The Importance of Financial systems and auditing

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Financial systems and auditing is very important for a company in order to mitigate business risk and to make sure the company is running in the right track. It also helps the company to detect early changes in the company and the action to be taken to solve or prevent the problems. In order to make sure all the necessary data are available for the purpose or auditing, appropriate financial systems are needed. Internal and external auditors can use all the data to check and balance the financial statements as well as the operational side. Financial auditing is usually done by external auditors meanwhile operational auditing is usually done by internal auditors. Both parties can share information in order to investigate the condition of a company. In the presence of financial systems such as computerized systems, all information can be stored effectively and can be use by both auditors in evaluating the company performance.

According to scenario 1, Mr. Daniels is an independent consultant system management which appointed to look into the effectiveness of Syarikat Alpha's purchases and stock management systems. He verifies the purchases and stock management systems of Syarikat Alpha. Based on his observation, he did recommendation which is to install an efficient computer system for the company's perpetual records for stock management. This is a very brilliant idea because computer system is very efficient and reliable where all the data will be stored safely in the system. However, Mr. Daniels did not consult the users of the systems and the internal audit department for their views and suggestions. This shows that Mr. Daniels as did not cooperate with the internal auditors of Syarikat Alpha in installing new system for the company. Even though Mr. Daniel is not the external or internal auditors of Syarikat Alpha, he should carry the job with responsibility and communicate with the members of the company. Below are the explanations about the auditors where Mr. Daniel should engage with them in implementing good system for Syarikat Alpha.

Duties, Status and Liability of the Auditors in Syarikat Alpha

Both internal and external auditors have their own duties, status and liability over the company that they being hired. These criteria make them perform the job in efficient, integrity and competent way. There are several differences for internal and external audit. Duties of auditor of Syarikat Alpha are to consult the company in term of financial statements and anything related to the financing activities of the company. This duty is usually conducted by external auditors. For internal auditors, they are more focused on the operational side and internal control systems.

According to ACCA, internal audit exist to provide the board or management assurance that the internal controls in place to manage risks that threaten the organization's objectives are in place and working as intended. This means that internal audit basically concern about the internal control systems for the company. They work for management. Status of internal auditors is under audit committee of the company. There will be a separate department named audit department that specialized on auditing the internal control system of the company. Chief audit executive will report the management about the audit program being implementing in the organization. Liability of the internal auditor is the management and the audit department might have discrepancies in the effectiveness of internal control system. Because of this, internal auditors need to struggle in finding the evidence and doing research in identifying the possible risks in implementing current control system.

External audit on the other hand are appointed by shareholders (in a limited company) and provide assurance to the shareholders that the annual accounts are free from material error. In short, external auditors are more independent and objective than internal auditors, although internal auditors try to maintain similar levels of independence and objectivity. Status of external auditors is basically outside the authority of management of the company (auditee). External auditors are independent and work under independent firm. They have their own management and rules to be obeyed. This means that all audit program implement in the organization is supervised under the management of audit firm and not the auditee. Liability for external auditors is basically come from the research about the company operations and the industry. It is quite difficult to understand the business operation as a whole because there might be hidden operation under the company. Other than that, external auditors might face the difficulty in assessing the internal control system if the relationship between the external and internal auditor is not good.

Other duties:

External auditors entitle to review financial reporting requirements of other organization which has business with the company. The same goes to the retirement funds and municipalities. Other than that, external auditor has to assesses Syarikat Alpha's financial health and ensures that all financial controls are effective and in place. In order to ensure this, the external auditor has to coordinates and requests the financial records and materials to be produced by Syarikat Alpha. The purpose of this is to make sure that the records are available for the company and it help the company to control the financial activities. These records will be examined by the external auditor which includes accounts receivable, account reconciliation reports and financial statements. Other than that, the duty of external auditor is to do planning which includes assigning staff and senior auditors to the engagement, assigning the workload to the auditors and setting the engagement dates. Engagement means that the auditor is having agreement with a company in order to audit the company performance. All the particulars regarding the engagement are the duty of external auditors. In the letter of engagement, the external auditor should specifically write the responsibility of the director of the company such as to prepare the annual report and maintain a good record keeping. So that, all related information about financial condition can be audited.

