Auditing and Financial Reporting

Question 1)

(I)

Essentially, suggestion by Mr. Nastase regarding reduction in chargeable amount of

fees for external audit is a practice that is not permitted under most ethical and
professional guidelines that apply to the audit professionals (Lubo, 2013). In fact, if
Borg Co proceeds to offer such a discount it may be considered to be against ethical
guidelines of audit firms in the UK and action may be initiated by professional bodies
such as ACCA or even ICAEW because it may indicate an unfair business practice. It
may also indicate that Borg Co has compromise on its independence as an audit
company through the compromise just to get the audit contract (Finley, 2015). The
action on part of Borg Co needs to be that of communicating with Mr. Nastase that first
it is against ethical guidelines of the accountancy profession to offer such a discount
and second the audit firm should clarify that fees are fixed depending upon audit time,
resources such as staff and expenses regarding the audit and so on.

(II)

Removal regarding any company auditors is only permitted to be done and carried out
in the United Kingdom as per guidelines and regulations given in “Companies Act 2006”
(Lubo, 2013). The key principle being that since only the shareholders of a given
enterprise are authorized to engage in appointment of the company’s shareholders
therefore it will only be the shareholders who are permitted to take up the activity of
removing or replacement of the persons appointed as the auditors. Therefore, the
procedure to be initiated on part of Navratilova Enterprises for the removal of the auditor
are as follows:

 Navratilova would necessarily require to ensure that an ordinary resolution that they
are seeking the replacement of Wade Austin will require to be given out and also at
 the same time Navratilova needs to ensure special notice is also accompanied along
with the resolution which specifically should mention the point about replacement of
Wade Austin (Lubo, 2013).
 Only the shareholders of Navratilova will be permitted to exercise the decision on a
collective basis whether or not they wish to remove Wade Austin.
 However, Wade Austin being the current legal auditor of Navratilova will be given a
specific chance and opportunity to make their own representations about being
removed to the existing shareholders of Navratilova.
 Navratilova will have to ensure all of the payments due to Wade Austin in terms of
compensation or damages are fully cleared before they are terminated.
 Finally, if the judgement is to remove the current auditors who are Wade Austin then
it is also mandatory for Navratilova to give specific instruction to registrar in the
United Kingdom about removal of the auditors and possible new appointment.

Regarding appointment of the new set of auditors for Navratilova as per the new
conditions then the procedure includes;

 Navratilova requires an ordinary resolution so that Borg Co can be appointed and

take the place of the previous auditors.
 The appointment of Borg Co should be supported by a majority of the
shareholders of Navratilova.
 Since the appointment is one of a permanent audit company to audit the work of
Navratilova, it will not be possible for the current directors of the company to
participate in the action of appointing Borg Co. Because under company law it is
only possible that directors will be involved in any casual or temporary filling of
audit company and not a permanent one such as Borg Co.

Therefore, in the given case the statement made by Mr. Nastase that since he has
allowed appointment of the company they should give 50% of the fee as a discount is
not valid or correct because Mr. Nastase does not have any power or authority to
perform such an action on behalf of Navratilova.
(III)

Wade Austin, is the current auditor who is working and handling the external audit of
Navratilova. Since they are officially appointed by the shareholders of Navratilova, they
should not worry or be concerned about what Mr. Nastase is planning to do because he
does not have the authority or power to perform the action of removal of Wade Austin.
He may only have the authority to recommend that Wade Austin be replaced but he
cannot actually perform this activity (Lubo, 2013).

Therefore, Wade Austin should not bow down and resign from the appointment until and
unless the shareholders of Navratilova approved the termination of current auditors and
their replacement. Importantly, the audit company of Wade Austin will be provided with
an opportunity to even make certain representations to shareholders of Borg Co and
therefore taking the route of resignation is not recommended since there is no lapse or
issue on part of Wade Austin but rather it is only Mr. Nastase who is requesting for their
replacement (Finley, 2015).
Question 2)

A)

(I)

Under circumstances wherein auditors themselves procure requisite evidence regarding

conditions or assertions contained within documents or reports being audited it is said to
comprise ‘Auditor Originated Evidence’ (Yoon et al. 2015). Often, such evidence may
be procured either by the auditors engaging in interview processes, taking up different
surveys or even examining documents and paper trail. Since, such category of evidence
is one wherein auditor has complete and full control over evidence gathering
procedures and techniques therefore it is considered a highly reliable. Moreover, the
auditor would be in a good position to gauge or measure relevance and also sufficiency
as per his audit experience therefore collectively enhancing the dimension of quality of
such related evidences (Trotman & Wright, 2012).

For example, auditors may prepare financial ratios for two or more years and use these
to examine any unusual variations in computed ratios for the enterprise. Secondly,
auditors may enforce physical presence at important events such as the enterprise’s
aggregation of stock count.

