Auditing and Professional Practice Cash Flow Statement - Sample

Question: Discuss about the Auditing and Professional Practice for Cash Flow Statement. Answer: Introduction This assignment is based on the subject of Auditing. The discussion, evaluation and analysis in the assignment focus on three different scenarios. The first scenario states about the case study of Bolts Ltd and the assignment tries to identify the threats that may occur due to non-maintenance of fundamental principles of auditing properly. At the same time, in the analysis of Bolts Ltds case, the assignment also tries to find out the fundamental principles that the company has not followed properly. In case of the second scenario, the discussion is carried on the accounting decision-making models. On the other side, in the analysis of the third scenario, the case study of Peak Sawmill Limited is used and the study tries to evaluate the key assertions that are at risk in relation to the accounts payable of the company. At the end of the assignment, a conclusion is derived by combining the overall findings of the study. Scenario One: Identifying the threats to compliance with fundamental principles resulting from the discussion with CEO and the fundamental principles that are breached As per the given scenario, the Chief Financial Officer (CFO) at Bolts Ltd is more willing to focus on the profitability and the future benefits of the acquisition of Steel Pty Ltd. Along with that, the CFO of the company also suggested to avoid the issues in the cash flow statements of Steel Pty Ltd. However, this type of avoidance may cause different threats in compliance with the basic or fundamental principles of auditing. Two possible threats are as under: Bias report: The report that will be prepared as per the discussion with the CFO of Bolts Ltd, then there is huge chance of producing bias audit report. The cash flow statement is one of the most important financial statements of a company (Elliott, Fanning and Peecher 2016). The cash flow statement discloses the capacity of the company to generate cash in particular financial year and if any mismatch takes place in the cash flow statement, then it indicates that the company has done some mistake intentionally or unintentionally (Fuchs et al. 2015). Therefore, while auditing it is very important to review the cash flow statement. If the audit report is prepared by ignoring the cash flow, then that report will be bias and so the decision taken by the management based on that biased report, will be wrong (Islam 2015). Hence, if the auditing is done as per the discussion with CFO, then there is high chance that the acquisition of Steel Pty Ltd can be a wrong decision. Future controversy: If the auditing is done as per the discussion with the CFO of Bolts Ltd, then the auditing will be inaccurate. The inaccurate auditing may cause controversy in the near future and if it is identified by the external governing authority, then the company as well as the auditor will be charged for paying the penalty (Power and Gendron 2015). The fundamental principles that are as risk of being breached are as under: The principle of objectivity is at risk of being breached. The principle suggests avoiding biasness while auditing (Griffith, Kadous and Young 2015). The principle of professional competence and due care is also at risk of being breached. According to this principle, the auditors need to maintain the professional skill and knowledge so that the professional service to the clients or companies can be maintained (Brown-Liburd, Issa and Lombardi 2015). At the same time, the auditors also require to follow the legislations, techniques and practice in order to provide care to the company or client. Scenario Two: a. Identifying the perfect action that Luke should take According to the American Accounting Association Decision-making Model, the audit firm or the auditors are needed to follow seven steps while taking any decision (Kothari, Mizik and Roychowdhury 2015). The model suggests taking ethical decision while auditing the financial reports of the companies (Cao, Chychyla and Stewart 2015). In case of Luke, he identified that the work done by Zane is right as per the rules, regulations and auditing principles. At the same time, Luke also realized that the work done by Zane indicates the high level work efficiency and knowledge. Apart from that, Luke also understood that the client has misled the manager because the client had personality conflicts with Zane. Luke knows that this type of attitude from the clients end is not ethical. However, the next assignment is also very important for Luke because his promotion to the audit supervisor post depends on that assignment. Due to this, anyhow, he wants to get the assignment. In this situation, Luke can take decision by following the seven steps suggested by American Accounting Association Model. If Luke works through this particular model, then the followings can be identified: Step 1 Establishing the facts: In the situation of Luke, it is the fact that the work quality of Zane is better than Luke because Zane has identified such issues, which might be impossible for Luke to identify. Another fact is the position of audit supervisor is very important to Luke. The third fact is the client had personality conflict with Zane. Step 2 Identifying ethical issues: Luke can copy the working plan that Zane had followed in the previous one (Griffin and Wright 2015). Luke may influence the audit manager for providing the next audit assignment because Luke understood that the previous client was not happy with Zane. Step 3 Identifying the norms, principles and values: The auditing principles suggest identifying each possible issue in the financial statements or reports of the companies (Ferris et al. 2015). At the same time, in order to follow the auditing norms, Luke needs to prepare the proper audit plan. He can tests the financial reports suddenly or can do sampling testing or can test by gathering the data. Luke also identifies that misleading the audit manager regarding Zane is not a professional behavior and his values do not permit this type of behavior. Step 4 - Identifying each alternative course of action: As the alternative action, Luke can inform the best points in Zanes work and can tell about the personality conflicts between Zane and the client. Luke has another option that he can show his positive points and try to influence the audit manager by not disclosing the best points in Zanes work. The third alternative is Luke can learn from Zanes work and improve his own quality so that he can compete with Zane. Step 5 Verifying the alternatives with the principles, norms and values: If the above alternatives are verified with the principles, norms and values, then it can be identified that the first and third point is ethical and do not break the principles, values and norms. Step 6 Identifying the consequences: If the first alternative decision is considered then it is more possible that Zane will get the assignment as her efficiency is high. However, if the third alternative is considered then there is a chance that the Audit manager will also consider Luke as a deserving candidate. Step 7 Taking final decision: The above two alternatives are indicating two different consequences and between two consequences, the second consequence is better than the first. Therefore, it will be better for Luke if he learns from the previous work of Zane and improves his quality of work. At the same time, Luke should not influence the audit manager against Zane as that will be unethical and against his values. Hence, Luke should try