Category: Auditing

Introduction

Strategic management refers to strategies that are used by managers in organizations to ensure that they achieve their organizational goals. In order to attain these objectives, they must come up with the strategies aimed at improving the performance of organizations. This means that managers must focus on the implementation of organizations’ mission and vision statements.

They should ensure that workers understand the organization’s mission statement to align their efforts with the expectations of the company (Hill and Jones, 2012). They should ensure that a vision statement is clear to all, as well. This is important because it gives everyone an idea of where the organization expects to be in the future, hence focusing on meeting those expectations.

Body

For this case study, the world’s largest mobile phone manufacturer, Nokia, was examined. Nokia has been able to beat its competitors in the mobile phone industry due to proper strategic management. In fact, the multinational corporation has around 132,000 employees who work in various branches worldwide. This means that managers have a lot of work to do to control such a large number of staff and ensure that they work towards achieving organizational goals (Hill and Jones, 2012).

Nokia’s mission is to connect people throughout the world, so it works towards making sure that the company provides quality mobile phones to the market. This means that managers must emphasize the importance of the production of high-quality mobile phones to attain a large market share. In fact, Nokia Corporation has been able to achieve this since it controls 28% of the total mobile phone market size.

The organization makes sure that it advances with technology in a timely manner, and this has helped Nokia to work effectively and develop. For instance, Nokia Corporation always ensures that it provides a high quality of its mobile devices, which implement the latest technological advancements, to enable its customers to get more opportunities due to those phones.

For instance, Nokia mobile phones are known to access the internet very fast, hence ensuring that customers can easily access information from wherever they are (Haberberg and Rieple, 2008). Also, Nokia devices do not have problems in accessing service providers’ networks. This means that Nokia mobile devices are manufactured with strong antennas that make it possible for them to access services even in places with weak signals.

Nokia Corporation has vast resources, which help the company survive in the business, regardless of the dynamic economic conditions. This is very important because organizations need resources in order to facilitate their operations throughout the world effectively. For instance, financial statements for the year 2010 show that Nokia’s total assets were valued at €39,123 million.

This means that the company is financially very strong, and hence, it has the ability to expand its business to desired levels without facing financial difficulties. In addition, managers make sure that they retain highly qualified personnel in order to maintain the high quality of its products (Martin, 2010).

In addition, employees are often trained to improve their skills to meet market expectations. Since technology is rampantly changing, it is very important for organizations to ensure that their employees are updated in a timely manner. Finally, the company enjoys a very strong brand name and trademarks which help it be on the top of the market. In fact, Nokia Corporation sets the pace for the other players in the world’s mobile phone industry.

Conclusion

Strategic management is very important in organizations because it helps in achieving organizational goals. In the process, performance is improved, hence making sure those organizations remain profitable. This includes equipping employees with adequate knowledge required to match the expectations of the organization and the customers. Therefore, managers in organizations should work hard to ensure that they manage their organizations strategically and effectively if they want to remain successful.

References

Haberberg, A. & Rieple, A. (2008). Strategic Management: Theory and Application. London: Oxford University Press.

Hill, C. W. & Jones, G. R. (2012). Strategic Management: An Integrated Approach. New York: Cengage Learning.

Martin, T. F. (2010). Strategic management. Michigan: Cengage Learning EMEA.

Practical Steps

The first step is to request the necessary documents that include previous audit reports and financial statements. Also, this information may include organizational charts and regulations. The second step is outlining an audit plan. Throughout this particular stage, the auditor is responsible for reviewing the obtained data and identifying any possible problems that may occur in the future. The third step is to schedule a meeting so as to present the scope of the audit to the company’s executives (Giove, 2015). The next stage of the audit consists of conducting extensive fieldwork and checking the internal controls of the audit. The fifth stage of the audit is the creation of a report that dwells on the outcomes of the audit. If any problems are in place, the auditor is responsible for providing adequate solutions to them. The last stage of the audit is a closing meeting that is necessary to summarize the results of the audit and set goals for the future. The key assertions that have to be taken into account are completeness, valuation, existence, and rights and obligations (Giove, 2015). They are pivotal because they are responsible for an adequate evaluation of assets and entities. Additionally, they serve as a validation of financial statements and are recognized as an inventory item of the audit.

Internal Audit

The role of internal audit when dealing with the assertions can be identified as fundamental due to the fact that it influences the prospects of any given organization. Internal auditors are responsible for maintaining the organization’s reputation and promoting the company’s growth while external auditors are interested in merely analyzing financial risks. Additionally, internal audit plays an important role in terms of critically affecting the organizational environment and the way the employees are treated by the executives. To expand on the topic, internal auditors present their reports to executive managers so as to outline the critical risks and accentuate the necessary improvements (Knapp, 2017). In other words, internal audit connects the stakeholders and executives so as to certify that the practices employed by the administration are effective and relevant. Also, when dealing with assertions, internal auditors are designated to preserve organizational values throughout the whole process of the audit by means of their professional insights and objectivity. To conclude, internal auditors are one of the most senior governance of any given company (in consort with both executives and non-executives).

Internal Control

The audit procedures can be significantly impacted by the internal controls. One of the key issues lies in the process of identification and testing of the risks that were previously identified by the internal auditor. These risks include the effectiveness of controls and material misstatement. Another downside of internal controls interfering with the audit process is the collection of evidence necessary to review the efficiency of controls and update the intervening data regarding the company’s financial success. In addition, this may also end up in issues concerning the reports on important controls (Knapp, 2017). The problem consists in the fact that internal controls may not be connected to the financial audit. This forces the auditors to count on internal controls so as not to increase the load on functional testing of the company’s financial statements. Most importantly, internal controls may limit the company’s access to the relevant evidence regarding the executives’ estimation of the organizational financial statements (Giove, 2015). So as to eradicate this problem, the auditors will have to employ a more active approach to the problem. In perspective, audit committees will be required to investigate the causal relationship between the defects of internal controls and the involvement of executives in the audit and subsequent decision-making process.

References

Giove, F. C. (2015). The essentials of auditing. Piscataway, NJ: Research and Education Association.

Knapp, M. (2017). Contemporary auditing: Real issues and cases. Boston, MA: Cengage Learning.

