Audit can be defined as process of unbiased examination conducted for the evaluation of financial statements of the entity. Principles of audit is governed by regulatory authority for appropriate analysis and evaluation. Main role of auditor is to provide assurance regarding fiscal accuracy. Present report is prepared to develop understanding regarding ISA and ISQC. Requirements describe in these standards will be applied in the provided case study. In the given situation offer for audit appointment is provided by the Pete Willow (Chairman of Willow Ltd) to Toby & Co. Thus in this report assessment will be made regarding acceptance and several audit risks.
Matters required to be considered by Toby & Co
In accordance with the codes of Ethics for Professional Accountants of IFAC, prior to the acceptance of new client relationship it is essential that professional auditor in practice should ensure that whether acceptance will create threat to the compliance of fundamental principles of auditing. Acceptance can only be provided by auditor for new audit engagement only if terms described under ISA 210 is satisfied (Mockford, 2012). In this order, Toby & Co is required to assess aspects of independence and integrity. Toby & Co should not accept the appointment in case if their firm have interest which will contradict appropriate conduct of audit. In the given scenario, an audit partner is friend of Chairman of Toby & Co Thus, if offer for audit appointment is provided to support manipulation than audit company should not accept their offer. For this purpose Toby & Co should check that audit partner does not have contradictory interest in the operations of Toby & Co to satisfy the aspect of independence and integrity. Further, company is required to act in accordance with the fundamental principles described in codes of Ethics for Professional Accountants issued by council.
Audit of the commercial entity is required to conducted in accordance with the accounting standards and norms of legislations under which auditor is reporting. These requirements are the technical standards of auditing. Toby & Co must compliance with the standards of 1990 Act or 2006 Act or any other relevant legislations (Deumes, 2012). These requirements include appointment, statements regarding cessation and resignation and responsibilities of auditor. Willow Ltd is a pharmaceutical company thus auditor must assess that operations of the company is as per medical norms.
Toby & Co should be competent to perform the engagement and they have sufficient sources for the conduct of audit. In this scenario Rosie & Co had resigned from audit because they do not sufficient resources for compliance of audit requirements. Further, company should obtain relevant information prior to the engagement with new client. If potential conflict of interest is identified in the entity than firm is required to assess that whether acceptance to the engagement will be appropriate or not (Zaman, 2011).
Willow Ltd is planning to appoint audit partner as a non-executive director. In this situation Ethics Partner has direct access to the independent non-executives thus they are obliged to comply ethical standards for the maintenance of independence and integrity. Further, ethics partners should consider that ethics are complied in induction programmes, continuing professional development for all partners and staff and personal training for the assessment of the effectiveness of firm's communication regarding their policies and procedures.
Responsibilities of Willow Ltd's audit committee in respect of external audit
Objective of formation of audit committee is to ensure financial accuracy through proper implication of financial principles. Main responsibility of audit committee is to review financial reporting and disclosure of reporting process. Committee typically will review financial statements of Willow Ltd on quarterly or annual basis (Nicolăescu, 2013). In addition to this, Audit committee of entity will interact regarding complexities and estimations with CFO and controller on regular basis. Further they monitor the choice of accounting policies and principles. External auditors of the company are required to report to the committee on variety of matters such as disagreements, material misstatements, fraud, illegality etc.
In the operational activities and recording of financial facts several accounting policies are selected by them for application for better treatment. Appropriate decision regarding selection of policies is essential because these principles will be continuously followed by management in upcoming accounting periods.
In addition to this, audit committee overview recruitment, performance and independence of the external auditors. Appointment of external auditor will be done by audit committee to compliance with statutory requirements. Further approval for the replacement of auditor is also provided by this committee (Phillpots, 2011). This responsibility is imposed to ensure that evaluation done by auditors is unbiased and supported by appropriate integrity. Moreover, they provide assurance that there are potential conflict of interest which will interfere in ability of auditor.
Audit committee will also assist financial department in preparation of financial statements. For this purpose they oversee the regulatory compliance, whistle blower hotline and ethics. Regulatory compliance risks and litigation is discussed by audit committee with management for compliance of statutory requirements.
Other responsibilities of the audit committee is the overview the performance of the internal audit function. Further, risk management policies are formulated by them for the secure future of the entity.
Audit risks required to be considered while audit planning by Toby & Co
Audit risk can be defined as possibility whereby auditor will not be able to discover deliberate computation or error while evaluation of the financial statements. Generally there is two categories of risk i.e. risk regarding assessment of financial materials and risk regarding assertions generated through the evaluation of financial materials (Clatworthy, 2013).