(II)

Under circumstances where auditors procure “third party” sources of evidence to aid in
the audit processes the case of the audit quality will depend on intrinsic characteristics
of third party involved, although the general view is that this category of externally
generated audit information is much more reliable when contrasted with information
gained from internal sources (Pittman, 2013). In particular, certain set of third parties
such as banking institutions may be considered to be largely valid and reliable as
compared to 3rd parties such as a large debtor or a large credit are associated with the
given corporation which may be considered to be to a certain extent unreliable because
large potential for influence clearly exists.
For example, a third party of a “bank” may be approached to obtain documentation of
loan and interest payments or otherwise even the bank balances of the given enterprise
and as such the third party involved would be the bank. The quality however while
dealing with bank would be quite high and reliable from evidence point of view to serve
audit. Secondly, “professional valuation reports” may also be procured, however it is
essential that the auditor should necessarily measure experience and independence of
such professional valuation agent (Beasley, 2010).

(III)

Under circumstances where the management solely provides evidence of transactions

or assertions many important implications arise for audit quality (Cosserat, 2009). This
is because, the evidence comes from the party or the entity which is directly being
evaluated or audited and so the auditor needs to carefully examine circumstances of
reliability that would become applicable to the collated evidence procure directly from
managers (Beasley, 2010). To be sure, auditors will need to reconfirm or established
validity of such management provided evidence by activities of test of
controls/effectiveness. In contrast to all about all other possible sources that include
those from “third parties” and those from the “auditor” themselves, those produced by
the enterprise’s “management” are most certainly lowest in qualitative terms (Cosserat,
2009).

For example, the enterprises own monthly accounting records for statements that are
being used for internal company circulation having appropriate endorsement from its top
managers may be considered as one such important source. Secondly, evidence of a
verbal form gained through queries made directly to the given entity’s management on
certain audit points that necessitate clarification (Pittman, 2013).
(B)

All auditors as part of their compliance with SAS 400 as a mandatory component to be
applied across all auditing activities need to ensure three distinct characteristics are
evident across any collated evidence. These three elements comprise the requirement
of being sufficient, that of being relevant or appropriate and similarly that of possessing
reliability. Cosserat (2009) contends that evidence will have the quality of being
“relevant” under circumstances wherein there is a clear logical straightforward
interrelationship with the element of the audit being measured. On the other hand, the
characteristic of “reliability” which is considered to be crucial considering the nature of
audit given that it needs to itself provide some degree of reliability assurance (Trotman
& Wright, 2010). This characteristic trait of reliability means the same outcome from
computed audit evidence can be created or generated when a given test or measure is
being repeated. Likewise, “sufficiency” is intrinsically connected to the amount and
quantity of the audit evidence being able to substantiate that all the data will exhibit the
same characteristic or quality. For example, the amount of credit transactions that are
checked by the auditor need to be of such quantity that the general viewpoint about the
credit transactions can be gained. For example, it will not be sufficient for auditor to only
consider two or three transactions out of 500 transactions it needs to be at least 30 or
40% (Beasley, 2010).
Question 3)

The Managing Director,

Oman Co Ltd,
Al Khoud,
Oman

Dear Sir,

Subject: Internal control review on stock and digital components.

Our audit company, XYZ auditors, conducted an inspection and detailed evaluation of
procedures being used for the stock and digital components. We have noted two crucial
deficiencies at your company and we present our recommendations to assist in
correcting the flaws in stocking and digital components.

Weakness 1;

Although, the storage room is currently locked and secure, its key is merely kept in the
drawer system of Miss Florence which in itself is not adequately secured. Moreover, the
room itself is being shared by 10 other staff members of your company meaning that it
is highly probable that a possible chance does exist whereby in the absence of miss
Florence from the room that the key may be accessed by an unauthorized person who
may then be able to gain access to the valuable digital items. This augments possibility
that digital components may be stolen or used for unauthorized practices and therefore
it will cause a loss to your company (Paterson, 2015).

Recommendation: the key to the stockroom is highly valuable and so it should specially
secure at all times wherein even the drawer system of Miss Florence should be
specifically locked up at all times irrespective of whether she is present at a location or
not. Moreover, it may be important to improve storage in a simple drawer system and
what may be required may be some fireproof container or compartment. Any duplication
of stockroom key should be carefully controlled and noted by senior management.

Weakness 2;

Currently, Miss Florence permits access to the stockroom on a verbal basis, wherein
any of the company staff may get an approval verbally from a supervisor or member
from the production department of your organization. This practice causes to challenges
at your enterprise, first unauthorized use of valuable digital components may occur
which in itself may cause damage and other financial losses. Secondly, there is no proof
or a trail of who had access to the stockroom and by whom it was approved. This
therefore negates any vital paper trail at your enterprise (Paterson, 2015).

