Auditor's Responsibilities and Financial Risks: A Critical Analysis of Valu Ltd.
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Introduction: Understanding External Auditors' Critical Role in Financial Reporting and Risk Assessment
1: Critical explanation with justifying rationale with respect to external auditor’s responsibility
The critical explanation with justified rationale associated with identifying responsibility of external auditors is considered to be related with defining the actions of the previous auditor as well as identifying the relevance and significance of how refusal to design and install a new computer-based inventory could potentially lead to organisational fraud. Further emphasis shall be provided on assessing high degree of trust and verbal representation for determining the key aspects needed to be considered with respect to ignorance in assessing business risks. Following is a detailed discussion on the two parameters where roles and responsibilities of external auditor are highlighted.
a) Actions of previous auditors
The actions of previous auditors are considered to be an important parameter that is needed to be adhered to for establishing the prospects of evaluating a detailed proposition in the design and installation of a new computer-based inventory control system. Hence, as a result of previous actions being taken by auditors over allocation of travelling expenses and other important expenses took place significantly leading to potential rise in overpayment of expenses. Hence, the action of previous auditor is considered to be inefficient leading to lower financial aspects for the company concerned Valu Ltd (iiasb.org, 2022, ISA 220 (5)).
Hence, the explanation of Valu Ltd.’s directors is not considered to be a justified one as auditing and accounting reliability has been compromised. Due to the compromise in evaluating the assessment of a new computer inventory the expected trading losses became a significant factor which further led to deplorable market and industry conditions. Moreover, it can be assessed that the external auditors associated with the company field to marginalise how the auditing purposes could be resolved in order to prevent a potential collision and collision. The associated role of Valu Ltd auditors with respect to the management of the directors of the company is considered to be related with finding a new approach to incorporate and enhance degree of collaborative business conduct and business profitability prospects (ifac.org,2022, National Standards (3)).
However, it can be critically assessed that the direction in which the company is headed is considered to be traditional and an approach that contains potential loopholes. Hence absolute vigilance to understand the numerical expressions and facts and figures has been jeopardised leading to indifferent financial and organisational propositions. Following is a detail analysis regarding the basic rules and regulations needed to be followed by an independent auditor as well as highlighting the auditor’s roles and responsibilities considering the predicament of Valu Ltd.
Roles and responsibilities of independent auditor
Examining financial statements
Primary role and responsibility of an independent auditor is considered to be related with thorough examination of financial statements for an organisation. This is considered to be an important facet which needs to be considered by an independent auditor to ensure justice in the auditing works that has been carried out. In the case of Valu Ltd, the auditors have grossly neglected the inclusion of designing and installing a new computer-based inventory control system to ensure that the organisation achieves its financial and operational goals. This action is considered to be a derogatory one which could have further ramifications about competitive advantage and positioning of the company (iiasb.org, 2022, ISA 315, (1)).
Hence, the potential chances of a fraud and miscarriage of financial statements could be magnified considering the neglect by auditors. Hence, in this case it can be considered that the expectations of Valu Ltd is considered to be not justified as a clear breach in the auditing functionalities from an auditor and has been established. The examination of financial statements is therefore considered to be any important determinant in the auditing works conducted by an auditor which has been rejected by an auditor in order to evaluate the appropriate valuation of the computer-based inventory control system (iasplus.com, 2022).
Scrutinising business-oriented data
The second important roles and responsibilities associated with the functional description carried out by an independent auditor is considered to be related with scrutinisation of business-oriented data. The scrutiny of business-oriented data is considered to be an important aspect as backtracking of relevant financials, data information is needed to be objectivised by an auditor. The main reason associated with scrutiny of business-oriented data is mostly associated with determining the scalability of financial statements and financial aesthetics appearing in a company's financial statements. In the case of Valu Ltd this role and responsibility by independent auditor is considered to be jeopardised as the role or inclusion of feedback from employees and other internal stakeholders has been grossly neglected. Thus, the expectation of Valu limited this regard in this regard is considered to be a justified one as owing to auditors’ negligence the financial condition of the organisation has been compromised (irb.co.za, 2022).
