Exam 2

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Name: Sara Majeed

Banner id: B01653686


Course: Audit Ethics & Corporate Governance (LNDN11002)

QUESTION NO 1
a) Identify and explain the audit assertions relating to balances at the period
end, specifically using non-current assets in your explanations.

Existence or Occurrence: This claim guarantees that the non-current assets described do
in fact exist and that transactions have taken place. The auditor must confirm the physical
existence of the land, structures, machinery, and vehicles, as well as the legality of any
transactions involving their acquisition or disposal.

Completeness: The declaration of completeness confirms that the financial statements


have accurately documented all pertinent non-current assets. The auditor must ensure that
all purchases and sales are appropriately recorded and that there are no unrecorded assets
or transactions.
This claim examines whether non-current assets are fairly valued, taking into account
both their original cost and cumulative depreciation. The auditor must evaluate if the
company's accounting standards are being followed and whether depreciation
calculations for land and buildings, machinery and equipment, and automobiles are
accurate.

Rights and Obligations: According to this claim, the corporation is legally entitled to
the non-current assets. In order to ensure that the business has the legal authority to use
and dispose of these assets, the auditor must review ownership records and contracts.
Verifying how non-current assets are reported and disclosed in the financial statements
falls under the presentation assertion category. In the notes to the financial statements, it
is important to make sure that the depreciation techniques, rates, and accumulated
depreciation are properly disclosed.

Cutoff: Cutoff assertion makes ensuring that non-current asset transactions are reported
in the appropriate accounting period. To make sure that asset purchases, sales, and
depreciation calculations are appropriately recorded in the right periods, the auditor must
examine the timing of these events.
b) Give two substantive tests that could be performed on Pie in the Sky Ltd.’s
non-current assets in respect of each of the assertions that you mentioned in
a) above.
For each of the aforementioned claims, there are two relevant tests that could be used to Pie in
the Sky Ltd.'s non-current assets:

1. Existence or Occurrence:
a) Physical Inspection: The auditor has the option of physically inspecting a sample of non-
current assets, such as real estate, buildings, machinery, and automobiles. This entails going to
the business' location and making sure the items listed in the fixed asset registry are indeed
present. Any discrepancies can be looked into more thoroughly.
a) Vouching to Supporting Documents: Choose a sample of non-current asset additions that
occurred during the period and vouch them to the appropriate supporting documents, such as
purchase invoices, contracts, and delivery receipts. This makes it easier to verify that the assets
were really bought and exist.
Completeness:
a) Conduct a trend analysis of the additions of non-current assets over the last few time periods.
Compare this to the company's historical data and benchmarks from the industry. Potential
omissions or undeclared assets may be indicated by significant variations or strange patterns.
b) Tracing to Documentation: Pick a sample of transactions from the business's expense or
cash disbursement records, and then follow those transactions to the fixed asset register. By
doing this, it is possible to make sure that all assets acquired over the time have been accurately
recorded.
3. Valuation or Allocation: a) Recalculation of Depreciation: Based on an asset sample's initial
cost and appropriate depreciation rates, recalculate the asset's depreciation expense. To find any
differences, compare the recalculated numbers to the quantities in the financial statements.
4. Rights and Responsibilities: a) Examine Ownership Documents: For a sample of non-current
assets, look over ownership documentation such as title deeds and purchase agreements. Verify
the company's ownership of and usage rights to the assets.
a) Confirmations from Third Parties: For assets covered by lease agreements or financed,
request written confirmations from third parties (such as lessors or financing institutions). This
supports the company's rights to and commitments with respect to those assets.
5. Presentation and Disclosure:
a) Disclosure Review: Check the financial statements' notes to make sure that each category of
non-current assets' depreciation methods, useful lifetimes, and accumulated depreciation are
appropriately stated.
b) Accumulated Depreciation Reconciliation: Match up the fixed asset register's accumulated
depreciation balances with the general ledger. If there are any differences, look into them and fix
them to ensure appropriate display.
6. Cutoff: a) Review Documentation Dates: Examine purchase orders, invoices, and receiving
reports for non-current asset additions near the end of the reporting period. Ensure that the
related transactions are appropriately recorded in the correct accounting period.
b) Examination of Disposal Documentation: Review documentation related to the disposal of
non-current assets, such as sales agreements or disposal records. Verify that disposals have been
accurately recorded in the correct period.
7. Classification:
a) Asset Classification Review: Select a sample of non-current assets and verify their
classification according to the company's accounting policies. Ensure that assets are properly
categorized as land and buildings, plant and equipment, or motor vehicles.
b) Segregation of Categories: Test the segregation of different categories of non-current assets
in the fixed asset register to confirm that they are separately identified and appropriately
disclosed.
8. Accuracy:
a) Recalculation of Depreciation: Recalculate accumulated depreciation for a sample of assets
and compare the results to the fixed asset register. Investigate any significant differences to
ensure the accuracy of the recorded amounts.
b) Reconciliation of Depreciation Expenses: Reconcile the depreciation expense recorded in
the income statement with the depreciation charged to the fixed asset register. Investigate and
resolve any discrepancies.
These substantive tests are designed to provide reasonable assurance that the non-current asset
balances in Pie in the Sky Ltd.'s financial statements are accurate, complete, and valid in
accordance with the relevant assertions. The specific tests conducted may vary based on the
auditor's judgment and the specific circumstances of the audit engagement.
c) Give three examples of good internal controls for the ordering
process of non-current assets.
Authorization and Approval: Ensure that the procedure for authorising and approving the
purchase of non-current assets is explicit and well-documented.
This might entail: requiring purchase requests or requisitions in order to purchase non-current
assets. Before making any purchases, these requests need to be evaluated and approved by the
proper management levels.
Putting in place a hierarchy for purchase authorizations depending on asset worth. Senior
management or the board of director’s approval may be needed for higher-value assets.
Utilizing an electronic signature or approval workflow system to guarantee that the required
approvals are received before the purchase is finalized.
Implement segregation of responsibilities to stop any one person from having complete control
over the ordering process. To lower the danger of mistakes or fraud, key roles in the process
should be divided.
For instance: The individual who submits the purchase request should not be the same person
who approves it and does the actual buy.
The person in charge of authorising the transaction should be distinct from the person handling
payments or entering the asset into the accounting records.
When making large purchases, involve the finance department in confirming the accuracy of the
order and its supporting documentation before processing payment.
Conduct in-depth due diligence on vendors before signing contracts for the purchase of non-
current assets. Potential problems with asset quality, pricing, and ownership may be avoided in
this way. Control examples include:
Keeping an updated list of authorized vendors and periodically evaluating it.
Examining a vendor's references or doing a background check before engaging in a large
transaction.
Confirming the legitimacy of the seller and making sure they have the authority to sell the items
being bought.
Comparing quotes or costs from many vendors to make sure the business is buying assets for
their fair market worth.