The primary goal of the paper is to understand and determine the differences between CPA (Certified Public Accountant) and CIA (Certified Internal Auditor) while comparing the concepts and depicting the key aspects of these two professions. In turn, the educational requirements and certifications have to be assessed by CIA and CPA while taking into account the methods approaches in the state of Georgia. It remains apparent that the requests might vary depending on the states, but they tend to have some similarities simultaneously. Lastly, it is evident that the awareness of these principles will determine the development of a career path and define the professional future, as the understanding of the requirements will contribute to selecting the right educational processes.

Firstly, the differences between CPA and CIA have to be determined to avoid confusion concerning these principles, as these certifications belong to the slightly different areas of operations. Firstly, it has to be mentioned that CPA is an accountant, who has completed the required education and have enough of the work experience to be considered as a public accountant (NYSSCPA, 2016).

In turn, the qualified accountants have to complete educational programs (CPE) on a regular basis to be aware of the accounting standards to assure the relevance of their practice (NYSSCPA, 2016). It remains apparent that the accountant is responsible for maintaining the transactions and guarantee their compliance with the financial standards while avoiding the potential presence of fraud. In turn, it is evident that the auditors also have to complete an examination to be able to be considered as CIAs.

In this instance, the internal auditor is represented by the independent professional to assure the ability of the company to comply with the financial reporting standards (Pickett, 2010). It remains evident that despite having duties in similar areas, the professional has different responsibilities and roles in the financial segment of any organization.

In turn, the educational and certification requirements have to be determined to assess the complexity of the professions. In this case, CPA is evaluated in the first place. In this instance, the first requirement is the ability to show the completed bachelor degree presented by a recognized institution (The Georgia Society of Certified Public Accountants, 2016). In turn, it remains apparent that the degree has to be related to the business administration and has the presence of accounting courses by having 150 semester hours completed (The Georgia Society of Certified Public Accountants, 2016).

Additionally, the individuals have to have 2,000 hours of work experience in public accounting; 2,000 hours in the business field or teaching, or have a combination of these practices (The Georgia Society of Certified Public Accountants, 2016). Furthermore, a person has to have a supervisor before completing testing, and one can proceed to CPA examination after complying with all the principles mentioned above. In this instance, it remains apparent that the ability to acquire education is a necessity, as expanding the duties while becoming a CPA requires a sufficient level of education and work experience.

Furthermore, the requirements for the CIA have to be determined to understand the necessity of education and certification to become a professional in the future in Georgia. Nonetheless, it remains evident that they have a tendency to vary depending on the level of education. In this case, The Institute of Internal Auditors offers a relevant program for the development of the internal auditors.

Nevertheless, the minimal requirements for the completion of the program are present. Firstly, an individual has to have a higher education in any sphere (The Institute of Internal Auditors, 2016). In turn, the candidate for the certifications has to have seven years of the verified work experience to be eligible for the application to the CIA (The Institute of Internal Auditors, 2016). Nonetheless, this approach is suitable for the application with no bachelor degree or equivalent. In turn, only two years of work experience are required after the completion of the bachelor degree, and only one year is needed for the applications holding master degree (The Institute of Internal Auditors, 2016).

Additionally, the applicants have to provide the reference from the authorized supervisor to assure his/her qualifications (The Institute of Internal Auditors, 2016). It could be said that the application process is similar to the acquirement of CIA qualification, as the auditors and accountants have their duties in the related fields.

In the end, it remains apparent that both of the certifications have a substantial set of requirements to comply with before being able to be considered as a suitable candidate for the approval. Nonetheless, it could be said the primary similarity is the necessity of the work experience in the financial field including accounting and auditing due to the practical nature of the professions. In this instance, the role of all requirements cannot be underestimated as they contribute to the sufficient development of an individual as a qualified professional. In this case, the understanding the development path will have a beneficial influence on an individual while selecting becoming CIA or CPA.

References

NYSSCPA: Accounting terminology guide. (2016). Web.

Pickett, S. (2010). The internal auditing handbook. Hoboken, NJ: John Wiley & Sons.

The Georgia Society of Certified Public Accountants (2016). Georgia State Board of Accountancy FAQs. Web.

The Institute of Internal Auditors: Certified Internal Auditor eligibility requirements (2016). Web.

Introduction

Auditing is the process of examination of financial practices that is necessary for the maintenance of sound governance levels of a company. This tool of financial control allows ensuring that an organization follows accounting principles and does not engage in misappropriation of assets. The aim of this paper is to analyze proxy statements and annual reports of two American, publicly-held companies: Walgreens and CVS Health. Walgreens is the largest pharmacy retailer in the U.S. with 13, 200 stores in 25 countries and more than 400, 000 employees (Walgreens). CVS Health is the second largest retail pharmacy in the U.S. with 9, 709 stores and 32, 000 pharmacists (CVS Health).

Key Characteristics

In order to better understand factors that influence the determination of external audit fees for Walgreens and CVS Health it is necessary to consider key characteristics of the companies (see table 1).

Table 1: Comparison of Audit Fees and Financial Statements for Walgreens and CVS Health.

Discussion

External audit is a tool for ensuring accountability in management that helps to achieve and maintain good governance levels. The remuneration payable to external auditors is of high interest to both companies receiving audit services and companies rendering them (Kikhia 42; Kimeli 23). Companies that enter into negations regarding the provision of professional audit services want to ensure that they pay reasonable fees.

Auditors are also cautious during such negotiations because they need the remuneration to be high enough to “perform the engagement in accordance with applicable technical and professional standards for that price” (Kimeli 23). Shareholders who are interested in auditors being independent and objective also have to be concerned with the reasonableness of audit fees (Yousef and Naser 14). Furthermore, the public in general and professional accounting bodies are also interested in the level of audit fees because they have to be in line with the ethical standards of the audit profession.

The following factors related to a client’s company characteristics might enter into the determination of fees paid for external audit services: industry, a size of a company, profitability, risks, the complexity of services, and report lag among others (Castro et al. 264). A large body of academic literature indicates that the following attributes of an audit firm influence an amount of audit fees: audit firm profile, independence of audit committee, experience, competition, industry specialization, and the Big 4 factor among others (Yousef and Naser 14).

