No, this is not an assurance engagement. For an audit engagement to have occurred between Chan and Chow and their clients, there must have been a three-party association and also suitable criteria to guide their work (AASB 2015). In this case, there were no three-party associations as per the facts given in the case. Similarly, no methodology was followed to facilitate the advice on accounting policy. It means that the assistance that was offered was consultation and not an assurance engagement.
Yes, the audit of financial reports constituted an assurance engagement. The audit firm sought to investigate the financial statements to ensure that the documents prepared showed a fair representation of performance. As a result, the event provided a reasonable assurance, which makes it an assurance engagement (AUASB 2015).
No, the assistance of management, as well as the board in increasing the strength of the internal control system and governance principles, does not constitute an assurance engagement. For the service the firm offered to count as an assurance engagement, there must have been a relationship between three parties and also a defined way of performing their tasks (AUASB 2014). In this case, there are no three parties who relate to one another. Neither was suitable criteria. Assisting the management led to a consultation event.
No, assisting in the establishment and partaking of training on internal audit teams does not constitute an assurance engagement. It is only an act of improvement of efficiency and involvement in the improvement of the performance of the internal audit teams. There are only a two-way exchanges instead of 3 where the parties seek to create methods of improvement as opposed to giving an assurance (AUASB 2014).
Yes, checking to know that the firm complies with corporate policies results in the assurance engagement. Chan and chow had an objective of an assurance engagement, which is to ensure that their client followed corporate regulations (AUASB 2013).
Week 2 Question
There are two essential types of threats to the independence of an auditor, which are self-interest threats and self-review threats (AUASB 2019). Self-interest threats are those which could occur as a result of Bass having financial or even some other non-financial interest with one member of BKM as a result of them having close associations such as family or friendship. Bass could hold financial interest with their client, undue reliance on fees provided by the auditor, and also the business association with them. It could also be as a result of the aversion towards the loss of the services their client offers to them.
The self-review threat occurs when there has been a need to revisit a previous judgment by BKM. For instance, BKM has had a prior engagement with Bass where the firm had a primary role in preparing its financial statement. They then went ahead to audit the same accounts. However, there arose a situation where they made an error for which they would be culpable of fines. Therefore a risk arises where the auditor will fail to identify shortcomings in the firm to avoid the loss of their reputation or even financial loss (AUASB 2019).
Self-interest: the first safeguard towards self-interest risk is for Bass to design applicable policies that will serve to prevent firm members from facilitating BKM from partaking managerial decisions for the firm. The second safeguard measure is to employ professional experts in auditing who work on their businesses as opposed to working closely with BKM. In this case, the firm will avoid the financial and non-financial interests arising from the decisions that they would have taken. The third measure is for the firm to make sure that BKM does not commit to transactional terms that could have existed (AUASB 2020a).
Self-review: the first measure is to ensure that there is an independent review of the system once implementation has been completed. The second is to recruit a different partner other than BKM to undertake assurance. The third is to avoid making proposals for BKM to do their work, which means that they will not have to engage them. The fourth is to ensure that Bass writes a representation to indicate that for the design of the process, they will have to take responsibility for the accounts receivable management system (AUASB 2015b).
Week 3 Question:
The small profit from the foreign exchange transactions in the Yen emanates from the fact that the firm operates from overseas, which makes it prone to the control and inherent risk. The rationale is that there could have been transactions in their overseas operations that could not have been translated accurately. It means that the wrong exchange rate was used. Since decreased profits were observed, it means that the firm used an unfavorable rate. It is an inherent risk because it is a transaction that is prone to misstatement before the firm considers related controls (AUASB 2009).
There will be an inherent risk associated with the delayed redeployment of assets. The financial controller has been charged with the responsibility of establishing the correct valuation of assets. The task has been delayed, which means that there might be a change in fair value. For the estimations to be done, complex balances will be involved, and there will be a high degree of using judgment, which means that the event will be open to manipulation or even errors.
iii. Introduction of bonuses
The inherent audit risk will be affected by the introduction of the increasing percentage of gross income for sales staff (AUASB 2020b). When the directors are paid bonuses, they will tend to ensure that they make the maximum bonus. It means that they will tend to manipulate the figures. For instance, they will overstate the gross profits through increasing closing inventory to give a lower cost of sale, which will, in turn, culminate in them receiving a higher bonus.
The control and inherent risk will be affected because the introduction of the new computer systems has been done within a short time, and there has been high confidence in it working (AUASB 2015c). It means that there was a minimal inspection of any possible faults. However, there is the possibility that problems could arise in transferring items that could not have been spotted. Additionally, the new system could have errors which the firm misses.
The detection audit risk will be affected because, with the creation of a new position and immediate transfer of responsibility, there is every chance that the new occupier of the administration position will not adequately handle the new system (AUASB 2019b). In this situation, the auditor will also have a low ability to discover possible mistakes of hiring a new individual and assigning him with new tasks immediately.
Week 4 Question:
The first internal control weakness is the lack of segregation of duties where more than one task is performed by the financial accountant (AUASB 2018a). It is evident when the accountant signs the voucher, completes payments by bank transfer, and returns documents to the accounts receivable. The same person also receives bank statements monthly and performs reconciliation. These are distinct steps that ought to be separated and performed by two individuals. The two individuals ought to operate independently.
Additionally, the firm does not conduct a self-evaluation, as seen by the fact that there are no processes of tracing the transactions (AUASB 2018a). As such, there is no procedure for control and no concerted efforts to ensure that the right flow of activities has been followed from the stores department to the financial accountant. Additionally, there is no policy guiding the flow of transactions in all the points where they are performed.
The lack of segregation of duties is a weakness because when the financial accountant oversees the payment to the bank and also reconciles the financial statements, he has control of two critical phases (AUASB 2018b). As a result, there is a possibility of making errors that go undetected or even engage in fraudulent activities. To solve this weakness, there is a need to reassign one of the tasks to another individual who is not answerable to the financial accountant. In case there are issues with enough personnel, the firm could rotate duties where in times of need, some individuals who are not committed to other functions can be reassigned these roles. There will have to be a defined way of employing this method to avoid creating further problems in terms of role assignment uncertainty.
The lack of self-evaluation is a weakness because it makes it difficult to identify possible shortcomings in purchases and payments processes; hence the existing controls will be of minimal use. Additionally, it is a weakness because there could be cases of fraud that could go undetected. The solution is to integrate all the activities and have an ongoing monitoring process from the store department to the reconciliation by the financial accountant. To attain success, there will be the need to identify possible errors that could occur as well as building knowledge on the interconnectivity of the roles of people from different departments such as stores and reconciliation by the financial accountant (AUASB 2014).
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