Internal auditor on the other hand is an independent, objective assurance and consulting the company in order to improve quality and add values to the organization's operation. Internal auditor basically focused on internal control system and evaluates and improves the effectiveness of risk management as well as the corporate governance.

Other than that, liabilities of an auditor includes complete the audit in accordance with all compliance guidelines, including Generally Accepted Auditing Principles (GAAP). GAAP is principles that view the financial reporting standards and the principles guide the auditors to audit all the financial statements in standard ways. Other than that, external auditor has to control the structure of the company in term of separation of duties among the staffs and consistent process fir reconciling accounts. These are very important because in order to make sure all the information are standardize, the workers have to separate the duties according to their expertise. After all the principles are followed, external auditor has to write reports and he is responsible to financial statement users who rely on the auditor to add credibility to the statements. The reports produce by the external auditor have to be true and fair and reliable. The financial reporting processes also have to be transparent where there is no error while preparing the statements. Other than that, external auditors also have to make sure that the Syarikat Alpha pay the tax property and on time.

Relationship between Internal and External Auditors of Syarikat Alpha

Internal and external auditors are closely related where they share same objective which is to make sure that Syarikat Alpha is running the business properly and follows the standards in preparing financial reports as well as at the operational level.

Both auditors will be assigned to different jobs and responsible to different party. Internal auditors are responsible to the management of Syarikat Alpha where all the activities record in operational level will be reported to the management of Syarikat Alpha. Meanwhile external auditors are responsible to financial statement users such as financial institutions, board of directors of Syarikat Alpha, banks, government, as well as taxation body. But this difference is did not break the relationship of both auditors. They still work for the same purpose.

First relationship between internal and external auditors of Syarikat Alpha exists when the external auditors used up the expertise of internal auditors in evaluating the company performance. For example, information about the weaknesses of company can be used by external auditors in recommending new systems to be installed in the company. According to Peacock E. and Pelfrey S. (1989) which conducted a research about the current attitudes of internal auditors toward their working relationships with external auditors, 92% from internal audit directors appreciated that external auditors make full use of the expertise of the internal audit staff. This survey was conducted of two groups: first group was represented by internal audit directors, and the second group was formed by staff auditors who work directly which external auditors. Both groups were asked to evaluate the overall performance of their organization's external auditor and their perceived relationship with the external auditor. From the result, I can say that the information prepared by the internal auditors is very useful for the referencing of the external auditors. The relationship between the internal and external auditors is very good since they can exchange information in auditing Syarikat Alpha.

The second relationship exist when both internal and external auditors of Syarikat Alpha follow a similar methodology in performing their audits, including planning and performing tests of controls and substantive tests. The difference is just the particulars that they audits. They also use audit risk model and materiality in deciding the extent of their tests and evaluating results. External auditors rely on the risk model prepared by the internal auditors. The steps involve in applying materiality that used by both auditors can be described as follow:

Third relationship between internal and external auditors exists when external auditors have to access, evaluate and test the internal auditor's competence, objectivity and work. From the data and statements that internal auditors produce, external auditors can monitor and evaluate their jobs. They can identify whether internal auditors manipulate the figures or not. This is very important in order to produce true and fair statements. Other than that, external auditors also have to understand the internal auditor's role when assessing their client's control structure.

An Audit with Reference to Scope, Materiality and Risk

In order to conduct audit, an auditor has to follows a set of step that illustrate good procedure in carry out audit efficiently. The steps involve initial planning for auditor and all steps are properly organized to help auditor to do audit. The steps are as follow:

Elaboration on Planning an Audit

Initial audit planning

First step of conducting an audit is auditor should do initial audit planning. This is the beginning of every audit program where auditor has to decide whether to accept the client or to continue serving with the existing. Discussion between the auditor and auditee (client) is extremely important for auditor to identify client's reason for audit. Reason for audit can be because of the failure of securing the company property, management suspicion on accounting department staff and so on. This information is likely to affect the remaining parts of the planning process. In the discussion, both parties usually obtain an understanding where all the terms and conditions are satisfied. Once the understanding is achieved, auditor will select staff for the engagement. Engagement should be done in proper way such as providing the letter of engagement to be signed by both parties. Example letter of engagement can be viewed in appendix. The need for outside specialists also has to be evaluated in order to satisfy the client.