d) For each of your suggested internal controls given in c) above, design a test
of control (compliance test) to evaluate the effectiveness of the control.
Approval & Authorization:

Control: Purchase requisitions are necessary for the acquisition of non-current assets and must be
authorised by the proper management levels.

Conformity Check: Pick a sample of non-current asset purchase requisitions, and check to see that
all necessary information is included (such as description, quantity, and cost).
Verify that the purchase requisitions' permission signatures or electronic approvals are from the
correct people by closely inspecting them.
To confirm that the approvals are from the relevant persons, compare the approved signatures with
the authorised signatory list.

Separation of Functions: Control: To prevent one person from exerting total control over the
ordering process, key tasks are divided.

Conformity Check: Verify that various people are in charge of proposing, approving, and
documenting asset acquisitions by going over the organisational structure and process flowcharts.
Trace the purchase requisition, approval, and purchase documentation for a sample of non-current
asset purchases to ensure that separate people participated in each step.
To ensure that the right people are aware of their allocated duties and the necessity for task
segregation, speak with them.

Research into the vendor:

Control: Before signing contracts for the purchase of non-current assets, careful due diligence on
vendors is performed.

Conformity Check: Examine the supporting documentation for due diligence procedures (such as
vendor background checks and reference checks) on a sample of recent non-current asset purchases.
Check to see if there is proof of a written review and approval procedure for hiring new vendors.
Verify that vendors were thoroughly screened before being engaged by comparing vendor
information to the approved vendor list.
Make that clauses addressing vendor validity and asset ownership are present in all vendor contracts
and agreements.

Question No 4
a) What work would the internal audit department do?
Identification and evaluation of potential hazards to the business's operations, finances, and
reputation. To identify these areas of risk, it is necessary to comprehend the business
processes, systems, and industry standards used by the company.
Examine the sufficiency and efficiency of internal controls that are in place to protect assets,
thwart fraud, and guarantee correct financial reporting. This entails evaluating access
controls, segregation of duties, control methods, and authorization processes.
Examine financial transactions, records, and statements to ensure their completeness and
accuracy. The internal audit division would make sure that financial information is
trustworthy and accurately depicts the company's genuine financial situation.
Operational auditing involves assessing the efficacy and efficiency of operational practices.
This could entail reviewing workflows, allocating resources, and ensuring adherence to
corporate guidelines and industry best practices.
Verify that the business is abiding by all applicable laws, rules, and industry standards via a
compliance review. The internal audit division would evaluate whether business practices
adhere to ethical standards and regulatory obligations.
Fraud Detection: Be proactive in looking for indications of fraud or abnormalities within
the company. Investigating transactions, disparities, or abnormalities that may point to fraud
entails doing this.
Improvement Suggestions: The internal audit department would make suggestions for
increasing internal controls, operational effectiveness, and risk management based on their
assessments. These suggestions can aid the business in improving its procedures and
lowering potential dangers.

