Financial Audit Failures Transition Economy -Myassignemenrhelp.Com

Question: Discuss About The Financial Audit Failures Transition Economy? Answer: Introduction: In the wake of global financial crisis the importance of audit have reached its peak. Considering the number of accounting scandals that the world of business has seen in recent times the utility of auditing has been reaffirmed. However, the failure of auditing in many cases such as in case of Enron, Satyam and other such accounting scandals have compelled the stakeholders to question the auditing standards governing the auditing principles and policies. With the objective of improving the quality of auditing, ASA 701 Communicating Key Audit Matters in the independent Auditors report has been issued by the Australian Auditing and Assurance Standards Board (AUSAB). An in-depth analysis on the auditing standard and its practical implementation in an audit of an entity is provided to help the readers in understanding the importance of the standard (Segal 2017). In order to complete the evaluation of ASA 701 and to assess its importance in auditing of an entity, BHP Billiton Limited has been chosen. BHP Billiton Limited is an Australian company in involved in the business of mining, petroleum products and metals. The registered head office of the company is in Melbourne, Australia. Auditing and its objectives The objectives of auditing is to provide an unbiased and independent opinion on the financial statements of an entity to express whether the financial performance reflected in the income statement of the company is a fair reflection of the financial performance of the entity and simultaneously whether the Balance sheet of the entity shows the true and fair picture of the entity as on the date to which these statements relate (Ratzinger-Sakel and Theis 2017). AUSAB has issued number of auditing and assurance standards to guide the auditors in discharging their duties efficiently as the auditor of different entities. ASA 701 has been issued by the AUSAB to deal with the matters which are recognized as key audit matters to make it compulsory for the auditors of listed entities to communicate these matters in the independent audit reports of such entities (Khler et al. 2016). Not only the standard is to be followed mandatorily by the auditors of listed entities but it also recommended for the entities which do not have their shares listed on a recognized stock exchange in the country. However, it has been left to the discretion of the auditor to take final decision whether to follow ASA 701 in auditing of unlisted entities. The standard has described the Key Audit Matters, here in after to be referred to as KAM in this document, which must be communicated to the stakeholders in the independent reports of the auditors. Let us have a brief dis cussion on the KAM to understand the matters which are to be communicated by the auditors in their reports to attract the attention of the investors and other stakeholders of the entities (Cordos and Flpa 2015). Key Audit Matters to be communicated in the independent auditors report ASA 701 has prescribed the matters to be communicated in the independent auditors report to ensure that key matters are communicated in the audit reports. In order to take cognizance of the investors and other stakeholders of an entity to assess the actual financial performance and position of an entity as on a particular date (McKee 2015). Following are the KAM which have been mentioned in ASA 701 to be mandatorily disclosed by auditors of listed entities and also recommended for the auditors of unlisted entities; Matters which require personal judgment of the accountants: The matters and items in the financial statements of an entity which require significant amount of personal judgment by the accountants and sometimes even that of the management need to be reported as KAM in the independent auditors report. These are the areas in financial statements which are prone to manipulation. ASA 701 has prescribed these matters to be reported in the independent auditors report to ensure that the investors and shareholders take note of these matters while evaluating the financial statements of an entity (Afterman 2016). Areas of financial statements which require auditors to make significant judgment There are few alternative methods which are allowed to be used in valuing the inventories of an entity. The accountants have the liberty to use any particular method to value inventories of an entity. The auditor needs to assess the inventory valuation method used by an entity to determine whether the same is in accordance with the relevant accounting standard. In case there is any contravention in valuation of inventories by an entity then the matter must be communicated in the report of the auditor in accordance with ASA 701 (Bdard et al. 2015). The inventory valuation technique used by an entity must be in accordance with the prescribed guidelines provided in the accounting standard AASB 102 to ensure that there is no contravention in valuation of inventories. This aspect must be evaluated by the auditor and accordingly, reported in his report to comply with the requirements of ASA 701 (Livne 2016). The depreciation method used by an entity: The AASB 116 has been issued by the Australian Accounting Standards Board to guide the accountants to charge depreciation in accordance with the standard to ensure that the financial statements reflect the true picture of an entity. However, due to the varied and complex economic and business environment under which different entities have to operate it is not possible to have a single method applicable for charging depreciation on non-current assets. Thus, there are more than one alternative which have been allowed for the accountants to choose while charging depreciation on non-current assets (Prasad and Chand 2017). Written down value method, straight line method of depreciation, sum of years digit method are all allowed under different circumstances to calculate the amount of depreciation