Taking into consideration the fact that Deloitte & Touche LLP and Ernst & Young LLP provided the audit services to the publically traded companies under discussion, it is necessary to start the discussion of the level of audit fees from exploring the role of the Big 4 factor in fee determination. The Big 4 companies charge premium fees for their services because they have “higher quality teams and they apply better procedures” (Castro et al. 264) allowing to effectively determine errors. 2016 proxy statements of Walgreens and CVS Health show that the amount of audit fees paid by the companies was fairly substantial—$13, 393, 800 and $12, 910, 811, respectively (CVS Health; Walgreens). It can be argued that audit fees levels are partially attributed to the Big 4 factor.

The difference in audit costs of the companies is $482, 989, which is not a considerable variation (CVS Health; Walgreens). Walgreens and CVS Health are companies of a large corporate size; therefore, they are subject to a high level of audit fees. The auditees size can be measured by “total assets, revenues, sales and number of employees” (El-Gammal 137). Large companies disclose more information in order to reduce agency and political risks, thereby increasing the level of audit effort that needs to be exerted by external auditors. According to Yousef and Naser, total assets and market capitalization are the most common measures used for assessing corporate size (15). In 2016, total assets of Walgreens and CVS Health were $72, 688B and $94, 462B, respectively (CVS Health; Walgreens). 2016 proxy statements of the companies show that market capitalization figures of Walgreens and CVS were $92, 151B and $84, 153B, respectively (CVS Health; Walgreens).

Even though CVS Health has more assets than Walgreens, the amount of audit fees it paid in 2016 was lower than that for its competitor (CVS Health; Walgreens). The discrepancy between the numbers can be attributed to the fact that there is a substantial difference in complexity of the auditees. Walgreens is the largest pharmacy retailer in the world with 13, 200 stores in 25 countries and more than 400, 000 employees (Walgreens). CVS Health, on the other hand, has only 9, 709 stores and 32, 000 pharmacists (CVS Health). There is ample evidence suggesting the existence of a positive relationship between the diversification of subsidiaries and operations of a company and audit fees it pays (El-Gammal 137). Walgreens has foreign subsidiaries that are subject to numerous legislative requirements for disclosure. It means that audit process of the pharmacy retailer requires additional time and manpower, which can explain the differences in the audit fees paid by the two companies.

Another important characteristic that can explain the discrepancy between the audit fees is client risk. In 2016, current ratios of Walgreens and CVS Health were 1.52 and 1.18, respectively (CVS Health; Walgreens). Even though the companies’ assets were greater than their liabilities, the current ratios indicate that financial health Walgreens was better than that of CVS Health. It means that CVS Health was less likely to honor its debts than its competitor. Also, in 2016, equity to debt ratio of CVS Health was 0.75, whereas equity to debt ratio of Walgreens was 0.64 (CVS Health; Walgreens). The fact that the audit fees paid by the companies differed only by $482, 989, which is unusual since there is a substantial difference in the complexity, can be explained by the discrepancy in risk levels.

Conclusion

The analysis of proxy statements and annual reports of two American, publicly-held companies—Walgreens and CVS Health—has shown that discrepancy in the audit fees can be attributed to the following factors: size, complexity, risk, and profitability.

Works Cited

Castro, Walther et al. “Determinants of Audit Fees: A Study in the Companies Listed on the BM&FBOVESPA, Brazil.” Revista Contabilidade & Financas, vol. 26, n. 69, 2015, pp. 261-273.

CVS Health. “Notice of Annual Meeting of Stockholders.” Investors.cvshealth.

El-Gammal, Walid. “Determinants of Audit Fees: Evidence from Lebanon.” International Business Research, vol. 5, no. 11, 2012, pp. 136-142.

Kikhia, Hassan. “Determinants of Audit Fees: Evidence from Jordan.” Accounting and Finance Research, vol. 4, no. 1, 2015, pp. 42-53.

Kimeli, Elkana. “Determinants of Audit Fees Pricing: Evidence from Nairobi Securities Exchange (NSE).” International Journal of Research in Business Studies and Management, vol. 3, no. 1, 2016, pp. 23-35.

Walgreens. “Notice of 2017 Annual Meeting of Stockholders and Proxy Statement.” Shareholder.

Yousef, Hassan, and Kamal Naser. “Determinants of Audit Fees: Evidence from an Emerging Economy.” International Business Research, vol. 6, no. 8, 2013, pp. 13-25.

Stakeholder’s analysis

Stakeholders could be regarded as people, organisations or members within a given community who affect the operations of the company at stake. The expectation of the different stakeholders influences the decisions undertaken by the firm. On the other hand, meeting all the demand of the stakeholders may be challenging, and the most managerial decision often fails to meet these wants. There are different groups of stakeholders. These include;

Economic stakeholders

These include the suppliers, competitors, distributors and the company shareholders. In Electrolux Company, these stakeholders are influential as they determine the profitability and sustainability of the company. For example, without the suppliers, the company will not be able to acquire raw materials easily. Competitors are also likely to cause an economic problem in the company. The major competitor is Whirlpool, LG, Sony, Samsung and other manufacturers of domestic and professional appliances. There are also the company shareholders, the suppliers these stakeholders have the greatest impact and should be highly considered during the strategic planning process

Social, political stakeholders

These stakeholders include policymakers, regulators and government agencies. The policies and laws developed by a given nation significantly affect the business operation and hence this group of stakeholders must be factored in. For Electrolux, the strategic manager should take into consideration the local and international laws and policymakers in the countries they invest in some of the key political stakeholders is are in the USA, Europe and Sweden.

Technological stakeholders

These encompass those who adopt new technology as well as those developing these technological solutions. They are important to the organisation as they influence the new products and services be developed.

Community stakeholder

These are those stakeholders who are affected by what the community does.

Stakeholder mapping

The various stakeholders’ in the Electrolux Company were mapped on the power interest matrix. In this matrix, the stakeholders are analysed depending on the level of interest as well as the power that these stakeholders have to influence the decisions that are made by the company. The resulting matrix is shown in table 1 below.