Understand the client business and industry

Second step is to understand the client business and industry. This is very important part of planning an audit because auditor has to discover the business operation as well as the industry. He has to know the potential risk of the business that can give impact and difficulty for audit process. Examples of high risk industry are casualty insurance companies, saving and loans, and health. If an auditor is accepting the client in these fields, he should have better communication with the previous auditor that has much experience in doing audit for the company. In order to understand the client business and industry, auditor can use information technology that connects client companies with major customers and suppliers. Auditor also needs to identify risk related to these relationships. According to Arens (2006), strategic system understanding of the client's business and industry is to analyze:

Industry and external environment.

Business operations and processes.

Management and governance.

Objectives and strategies.

Measurement and performance.

With all these factors, an auditor will manage to understand better about the client's business and industry.

Access client business risk

Third step is to access client business risk. Once the auditor understand the client's business and industry, it is easier for him to assess the risk associated with all the strategic system. According to Arens (2006), client business risk is the risk that the client will fail to achieve its objectives. For example, the advancement of technology nowadays can give competitive advantage for the company. If client do not obtain the best technology, this can be a business risk for the company. From this risk, auditor has to identify the risk of material misstatements in the financial statements due to client business risk. Once the auditor identify the business risk and material misstatements, he can plan on the corrective action or control systems that can mitigate business risk such as audit risk model and Enterprise Risk Management (ERM).

Perform preliminary analytical procedures

Analytical procedures can be described as comparison of client ratios to industry or competitor benchmarks which provides an indication of the company's performance. It is a very effective tool that can identify possible misstatements at a low cost. It can be used to reduce detailed test and to assess going-concern issues. Sample of analytical procedure can be viewed in appendix.

One of the ratios that an auditor should concern about is current ratio that indicates the short-term debt paying ability. This ratio has to compare with the ratio of industry. If the company has lower ratio than the industry, this means that the company is not good enough in short-term debt paying. Other ratios that can be used to evaluate the company performance are liquidity activity ratio, ability to meet long-term obligation and profitability ratio.

There are five types of analytical procedures that can be used which are:

Compare client and industry data

Compare client data with similar prior period data

Compare client data with client-determined expected results

Compare client data with auditor-determined expected result

Compare client data with expected result, using nonfinancial data.

Once the auditor has completed the analytical procedures, they will go for set materiality and access acceptable risk audit risk and inherent risk. In this part, audit risk model will be used as one of the tools available in evaluate the risk. Great care must be used in revising the risk factors when the actual results are not as favorable as planned.

The next step is audit planning is to understand internal control and assess control risk. In this part, the relationship between internal and external auditors is very important where both parties can communicate about the internal control system for the company. Based on scenario given, Syarikat Alpha is having problem with the internal control system where the computerized system do not work well and as a result, management decided to shelve the entire project. From here, auditors need to assess the real function of the system installed by the company

After that, auditors need to gather information to assess fraud risks. Fraud is possible to be happened when the company having problem with the data stored. For example, employees can easily manipulate the data and commit fraud. With all the risk, auditors will then develop overall audit plan and audit program in order to mitigate the business risks.

Statutory Audit Report

Statutory audit report is a report that shows the financial statements compliance with the law. According to CIMA (2004), statutory audit report covers all external audit activities, to ensure that the entity complies with the appropriate fiscal requirements, accounting standards, and other legislation governing the financial records of the entity. This means that all the financial reports have to be transparent, free from bias and misstatement. Meaning to say that the balance sheet must give a true and fair view of the state of affairs of the company as at the end of the financial year; and the profit and loss account must give a true and fair view of the profit or loss of the company for the financial year. This report is being prepared by the directors of the company and being audited by the auditors in accordance with the Companies Act 1965. According to Arens (2006), Section 169 of the Companies Act 1965 requires the directors of every company to lay before the company at its annual general meeting audited financial statements that give a true and fair view of the state of affairs of the company and its result for the period under audit. This means that, director of Syarikat Alpha also entitled to prepare true and fair statements before the company annual general meeting. All the financial activities should be stated clearly without any error or misstatement. The preparation and processing all the financial information also should be done in proper way and meet the standards as well as the General Accepted Accounting Principles (GAAP). In statutory audit report, auditor is required to fulfill several conditions where the purpose of these conditions is to make sure the financial statements being audited are true and fair.