Highlighting the applicable tax obligations and tax liabilities
Tax applicability or the assessment of tax obligations and tax liabilities is also deemed to be an important role and responsibility that is needed to be conducted by an independent auditor on a daily basis. This role is due to be a significant one as it encourages the auditor to understand a basic knowhow on what the potential tax obligations might be. Tax liabilities are usually considered to be a core component of the financial statement of an organisation which relates to what specific amount of taxable returns is needed to be facilitated towards governmental and federal agencies. In the case of Valu Ltd the independent auditor has thoroughly neglected the price quotient associated with the computer-based inventory control system. Thus, the expectation of the company’s directors is considered to be a justified one as a clear indication of audit lapse has led to financial missed management and fraud (namic.org, 2022).
b) Informal Working Partnership
The informal working partnership is also considered to be an important determinant of the auditory composition interlinked between the independent auditor and the managerial concern of Valu Ltd. This is considered to be an important determinant as the relevance of informal working partnership is considered to be an important determinant for assessing potential business risks and threats as well as allowing prosperity in organisational communication channels. The expectations of working together closely have been further ignited based on Able and Cassie establishing the time bound factor related with ensuring proper spendings and a marginal reduction in the costing reduction. However, it can be critically expressed that the significance of business has increased substantially leading to a risky proposition in the day-to-day conduct of operational activities. This is subsequently jeopardised by not initiating a proper and feasible communication to ensure that directors indulge in frequent conduct of meetings and reviews for harmonising the financial aesthetics of the company.
The lack of precision and clarity on the relevant activities needed to be staged for ensuring growth and prosperity of Valu Ltd has also led to insignificant business propositions that seem to be mostly untruthful when communication approaches are being catalysed with independent auditors/ Therefore it can be considered that expectations of the company are not reasonable owing to the fiasco caused due to unrecognisable communication streams and channels.
2: Discussion on response needed to be facilitated by the auditor
The relevant response needed to be facilitated by an auditor becomes more significant and vital when monitory consent or financial proposition is involved. In the case of Valu Ltd it can be further considered that the proposed jewellery voucher of GBP 140 for each member of the audit team is considered mostly as a token of appreciation. Generally, acceptance of a token of appreciation is not disregarded when the monetary consideration is considerably lower on the auditor's part however high monetary or token value concentration is generally refrained from an auditor accepting it from clients. However, the tricky aspect of accepting gifts from a client is considered to be an important determinant which needs to be adhered to by auditors in order to have a hunch on the financial status and structure of an organisation from where the gifts are being distributed. Thus, the potential prospects of monetary discourse could also take place which would further encourage window dressing of an organisation’s financial structure and metrics.
The handling of token of appreciation by an independent auditor could be a tedious and a self-compromising position which many organisations often take advantage of to hide their actual financial position. Thus, primarily an independent auditor could acknowledge receipt of jewellery vouchers from clients in a gleeful manner. However, safety and precaution are needed to be adhered to with regards to accessing the rationale of Valu Ltd. with respect to dispersing and dispatching gifts and jewellery vouchers.
3: Critical comment with justification regarding validity of remarks made
The comment made based on assessment and validity of remarks by Cedric Candod is mostly considered to be related with ascertaining the relevant interests and assertions for ascertaining auditor’s interest and the mistakes that were committed. The critical assessment with regards to functional description that is being propelled by independent auditors is considered to be related with disclosures made in the financial statements of Valu Ltd. Therefore, it can be duly assessed that making assertions on financial performance of the company has led to large scale omissions and neglect for incorporating key financial aspects that should have been initially included in the preparation and presentation of financial statements. The remarks made by the member of the audit team is more a matter of concern as zero or minimal confidence from a shareholders perspective exists in the organisational domain of Valu Ltd. Hence critical factors are mostly associated with lack of clear authority and control with respect to justifying numerical facts and expressions. This is considered to be an important facet which needs to be considered by an independent auditor to ensure justice in the auditing works that has been carried out. In the case of Valu Ltd, the auditors have grossly neglected the inclusion of designing and installing a new computer-based inventory control system to ensure that the organisation achieves its financial and operational goals.