to get the next audit assignment by maintaining work ethics and professional behavior. b. Identifying the difference between the decisions taken by Luke and the decision that could be taken by using the Mary Guy model As per the Mary Guy decision-making model, there are six steps that the auditors or audit firms need to follow in order to take ethical decision (Helin and Babri 2015). The steps include the followings: Identifying and defining the problem Determining the target or goal Lists all possible solutions (Gaynor et al. 2015) Evaluating each alternative to identify which is meeting the requirements in best way Determining the course of action that can help to achieve the desired target within the possible constraints Making the commitment to choose the course of action and implementing the same (Samsonova-Taddei and Siddiqui 2015) Therefore, in the above it can be identified that the steps in Mary Guy decision-making model are different than the previous decision-making model that is American Accounting Association Model to some extent (Burke and Tomlinson 2016). However, both of these two decision-making models suggest taking the ethical decision. In case of Luke, it is also needed that the decision is taken on the ethical ground and the suggested decision shows the ethical point (Schultz and Tran 2015). Therefore, there will be no difference in the decision of Luke if he uses the Mary Guy decision-making model. Scenario Three: a. List of two key assertions at risk in relation to accounts payable As per the case study of Peak Sawmill Limited, the accounts payable personnel are facing problem due to slow movement of the management regarding the distribution of information about price negotiation. At the same time, it has also been identified that the number of days to pay back the creditors has been decreased significantly in the current accounting period from the average number of days of accounts payable. These indicate that there are some problems or issues in the company for which the significant changes happened in the company. However, due to these, some key assertions of financial statements are at risks in relation to the accounts payables. Two key assertions are stated below: Completeness: The auditor needs to identify and provide the opinion about the completeness of the financial transactions of the company (Mock and Fukukawa 2015). In case of Peak Sawmill Limited, it can be identified that the number of days have been decreased in current accounting period but the accurate reasons behind the decrease have not been mentioned. At the same time, the accounts payable personnel were not properly informed about the changes in the prices. Therefore, the assertion of completeness is at risk. Accuracy: The auditors are also required to identify whether the financial statements of the company are accurate or not. In case of the company Peak Sawmill Limited, it has been identified that the reconciliation statement of account payables shows that in the invoices of five major suppliers, the pricing is not correct and at the same time, some invoices have kept in hold. Therefore, the accuracy assertion of the financial statements is at risk. b. Justification for each assertion In the above, it has been identified that the assertions of completeness and accuracy of the financial statements of Peak Sawmill Limited are at risk. The completeness assertion of financial statement is at risk because the number of days of accounts payables has declined significantly in the current year, which is not usual. At the same time, the accounts payable personnel of the company has also complained that the management does not provide the information regarding the changes in the price of the logs within the required time. Along with that, it has also identified that that the some of the invoices of five major suppliers have not been considered during the reconciliation of the accounts payable account. Therefore, it is very clear that the calculation for the payment of the suppliers has not been done accurately. At the same time, it can also be said that the calculations done by the account payable personnel are not complete because many entries they kept on hold. Therefore, it can be said that the accuracy and completeness assertions of financial statements are at risk. c. Substantive test for each assertion It has been identified that the financial statements of Peak Sawmill Limited are having the completeness and accuracy assertion risks. However, in order to conduct proper audit, it is very much important to run a substantive test for each of the assertion risk (Sridharan 2015). The substantive tests to collect the appropriate evidence of audit are stated below: In order to collect the proper audit evidence regarding the completeness assertion risk the substantive test can be done by contacting the suppliers of the company that is Peak Sawmill Limited (Filipovi, Kremslehner and Muermann 2015). If the suppliers of the company are contacted by the auditors then it can be identified that whether there is any differences between the calculations of the suppliers and Peak Sawmill Limited or not. At the same time, it is also important to identify how much difference is there between the calculations of two parties (Jackson 2016). Along with that, the auditor can ask different questions to the suppliers in order to verify the payment calculations done by them. At the same time, the auditors can ask different questions and justification from each of the account payable personnel in order to verify the financial statements of the company. Therefore, it will be easier for the auditor to identify whether the companys personnel have included all of the entries in the books of accounts of the company or there are some mistakes. On the other side, in order to collect the appropriate evidence for audit of the accuracy assertion risk of Peak Sawmill Limited, the detailed-analysis procedure can be adopted. This procedure is bit time consuming but the chances of collecting proper data and evidence are more (Warren Jr, Moffitt and Byrnes 2015). In this particular audit data collected procedure, the auditor needs to ask for all of the financial statements along with the supportive documents from the accounts payable personnel at the company. After collecting the documents and financial statements, the auditor needs to analyze and compare each of the entry made by the accounts payable personnel in the financial statements. This type of substantive test can provide the detail information of each entry (Sridharan 2015). Therefore, the auditor can easily identify how much the calculations in the financial statements are correct in respect to the accounts payable of the company. Therefore, from the above discussion, it can be said that in order to verify the completeness assertion risks, the auditor can use the question answer technique with the suppliers. On the other hand, to verify the accuracy assertion risk, the auditor can apply the data collection from the companys personnel technique. Conclusion: In this study, it has been identified that cash flow statement is one of the most important financial statements for auditing. The cash flow statement provides the information regarding the cash transaction of the company and so if this statement is avoided at the time of auditing then the fundamental principles of auditing like, objectivity and professional competency and due care will be breached. On the other side, the American Accounting Association Model and Mary Guy model both suggest to take ethical decision at the time of auditing. 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