The Purpose of a Statutory Audit Report

The purpose of a statutory audit report is to protect the shareholder of the company from manipulated by irresponsibility person or party in the organization. If the statutory audit report is not exist, the shareholder's wealth will be affected and decrease from time to time. Other than that, statutory audit report can make sure the financial statements and annual reports are reliable and not falsify.

Statutory audit report apparently brings benefits which exceeds its cost to the company. If Syarikat Alpha implements statutory audit reports in the company, it just has to hire the external auditors to make sure the reports are fulfilling the standards. On the other hand, if no statutory audit reports are being done, risk of error and fraud is always there to be the obstacles in saving the costs. If there is fraud occur, company can lose its shares as well as the company wealth.

Other than that, according to ACCA global (2010), external audit reinforces sound financial management and corporate governance. Financial management and corporate governance are both the factors of company health and can contribute to the successful of the company. Corporate governance means that the company is directed and controlled in term of its performance by monitoring and attaining its objectives. Statutory audit reports can make sure that the objectives of the company can be achieved through its observation and monitoring the financial position of the company.

The Content of a Statutory Audit Report

Statutory audit report consists of several elements that explain the overall performance of a company. There is a format that auditors should follow in producing statutory audit report. It is known as qualified audit report and the structure is approved by ACCA and other auditing bodies.

Title.

A statutory audit report should begin with a title that includes the word independent, for example, "independent auditor's report". The word independent shows that the audit was unbiased in all aspects. Title is very important in order to convey to the users and illustrate them with the content of the reports.

Audit report address.

Address is usually written to the company, its stakeholders, board of directors or the shareholder. All members of the company have right to know the content of the report and the audited financial statements such as balance sheet, profit and loss account and cash flow account.

Scope.

Scope in the statutory audit report explains the elements of financial statement that have been identified and audited. This paragraph is very important to avoid misunderstanding where all the financial information is complete stated with pagination in the annual report. In this paragraph also, auditors will mention about the financial statements which is subject to audit such as The Balance Sheet, The Profit and Loss Account, The Cash Flow Statement and The Statement of Total Recognized Gains and Losses (STRGL). Other than that, scope also consists of explanation about the responsibility of management and that the auditor's responsibility is to express an opinion on the statements based on an audit. The importance of scope is to communicate with the users about the management and their selection on appropriate approved accounting standards. Other than that, auditors should disclose the details of directors such as remuneration and other details about the transaction between the company and its director.

The basis of opinion

In this paragraph, auditors will explain about the auditing standards that give benchmark or reference to him in conducting the audit for the company. This means that all the audit process is compliance with law and regulation. It is very important for auditors to explain further in this paragraph in order to satisfy the users including external users about their commitment in auditing the company through legal procedures.

The opinion

In this paragraph, auditors will give conclusion based on the result of the audit. Professional judgment will be written such as the information risk associated with the financial statement even the statements have been audited. Other than that, auditors will explain the potential risk of the systems used by the company and other judgment on improvement of the systems based on their professional point of view.

Signature and date

Statutory audit report must be signed by the registered auditor and date should be written. It is important to show the date because it specifies a key point in the post balance sheet events review period and it will usually be the same as the date of approval of the financial statements.

Qualification on Audit Report

Qualification on audit report means that the auditor qualifies the audit report based on his opinion on the financial statements. For example, is there is a limitation on the scope of the audit examination, he will give opinions whether he agree or disagree with the matter. Other than that, auditor has to give judgment on the effect of the matter is or may be material to the statement. Qualification on audit report is done through the professional sight of an auditor. There are several characteristic that categories the audit report into different types of qualification. The different types of qualification will be discussed below.

Different Types of Qualification within an Audit Report

There are five types of qualification within an audit report. The five types are uncertainty, scope limitation, disagreement, adverse opinion, and disclaimer opinion. These qualifications will rise when an auditor identify the circumstances of the financial statements of a company.

Uncertainty.

