Profit maximization and wealth
maximization are the two major objectives that have to achieve by the business
organisations to run their business activity successfully for a long period of
time. The achievement of these two objectives depends on the accountability of
the organisations. Tn other words the business organisations have to do
different business activities to achieve those objectives and the accounting
activity is the most important activity that help the organisations to achieve
the objectives. The main function of the accounting activity is to calculate
the cost of production and revenue of the organizations (Zadek, Evans &
Pruzan, 2013 ). Accounting activity also provide some important
information about the areas in which the company invest their financial
resources and provide a transparent view about the flow of financial resources
in the organisations. Based on these information organisations prepare
different financial statements such as profit and loss account, income
statement, balance sheet, cash and fund flow statement. These statements help
the organisations to acquire a brief knowledge about the expenditure and
revenues of the company. The following study discusses about the relevant theories
and standards of accounting that help the organisations to prepare the
financial statements in a legal manner. The financial statement should be
prepared in legal manner because the users of the financial statements such as
investors, shareholders and government to calculate their earnings.
The main focus of the study is to
provide some information about the relevant theories of accounting and the
implementation of such theories in the accounting process. The advantages of
the application of such theories in the accounting process also will be
mentioned in the study (Brusca et al. 2016). This study uses the positive
research accounting to explain the relevant theories of accounting. This study
uses the ontological and epistemological assumptions to explain the positive
accounting theories. The positive accounting research is a well established
social system for contributing to the scientific research project. The positive
accounting research also provide some solutions to solve different puzzles in
the theories. The study also discuss
about the every aspects of the
background of the positive accounting theories and criticise the theories to
provide a clear picture about the loopholes in such theories.
1.What are the main rudiments of
accounting theory?
2.What is the main issue in current
terms of accounting based on this assignment?
3.What are the business risks
associated with the same?
4.What is the specific audit risk
associated with the business risks?
In the theoretical framework of this
study is tried to analyze the independent issues of the auditor in the modern
business organisations. The auditors play a vital role in the accounting
process because the report provided by the integrity and reliability of the
financial statements of the organisations depend on the certificate and report
provided by the auditor (Krahel & Titera, 2015). The audited financial statements
help the stakeholders to get a clear picture about the income of the company.
Therefore, the auditors have to prepare the financial statements unbiasedly to
maintain the trust of the stakeholders on the auditor's.
The assignment question 1 provides a
situation to identify the issues associated with the auditor independence in
the selected company. The auditor of the company tries to meet different
accountant of the company to get some relevant information about the
expenditure, revenue and profit of the company. The study will analyze the
situation provided in the assignment question to identify the relevant
threats associated with the independence of the auditor. According to the
scenario the Luxury Travel Holiday ltd appoint a new auditor in their company
to prepare a financial report for the financial year 2015 by auditing the
financial statements in the previous year. The auditor also have an audit
partner who provide all relevant information such as Ceo of the company, the
name of the accountants of the company and the organisational culture of the
company (Macve,
2015).
The partner also provides the informations about the standards used in the
preparation of the financial statements. Geoff also suggest the new auditor to
meet the relevant people of the company to get some important information about
the financial performance of the company.
The study analyze the scenario
according to the situation provided in the scenario. In the first situation the
auditor meet the CEO of the Luxury Travel Holidays ltd as per the suggestion of
the Geoff to acquire some knowledge about the satisfaction of the board of
directors about the financial performance of the company. According to the Chris
CEO of the Luxury travel Holidays ltd the board of directors is happy with the
last year financial report of the company audited by the Geoff (Lee, 2013). For this reason the boards of
directors wants to invite Geoff in the annual general meeting to provide a
speech about the financial performance of the company. Board of directors
influences Geoff to appreciate the integrity and reliability of the financial
statements prepared by the company to the investors. The board of directors
also influenced Geoff to motivate the investors to increase their investment in
the company and generate new investors for the company.
The independence issues of the auditor associated with the
first situation:
The issues arise in the first
situation can be threats for the independence of auditor. The major threats to
the independence of the auditor are as follows:
A) As motivate the investors of the
company to increase the investment is against the ethic of the auditors. The
law associate with the auditing process does not permit the auditors to
motivate the investors or promote the company’s financial performance to the
investors. Therefore, Geoff can refuse the offer of the board of directors of
the Luxury Travel Holidays Ltd because it is threates to the ethical
independence of the auditor (Lehman, 2014).
B) As the Luxury Travel Holidays ltd
is the client of the Clarke & Johnson auditing company and Geoff is a
normal employee of the Clarke & Johnson. Therefore, the board of directors
can influence the Clerk and Johnson to push Geoff for the speech in the annual
general meeting. This situation can be a threat to the job of the Geoff in the
auditing firm.