During the strategic decision-making process, the key stakeholders are c=grouped, as shown in table one. In section A, we have the community members and competitors; the two have low interests in the strategic process and also have no power in influencing the decisions that are made. In the second category (B) we have the stakeholders with high interest but low power, these include the activists, employees and suppliers of Electrolux. Any decision may affect them, but they don’t have enough power to influence the decisions that have been made. Group C are stakeholders who have power but little interest in the company, for example, the state/government. They include the policymakers. Electrolux must ensure that these policymakers are satisfied by following their rules and regulations. The fourth groups of stakeholders are the most important as they have the power to influence the decisions made as well as very high interest in the company. These groups of stakeholders are the key players, and their opinions must be taken into consideration. For group A, the Electrolux should exercise minimal effort during the decision-making process. For group B, the stakeholders must be properly informed, for group C, the company must satisfy the requirements while group D, the company should consider them as the key players.

Electrolux organisational audit

To conduct an organisational audit of the Electrolux Company, the SWOT analysis and the porters’ five forces were used. The strength and weaknesses are controlled by the internal environment, while the opportunities and threats are controlled by the external environment (John 23).

The resulting SWOT matrix table is shown below.

From the SWOT analysis that was carried out, it can be seen that the company experience, globalisation and large labour force are some of the company’s internal strengths. The main weaknesses are lack of proper distribution channels, costly products and demerger. In light of this, it is necessary that the companies ventures into the dealership with retailers who can market products to the final consumers. The company should also diversify to increase their profits. In this case example, we see the company demerging and losing the outdoor products instead of diversifying to other products. Looking at the current trends, most of the companies are diversifying, and this is imperative for Electrolux.

The major threats facing Electrolux are the high competition that exists in the local and international market. The company must develop appropriate strategies to counter these competitors. The company should also innovate as a means of developing competitive advantages

Porter’s five forces

Porter’s five forces is a vital tool in assessing the attractiveness of a given industry. During the potter five force analyses, the five competitive forces that are examined are: the threat of substitutes, the buying power, the supplier’s power and the rivalry between competitors

The threat of substitutes – normal

There are many substitutes that have been developed by the small industries that supply domestic appliances. The substitutes are developed from inferior materials and are less costly as compared to the Electrolux products. Owing to the regulations in the USA, Europe and other developed nations, most substitutes are not available in the market, and hence the threat is normal.

The power of the buyers – high

The domestic appliances market is very large in the developed nations, especially in the USA and Europe. The buyer for Electrolux products primarily comes from the retailers, dealers and ordinary consumers. The retailers purchase products in large quantity and distribute these products to the final consumers. Dealership seems to be the most viable option as the retailers and dealers buy products from the company. Based on this, most of the dealers and buyers can purchase the products in bulk and sell to consumers. Due to competition t, Electrolux must cut prices to make their product profitable to the dealers and thus increase sales.

The power of suppliers – normal

The supply of the raw materials used in manufacturing the appliances is readily available, and there is high completion. This means that the Electrolux can buy raw materials at a low, competitive price. The company can also integrate backwards and start producing most of the items being supplied by contractors. In terms of the supplier, the threat is normal

Rivalry from competitors – fierce/very high

In the market, there is very high competition. Most of the companies are producing domestic appliances, and these are sold in the USA. Also, the competitors have adopted various strategies to drive costs down, attract customers and brand their products. Companies based in Asia (LG, Sony and Samsung) have penetrated the USA market, and this has increased the competition. The competing companies are all international companies, and this means they have the power to develop and implement strategies to take up a larger portion of the market. The acquisition of Maytag by whirlpool has enabled this firm to gain a high competitive advantage over Electrolux. Asian based companies can produce at low costs and sell these products abroad at relatively low prices. The competition for the products is heightened by the fact that products differentiation is only achievable through modification of the product shape, increasing the functionality of the product and price changes. The competitors can develop mechanisms for countering the actions and plans of Electrolux. This low product differentiation increases competition.

The threat of new – normal

The threat of new entrants is normal. Due to the intense rivalry and competition, new market entrants will be faced with severe completion, and this acts as a de-motivation to new entrants. However, companies with new innovative products can use this as leverage and a market penetration strategy.

Electrolux environmental audit

The environmental audit entails a critical survey of the Electrolux external environment. The PESTEL analysis will be used; this will show the opportunities and threats that exist outside the business environments (David 5). The PESTEL framework categorises environmental factors into six main areas. These are political, economic, social, technological, environmental and legal factors.

Political factors

In the areas where Electrolux operates, the political environment is stable. The USA and Europe have a well-regulated environment that allows companies to operate in a free and fair manner. With globalisation being accepted internationally, most companies can operate in most of the countries.

Economic factors

The countries where Electrolux operates have good monetary laws that prevent inflations and price fluctuations. The economic conditions are good, and the buyers have the power to purchase the products to be marketed. The countries have a good growth rate, and fuel prices are stable. The economic environment is favourable for the operation of this business.

Social

The society in the USA, Europe and other areas where Electrolux operates has many consumers who want to buy state of the art domestic appliances. There is an increase in the use of appliances that the company provides. The population in these countries is enormous, and this creates a large market for the domestic appliances which Electrolux supplies. There is also a large market for those people weighing to upgrade their products. The populace is also conscious about the technological changes and would like to purchase new products that are being availed in the market.

Technological factors

The domestic industry market has got many competitors, and they compete based on technological improvements to the appliances. Most of the competitors are currently manufacturing products that save energy, and the consumers are receptive to them. The competitors also try to increase the functionality of the appliances through the use of automatic control, among others. For Electrolux to be successful, they must continually innovate to develop efficient and energy-saving products.

Environmental factors

Due to the environmental pollution and green house warming, most countries like the USA, Europe and other countries where Electrolux operate are advocating for the use of an appliance which consumes less wattage and saves power. Environmental regulations also require companies to perform a life cycle analysis so that the product be made does not significantly affect the environment.

Legal factors

The legal and regulatory framework in all the nations where Electrolux operates is well established, and the business milieu operates within these frameworks. There are well-established tax laws, contract laws, consumer protection laws, health and safety, among others. The company must operate within this framework.

Analysis of the possible strategies

To determine the company’s growth strategy, it is necessary to draw the Ansoff growth matrix. The matrix indicates that a business can grow using four main strategies; these are:

Market penetrations: in this regard, the company seeks growth with the existing products by increasing its market share.

Market development: the company tries to market its products in a new market

Product development: the company seeks to develop new products in response to the consumer wants or to counter a competitor. Once these products are developed, they are sold in the existing market.

