moreover, since in that respect is always the probability of (market) risk involved due to price fluctuations, it is the presence of market forces which could have gone either way.The probability of loss to the client in the event of the markets falling could not be underestimated. Hence, the opinion here of the auditor should be a disclaimer opinion (a category of Qualified opinion) since the high hat forecast of the estimates could go wrong and affect either side and the auditor could not be held lia ble for the estimation or forecasting based on market factors (external), abandoned the information and facts available to the auditor for forming an opinion about the familys accounting policy.(iii)In this case, there is a small NFP or Not-for-profit organization, which spate be characterized by a high % (completion) of bestow revenue and, in such a organizational framework, the internal control degree is low. In view of this, the % slayness of revenues and the risks associated with auditing are also high. Larger the size of the NFP organization, lower the completion % of total revenue and better control over internal control and in turn, lower the risks associated withAs the degree of internal controls is low, the auditors self-assertion of unforesightful audit consequence and lack of control over the revenue completeness is correct and fair. Hence, the opinion issued by the auditor is one of disclaimer type in view of the limited scope or horizon and the limitations of th e auditor in terms of the audit evidence provided or made available to the auditor to give the fair and dispense with opinion and the materiality of the information given. So there is a limitation of scope of the auditors examination.(iv)The company is follows the accounting policy of not disclosing the directors fees in its monetary narrations.Since the disclosure of directors fees is mandatory as per Corporations Act, 2001, (Australian corporation and securities legislation, 2001), the assertion and opinion of the auditor with regard to the materiality or otherwise of the fees does not hold well. The Materiality arises when it affects (i) determination making with regard to resource allocation (ii) accountability of management. The point of materiality is covered under AASB 1031 of the Australian Accounting Standards Board. Since as per the Govt. of Australias guidelines issued with respect to disclosure of directors fees is mandatory, non- conformity with the same or non-dis closure may lead to penalties for non-compliance on the part of the management and the auditors of the violating company. Hence, in view of contravention and non-compliance with the acceptable financial describe policies, the auditor needs to give a hooked enunciate.(v)The management of the company estimates the provision for bad debts at $550000. The audit arrives at the fair and reasonable estimate at 655000. The management of the company has refused to accept the figures of estimated given by the company for it would keep down the ne profit to the extent of $105000. Bad and doubtful debts are classified ad into recoverable and irrecoverable debts. beneath the accounting norms for bad debts as per the Corporations Act, 2001, the irrecoverable debts are written off. The recoverable debts are those which are likely to be recovered and provision in respect of which is make in the financial statements of the year. Provision for suspicious debts is under Section 237 of the Corpo rations Act, 2001 and AASB 124. In the Income Statement, the provision for doubtful debts is shown as a loss, while in the rest close Sheet, the provision is reduced from the Trade debtors as Net Debtors and is shown under genuine liability on its own (Current liabilities and provisions). Audit of accounting estimation follows the procedure collection of audit evidence, ascertaining and assessing the reasonability or otherwise of the accounting estimates, revising and renewing the estimates, and brush uping the subsequent events. As the materiality factor is involved in the accounting for the estimated figure of provision for doubtful debts, the field would not give a fair view of the financial report for the period and hence the auditor should give an adverse report indicating that the accounts do not reflect fairness in its state of affairs and financial position.(vi)In the case, the company has cash balances maintained in a conflicting bank account situated in a foreign c ountry or location.In this case, since there is no substantial audit evidence to enable the auditor to form an unbiased, independent opinion, the auditor can only give a prejudiced, qualified (limited scope) opinion on the reasonable grounds of his best professional expert judgment and experience, which may even be based on reasonable assumptions born out of facts available. Since the materiality figure is given, and the cash balance in the foreign account is just close to that figure, valued figures of materiality in the case do not hold good. Hence, the classification by the auditor of the entire cash balance held in the foreign account in the foreign location as current asset (asset required to meet short term obligation) is fully justified and the opinion given