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Audit Engagement of Top End Oil & Gas Limited - Assignment Example

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The paper "Audit Engagement of Top End Oil & Gas Limited" is a great example of a finance and accounting assignment. Both the Australian auditing Board (ASB) and the International Auditing and Assurance Board (IAASB) provide for the auditor to observe various independence and ethical issues before accepting an engagement from a client in a bid to ensure that the auditor performs the audit in an independent, ethical and professional environment…
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Extract of sample "Audit Engagement of Top End Oil & Gas Limited"

Running header: Audit and assurance Student’s name: Instructor’s name: Subject code: Date of submission: Audit and assurance 1. The independence and ethical issues involved in the audit engagement of Top End Oil & Gas Limited (TOGL) Both the Australian auditing board (ASB) and the international Auditing and Assurance Board (IAASB) provide for the auditor to observe various independence and ethical issues before accepting an engagement from a client in a bid to ensure that the auditor performs the audit in an independent, ethical and professional environment. Auditors independence should be characterized by both integrity as well as objective approach to the audit process that will enable the auditor carry out the audit assignment in a free and objective manner (Jagerrow, 2012). As such, there is need to consider whether the audit firm will be have both perceived and real independence in carrying out the audit engagement at TEOGL. According to IAASB, some of the factors that may threaten auditor’s independence include interference from the client’s management, an existing conflict of interest between the audit firm and the client as well as existence of relationship between the auditor and the client. In the case of the current audit engagement, the following factors may affect the auditor’s independence and may hence need to be considered before the engagement is accepted. i) Until last year, one of the audit firm’s former partners has been a director at TEOGL. Although the concerned person is no longer a partner at the audit firm neither is he a director at the company, there is need to ensure that he has not influenced the selection of the audit firm as TEOGL’s auditor. This is because he still may have interests in the company and hence he may compromise your independence as a bargain for his having selected our audit firm to audit the company. However, if no conflict of interest is established and hence no possibility of compromising on auditor independence, then the audit engagement can be accepted all other factors held constant. ii) Over the years, the business services division of our firm has provided TEOGL with tax and business advice. This may have an indirect effect on the audit firm’s independence. This is because the management may be tempted to use the tax and business advice assignment as a way of interfering with the auditor’s independence for instance by threatening to cancel this contract if their will is not followed. This is especially so given that the company has been found to engage in a number of unethical practices. On the other hand, the audit firm may be tempted to compromise on its independence in a bid to keep the tax and business contract (Wiley.com, 2014). As such, there is need for the firm to convince itself that the tax and business contract will in no way interfere with its independence in carrying out the engagement. Otherwise, the audit engagement should be declined. The audit engagement can also be rejected based on some ethical issues. The Australian audit standards require that before accepting the audit engagement, the audit firm ought to determine whether accepting the audit engagement will interfere with the firm’s compliance with the fundamental principles required of auditors. Ethical issues and hence threats to auditors independence may arise from questionable issues associated with the client such as the ones TEOGL is involved in. When known, ethical issues have the potential of interfering with compliance with audit principles. Such issues include if the client is involved in illegal activities, questionable financial reporting practices or dishonesty. As such, the audit firm should investigate in the case of TEOGL the following ethical issues before accepting the engagement; i) It can be concluded that the reasons behind the departure of the previous auditor’s departure were due to TEOGL’s engagement in questionable financial reporting practices. The company did not want to disclose some of its liabilities as it knew this would interfere with its balance sheet and hence its creditworthiness. This could also be the reason behind its laying off some of its accounting staff. As such, the audit firm should consider whether TEOGL will be willing to break away from this trend or not. If they determine TEOGL will continue insisting on inappropriate financial reporting practices, then the audit firm should considered declining the engagement. ii) TEOGL has been engaging in unethical practices of environmental pollution and hence has had to cancel some of its projects (Marie, 2010) iii) The company is currently being investigated for its level of toxic waste into the Darwin harbor and some of its sites by the environmental protection agency which is an unethical practice iv) The company is also being investigated by the department of immigration in relation to its compliance with the requirements of the department on conditions of employees on oversees 457 work visas which is unethical All the above issues are ethical matters that should be considered before accepting the engagement as they also have the potential to interfere with the firm’s reputation. 2. The appropriate processes for undertaking a client assessment and accepting an audit engagement; As provided by IFAC’s code of ethics for professional accountants, the auditor ought to consider whether the acceptance will would threaten the firm’s compliance with the fundamental principles before an Audit engagement can be accepted (Picket, 2003). This is important for a number of reasons including the society’s expectation about the role of the independent auditor in maintaining security markets integrity, legal liability expansion hence the need for the auditor to assess the risk components of an audit and advances in information technology which are changing the nature of attestation process. Consequently, the acceptance of audit engagement should consist of the following; i) Assess the client’s business risk including the risks associated with the client’s profitability and survival ii) Auditing the risk the firm may knowingly fail to modify appropriately his opinion on materially misstated financial statements iii) The auditor’s business risk arising from litigation costs for alleged audit failure and related costs. As such, the following processes should be undertaken in undertaking client assessment and hence deciding whether or not to accept the audit engagement; i) Evaluate the integrity of the client’s management – if the management is deemed to be dishonest as in the case of TEOGL failing to disclose material liabilities, there is a high likelihood of material errors and irregularities / fraud that the management may not want