Diversification: the company develops new products and also expands to new markets

The Ansoff matrix was used to analyse the alternatives and strategies that Electrolux are using. The resulting matrix is shown below.

From the analysis of the current strategies adopted by Electrolux, it can be seen that most of these are based on improving the current strategies to ensure that the company gains a bigger market share. The company also plans to develop new products, but this has not taken into great consideration. Most methods are on cutting production costs and improving the efficiencies of service delivery.

In future, the company should look into the possibility of expanding to other markets in Asia and Africa where the competition is not very high. Product development should also be taken into consideration. The company should develop appliances with increased functionality, more digital controls and user programming as well as the development of energy-saving domestic appliances. Electrolux can also develop new products and move into the new markets. Though diversification is a risky venture, it could result in the generation of high sales volume and increase profitability.

Electrolux future strategy

I would select the development of new products as the best strategy for the company. The new product to be developed should be cost-effective, more efficient, have increased functionalities and be energy saving. This strategy should be employed in all the appliances that they manufacture. This is a feasible option in the long run as product differentiations, and low prices should result in increased market share and the development of strong brands

Vision, missions and goals

A strategy can be regarded as the long term direction that a given firm would take. A strategy defines the long term objectives of a given organisation and enables firms to define the methods that will be used to achieve competitive advantages (Vijay 32). In line with the strategies, there is a strategic statement which sets forth the organisational goals. These are the vision, mission, objectives and goals and core competencies.

Vision: this statement indicates where the organisation wants to be in the future. It helps the company mobilise energy towards the achievement of these goals. For example, the Yahoo visions statement is “to deliver your world, your way” while that of Electrolux vision is “To become the best appliance company as measured by customers, employees and shareholders”. Nokia’s vision is “a world where everyone can be connected.”

Mission statement: this statement gives the overriding purpose of the organisation. It is the central strategy of the organisation and helps managers focus on the key strategy

Objectives: This statement outlines a quantifiable statement about company goals. The objectives show the expected results based on numbers which can be quantified and measured.

Goals: these are the main endeavours that the company wishes to undertake.

Issues with strategic planning

Strategies can be defined as the long term goals and scope of the organisation. Strategic decisions should be carefully formulated, taking into consideration the various issues that hamper the implementation of these strategies. In the yahoo case, the organisation did not have a clear focused vision. Due to the large size of the organisation, everything was not being handled clearly and precisely. The next problem was the lack of ownership and accountability. In terms of achieving the strategic goals, the company didn’t give clear roles and responsibilities to the workers. This was coupled with a lack of ownership as the management didn’t own the strategic decisions, and they were found to be pursuing the same goal over and over again. Their other problem was lack of decisiveness. To solve yahoo problems, three key pillars were to be established. These were: focusing on the vision, ensuring that there were accountability and responsibilities were delegated appropriately and ensuring that the strategic plan was implemented. The main issues affecting the strategic plans are

Uncertainty

The future of any organisation is uncertain, and this issue affects the implementation of the strategic objectives.

Operational decisions

Strategies must be linked with organisational decisions. This usually presents a problem, especially for managers, as they have to make decisions that are in line with the strategic plans.

Integration

There is a need that managers integrate the strategic goals with the company functions and operational as well as with the other organisations. Yahoo can use an integrated approach with big companies such as Sony.

Relationship and networks

It is important to link the strategies with the customers, suppliers and other stakeholders who play a crucial role in the business. Yahoo strategies should link with those willing to advertise and the mail service users.

Complex organisations and the change process

Most of the large multinational companies have problems with the implementation of the strategic objectives, especially where changes in the way issue are handled. Managing change is rather complex in large organisations.

Different planning technique

Different planning techniques are used in strategic planning. The most common method is the Boston Consulting Group (BCG) matrix. The matrix has four portions; these are stars, question marks, cash cows and dogs.

• Star: this is a promising business venture that will be undertaken shortly
• Question mark: this is a business unit that doesn’t have a high market value
• Cash cow: this has a high market share in a mature market.
• Dog: this has a low market share in a static and declining market

Roles and responsibility for strategic implementation

The strategic implementation of the strategic plan has four main elements

Identification of the goals and objectives: The expected results are outlined

Formulation of the specific plan: the developed objectives are then changed to specific tasks and deadlines

Budgeting and resource allocation: this entails allocating the funds to the developed plans

Monitoring and control: this entails checking whether the set objectives have been met within the stated timelines and budget.

The complexity of the implementation process depends on the size of the organisation, the size of the change process and the degree of uncertainty that exists in the market.

Resource requirements

During the process of strategic plan implementation, resource allocation is one of the key issues that should be taken into consideration. The main considerations that are taken into account are the contribution that the resources have in the fulfilment of the organisation’s strategic plan. Resources should be diverted from the cash cows to star projects which have long term capacity. The resources must also be allocated to activities that will develop the key strategies.

Targets and timescales

The strategic plan implementation process entails the transformation of the plans into quantifiable operations activities that will result in the change process. The following must be taken into consideration:

The strategy developer: at most times, managers are responsible for the creation of the plans, and they should be accountable during the implementation process.

After formulating the team, the task of each team members should be outlined

Communication: communication is important prior, during and after completion of the implementation.

Monitoring: the project must be monitored so as to ensure that the objectives are met within the specified timelines and budgets.

Works Cited

David, Aaker. Developing Business Strategies, 5^th edition, New York: Wiley, 1998. Print.

John, Bryson.Strategic Planning for Public and Nonprofit Organizations: A Guide to Strengthening and Sustaining Organizational Achievement, 3rd Edition, New York: Jossey-Bass, 2004. Print.

Vijay, Govindarajan and Chris,Trimble, Ten Rules for Strategic Innovators: From Idea to Execution, Harvard: Harvard Business Review Press, 2005. Print.

The audit report for General Employment Enterprises, Inc. (GEE) for the 2009 fiscal year was performed by independent auditors, BDO Seidman, LLP, and was released in January 2010. The audit documents that the net revenues of the company had dropped by 32% compared to 2008. There was also a considerable decrease of 15% in the company’s spending on selling, general, and administrative expenses compared to the prior year.

