Question

Armando is a CPA who has been working as an audit manager at a large CPA firm for several years. He is just assigned as an auditor for Top Motors Inc. supervising his new coworker, Maria, who is a recent BCC graduate and just started working at the firm. Armando’s friend, Sangho, just got hired as Vice President of Accounting at Top Motors, so Armando is really looking forward to the audit. Because he has been very busy lately with his family and because his friend is VP at Top Motors, Armando does not spend time to study Top Motors or prepare the audit. When the audit starts, he talks with Sangho and trusts that his friend has excellent internal controls, and signs the audit report.
a) Discuss how Armando has or has not met the requirements of the audit according to the standards.
b) How should he have planned and structured the audit?

Answer 1

A.

Based on the available inputs, it is very clear that the Armando has not fully studied Top Motors and signed the audit report only based on trust. Armando has not met the requirements of the audit according to standards.

Organisations hire external auditors for one main reason: To have an objective assessment of the organisation’s financial standing. As external auditors should not have a developed relationship with the organisation that they are reviewing, they should not be biased in any way; this means that they can be objective throughout their audit. This translates to accurate data needed by the organisations in assessing their progress or lack thereof.

When organisations hire external auditors they ensure, to the best of their abilities, that he or she is not a relative or a friend of the owner, employee, or manager. Those auditors who are reviewing publicly traded companies should not hold stock in them or have any equity stake in any or their holdings or subsidiaries.

External financial auditors must follow GAAS or Generally Accepted Auditing Standards, which is a testament to their diligence, independence, and training. Being an external auditor, Armando should have been carried out the following tasts,

1. Evaluate business operations, financial statements, and the organisation’s compliance with relevant laws.

2. Identify irregularities in their departments and make recommendations on how to address them.

To conclude, audit is not just about the auditor providing assurance on the financial statements but also about the auditor making a contribution to the raising of standards at the audited entity. Based on the above, it is concluded that Armando has not met the requirements of the audit according to standards.

B.

The independent auditor generally proceeds with an audit according to a set process with three steps: planning, gathering evidence, and issuing a report.

An external auditor should start with developing a Audit program,

Audit program. This is where the actual external auditing will take place. The auditor will collect, assess, and interpret data to gain understanding of the organisation’s activities. For each major activity listed in the financial statements, external auditors will have to identify and assess risks that may have significant impact on the organisation’s performance or financial position.

A good audit program should include the following,

a. Plan and perform operational and financial audits to ensure that financial statements are fairly presented in accordance with GAAP.

b. Perform tests of internal controls to ensure effectiveness

c. Perform substantive testing of account balances to determine reasonableness

The external auditor will also look for any irregularities. These may include the company manipulating its own financial performance to mislead investors, delaying the disclosure of future financial performance, etc.

Further, any irregularities, manipulations so identified has to be reported with necessary evidences, so next task is evidence gathering,

Evidence gathering. External auditors will obtain evidence in order to successfully satisfy the requirements of the audit program. This may include confirming compliance with accounting policies, examining accounting records, and verifying assets that the organisation has purchased.

Going further, after a thorough investigation, the auditors will submit a financial report and state their objective opinion. The scope of the audit and the outcome will be outlined in their report.

Reporting. Prepare and present to management reports on audit findings, which might include material misstatements of financial information or severe control deficiencies, and provide recommendations on improving these shortcomings in the future. The findings of an external audit can strongly influence the reputation of the company. There can be serious consequences if the conclusions about debts, assets, tax responsibilities, and payments do not match the organisation’s own statements. External auditors will rate the client depending on their review. An unfavourable rating and this can influence if they can stay in business.

.