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Audit Homework 1

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by

Valeriya Alexandrova

on 18 March 2013

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Transcript of Audit Homework 1

WEEK 2 Question 1.26 Question 1.27 Question 1.28 Question 2.22 Why would we obtain an audit?

1) Separation of ownership and control of company => information asymmetry => each party will act in his/her self-interest.
2) As it is a start-up company with potential growth in future, the correct information about investment decision would be of utmost importance. So audit will assist in getting correct info about manager's performance as well as future potential.
3) As the company has several big investors as well as bank loan, the audit can help with insurance against losses (but most start-up co usually making losses at the beginning, so audit will help to obtain assurance of verifiability, compliance, going concern and accountability of the company Audit expectation gap

The senior auditor see that the society has a lot of expectation in regard to auditor's performance, but the reality differs from these anticipations.
The idea that a company will continue to operate indefinitely, and will not go out of business and liquidate its assets is one of the main assumption about any company, but auditors do not guarantee this assumption by giving auditing reports (they are only reflecting the information about the past)
It is unreasonable to think that auditors could find every mistake (immaterial misstatements may not be detected).
Lastly, there is a lack of incentives to improve auditing performance.
However, the auditor's opinion is one-sided (only mention "unreasonable expectation" while there are other factors that affects the audit expectation gap such as actual auditing performance). Independence of an auditor Audit committee Madoff's scheme Auditing Homework - Enron and WorldCom (US),
- Parmalat (Europe),
- Equitable Life Assurance Society (UK),
- HIH Insurance (Australia), other prominent entities to fail in Australia around this time included Ansett, Centaur, Harris Scarfe, One.Tel and Pasminco. The early 2000s failures: Quality of audit:
1) Auditor will DISCOVER a breach in the client's accounting system
2) Audit will REPORT the breach Lack of independence => cheating by auditor => if caught, he will loose some portion of his value by termination by other clients and through reduced fees from those that continue to retain him => Those with greater number of current clients have less incentive to cheat. ASX Listing rile 12.7:
1) The board should establish an audit committee
2) The audit committee should consist only of non-executive directors
3) Consist of a majority of independent directors
4) should be chaired by an independent chair
5) Has at least 3 members
6) Should have a formal charter Question 2.24 Importance because of:
1) greater confidence in investment decision
2) decrease the cost of capital
3) Improvement of internal conduct Duties:
- Approve the appointment and retention of external auditors
- Review accounting policies and any changes
- Review significant unusual transactions
_Review internal audit plan
- Coordinate the work of internal and external auditors
-Monitor compliance with legal and regulatory requirements Role in enhancing
corporate governance

1) Identify business risk
2) Address control gap
3) Ensure accountability and performance indicators
4) Enforcing employee conduct Scheme: No fundamental business, basically the scam to move money around.
Reliable info to investors
- BAS
- Verification of transaction statements
- Assurance report
Risks:
- losing money for individual investors
- job and reputation of fund managers
Investor only look at the return without questioning the business itself which leads to losses.
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