Evaluation of the Public Internal Audit

Question: Explain about the Report for Evaluation of the Public Internal Audit. Answer: Introduction The obligation or requirements of an auditor while auditing an financial statement or historical information or complete set of financial statement is provided through Australian Auditing Standards. The form and content of audit are also explained through auditing standards. The report consists explanation regarding ASA 700 Forming an opinion and other Australian Auditing Standards. The part of the report which includes case studies has been explained by connecting the facts with the standards and then the conclusion has been provided. Analysis of all the auditing standards has been done to prove explanation in a better manner. The comment regarding the critical words used while auditing and the effect of opinion on financial statements have also been included in the report. 1: Audit Reports. Part A ASA 700 Forming an Opinion and Reporting on Financial Statements. The compilation of this standard was prepared by included amendments on 27th June 2011 by Auditing and Assurance Board (AUASB). This specification is applicable on the audit framework to provide opinion on financial statements. This can be for any other purpose or an audit report of financial year or for a period of half year for the period commencing on or after 1st January2010. General purpose financial report means financial report according to general purpose framework (Wei and et.al. 2014). The framework which meets the needs of users of financial statements to general framework. Opinion of auditor is based on the fact that financial statements have been prepared by considering appropriate financial reporting framework or not. Form of Opinion Unmodified Opinion: The auditor expresses an unmodified opinion in case he concludes that the financial report has been prepared in accordance with applicable financial reporting framework in all respect (D. Chambers, 2014). In case an unmodified opinion has been expressed by an auditor, the opinion shall be regarded equivalent that financial reports are presented on fair basis and gives a true and fair view as per applied auditing standards. Modified Opinion: In case the auditor concludes that according to availability of audit evidence in entity regarding financial statement is not free from material misstatement This statement is also valid in situation where it is not possible to achieve adequate proof for conclusion of fact that where reports are free from material statements or not. The auditor shall modify the opinion by following provisions ASA 705(Cohen and et al.,2014). Qualified Opinion: The auditor expresses qualified audit opinion according to AUS 802 in case the financial statement do not provide a true and fair view according to accounting policies followed in preparation of financial statements, in case they are not in compliance with statute or not in accordance with accounting standards (Chen and et.al. 2016). Adverse Opinion: Inability to form an opinion or Adverse Opinion is expressed in the case where the entire financial report is so extensive that auditor is not able to form an opinion (Chan, 2016). The same has been provided in AUS 802 The audit report on financial information other than a general purpose financial report. Part B (a) Case: In the present case, the company is dependent on bank overdraft to pay off the debts. The bank wants the repayment in one month and company has been unsuccessful in arranging other finance as the cash flow does not cover its debt. Opinion: The auditor has to express opinion according to the available audit evidence. Going concern is a basic concept of business and an assumption taken while preparing audit report (Carson and Fargher, 2012). Incapacity of company for repaying there debt has been assumed as material weakness. It is because, company is being unsuccessful in attaining of other finance support for payment of debts. Hence, a material uncertainties exist regarding payment of debts over next twelve months an opposing opinion will be expressed by the auditor. (b) Case: A local company uses same inventory valuation LIFO, as followed by its American Parent Company. The difference between LIFO and FIFO system has a material effect in stock and not on the remaining financial statements. Opinion: The modified opinion will be formed by the auditor in this case as the financial statements do not provide true and fair view of books and accounts. It can be said that the qualification is not so severe to give rise to circumstances of forming an adverse opinion (Bhaskar and et.al. 2016.). The effect of LIFO system on stock and it impacts on profit of organisation should be explained in financial reports. As it is provided in the data that the material effect is present to the extent of inventory and not on the remaining financial statement, the same should be provided in the audit report and the effect on profit due to adoption this policy should also be explained. (c) Case: The Victorian manufacturing company includes factories in its balance sheet on market value less accumulated depreciation. A factory in Melbourne has been carried on same value for five years. The reason behind it explained by the directors is that the market values have been stable from last five years. Opinion: An unqualified opinion will be expressed by the auditor in the present case, as the same accounting policy has been followed on a consistent basis and the financial statement presents a true and fair view (Amin and et.al., 2014.). An explanation regarding the accounting policy should be made available in audit report so that the users can take decision accordingly. Facts of the case The factory foreman is responsible for the hiring the applicants. In case the applicant is hired, a statement regarding income tax instalment declaration is prepared and given to foreman. In the morning each worker fills name and time of arrival and departure itself. At the end of the