Uncertainty audit report will arise when the auditor cannot find the evidence regarding his doubts which exist in relation to an unresolved matter. This means that there is limitation upon the scope of auditor. Auditor will find difficulties in resolving the problem or doubt. For example, the auditor having doubt and think that the company hold large number of liabilities but not state the exact figure in balance sheet. But he cannot find the evidence of those liabilities and this will lead to uncertainty audit report.

Disagreement.

Disagreement audit report rise when there is failure to comply with the accounting standard or legislation in the financial statements. This means that the auditor fail to make use the standards and policies that fixed by the accounting bodies. Other than that, disagreement also rises from factual discrepancies which means there are different fact exist in the report. For example, auditor's fact and client's fact is different. When this happened, the audit report is said to be disagreement. Unsuitable accounting policies and inadequate or misleading disclosures given in the financial statements also give rise to this type of audit report. In order to solve disagreement audit report, auditor and client have to co operated in achieving actual fact and there are no discrepancies in the audit report. By this way, both parties can give well reflect and correct view of the financial statements.

Adverse opinion.

Adverse opinion rise when the financial statements do not present fairly in term of the financial position, cash flow and any statement that need conformity with generally accepted accounting principles. This means that the financial statements do not give a true and fair view or do not comply with the Companies Act 1985. In adverse opinion, auditors will write his point of view if he thinks that the statements in lacking in term of its fairness. He also should write about his opinion in overcome the problem of unfairness of the financial statements. These opinions will be written in the separate paragraph of the audit report.

Disclaimer opinion.

Disclaimer opinion exists when the auditor is unable to form an opinion on an entity's financial statements. This means that the opinion cannot be given. This might result from nondependent auditor, a material scope limitation exists or a significant uncertainty exists. According to ACCA (2010), the uncertainty arises because of an imposed limitation of scope by the directors.

In order to add value and clear vision to you company, the office of KPMG Malaysia will provide you with qualified auditors in order to audit the financial statements of your company and provide tax and advisory services. Auditors will also provide you with evaluation on the internal control issues and noncompliance issue which compliance with laws and regulation. The financial statements of the company such as Balance Sheet, Profit and Loss Account and The Cash Flow Statement should comply with the accounting standards (generally accepted accounting principles, GAAP) and should follow the standards from Companies Act 1985.

Through the professional view and expertise, auditors will produce audit reports which enhance the reliability of information prepared by your company for use by investors, creditors and other stakeholders, including country-specific statutory requirements. All the auditing activities carry out by the auditors comply with the International Standards of Auditing which emphasize on core principle relating to professional integrity, independence and ethical behavior. The additional of technologies and tools will assist our auditor's team to enhance knowledge about your company operations as well as the industry as a whole. All the activities will be supervised by the top management of our company and consultation standards will be given. The professional view is based on the resource centers which are The Audit Committee Institute (ACI), The International Standards Group, and Sarbanes-Oxley Act. With adequate information from the excellent sources, we will audit your company in efficient manner.

From our observation, Syarikat Alpha is currently having problem in purchase and stock management system where the computerized system give problem to the data stored. As a result, your company has decided to shelve entire project which can be a big loss for the company. The corrupt of the systems give rise to the incomplete financial statements and at the same time give rise to the misstatement and risk. This problem has affected the whole financial statements preparation and this give rise to the need of professional auditing in order to audit the whole computer-based system. Potential risk that might occur from this problem includes accounting risk, control risk and inherent risk, as well as the risk of fraud. One of the tools that we will implement in auditing is audit risk model

The services that we offering can facilitate the management systems of your company and at the same time can increase efficiency and effectiveness of Syarikat Alpha. Conclusion and recommendations from us will help the company to solve the current problem and mitigate risk to the business.

Conclusion

As a conclusion, Syarikat Alpha really needs an audit program from external auditors in evaluating the current problems and performance of the company. The problem that this company faces is quite serious because it gives rise to the business risks, material misstatement and fraud. Proper audit plan need to carry out in accordance because from that, external auditors will know exactly about the company current situation as well as the previous performance in the industry. A good auditor will carry out the audit process comply with the law and regulation and always behave in ethical manner. All the procedures have to be followed and this can lead to good communication between the auditors and the company.

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