Question

Khalid recently received his accounting degree from Sultan Qaboos University and went to work for accountancy firm. After working for 6 months with accountancy firm, he was sent to the Sky manufacturing company to audit the financial year 2019. Khalid had his first ever experience of Audit, and he was not confident of his professional experience at this early point in his career.

However, during the audit, he noticed, that some of the company's transactions and events were recorded in a way that might be in violation of accounting theory and generally accepted accounting principles. Khalid is very much confused about the practices they followed. Sky manufacturing may face serious consequences, if they continue with the same practices. During the audit, Khalid observed that some of the company’s important information is not shared with him., which is a clear violation. The owner of Sky manufacturing is putting a lot of pressure on Khalid to make a good report for the audit.

a. Khalid is an honest auditor and concerned about his work and career. Being aware of the complexity and nature of work, he has to be resilient, diligent, inquisitive, insightful, and impartial. Discuss and state examples, how would Khalid imply these characteristics to do his work
professionally in the above scenario?
b. The auditor should challenge the financial accounting practices used or should challenge the intentions of the management. Write your decisions and the reasoning behind your conclusions.

answer should be not less than 400 words for each part.

what do you mean?

Answer 1

Background:

GAAP (generally accepted accounting principles) is a collection of commonly-followed accounting rules and standards for financial reporting to make uniformity among various organizations.

The purpose of GAAP is to ensure that financial reporting is transparent and consistent from one organization to another. For this purpose many countries have adopted International Financial Reporting Standards (IFRS). IFRS is designed to provide a global framework for how public companies prepare and disclose their financial statements.

In India, Ind AS has been issued by the Institute of Chartered Accountants of India after some minor modification with International Financial Reporting Standards (IFRS).

These Accounting Standards streamline the accounting procedures and accounting concepts so that there can be uniformity. Similarly Auditing Standards are also prescribed by accounting institution of local country so that there could be alignment in Auditing to monitor fraud & error in accounting and other fields.

a.) Khalid is an honest auditor and has integrity about auditing and accounting procedures for Sky manufacturing. Khalid being an independent auditor should inspect and verify accounting procedures to monitor fraud & error in management. He should after due diligence came to notice to management about discrepancy in methods and procedures adopted by staff.

Even when the owner of Sky manufacturing putting a lot of pressure on Khalid to make a good report for the audit, he should consult with his audit team and his seniors about such compromise with his integrity. Khalid observed that some of the company’s important information is not shared with him, then he should convey this to his superiors and should mark these as qualified in audit report of Sky manufacturing.

b.) The auditor should challenge the financial accounting practices used or should challenge the intentions of the management because management is concerned about positive report and higher profits only. Management does not want to show critical discrepancies and important documents which could hold management accountable. These information/issues are material for Sky manufacturing future aspects like investments, customer demand etc. which should be reported in audit report so that public in general can understand the financial and non financial position of company.

Since, Khalid noticed that some of the company's transactions and events were recorded in a way that might be in violation of accounting theory and generally accepted accounting principles, he should came to knowledge these violations to management so that corrective actions could be taken to tackle adverse situation and management should make sufficient preventive measures so that these fraud and error never happen in future also.