in the books of accounts of the company. The auditors will have to use their knowledge and judgment to evaluate whether the method that has been used by an entity to ascertain the amount of depr eciation is in accordance with the AASB 116. In case of non-compliance with the provisions of AASB 116 by the entity which is under audit the auditor must communicate the matter in his report to attract the attention of the investors and shareholders of the entity (Reid et al. 2015). BHP Billiton financial statements dealing with such matters Matters and areas in financial statements of BHP Billiton Limited which require significant judgment of the auditors as well as that of the management of the company: Being one of the largest companies in the world as far as in the mining industry is concerned; BHO Billiton Limited has to deal with numerous aspects in its financial reports which require significant amount of judgment by the accountants and management of the company (Boolaky and Quick 2016). A brief description of the areas of financial statements of the company which have been determined after significant judgment from the management and the accountant are as following: Depreciation and amortization: The amount of depreciation and amortization provided by the company on its non-current assets including intangible assets require the management to use substantial amount of judgement. The auditor of the company must evaluate the method of depreciation followed by the entity and the amount of amortization provided on intangible assets to assess whether the same is in accordance with the relevant accounting standards, i.e. AASB 116 for depreciation and AASB 138 for amortization on intangible assets (Carson et al. 2016). Valuation of intangible assets of the company: The company has substantial amount of intangible assets. The management and accountants judgments are essential in recognition and measurement of intangible assets. However, the estimates and judgements by the management and the accountants of the entity should be in accordance with the accounting standard AASB 138 issued by the accounting standards board in the country. Recognition and measurement of intangible assets are essential to the preparation and presentation of financial statements in accordance with the conceptual framework in financial reporting (Reid et al. 2016). The auditor of the company must evaluate the technique and methods used by the entity to assess whether these are in conformity with the accounting standards or not. In case there is any contravention with respect to accounting standards in recognition and measurement of intangible assets of the company then the same must be reported by the auditors of the company in the independent auditors report. Significant events or transactions and their impact on the audit of the financial statements The significant events and transactions are those which are irregular in nature and unique from the point of view of an entitys regular business. It is important that such events and transactions are identified separately and reported by the auditors in the audit reports. ASA 701 prescribes that such significant events and transactions must be reported in the audit report of an entity to allow the users of the financial statements and audit report of an entity to take note of such significant events and transactions to appraise the effect of these transactions and events on the financial performance and position of the entity. Such event includes any significant event and transaction which might influence the going concern assumption of an entity as envisaged in ASA 570. Let us have brief discussion on such events and transaction which can be considered as significant from the stand point of an entity (Carver and Trinkle 2017). Any transaction involving the sale of a portion of an entitys business Transactions which involve sale of a portion of entitys business such as sale of non-current assets of the company which are used for the revenue generation purpose of the entity. Sale of an important portion of an entitys business will impact the going concern assumption of the entity as its ability to continue in the long run will be negatively influenced subsequent to the sale of portion of an entitys business (Majors 2015). Any new contract in which an entity has entered In case an entity has entered into any contract which will significantly influence the revenue of company in the future will have to be communicated by the auditor in the independent auditors report to ensure that the investors and other stakeholders of the entity are aware of such contract (Lee 2016). Severance of any existing contracts: In case of severance of existing contracts that is expected to negatively influence the ability of the entity to generate revenue in the future shall also be reported in the audit report of the entity. Other significant events and transactions: Other significant events and transactions also have to be reported by the auditor in accordance with the relevant standards on auditing to comply with the requirements of the standards. In respect of BHP Billiton Limited: The significant events and transactions in respect of BHP Billiton Limited is the expansion plan of the company to invest huge amount of funds to expand its business in the future with the objective of continue on the path of growth in the future. In order to maintain a sustainable growth in the future the company has been continuously looking for new markets and has decided to invest huge amount of funds in the future (McKee 2015). Apart from that the decision of the company to amortize all of its intangible assets within a period of 10 years is also something which is to be given due importance by the auditors while conducting the audit of the company (Livne 2016). Conclusion It is recommended that an entity should follow the accounting standards while preparing the financial statements and the auditors to follow the relevant auditing standards while conducting an audit. 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