Toby & Co are required to consider all the described risk while audit planning of Willow Ltd. Inherent risk can be defined as susceptibility of assertions regarding material misstatements. Risk of material misstatements is identified overall in the financial statements. For example according to clearance letter provide by the Rosie & Co, finance expenses of company has been enhanced by creation of the fictitious purchase invoices. Such kind of error is difficult to identify by the auditors because for such misstatements source document of the company is manipulated. Inherent risk is generally considered to be higher where there is situation of prudent judgement or estimation or where transactions is highly complex. Such kind as risk adversely affect the reliability of audited statements (Deumes, 2012). Thus, Toby & Co is required to take care of these risk for proper evaluation and assessment. Inherent risk of the Toby & Co is relatively high because organization is operating in a highly regularized sector, further company is having complex network of related entities. These factors can lead to misrepresentation if there will be absence of relevant financial controls. Control risk can be defined as material misstatements in the financial statements due to irrelevant factors of control. As per the statutory requirement, organization must have appropriate internal controls for detection and prevention of risk of frauds and errors. Control risk is considered to be high if audit entity does not proper measures for control risk (Zaman, 2011). In the given scenario of Willow Ltd. there is high possibility of control risk because accounting and management information systems are outdated. In addition to this, there is situation of duplication of some accounting records because accounting is done through manual and computerized techniques. Further, accounting team the company quite small, and two members of the team had resigned and their replacement is not appointed. Control and inherent risks are originated by the company and these risks can be controlled by the clients. By considering these factors level of risk is determined by auditors which will be acceptable for the audit.
On the basis of the inherent and control risk, detection risk will be evaluated by Toby & Co. For this purpose following model is required to be implemented by entity-
Audit Risk= Inherent Risk * Control Risk * Detection Risk
In the present scenario detection risk will be lower to compensate inherent and control risk. Detection risk can be defined as possibility where auditor fails to detect a material misstatement in the financial statements. For the reduction of the detection risk Toby & Co is required to apply various audit procedures. Through these techniques, auditor will be able to detect material misstatement in the financial statements of the Willow Ltd (Phillpots, 2011). This is the most crucial part of audit planning because miss-application of principles or omissions can lead to inappropriate evaluation by auditors. High control and inherent risk can be noticed by the fact that company is having outdated accounting and management information systems. Moreover, material misstatements are identified by the previous auditors of the company.
Non-audit services that can be offered to Willow Ltd.
Initially Toby & Co can offer services which are required by the legislation. In these services provisions of regulatory returns are covered such as payment to the Prudential Regulation Authority (PRA). Through these service Willow Ltd will be able to comply statutory requirements and prevent occurrence of the penalties (Use of External Auditors to Provide Non-Audit Services. 2012). Other than this, Toby & Co provide explanation of legal requirements to report on matter such as grant application, issue of security other than cash etc. By using these services Willow Ltd will be able to satisfy contractual requirements.
Toby & Co can assist Willow Ltd in tax compliance. For this purpose audit company will prepare their draft returns, submission of returns and further correspondence with tax authorities. Toby & Co can also provide them advise on tax matters by considering facts of recent development and high or complex risk areas. Through these services Willow Ltd will be able to expatriate their tax matters. Along with the cost advise, Toby & Co can also provide guidance for human resource management and cost structure (The provision of non-audit services to audit clients. 2015). On the basis of this guidance company will be able to make optimum utilization of their resources. They can take compensation for amount payable in their legal case with individual who suffered severe and enervation side effects due to treatment in a clinical trial in 2014.
On the basis of above description it can be said that Toby & Co should act in accordance with the codes of Ethics for Professional Accountants of IFAC, prior to the acceptance of new client relationship. They are required to assess aspects of independence and integrity. Toby & Co should not accept the appointment in case if their firm have interest which will contradict appropriate conduct of audit. Primary responsibility of audit committee is to review financial reporting and disclose of reporting process of the company. Toby & Co are required to consider control, inherent and detection risk while audit planning of Willow Ltd. Inherent risk and control risk can be controlled by organization. Thus, as per the statutory requirement, organization must have appropriate internal controls for detection and prevention of risk of frauds and errors. These risks are considered to be high if audit entity does not have proper measures for control. In the present case situation of Willow Ltd. there is high possibility of control risk because management and accounting information systems are outdated. In addition to this, there is situation of duplication of some accounting records because accounting is done through both manual and computerized techniques. Henceforth, for proper assessment of financial assessment and reduction of the detection risk Toby & Co is required to apply various audit procedures. Through these techniques, auditor will be able to detect material misstatement in the financial statements of the Willow Ltd.
- Clatworthy, M. A., 2013. The impact of voluntary audit and governance characteristics on accounting errors in private companies. Journal of Accounting and Public Policy.
- Deumes, R., 2012. Audit Firm Governance: Do Transparency Reports Reveal Audit Quality?.Auditing: A Journal of Practice & Theory.
- Mockford, C., 2012. The impact of patient and public involvement on UK NHS health care: a systematic review. International Journal for Quality in Health Care.
- Nicolăescu, E. 2013. Developments in Corporate Governance and Regulatory Interest in Protecting Audit Quality. Economics, Management, and Financial Markets.