Recommendations: a strict provision and policy regarding written documentation being

the only way that stockroom can be accessed should be mandated. There should be a
written form which has to be signed upon by the supervisor allowing stockroom access
and each of these forms should be numbered and miss Florence should keep a track of
these. When any form is presented to miss Florence, careful attention to the date, to the
approval authority and to the quantity should be maintained and if any doubt she should
follow up with the person who approved the request for stockroom access (Beasley,
2010).

We trust that our findings on stock and digital components based access procedures
will be honestly considered by your entity. Please feel free to discuss internal control
procedures or rational as suggested by us by calling the undersigned

Mr Abdullah Al Hooti

Senior Auditor

KPMG Oman
Question 4)

“Independence” is a characteristic trait and element that is strongly associated and

interrelated with the audit and accountancy field and practice (Schmidt, 2012). Given
that independence characteristically refers to the circumstance of the auditor showing
“intellectual honesty” which in turn reflects the condition wherein the auditor functions
and carries out duties without considering any external factor or element which is not
directly associated with performance of the audit function and rather it behaves in a
straightforward and objective manner. Therefore, independence of auditor is highly
crucial to perform the key task of expressing assurance or objective view on the
elements being audited. For this reason, independence is present in almost every
professional as well as ethical framework connected to accountancy and audit
(Tepalagul & Lin, 2015).

Moving on, the statement regarding auditor independence can further be bifurcated into
two separate and differentiable elements. First, there is the independence to be shown
in actual performance of audit work or rather independence associated with auditor
mindset in terms of objectivity. Secondly, arguably there is also the element of auditor
behavior and action in terms of showing some form of independence. Both of these
elements of independence are extremely important and should be present “together” in
order to fully validate independence (Schmidt, 2012). In other words, it is becoming
increasingly necessary that auditors should show both forms of independence the first
being actual form of independence connected to their mindset and second being that of
actually appearing to be doing their audit work and tasks in an independent manner.

Failure on part of any auditor to ensure they appear to be independent to external

parties or people will have strong negative implications because the external parties or
people do not have first-hand knowledge of practices or systems being implemented by
any auditor but rather the only are able to see the behavior and action of the auditor. So
therefore, if any auditor does not appear to be independent, then the external parties
and people will not be able to place their reliance or trust on the documents audited or
work done by the auditor because in their mind they are holding the opinion that the
auditor is not independent as they have seen from his behavior and actions (Blay &
Geiger, 2013).

Commonly, there are certain safeguards to promote auditor mindset and appearance to
be independent and these comprise actions of not being beneficial owner of any
company shares, not taking or accepting gifts whether in kind or weather in cash from
any of the audit-related clients, not having personal family relationships with any
members from the given enterprise or even not accepting any form of excessive gifts or
excessive positive treatments from the clients (Tepalagul & Lin, 2015). In short, every
auditor to protect sanctity of the audit profession as well as their own reputation needs
to show independence from mindset and also in actual appearance and dealings.

(2600 Words)
References

Books

Beasley, S. 2010. Auditing and assurance services. Fourth Edition. London: Prentice.

Cosserat, G. 2009. Modern Auditing Practices. Fifth Edition. New York: Wiley.

Paterson, J.2015. Internal Audit Practices and Principles. Fifth edition. Ohio: New York

Pittman, C. 2013. Fundamentals of Auditing. Fourth edition. New York: Wiley

Journal

Blay, D., & Geiger, A. 2013. Auditor Fees and Auditor Independence: Evidence from
Going Concern Reporting Decisions*. Contemporary Accounting Research, 30(2), 579-
606.

Schmidt, J. 2012. Perceived auditor independence and audit litigation: The role of
nonaudit services fees. The Accounting Review, 87(3), 1033-1065.

Trotman, T., & Wright, F. 2012. Triangulation of audit evidence in fraud risk
assessments. Accounting, Organizations and Society, 37(1), 41-53.

Yoon, K., Hoogduin, L., & Zhang, L. 2015. Big Data as complementary audit evidence.
Accounting Horizons, 29(2), 431-438.

Tepalagul, N., & Lin, L. 2015. Auditor Independence and Audit Quality A Literature
Review. Journal of Accounting, Auditing & Finance, 30(1), 101-121.

Websites

Finley, S. 2015 Auditor liability and audit standards. Available at:

http://www.accaglobal.com/middle-east/en/student/exam-support/auditor-liability.html
(Accessed: 2 June 2016).
Lubo, C. 2013 Auditors: Appointment, resignation or removal. Available at:
http://www.corplaw.ie/blog/bid/343834/Auditors-Appointment-Resignation-Or-Removal
(Accessed: 2 June 2016).