Income from investment also fell, amounting to a total loss of $50,000. As a result of this decline in business revenue, the company’s assets decreased by $1,695,000. The biggest loss was in the form of cash and cash equivalents, where the assets decreased by $1,355,000, and the total liabilities and shareholders’ equity of the company declined by over 33%. The overall losses in revenues and current assets can be attributed to the economic crisis of 2008, which resulted in the reduction of demand for the company’s services. The audit report contains all the relevant financial information that can be provided to third parties as proof of the company’s business activities, profitability, and financial management.

Liabilities to Third Parties

The actions of BDO make the company liable to third parties under both the Common Law and the Federal Law of Securities. In the present case, under the Common Law, BDO owes a duty of care to the following categories of entities: auditors’ clients, third-party beneficiaries, and prospective third-party beneficiaries (Baker & Prentice, 2008). The main Federal Law applying to BDO, in this case, is the Security Act of 1934 (Baker & Prentice, 2008). Under Section 10A of the Security Act of 1934 (2011), the firm is subject to a civil penalty, whereas, under Section 21C, BDO would also be subject to a Cease-and-Desist Order, which may require it to freeze its activities temporarily and prohibit workers responsible for violations from further audit work (permanently or temporarily).

Auditing Standards, Ethics & the Auditor’s Liability

The GAAP (2006), effective December 15, 2001, outlines the basic auditing standards that should have been applied in BDO’s activities. The standards include reporting suspicious activities and clearly indicating the inadequacy of unjustified financial information in the report (GAAP, 2006); these requirements were clearly violated by the BDO. Regarding auditing ethics, objectivity must be at the core of any independent auditor’s work. Audits are designed to promote transparency and ensure the identification of cases providing misleading financial information and fraud. Falsified or misleading information can harm current and prospective beneficiaries, as well as the shareholders of the company who rely on audit reports.

Therefore, the auditors that do not report possible fraud cases breach official standards for work, as well as auditing ethics, and are partly liable to third parties for any damage incurred by entities who relied on their report. However, the auditors’ liability is limited under the Security Act of 1934 (2011), as they are not deemed responsible for the audited firm’s fraudulent actions, but only for not complying with the reporting and investigation standards.

Management vs. Auditor Responsibility

The company’s management is responsible for providing transparent, current, and reliable financial information, which can be used by clients and shareholders to assess the company’s performance. Auditors, on the other hand, are responsible for ensuring that the information is indeed transparent and to report any suspicious activities to the Commission. I believe that, in this case, the management of the company should be held responsible for the fraud itself; however, auditors should have a greater burden as they breached both their official standards of work and professional ethics.

The Sarbanes-Oxley Act

One of the main provisions of the Sarbanes-Oxley Act (SOA) was the establishment of a separate body to govern the activities of external auditors (EY, 2012). This improved control over auditors and increased their liability in the cases of potential non-compliance. The Act also prohibited auditing firms from providing certain services to clients, such as financial information systems design and implementation, appraisal or valuation services or fairness opinions, and internal audit outsourcing services (EY, 2012).

Overall, the provisions of the Act enhanced accountability improved oversight and governance and granted better transparency of audit services. Under the SOA (2002), the audit firm would be subject to investigation and disciplinary procedures, including sanctions, such as suspension or firing of any persons involved, temporary registration suspension, limitation of the company’s activity, and civil monetary penalties.

Conclusion: Proposed Action

In the present case, it is evident that the auditor overseeing GEE’s financial statements concealed the suspicious information intentionally, which is a severe violation of both the law and the auditing standards. I believe that the appropriate line of action should begin with an investigation to determine the involvement of individual persons in the illegal act, as well as to determine conclusively whether the misconduct was indeed intentional. Based on the results of this investigation, I believe that any subsequent action should include the consideration of the application of a full range of sanctions available, outlined under the SOA (2002).

One of the sanctions that could be applied to BDO is the suspension of individuals who were proven to be directly implicated in the violation of the accounting and auditing activities (SOA, 2012). This action would prevent further violations. The suspension, in this case, may be temporary; however, depending on the results of the investigation, the company may have to fire the auditors that participated in the audit of GEE if their fault is greater than anticipated. For instance, if the investigation found that the reversal of the investigation claim was due to the bribing of the auditor, the said employee should be banned from future work in auditing to prevent future cases of misconduct.

The second sanction under the SOA (2012) is the revocation or suspension of the company’s registration. Similarly, the severity of the sanction under the SOA (2012) depends on the degree of BDO’s involvement with the violation and knowledge of GEE’s suspicious activities. For example, if BDO was aware of the fraud in the company and withheld the information from the legal authorities and the Commission, the firm could lose its license permanently.

Another possible sanction is the limitation of the company’s activities or certain functions (SOA, 2002). Both the temporary registration suspension and the limitation of the company’s activities would give management the time needed to determine the sources of internal non-compliance and solve the issues, as well as to provide additional training to staff that would help avoid similar situations in the future.

Finally, the violation of the reporting and investigation requirements by BDO should incur a substantial monetary penalty under the SOA (2002). The size of the fine is dependent on the results of the investigation and may range from under $100,000 to $15,000, depending on the involvement and intent of the responsible auditor (SOA, 2002). A combination of these sanctions would ensure appropriate future control of individual auditors by the management, leading to fewer cases of misconduct, as well as helping the firm to re-establish its reliability and reputation within the accounting market.

References

Baker, C. R., & Prentice, D. (2008). The origins of auditor liability to third parties under United States common law. Accounting History, 13(2), 163-182.

Generally Accepted Auditing Standards (GAAP). (2006). Web.

Sarbanes-Oxley Act (SOA). (2002). Web.

Ernst & Young LLP (EY). (2012). The Sarbanes-Oxley Act at 10: Enhancing the reliability of financial reporting and audit quality. Web.

Introduction

The article titled “How Big Data and Analytics are Transforming the Audit” written by Roshan Ramlukan examines the impact of big data on the audit. This paper aims to explore how modern technological development influences the audit process by analyzing the information presented in the article.

Analysis

Recent technological advancements promise to change the current audit process. Namely, big data and analytics have the potential to transform audit into something more than sample-based testing (Ramlukan 16). New technology is associated with the benefits of analyzing “entire populations of audit-relevant data” with “higher quality of audit evidence and more relevant business insights” (Ramlukan 16). By introducing bid data and analytics into the audit, it is possible to obtain a better picture of fraud and risks to business continuity. Therefore, these technological solutions can transform the way financial reporting is being analyzed. In short, big data and analytics will help to deliver a more credible and relevant audit (Ramlukan 16).