b) In what ways may the external auditors place reliance on their work?
Understanding Internal Controls: The internal audit department's evaluation of the
company's internal controls can be relied upon by external auditors. This knowledge aids
external auditors in identifying risk areas, evaluating the efficacy of controls, and designing
audit methods appropriately.
Internal auditors frequently conduct risk analyses and pinpoint the main areas of concern.
These evaluations can help external auditors priorities their own audit processes and
concentrate on high-risk areas.
Controls testing: External auditors may rely on controls testing if the internal audit
department has already examined them and given confidence regarding their efficacy. This
can cut down on redundant work and streamline the auditing procedure as a whole.
The documentation, work papers, and evidence produced by the internal audit department
may be used by external auditors to support their own audit conclusions. By minimizing the
need to repeat some audit procedures, this can save time and resources.
Fraud Detection and Investigation: External auditors might use information from internal
audit department investigations of fraud or irregularities to inform their own methods and
evaluations.
External auditors can depend on the internal audit department's recommendations for
enhancements to internal controls and operational procedures. Auditors may use this
information to better understand how management has addressed identified shortcomings.
c) Draw up a checklist for the external auditors to use to assess the internal
auditors as potentially being capable of producing work on which the
external auditors may rely?
Experience and credentials:
Are the internal auditors properly trained, skilled, and
knowledgeable about the relevant industries?
Do internal auditors hold the necessary certificates or other professional credentials, such
as Certified Internal Auditor or Certified Public Accountant?

Independent and unbiased thinking:


Is the internal audit department independent and
unaffected by management or other departments in an improper way?
Exist any conflicts of interest that can jeopardise the impartiality of the internal auditors?
Governance and the internal audit charter:
Does the internal audit department have a
written charter outlining its mandate, powers, and obligations?
Does the internal audit department have a clear reporting structure that includes
interaction with the audit committee and outside auditors?
Risk evaluation and preparation:
To identify the main areas of risk and concern, does the
internal audit department perform a thorough risk assessment?
Is the internal audit plan in line with the goals, threats, and legal obligations of the
business?
Methodologies and techniques for audits:
Do the internal audit department's audit
methodology and processes have documentation and are they clearly defined?
Are audit processes thorough, organised, and intended to offer a fair level of assurance?
Internal Control Assessment:
Does the internal audit division evaluate the suitability and
efficacy of internal controls, including their design and operational efficacy?
Are control weaknesses found and reported to management with suggestions for
improvement?

Sampling and testing:


Does the internal audit department carry out enough testing and
employ the right sample methods to support its findings?
Is the sample size appropriate and well-justified, as well as the selection process?
Work papers and Documentation:
Are audit findings, work products, and supporting
documentation thorough, logically arranged, and easily accessible?
Do work papers provide justification for conclusions and suggestions?

Question No 3:
Explain the argument for and against the application of OECD corporate
governance principles?

Justifications for Implementing OECD Corporate Governance Principles:

Investor Attractiveness and Confidence: Applying OECD corporate governance


guidelines can improve the company's appeal to investors. Investors are more likely to
invest when they believe a company adheres to good corporate governance principles,
which increases capital inflow.
Transparency and Disclosure: In order to uphold these standards, the corporation must
give stakeholders accurate and timely information. By being transparent, a firm can deter
fraud and give investors a comprehensive picture of its operations and financial status.
Accountability and Board Oversight: The guiding principles stress the significance of a
strong, impartial board of directors. By doing this, conflicts of interest are less likely to
arise and decisions are made with the interests of shareholders and the firm at heart.

Identifying and addressing possible risks early on can assist improve risk management
and overall organizational performance. This is known as risk mitigation.

Capital Market Access: Businesses that follow good corporate governance principles
are frequently more appealing to institutional investors and have simpler access to capital
markets. The company's objectives for growth can be aided by this.

Arguments against the Application of OECD Corporate Governance Principles:


Interference and Flexibility: Some business owners and managers may perceive
adherence to strict corporate governance principles as unnecessary interference in their
operations. They might argue that their success thus far has been due to their autonomy
and flexibility in decision-making.

Cost and Resource Allocation: Implementing corporate governance practices can be


costly, particularly for smaller businesses. Allocating resources to comply with these
principles might divert funds from other essential business activities.

Short-Term vs. Long-Term Focus: The emphasis on shareholder rights and short-term
financial performance might lead to a focus on immediate gains at the expense of long-
term strategic planning.

Cultural and Contextual Differences: Corporate governance principles may not always
take into account the cultural and contextual differences of each company and region. A
one-size-fits-all approach might not be suitable for all businesses.

Lack of Immediate Impact: Some business leaders may question the immediate impact
of implementing these principles on their bottom line, especially if their current practices
seem to be yielding positive results.

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