C) The board of directors also can
influence Geoff to conceal the negative issues of the financial statements such
decrease the liability, decrease the losses etc from the investors and measure
all the positive issues in the speech such increment in the assets, decrement
in the liabilities, decrement in the losses and expenditure to increase the
goodwill of the company among the investors. This situation can be a threat to
the honesty of the auditor (Mohammadi, 2015).
Such pressure decreases the
independency of the auditor in the organisation and manipulates the auditor to
audit the financial statements based on the requirements of the company. This
factors damage the integrity and reliability of the financial statements.
The following measures can help the auditors to protect
their independency from such situation:
A) The auditors can refuse the offer
of the board of directors of the company.
B) The auditor can prepare some own
policies to maintain the morality in the preparation of the financial report.
Therefore, the Clarke and Johnson cannot force the auditors to provide an
speech in the seminar of the luxury Travel Holidays ltd.
C) The Clarke and Johnson also
conduct some rules and regulations for the auditors and the clients of the auditing firm. Therefore, the clients cannot
offer such opportunity for the auditors and the auditors can not accept such
offers of the clients (Anders, 2015).
D)
The auditors can also take legal help if the board of directors of the
Luxury Travel Holidays limited force them for providing speech in the seminar
because motivate the investors to invest
in the company by the auditors is a illegal activity for the company.
E) Auditors also can be a
whistleblower for the company by providing all relevant information about the
illegal activities in the financial statements of the company.
The all above measures help the
auditors to avoid such offers of the company during the auditing job (Ramesh, 2013).
In the second situation Chris the
CEO of the Luxury Travel Holidays Ltd try to provide a family holiday package
for both the new auditor and Geoff as a gift for the good auditing job. As
Luxury Travel Holidays ltd is just a client of the Clarke & Johnson
therefore, the new auditor and Geoff cannot
accept such gift. Such gifts are like a bribe to the auditors. The auditors
should refuse such gifts from the Chris because it increases the liability to
the company of the auditors and this can be a major threat to the independency
of the auditor. The other threats associated with such gifts are as follows:
A) Such gifts increase the biases
during the auditing process of the financial statements and the company can
influence the auditor's to do window dressing in the financial statements to motivate
the investors to invest in the company. This is a major threat to the
independency of the auditors in the company (Watts, & Zuo, 2016).
B) The acceptance Such gifts also
increase the greed of the auditors. The increment of the greed decreases the
independent of the morality of the auditors. Therefore, the auditor cannot
audit the financial statements of the company with the morality.
C) It also decrease the room of the auditor to provide some independent opinion about the financial performance of the company. Therefore, the auditors cannot provide a clear picture about the actual financial performance of the company to the investors.
C) It also decrease the room of the auditor to provide some independent opinion about the financial performance of the company. Therefore, the auditors cannot provide a clear picture about the actual financial performance of the company to the investors.
The following effective measures can save the independency of
the auditor:
A) Provide the information about
such offers of the company to the Clarke and Johnson to influence them to take
some effective measures about such offers of the company.
B) The auditing firm can prepare
some rules, regulations and policies for the company and the auditors to
prevent such situation in the company (Appelbaum, Kogan & Vasarhelyi, 2016).
C) The auditing firm can include
such issues in the contract with the company to prevent the arising of such
issues during the auditing process.
The all above effective measures
have to follow by the auditor to be prepared and aware about the process to
avoid such situation. The avoidance of such situation can protect the
independency of the auditors.
According to the third situation of
the scenario the first year accountant of the Luxury Travel Holidays ltd
Michael is very excited to be a part of the auditing team and his father is the
financial controller of the company. Therefore, the auditors can get some
assistance in the process of auditing of the financial statements. Michael can
provide some relevant information about the sources of income of the company
and the factors of the expenditure of the company as his father is the
financial controllers of the company (Hopper, Lassou & Soobaroyen, 2017). The auditors can get all the
relevant financial statements of the company through the help of Michael.
However, this situation also reduce the room of independency of the auditors.
As Michael is the employee of the of the Luxury Travel Holidays ltd and his
father is the financial controller of the company. Therefore, the auditors cannot
maintain the secrecy in the auditing job. There is a probability of the leakage
of some relevant information about the auditing job in the company. For this
reason the company gets some time to conceals the relevant information that
reveal the actual financial status of the company as the father of Michael is
the financial controller of the company (Hayne & Salterio, 2014).
The effective measures to protect the independency in the
third situation
The auditors can provide some
limitations of the inclusion of Michael to protect the secrecy of the auditing
job. The auditor also request the
company not to include the employees of the company with the auditing team. In
this way the auditors can protect the secrecy of auditing job.