In order to realize the benefits of new technologies, it is necessary to overcome some barriers to integration. The most significant technological difficulty that has to be surmounted is data capture. Due to numerous security concerns, companies are not willing to share data with auditors and spend significant amounts of money to create multilayered approval processes (Ramlukan 17). Another difficulty has to do with the fact that sub-ledger information that can be processed with the help of big data and analytics substantially increases the process of data extraction. Given that companies use different accounting systems, data capture can be time-consuming. Therefore, it is necessary to overcome these difficulties in order to efficiently analyze audit evidence.

In order to introduce big data and analytics in the auditing profession, it is necessary to align them with auditing standards that govern it (Ramlukan 17). These standards and regulations were put in place many years ago; therefore, they are not suitable for leveraging big data (Ramlukan 17). Substantive analytical procedures is an area of auditing standards that examines “the reasonableness of relationships in financial statement items to uncover variations from expected trends” (Ramlukan 17). At the time when these standards were conceived, modern analytics techniques allowing to obtain substantive evidence with the help of bid data were not existing; hence, this standard has to be revised.

Validation of data is another area of auditing standards that should be overhauled. The current regulations providing guidance for the process of validation of “the accuracy and completeness of the data” (Ramlukan 18) are not suited for modern types and volumes of information. Defining audit evidence is another standard that requires re-thinking. In order to make big data and analytics a part of the auditing process, it is necessary to indicate what type of audit evidence is derived with their help. The audit is a process that is governed by precision. However, it is not clear how precise big data should be when any material misstatements are essential for data analytics.

Conclusion

The article suggests that the use of big data and analytics will substantially transform the audit. Modern technological solutions will help auditors to obtain a better picture of fraud and risks to business continuity. However, in order to realize these benefits, it is necessary to overcome some technological difficulties. Moreover, four areas of auditing standards have to be reviewed before the introduction of new technologies in the auditing process.

Work Cited

Ramlukan, Roshan. “How Big Data and Analytics are Transforming the Audit.” Financial Executive, vol. 31, no. 3, 2015, pp. 14-19

Introduction

Auditors perform examinations of financials within a particular establishment to determine whether the company complies with the existing regulations or to detect fraudulent activity. International Standard on Auditing (ISA) provides an explanation of specific criteria that auditors have to adhere to when performing their work. This is reflected in the report – a finalised version of an auditor’s work which provides information regarding the examination that was conducted. This paper aims to review particular standards, which apply to external audit reports and identify criteria for standards number 220 and 320.

Standards of Reporting

An excellent external report should provide extensive information regarding the actual state of financials of an establishment. According to BPP Learning Media (2017), an external audit report presents an independent opinion concerning the financial statements of an organisation. In general, it gives an understanding of whether these financial statements are recorded in accordance with the existing regulations. BPP Learning Media (2017) emphasises that while the auditor may provide recommendations to the board of directors of a particular company, the purpose of the report is to only display factual information.

Criteria to be provided in the External Auditor’s Report

BPP Learning Media (2017) state that the specific rules for an auditor’s report are regulated by the ISA 700, ISA 7001, ISA 705, ISA 706 statutes. These standards provide advice on the formatting of the document and specific information that should be included by the auditor. For instance, ISA 700 is a guidance about the formation of judgement connected to the financial statement that an auditor reviewed (International standard on auditing 700 2009).

In addition, it contains regulations concerning the content and format of the report itself for the general financial statements. For example, the standards emphasise the importance of consistency in the text, which enables a clear understanding of the findings (International standard on auditing 700 2009). This is facilitated through the preparation process in which the auditor determines whether the financial statement can be reviewed or if it contains significant errors. Moreover, it is crucial to identify if any bias is present within the management of a company that could have an impact on the financial outcomes (International standard on auditing 700 2009). This element is included in the conclusion of the report.

Next, the auditor should include a Key audit matters (KAM) statement in the report, which is the most important standard. According to Kesimli (2019), KAM is the primary issues that an auditor decides to discuss as part of the report. This ISA standard applies in case an auditor wants to communicate a particular matter or if he or she are required to do so by the law. This aspect of an auditing report should reference specific disclosures in the actual text (Arnold 2017).

This component aims to provide additional insight into the scope of work that was performed and ensure transparency (Arnold 2017). When determining which parts should be included in KAM one must evaluate the elements that imply high assessment risk, in accordance with ISA 315. An auditor should state his or her judgment regarding particular accounting issues that lead to uncertainties or those that have significant issues affecting the financial statement as a whole. The final component is the impact that the process of auditing had on particular operations.

Formal Quality Report Standards

Audit quality can be defined through the adherence to the existing standards, coherent and understandable statements made by an auditor. These standards are reviewed by multiple organisations consisting of boards that ensure the transparency of the process (International Federation of Accountants n.d.). The aim is to create criteria that would be applicable in real life audits, and that would ensure the efficient work of the auditors.

An auditor must ensure that his or her work is compliant with the current standards of performing audits and preparing a report, as those are updated regularly. According to the International Federation of Accountants (n.d.), it is crucial to ensure that an auditor adheres to the current standard developed by international organisations because those determine the quality of the performed work. It is essential for the report to reflect the factual statements, while an auditor may indicate his or her opinion regarding specific components that affect the financial statements of a company in particular parts of the text that were discussed above.

Standard No. 220

While it is evident that quality is a crucial determinant of the report outcomes, auditing companies have to ensure that their internal processes are developed in accordance with the current standards. According to the International Federation of Accountants, the 220 standard regulates quality control within the audition process (Exposure draft, the international standard on auditing 220 (revised) 2019).

Together with the ethical requirements for auditing, this standard presents an understanding of how companies that provide audit services should control their internal processes. Firstly, these firms have to ensure that their personnel and procedures comply with the ethical and legal standards (International standard on auditing 220 2009). Additionally, this International Federation of Accountants regulation implies that such firms have to have quality control systems in place.