week, workers drop their time sheets in a box near door factory. The completed sheets are taken back to payroll clerk. Two clerks are given the responsibility, and they divide cards between them in alphabetical order. Each clerk is responsible for his own section. The payroll cheques are manually signed by chief accountant and given to foreman. Delivery of cheque is arranged in case worker is absent. The payroll bank account is reconciled by a chief accountant who prepares monthly pay roll. Internal control can be said as auditing procedure for assuring the achievement of entitys effectiveness and efficiency. Internal control includes all the components that control the risk (Akay, 2014). It is a means through which the available resources are monitored, directed and measured. The objective of the internal procedure can be said as the reliability of financial report at the organisation level. Weakness of internal control system is enumerated as below: The workers are hired by a single person, and no check on him is available whether the bases on which the employees employed are appropriate or not. The time sheet having arrival and departure time is filled by the employees in separate sheets; no register is being maintained; even no authority is present to check whether the time of arrival or departure in office. The clerks know regarding their working in advance only, in these circumstances they can defraud the entity. The payroll bank account is reconciled by a chief account who also prepared monthly payroll tax report. Test of control for errors identified in above parts A test of control is a process through which the effectiveness and efficiency of the control of entity are checked for preventing direct material misstatements. In case the internal control of the organisation is weak then; the same has been identified by the test of control. The auditor will use substantive testing for checking the internal control which increases the cost of audit (What are a test of controls? 2014). The control procedures can be applied in an organisation to improve the internal control through two method test of details and substantive test procedures. Test of details include procedures like asking confirmations from the customers regarding their balances or the amount they owed, tracing the existence and ownership through inspecting sales invoice, analysis of the amount received after the year end to check whether the amount due was bad or not; it can be said as a check against provision of bad debt. Substantive test is performed including analytical procedures and are additional to the test procedures which have been already performed (Test of controls, 2015). It includes enquiry and information which it performed to ascertain the information which is not available within organization and if available than the auditors cannot trust on it, Inspection is also a part of substantive procedure in which the analysis regarding the performing of obligation is being done, Observation is done to assess the manner in which the responsibility or the duty is completed by the specific authority and Recalculation, and performance is also a meth odology which is applied under this method to have a check on activities that have already been performed by the employees (William and et.al. 2016). The following control procedures can be followed to remove the weakness present in the current system of the organisation: Enquiry Confirmation: The substantive test will be done to monitor the weakness present in internal control of organisation due to the current procedure of hiring workers (Six Components of Good Internal Control Systems for Smaller Entities, 2012). The foreman should be inquired regarding the quality on the basis of which workers are hired, and confirmation regarding the following procedure must be submitted to higher authority Inspection: Instead of submitting information on different papers, a register should be maintained regarding the details of arrival and departure time. Authority should be made available to check whether the details have been correctly submitted or not. Test to details: The clerks have divided the work in alphabetic order; therefore they check the details of same workers every time which is not rechecked by a higher authority (New Guidance Allows Rapid Evaluation of Risk Management, 2014). Some entries from both the sections could be checked to ascertain the fault or error done by them. Performance and Recalculation: In the present case, the work is completed and verified by one and the same person, which increases the chances of presence of a fault. The chief accountant prepares the pay roll and reconciles the same; the errors cannot be traced as both the responsibilities are given to one and same person (Internal Controls, 2013). The reconciliation procedure should be reperformed, or calculation should be revised so that the possible errors could be identified. Conclusion The above report depicts the importance of internal control of an organisation. The kinds of opinion which can be expressed by the auditor have been explained in the report. It can be concluded from the above report that disclaimer of opinion is expressed only in the case when the sufficient appropriate evidence is not available to him through which he could express their viewpoint concerning the true and fair view of financial statements. According to the analysis, the internal control plays a major role in the organisation as the obligations are fulfilled with efficiency and effectiveness in the environment of the entity. Test of control and substantive procedures are being used to ascertain whether the appropriate internal control is present in the organisation. References Books Journal Akay, S., 2014. A Study on Evaluation of the Public Internal Audit in Terms of The Organization and Legislation. Uak University Journal of Social Sciences, 2014(17). Amin, K. And et.al. 2014. Going concern opinion and cost of equity. 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