The auditory jargon is also considered to be a critical and vital aspect that caters for suitable analysis of financial structure that is concentrated within an organisation’s internal perimeters. This could well be a critical aspect which could potentially lead to insignificant complexities in the auditory structure of Valu Ltd. Moreover, the critical expressions of misguided and diluted auditory propositions could easily nullify the relevant financial status of the company to encourage a healthy and prosperous relationship with external stakeholders including private investors, shareholders and government regulators. Hence, it can be further considered that the rate of financial effectiveness and efficiency has been compromised in Valu Ltd. to instigate a favourable accounting assertion and proposition.
The further aesthetics related with ascertaining the usage and implementation of audit assertions is deemed to be an important category of financial importance which needs to be substantiated by independent auditors to compensate for financial disparity and disillusionment. Hence, in the case of Value Ltd. it can be further assessed that the relevance of audit assertions has created a large void in the preparation and presentation of financial statements. The potential of falsely integrating financial components with respect to omissions and lack of financial interpretation has also resulted in financial distress for the company. Therefore, the interest and assertions of the audit team associated with the preparation and review of financial statements during a particular financial year is considered to be gravely misguided. Thus, it can be asserted that lack of financial parity and a lack of financial transparency has created self inflicting wounds in the assessment of financial performance over a prolonged period of time.
The justifying rationale attached with the performance measurement of Valu Ltd is also considered to be a mixture of indifferent financial propositions and indicators which has yielded in financial distress for the company. Therefore, it can be determined that false auditory assertions and auditory distress has led to the financial capitulation of Valu Ltd. Moreover, the prospects of reviving lost ground and a loss in competitive advantage could bear the brunt of disharmonised investors and a potential tussle between the organisation and associated Government and federal bodies.
4: Identification of audit concerns arising from new computer-based accounting system
The identification of audit concerns arising due to the purchase of a new computer for accounting systems has led to the financial distress and disorientation in the preparation of financial statements. Audit concerns involving fraud and inventory inaccuracy are most likely to be impacted due to improper retention of financial recording facilitated. The relevance of fraud is also considered to be a vital proposition that indulges into presenting numerical facts and figures which are deemed to be distinctive than the actual facts and figures retrieved.
Auditory concerns with respect to inventory in accuracy is also deemed to be a significant blow that catapults into perennial organisational and financial distress. Inventory inaccuracy is generally conceded when the due date of recording inventory is considered to be different from the date actually recorded. As a result of this inventory holding period is considered to be fluctuated and it could also lead to impacts in the reorder and inventory possession levels.
5: Five risks needed to be considered for assessing inherent risks attached to financial statements
The assessment or the existence of financial and audit risk is further considered to be an important proposition that needs to be substantiated based on analysing the financial statements of a company. Financial risks are further considered to be important for establishing how fluctuations in the industry and market relate to financial volatility for an organisation. The available financial risks that catapult business instability for Valu Ltd. is further discussed as follows.
Economic Risks
Economic risks are considered to be the primary factor for Valu Ltd. which catapults into high-risk propositions for the company. The business risk is generally considered to be higher as it could catapult negative aspects and attributes of financial prosperity for Valu Ltd. The linked inherent risk and the audit concern with regards to the effect on the financial position of the company is mostly considered to be an adverse proposition which could lead to generation of lower profitability in the future (ifac.org,2022, International Standards (4)).
Market Inflation
Market inflation is considered to be the second important factor or risk which leads to insignificant financial aesthetics for Valu Ltd. Nature of risk is considered to be medium for marketing solution as it only emphasises high procurement and raw material costs. The associated inherent risk with respect to affecting the company financial statements is considered to be influencing the statement of income or manipulating the cost items of the income statement for Valu Ltd.