by him would be classified as disclaimer opinion, since the opinion does only reflect the best under the given circumstances and the facts.PART- BIntroductionThe auditor gives opinion of usual chord types, in case of audit reports, namely, adverse, disclaimer, and qualified opinion in respect of the companys accounting norms, procedure and systems. Further, the audit of accounting estimates of the companys accounting procedure and practices would be generating modified, unqualified and qualified audit reportsExecutive SummaryUnder this report, we shall locate three annual reports from the distract sources mentioned in respect of three Australian companies listed in the ASX (Australian Stock Exchange) and also available in the CQU website. In these audited reports, the auditors opinions qualified opinions, unqualified opinions, and modified opinion with a Matter of vehemence as expressed by the auditors in these reports are shown. The detailed opinions are written in respect of the three companies annual reports considered for reporting on the Audit analysis of the financial reports of companies. Finally, conclusions are drawn based on the analysis of these reports. surveyNow let us discuss t he various opinions expressed by the auditors in respect of the three annual reports of the companies (Refer Appendix) as underQUALIFIED OPINIONA Qualified opinion may be issued where there is a disagreement with management concerning appropriate accounting policies, a conflict between applicable financial reporting frameworks, or a limitation on the scope of the audit. A Qualified opinion can be used only when the auditor believes that the overall financial report is jolly satisfied. (Arens, at.al, 2010)I have constitute the following company with the Qualified Audit opinion.Gerard Lighting Group LtdGerard Lighting is a listed Australian Company in the power sector. As it is the major company in its product line, I have taken this company as an assignment subject so that the companys accounting policies and practices, a operose company in the infrastructure sector can be thoroughly studied and reviewed.The annual report of the company for Year ended 2009 has been studied and the features of its auditors report are as underAudit of its accounting estimates of expenses (Fielder, 2010) incurred during the period. valuation and assessment of efficiency and adequacy of its processes and controlsIndependence of the external auditor has been certified and ensured despite the auditor cosmos engaged in the non-audit professional activitiesA review of the directors forecast (historical), historical pro-forma financial statements and best estimates assumptions, based on external factors (judgmental and subjective) beyond ones control and scope, has been carried by the auditors, which is done as per the audit evidence and financial data available to the auditors which is insufficient for the propose of audit, hence the auditors clearly state that this is just a review of the management activities and forecasting based on its core performance factors, not a complete full-fledged audit. Hence there is no opinion made by the auditors on the audit report in view of insu fficient audit evidence with the auditor as per information provided by the company for the purpose of audit which indicates that the auditor does not undertake any responsibility and the auditors opinion is known as disclaimer opinion, (Arens, et. al, 2010) a classification of qualified opinion, having insufficient audit evidence to form unbiased, clear opinion.The independent external auditor KPMG of Gerard Lighting Group Ltd has expressed their satisfaction over the financial report inclined(p) and presented by the board of directors. The auditors have assessed and verified the statement of comprehensive income of the group, change in equity and statement of cash flow on date of year ending as well as the digest of all the significant accounting policies that has been followed by the company and the notes presented by the company. The auditors have found that the board of directors has discharge their duties in fair way. They have ensured that company follows the appropriate p olicies. As an overall view of the auditor this report is true, fair and stark from any material misstatement.UNQUALIFIED OPINIONAn flat opinion is the most common type of auditors report. An unqualified opinion is issued when the independent auditor believes that the companys financial statements are sound that is, the statements are uninvolved from material misstatements. This is different from a qualified opinion which is issued when the independent auditor discover something in the financial statements that is subject to major concern.Harvey Norman HoldingsThis is a leading Australian listed company in the product segments compound retail, banking and franchise. As a company based on very sound policies, principles and practices, we have considered it for the study. The annual report of the company for the Year ended 2009 have been studied. The features of its annual report are as underThe audit of the financial position for the year has been made as per the audit procedure and carried in terms of provisions laid down under the