According to the fourth situation
Annette who is the employee of the company also be included in the auditing
team. As Annette is the accountant of Clarke and Johnson in the tax advisory
department. Therefore, Annette can provide some important information about the
tax obligations of the company. The relevant information helps the auditor to
include the tax obligations of the company in the audited financial statements
and report (Knechel
& Salterio, 2016).
The inclusion of the relevant information about the tax obligations of the
company in the financial statements increases the trust of the government about
the reliability of the company. However, the request of Annette also reduces
the independency of the auditors in the auditing job. Annette can conceal or
overlap some relevant information about the tax obligations of the company.
This situation can damage the integrity and reliability of the audited
financial statements of the company to the stakeholders. The low quality of the
auditing job also reduces the goodwill of the Clarke and Johnson auditing firm.
Therefore, the auditors have to be careful about such situation during the
auditing job.
The auditor can take some effective
measures to avoid the inclusion of such situation during the auditing of the
financial statements of the company. The following measures can be effective
for the auditors to protect the independency:
A) The auditors can refuse the request
of Annette about the access of the information related with the tax obligations
of the company.
B) Auditors can force Annette to
disclose all relevant information about the tax obligations of the company (Miller & Power, 2013).
C) Auditors can analyze the previous
year’s tax obligation statements of the company to ensure about the accuracy of
the present tax obligations of the company.
In this way auditors can protect
their independency in the auditing job. The independency of the auditors is
very relevant for the company also because the integrity and reliability of the
financial statements prepared by the company depend on the financial report
provided by the auditors. While, the information about the reduction of the independence
of the auditors leaked among the stakeholders that will decrease the trust of
the stakeholders from the company. Therefore, it is very important to the
organisations to maintain the independency of the auditors during the
preparations of the financial report of the company.
(a)Description of two business risks to MSL(Mining and
Supplies Limited) that Crampton and Hasaad will consider in the context of
purchasing of equipment and spare parts while preparation of audit of 2015.
The business risks associated with
MSL can be identified in terms of the purchasing and selling based terms and
conditions related to mining and spare parts based products which are made
available to the customer at two years
tenure of labour and spare parts warranty along with a one year free
maintenance service period (Bromiley et al.
2015). Business risk is something
that affects the results, evaluations and processes and activities of
operations management. In our case business risks are associated in terms of
purchase and sale to and fro from Mining and Supplies Limited in and across
different nations like that of Australia mainly to companies of Perth, New Castle and Mount Isa in the varied and
proportional manner in different intensities in different scenarios. Business
risks are primarily caused by certain causal factors of business which are
namely economic factor, technological factors, geographical factors,
market-based competitive factors and business volatility based changes in
business conditions. Business risks are factors that prevent organizational
process based programs and policy implementations in terms of business policy
formulations and auditing methodologies (Collier, 2015).
Business Risk: Two important business risks associated with this auditing
methodology are:
Loss of customers and reduction of
customer base because of increase in production costs and freight charges of
business. These two business risks must transform into audit risks for the
future period of time as gauged from the top down approach or analysis
respectively in terms of its understanding or comprehensive abilities and
relevant environmental abilities judged in terms of risk evaluation and
business policy appraisal and estimation procedures.Both of these business
risks finally transforms into financial statement based error risks. Both of
these business risks are strategical based risks and financial risks or finance
based risks respectively.
Strategy based risks are that which
arise from shifts in customer based preference pattern in business due to some
economic and socio-cultural business oriented conditions judged in terms of
market-based perturbations or disturbances created in the market which may be
met in form of externalities affecting market procedures and programs
respectively. Either the production technology may become obsolete or the there
may be the operation of certain market forces which may affect the business
climate in terms of certain modus operandi based circumstances and situations
respectively. These two risks may put the auditing company under threat due to
a multiple no. of reasons, hence loss of customers due to brand unpopularity or
faulty production procedures are the main strategic risks associated with this
type of auditing business based activities of purchase and sale of spare parts
and mining equipment to and fro from MSL to different regions of Australia in
general terms and conditions (Spence & Carter, 2014).
Financial risks are encountered in
form of increase in production costs which may affect the financial
infrastructure based base of the company and may led the company in a number of
financial lags and loopholes in business based cash flow generation process in
terms of inflows and outflows of money through sale and purchase of spare parts
and mining equipment to and fro from MSL respectively.
(b)
Description of specific audit risk associated with each and every identified
business risk.500
Specific audit risk is the type of
risk associated with the two different varieties of business risks to
MSL-associated with its business of spare parts and mining equipment with the
leading mining companies in Australia like that located in Perth, New Castle,
and Mount Isa respectively. Audit risk is based on preparation of auditing
procedures and balances statements in terms of income flow and cash flow
respectively in varied intensities and manners (Wu, Chen & Olson, 2014). Hence misstatement in balance sheets or lags
in data of revenues, costs and inventories and cash flows are the main types of
business risks associated with the plans and procedures of auditing based
business preparations and policy implementation procedures cum methods.