disclosed and may even want to interfere with auditor’s independence (Porter, 2011). ii) Identification of special circumstances as well as unusual risks- in this regard, the audit firm should identify the intended users of the financial statements in order to gauge the firm’s legal liability exposure. Firm’s like TEOGL facing potentially significant legal claims need a lot of care before accepting the offer. The client should also not have poor quality accounting records, weak internal controls or any restrictions being imposed by the client to the audit firm. iii) Assessment of the audit firm’s competence for performing the audit- the audit firm based on the client assessment earlier undertaken should decide on the clients to be assigned to the audit which in essence determines the level and type of supervision necessary. Based on the nature of the client’s business, the auditor should consider whether to use experts or specialists. The assessment should also enable the client firm decide whether it has the resources necessary for carrying out the audit. iv) Evaluation of the auditor’s independence- part of client assessment will involve assessing independence as provided for GAAS rule 101 on code of conduct. Such factors as management interference and conflict of interest between the auditor and the client may hinder auditor’s independence and should be assessed before accepting the audit engagement. v) Determination of the auditor’s ability to employ due care- in this regard, two factors ought to be considered. These include; The engagement’s timing – appointment should be done at the earliest point since the auditor will have more time for planning. In addition, accepting an audit engagement that is so close to the client’s close of financial period has the potential of increasing the client’s business risk. Fieldwork scheduling – interim work carried out between 3 and 4 months to the client’s end of financial year will assist the auditor to pan audit procedures (Jabez, 2004). This will achieved through use of a time budget and will aid in determining the fees to be charged to the client. vi) after the above process have been found satisfactory, the auditor will accept the engagement and should embark on drafting the engagement letter that should define the relationship between the audit firm and the client. 3. The Issues to be considered when planning the audit and undertaking the assessment of risk and internal controls In formulating the audit plan, the auditor should bear in mind the audit approach he intends to adopt including the extent to which he wishes to rely on internal controls as well as specific aspects of the audit that may call for special attention according to IAAS 300. As such, the auditor ought to consider the following; i) Whether he has gained enough understanding of the client’s accounting and internal control systems ii) The accounting policies the client has adopted as well as any changes in the policies iii) Any matters raised in the previous audit that may be relevant in the current audit especially as relates to weak controls and accounting problems (Bradley, 2009) iv) Any relevant changes in legislation and accounting practice affecting the client’s financial report v) The current trading circumstances including changes within the business that might affect the business e.g. in terms of internal controls vi) Any changes in the client’s accounting procedures including installation of new accounting information system that might affect internal controls vii) Conditions such as existence of related parties that may call for special attention viii) Any current impending financial difficulties the client may face and which may affect the audit ix) The nature and timing of reports and relevant communications with the client in a bid to ensure the audit plan accommodates such timings. Such should include the annual general meeting, stock take etc. x) The materiality levels the auditor is willing to set for the audit while identifying areas with material transactions calling for more audit work xi) The client’s internal audit department and the level of reliance the auditor wishes to place on it xii) The number of audit staff the audit requires, their experience as well as the special skills that may be required as well as the timing of the audit visits (Gray, 2011). In preparation of his audit plan, the auditor ought to assess risk and internal controls in order to determine the level of materiality and the level of reliance he intends to place in the client’s internal controls. As such, he should consider the following factors; a) The client’s internal and external factors likely to increase inherent risk. These may include such factors as rapid change in the client’s inventory, expiring patterns for such clients as pharmaceuticals, state of the economy, availability of financing (Public company accounting oversight board, 2014) b) Pre-period misstatements since if the previous period misstatements that were not material, the errors are still existent in the current period financial statements and have to be adjusted c) Susceptibility to theft or fraud of certain of client’s assets in which case some of the client’s accounts may be deemed inherently risky In developing the audit plan, the auditor should also assess the client’s internal controls in a bid to decide on the level of reliance he intends to place on them. In so doing, he should consider the following factors; i) Consider the client’s external influences affecting the client e.g changes in technology, state of the economy, changes in generally accepted accounting principles etc. ii) How the client’s management assesses its controls. In this regard, the auditor should also consider whether the client has other business in other location and whether the client has an internal audit department since a company with an internal audit department is more likely to have put in place strong internal control systems (Allan, 2006). iii) Use of questionnaires in assessing client’s internal controls iv) The client’s overall inherent risk as discussed above v) The size of the entity vi) The client’s entity organization and ownership characteristics vii) The client’s nature of business viii) The diversity and complexity of the client’s entity operations ix) The applicable regulatory and legal requirements x) The nature and complexity of the systems the organization has put in place for internal control. References: Jagerrow, B2012, contemporary issues in auditing, London, Rutledge. Wiley.com, 2014, Audit planning 1, Retrieved on 2nd April 2013, from: http://www.wiley.com/legacy/products/worldwide/canada/sc/moroney/assets/Auditing_S ampl eCh03.pdf Public company accounting oversight board, 2014, Consideration of internal controls in a financial statement audit, Retrieved on 2nd May 2014, from; http://pcaobus.org/Standards/Auditing/Pages/AU319.aspx Marie, L2010, Auditing for dummies, New York, For dummies. Porter, B2011, Principles of external auditing, New York, John Wiley & Sons. Jabez, D2004, Auditing and assurance services, Oxford, Oxford University Press. Bradley, J2009, Auditing: Concepts for a changing environment, South-Western College. Gray, I2011, The Audit Process, London, Rutledge. Allan, W2006, Auditing, Oxford, Oxford University Press. Picket, K2003, The internal Audit Handbook, New York, John Wiley & Sons. Read More
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