Corporations Act, 2010 (Australian corporation and securities legislation, 2001)and the Australian Accounting Standards Board.The independence of the auditor being certified and ensured despite the auditor engaged in non-audit professional activities.The compliance with the standards and opinion about the fairness of the financial position by the auditor.Given the sufficiency of audit evidence and financial information, the audit carried represents a full and fair position of the financial standing of the company, in the opinion of the auditor with regard to the auditors report.This is an unqualified report expressed with regard to the unbiased independent opinion of the auditor on the financial position of the company.Finally, the auditor gives an unconditional, unqualified opinion based on data made available for forming an independent opinion and has classified the reports as unqualified reportsThe Independent auditor Ernst and Young of Harvey Norman Holdings have found that the financial report for the year ending 30 June 2009 has been satisfactory under various rules and have expressed an unqualified opinion on the report. The auditors have found enough audit evidences from various judgments and procedures that the financial report prepared and presented by the management is true. As a whole the auditors has expressed their opinion that this financial report is true, fair and free from any material misstatements and has been prepared by complying with all the relevant rules and laws of land.MODIFIED OPINIONAn Unqualified audit report with an emphasis of matter is appropriate for an audit with satisfactory results and a financial report that is fairly presented, but where the auditor is required to provide additional information (Arens, et. al, 2010)The company with Modified opinion with an emphasis of matterAXA Asia Pacific holdingsThis is a major listed Australian company in the financial (insurance ) sector and is considered for the purpose of the study due to its key market position and sound financial practices. The annual report of the company for Year ended 2009 has been studied and following are the features of its auditors report areAudit of its accounting systems and procedures.Evaluation and assessment of sufficiency of audit evidence.Independence (Roebuuck Martinov-Bennie, 2010) of the external auditor has been certified and ensured despite the auditor being engaged in the non-audit professional activities.The auditor has expresses an unqualified report on the financial position and expressed compliance with the AASB1039 (Australian accounting standards board). (Audit of Accounting estimates issued by AARF on behalf of ASCPA ICAA AUS516, 1995)Materiality (Pflugrath, 2010) with regard to the facts and figures presented has been checked and ascertained by the auditor and their conformance with the Australian accounting standards has been ensured. The forecast data ba sed on judgmental assumptions and the subjective decisions made by directors of the company have not been reviewed or subjected to any kind of review. Hence, this is an aspect of a modified opinion with matter of emphasis.Considering the adequacy of sufficient information for giving true position of the financial state of affairs of the company, unqualified opinion has been given in the auditors report.The auditor Price Waterhouse Cooper has expressed their satisfaction over the independence of the external auditors and the financial reports of the AXA Asia Pacific prepared by the management under the Corporations Act 2001 and Australian accounting Standards as well as International Financial Reporting Standards. The auditors has found enough auditing evidences those indicates that this financial report of AXA Asia Pacific is true and has been complied with all the ethical and regulatory norms stated under Corporation Act 2001, Australian Accounting Standards while preparing financi al reports. The auditors have said that this report is free from any material misstatement.On overall basis the auditors have found the financial report true, fair and free of any material misstatement and has complied all the rules and laws that governs and are relevant for a corporation having business in Australia (Annual Report, 2009 AXA Asia Pacific Holdings Limited).ConclusionsWe have studied a report based on the audit opinions expressed by the auditors regarding the accounting records based on the sufficiency of the audit evidence supplied and the audit plans carried out by the auditor. In all the cases, to the extent of the information supplied, they (auditors) have made independent opinions with regard to compliance with the Accounting standards of Australia (AASB) and compliance with the Corporations Act, 2001 and have qualified their opinions to the extent of the forecast and best estimates made by the management based on their subjective judgment and perception and also made opinions with regard to the fairness of these financial reports.From the analysis and review of the above companies, we can draw the following brief inferences with regard to Qualified, Unqualified, and Modified reportsGLG Qualified opinionHRH Unqualified opinionAAPH- Modified opinion with matter of emphasis.