Identification of business risks for instance loss in consumer demand and the
increase in production costs may lead to indirectly to the identification of
specific audit risks indirectly from various grounds and objectives
respectively which may be seen or witnessed from different facets cum scenarios
of business respectively. For instance, a specific type of audit risk is a
disagreement of auditing business with the accounting principles of the audit
which brings disagreement of the audit . It deals with the basic terms and
conditions of audit based accounting norms and varied principles of business
policy formulations. The specific audit risk may come from different facets and
angles of business such as mentioned as follows:
1.Mis cooperation in dealing with
the reports of financial reporting based problems and propagandas of business
policy formulations and misunderstanding in terms of business disagreements and
other misconceptions.
2. Misidentification in dealing with
complex accounting plans and policies
3. Lower commitment in terms of
implementation and use of effective business procedures and plans regarding
preparation balance sheets and financial statements respectively.
4. Incomplete cognition levels and
know how of finances in relation to business procedures and business agreements
in respective terms and conditions.
5. Lack of approach and attitude to
deal with accounting based business and related procedures and programs in
terms of accounting and auditing measures and lack of transparency and
conspicuousness related with the same (Siegel, 2016).
Audit risk can increase or decrease
as per the degree or magnitude of credits and liabilities in the net amount
being outstanding in business based procedures and propositions respectively.
Similarly choice of improper sources
for data collection methodologies may also lead to audit based risks and
challenges in business based accounting procedures in terms of assessment of
business risks and challenges arising in business from each and every ground or
criterion finance and accounting as per the discussed issues of MSL which
carries out the business of sale and purchase of spare parts and mining
equipment across different Australian markets in some important business
destinations of Australia like that of Perth , New Castle And Mount Isa
relevant to certain terms and conditions of business development procedures and
programmes of business accounting based financial management and related
procedures of business accounting processes.
The availability of the literature
related to the auditing are not enough for explaining the role of the auditing
in the modern organisations. The
theories provided in that literature are not relevant with the implementation
of the auditing practice in the organisation culture of the company. The
literatures also did not mention some relevant areas of the audit which make a
huge gap between the practical audit and theoretical audit. The following study
tries to cover all the gap in those literature about the audit and try to make
the theories of the audit more practical for the implementation in the modern
organisations.
The researcher of the study tries to
use some methods to interpret and explain the audit in a proper manner. The
researcher use the post positivist approach to interpret the models, background
and theories associated with the audit (Knechel & Salterio, 2016). The researcher also uses the deductive
approach to analyze the theories, models and background to provide some detail
information about the audit in the study.
The study will play a vital role in
the implementation of the audit in the modern organisations in a proper manner.
As audit is an important activity for the organisations to maintain the
integrity and reliability in the preparation of financial statements. The study
provides some relevant information about the issues faced by the auditors in
the preparation of the audited financial statements in the organisation. The study
provides some relevant suggestions to the auditors about the process to avoid
such issues during the auditing job. The study also provides a process for the
modern organisations about the availability of the financial statements to help
the auditors in the preparation of the financial report. As the income of the
investors depends on the financial performance of the business organisations
and the financial statement reveal the financial performance of the company.
Therefore, auditing of the financial statements is very relevant because the
reliability of the financial statements depend on the financial report provided
by the auditors.
The scope of audit in the modern
business organisations is very wide but the above study can not provide enough
information about the advantages of the implementation of the auditing practice
in the organisation. The study cannot provide enough information about the
issues faced by the auditors in the preparation of the financial report. The
study can include the following problems in the study such as:
A) Lack of the documents: Sometime organisations can not
provide proper documents such as bills, invoices, cheques etc as the evidences
of the transactions. The absence of such documents increases the complexity of
the auditors in the preparation of the financial report.
B) Lack of support of the company: Sometime the auditors have to take
some interviews of some employees such as accountant, financial manager,
financial controller of the company to get some relevant information about the
financial status of the company.
C) Force of the company: Sometime the company forces the
auditor to prepare the financial report according to their requirements. This
situation creates some complexity to the auditors in the preparation of an
unbiased and independent financial report (Watts, & Zuo, 2016).
The above study can provide some
recommendations to solve such problems of the auditors. The study also can
provide some relevant rules, regulations and standards that can be used by the
auditors to prepare a proper financial report.
After the analysis of the auditing
practice throughout the entire study it is clear that the inclusion auditing
practice in the organisational culture is very relevant for the modern
organisations. The retention of the existing investors and the generation of
the new investors in the company depend on the financial report provided by the
auditor. Therefore, it is mandatory for the modern organisations to implement
the auditing process in the financial statements for maintain the trust of the
investors. The organisations and the auditors can use the recommendations
provided by the study to prepare the financial report with proficiency.
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