Auditing Assignment: A Letter To The Audit Manager Of ABC & Associates (A&A)
Background of Auditing Assignment:
According to ASA 240 -The auditor’s responsibilities relating to fraud in an audit of a financial report (para. 27):
‘When identifying and assessing the risks of material misstatement due to fraud, the auditor shall, based on a presumption that there are risks of fraud in revenue recognition, evaluate which types of revenue, revenue transactions or assertions give rise to such risks.’ (https://www.auasb.gov.au/admin/file/content102/c3/ASA_240_Compiled_2019-FRL.pdf) Required:
Write a letter to the Audit manager of ABC & Associates (A&A) audit firm, Mr John Foster, in which you address the following:
- Relying on the information in ASA240 (refer to link above), explain the difference between the responsibility of management and those charged with governance and the responsibility of auditor in relation to the prevention and detection of fraud.
- Discuss the misconception that exists in society surrounding the role of the auditor in relation to the prevention and detection of fraud in an audit of financial statements.
- Provide two reasons why an auditor presumes that there are potential risks of fraud relating to revenue recognition in entities. Make sure that you explain your reasons clearly.
- Provide two case examples of revenue misstatements that have been reported in the media.
Auditing Assignment Part A
Letter to the Audit Committee
Mr. John Foster
ABC and Associates (A&A Audit Firm)
23rd September 2021
This is to bring your kind attention to the fact that material misstatement even after imposing strict work ethics and framework is very common in Australia. Many of us fail to understand the value of the correct audit report but Companies even fail to implement it. Due to the material misstatement, wrong information of the financial statement that is incorrect, later influences the economic decisions and my major area of concern is that how do even companies get to fool the stakeholders?
I am writing you this letter to inform you about an incident of fraud that happened in the Company, I was auditing the reports. The executives have deliberately overstated the statements and tried fooling the stakeholders with asset misrepresentation. As an Auditor of the Company, I figured out this at one go but my area of concern is that even though there are management and auditors, why do these things happen? The fraud that, I was assessing was directed towards the case of fraud in revenue recognition. There are certain responsibilities from both the auditing committee and the management wherein, both the parties should stay loyal, unbiased, and communicative of everything. Auditors should respond to the material misstatement and delegate certain responsibilities by taking the help of IT and forensic experts. In the Company, which I was auditing, there was a lack of communication and no decentralization. In Australia, there are very less rights given professionally to the Auditors to interfere in the organization.
Identification of Management Responsibility and Auditor Responsibility
The auditors' work does not end by only presenting the accurate audit report but, a good auditor should interfere with the workings of the organizations to determine the fraud and the competencies of the team involved in the work.
An Auditor can incorporate various activities according to the Auditing Standard ASA 240 like changing the time of the auditing procedures and the nature (Auditing and Assurance Standards Board, 2019). The Auditor can interfere with the auditing proceedings by physical observation and timely inspection and the use of computer-assisted auditing techniques to fasten the accuracy. The up-gradation of the proceedings may be designed in such a manner that it complies with the latest research and technologies.
The duty of the auditor or the auditing committee does not end by only presenting the papers to the organization about its more than just a government job. An auditor should stick to the ethics and morality of the education and accounting standards and unbiased reporting of the accounts without coming under the influence of the top-level executives.
Misconception existing in the society
Many miss conceptions exist with the role of the auditor that only scrutinizing of the reports remains the only ambition but in reality, an auditor doe much more than that. Right from the assets valuation to carefully checking the inappropriate override of controls, an Auditor can try to minimize the fraud.
Two reasons why I presumed that there is a potential risk of fraud concerning the revenue recognition is that in the Company there were assets misrepresentations because the executives' remuneration was directly linked to the achievement of the objectives. Failing to which can lead to a reduction in the salary and incentives. The second reason that I found that made me suspicious is that the actual sale was not recorded but those that are kept for the future are shown in the financial recordings, which is unethical (Auditing and Assurance Standards Board, 2019).
Hence, to cater to the issues as an Audit Committee, the APES 110 Code of Ethics for Professional Accountants shall be kept in mind that are issued by the Accounting and Professional and Ethical Standards Board for performing the additional duties.
In order to begin with, the communication shall be made a priority, or more than one Auditor and management shall perform the duties collectively. Some of the steps that can be followed are as follows:
Professional Skepticism: An Auditor should come forward and ask questions related to the various recordings of sales and revenue made by the Organization in order to determine whether this is accurate or false. The Auditor cannot disregard the statement shown by the organization but at least can take conformity from the third party or use the work of experts to document the level of authenticity.
Discussions with the team involved: Involving more than one Auditor may reduce the chance of errors and intentional frauds as well as pave ways for experienced feedbacks and insights from more experienced auditors. Ideas exchange when group members communicate amongst each other and reach a better understanding of the financial statements.
Ensure the complete flow of communication: The management should ensure that there is an appropriate flow of communication from both sides and at all levels of management.
Case examples of revenue misstatement
One of the biggest frauds that were reported in news was of NutraCea, Inc, a company that specialized in the stabilization of bran. The reports of its executives overstating sales recording are well known. This was done to keep up their incentives going between the very high demand and inability to meet the Company's profitable objectives (Corey et al., 2017). Fortunately, the Auditor found out demanded a restatement of all the recordings from the scratch. This could happen only when there was a complete flow of information and the management informed the auditor about the unfair means going on and eventually the auditor interfered.
Another example is the case of RIL Australia Private Limited which dates back to 2017 when the auditor stated that the financial statement that was disclosed by the executives of the Company did not comply with the actual results of the auditing (RIL (AUSTRALIA) PTY LTD, 2017).
Hence, the two cases state that an effective flow of communication is crucial for both management and the auditor with regard to the establishment of good follow of the Accounting Standards and ethical practices.
Thanks and Regards
Auditing and Assurance Standards Board. (2019). Compiled Auditing Standard ASA 240 Auditing Standard ASA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of a Financial Report Prepared by the Auditing and Assurance Standards Board. https://www.auasb.gov.au/admin/file/content102/c3/ASA_240_Compiled_2019-FRL.pdf
Corey, T., Russell, D., Rao, A., & Martin, C. (2017). Auditing assignment NutraCea, Inc. -A Revenue Recognition Case Study. https://www.ship.edu/contentassets/569211b0c6f243808c3c64f54e816cd2/nutracea-inc---a-revenue-recognition-case-study.pdf
RIL (AUSTRALIA) PTY LTD. (2017). RIL (AUSTRALIA) PTY LTD Financial Statements FY 2016-17. https://www.ril.com/DownloadFiles/FinancialStatementOfSubsidiaries16-17/113%20-%20RIL%20(Australia)%20Pty%20Ltd.pdf