Internal Tussle
Internal tussle is considered to be the third financial associated with an organisation where a conflict rises between various stakeholders and interested parties within an organisation. Therefore, the nature of risk is generally considered to be low as it only affects the decision-making paradigm for Valu Ltd. This is further reflected in the company’s financial statements based on the corporate governance report published on an annual basis.
Financial Disparity
Financial disparity is considered to be the fourth important risk factor that enhances the financial composition of an organisation (iasplus.com, 2022). Nature of risks under financial disparity is considered to be high as it could catapult inappropriate financial results for Valu Ltd. This can be reflected in the statement of financial position prepared on an annual basis.
Inappropriate Auditors Report
Inappropriate auditors report is considered to be the fifth important risk where hasty presentation of financial statements is generally conducted by organisations. The nature of risk is considered to be high for Valu Ltd. while the auditor's report is mostly reflected as the core component of the financial statements (irb.co.za, 2022).
6: Analytical review of financial statement summary
The five risks ascertained as part of the area of concern for an organisation are considered to be as follows. The discussion shall be further facilitated based on calculations of ratios for both drafted and audited values [Refer to Appendix 1].
High Drafted Value of Gross Profit
The nature of audit concern is mostly associated with inappropriate revenue recognition propositions which has led to an inflated value of gross profit. This is further reflected based on calculation of Gross profit Ratio which leads to figures of 36.79% as compared to audited figures of 32.79%.
High Drafted Value of Net Profit
High drafted value of net profit is also considered to be associated with audit concerns of revenue recognition which has led to inflated value of drafted net profit as opposed to audited net profit. This is further established based on ascertaining the ratios as 7.31% and an audited figure of 4.62%.
High Inventory Draft Value
The high inventory draft value is also considered to be an important determinant and component of the financial structure where inventory valuation has increased owing to inappropriate assertions being made by an auditor. The numerical figures can be further expressed based on the ratio calculator of quick ratios which ascertains expressions as 0.35 times and 0.25 times as the draft and audited figures respectively.
Higher Intangible and Non-Current Assets
The prospects of high intangible and non-current assets is considered to be another important determinant of analytical review of financial statements where the particular audit concern of transparency and materialism is being violated. This is further reflected based on calculation of fixed asset ratios where the numerical expressions of drafted figures are considered to be 2.54 times while the audited figure is considered to be calculated as 3.70 times. Hence, a higher variability in the differences between auditor and draft figures could be established leading to inappropriate financial analysis of the company (namic.org, 2022).
High Payable Values
Higher payable values are also considered to be an important determinant of the potential risks and areas of concern that influence the financial statement analysis of Valu Ltd. The audit concern of information delays inventory in accuracy and proper adherence to revenue are mostly jeopardised leading to higher payable values in draft as compared to audited values. This can be further expressed numerically based on calculation of payable turnover ratios. The resulting figures of ratios are calculated as 2.18 Times as draft and 3.55 times as the audited ratio.
References
iiasb.org, 2022, Audit Concerns [online], Available at: https://www.iaasb.org/ [Accessed on: 06.12.2022]
ifac.org,2022, Audit Procedures [online], Available at:https://www.ifac.org/system/files/publications/files/IAASB%20HANDBOOK_Vol%201_0.pdfoc [Accessed on: 06.12.2022]
iasplus.com, 2022, Audit Standards [online], Available at: https://www.iasplus.com/en/resources/global-organisations/iaasb [Accessed on: 06.12.2022]
irb.co.za, 2022, Audit and Assurance [online], Available at: https://www.irba.co.za/upload/IAASB-2020-Handbook-Volume-3.pdf [Accessed on: 06.12.2022]
namic.org, 2022, Financial Risks [online], Available at: https://www.namic.org/issues/regulatory-bodies [Accessed on: 06.12.2022]
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