Standard No. 320

The notion of materiality refers to the importance of particular standards and ability to ignore them if necessary when the impact of those is relative to the result. According to the Financial Reporting Council (2016, p. 2), the standard in question is responsible ensuring that auditors utilise “the concept of materiality in planning and performing an audit of financial statements”. Therefore, this statement aims to identify in which cases an auditor can apply this strategy in his or her work when preparing or carrying out an audit.

This standard takes into account the notion of misstatements, which should be defined in the report. In general, an auditor should ensure that a financial statement that he or she reviews is free of errors (International standard on auditing 300 2009). This concept is essential because an auditor has to make a judgment regarding a particular misstatement, its nature and relative importance to the result. It is necessary to choose a specific benchmark that would serve as an indicator for the auditor when evaluating misstatements (Materiality in the audit of financial statements n.d.). Using this information an auditor can identify which components if a financial statement contains crucial mistakes.

Conclusion

Overall, it is crucial for auditors to comply with the standards identified by the International Federation of Accountants and ISA. Primary standards number 220 and 320 provide an understanding of the essential components that an auditor’s report consists of, quality standards and materiality elements. However, other regulations, such as ISA 700, ISA 7001, ISA 705, ISA 706 are applicable as well. In addition, currently, auditors are required to include a KAM statement in their report, highlighting the key components and impact that the auditing process had on an establishment in question.

Reference List

Arnold, C 2017, Auditor reporting standards implementation: key audit matters. Web.

BPP Learning Media 2017, ACCA F8 audit and assurance, BPP Learning Media, London.

Exposure draft, international standard on auditing 220 (revised), quality management for an audit of financial statements 2019. Web.

Financial Reporting Council 2016, International standard on auditing (UK) 320 (2016), The Financial Reporting Council limited, London.

International Federation of Accountants n.d., Audit quality and international standards on auditing. Web.

International standard on auditing 220: quality control for an audit of financial statements 2009. Web.

International standard on auditing 300: planning and auditing financial statements. Web.

International standard on auditing 700: forming an opinion and reporting on financial statements. 2009. Web.

Kesimli, I 2019, External auditing and quality, Singapore, Springer.

Materiality in the audit of financial statements. n.d. Web.

Why is an audit considered to be the final phase of a budgetary process?

Auditing is a crucial process undertaken by accounting professionals to inspect an organization’s performance. The ultimate objective is to ensure that the presented non-financial and financial statements or reports are fair and justifiable. Santiso (2015) indicates that auditing should be studied as the final stage or phase of every budgetary process. The financial plan of every corporation has a lifecycle. Typically, the process begins with the planning stage and ends with the evaluation phase (Santiso, 2015). However, monitoring must be done continuously in order to maintain internal control and ensure that budgetary constraints are taken into consideration.

During the process, discrepancies and overruns (or overspendings) tend to be identified by auditors. There is always a need for a thorough auditing process in every public or private organization. This practice will usually take place at the end of every fiscal year. It is undertaken to examine end-year statements and financial reports in order to ensure that they are accurate. Recommendations are provided by the audit team after the procedure is successfully completed. After this practice is undertaken, it can be asserted that the budgetary phase has been completed effectively. Many experts acknowledge that auditing is a powerful procedure since it makes it easier for stakeholders to assess compliance with accounting requirements and budgetary practices (Pitt, 2014). This final phase of the budgetary process examines how funds have been spent throughout the year, and if the targeted organization or institution has realized its financial objectives. Emerging issues are identified and shared with different policymakers. Such stakeholders are required to make appropriate decisions or implement desirable changes.

What organizations undertake governmental program evaluations, and why do they do it?

Governmental program evaluations are usually undertaken in order to determine whether a specific project will be effective and meet the needs of different stakeholders. Such practices are needed in an attempt to strengthen existing programs and ensure that new ones transform the lives of the greatest number of people. There are various organizations that are required to undertake governmental program evaluations. Some of them include public institutions and state-managed corporations (Posavac, 2016). Examples include public universities, airlines, and hospitals. Non-governmental organizations (NGOs) such as the American Red Cross can also complete such studies if they want to achieve their potential.

There are several reasons why the above public organizations undertake governmental program evaluations. The first one is that the procedure presents meaningful insights regarding the effectiveness of a given project. The inclusion of different stakeholders, such as community members and policymakers, is an approach that ensures that every issue is identified and addressed efficiently. The second one is that the evaluation process can present evidence-based insights for improving the targeted program and ensuring that most of the challenges affecting different people are addressed. Thirdly, program evaluation can also be undertaken to estimate the number of funds that are required to support the intended project. Fourthly, public organizations, and projects have been associated with increased cases of embezzlement and corruption (Posavac, 2016). The efficient evaluation has, therefore, been outlined as one of the powerful approaches for improving the level of accountability. This means that different individuals involved in the project will be willing to complete their tasks diligently and utilize public resources effectively. When these issues are understood or taken into consideration, every governmental program evaluation will ensure that the needs of the greatest number of citizens are met.

What is the difference between a formal compliance audit and a performance audit?

There are different types of audits that are completed in business organizations. Some of them include performance (also known as operational) and compliance auditing. The main difference is that performance auditing seeks to improve the effectiveness of an organization while compliance auditing is undertaken to examine whether procedures and financial reports are in accordance with existing policies, procedures, or regulations (Santiso, 2015). This means that it would be impossible to execute better business practices using compliance auditing. In terms of focus, performance auditing targets a company’s objectives while compliance auditing monitors accounting practices or transactions. According to Santiso (2015), performance auditing is unique for every business organization or company. This is true because different methods can be embraced. On the other hand, compliance auditing must follow standardized criteria and methods. Inferences are made after the process is completed successfully. Compliance audits should be presented in standardized formats, while performance audits can use diverse versions.

A good example of a performance audit is a budgetary procedure undertaken to monitor the efficiency of an organization and/or its approaches to waste management (Santiso, 2015). This type of audit can present inferences for making timely improvements or changes. Another example is an audit completed to examine the profitability of a given department or unit in a business organization (Pitt, 2014). The best example of a compliance audit is the one undertaken to determine if a given corporation follows the outlined Environmental Protection Act (EPA) guidelines for disposing of wastewater. These types of audits are, therefore, crucial since they work synergistically to ensure that a given organization is profitable and operates in accordance with every existing regulation.

References

Pitt, S. A. (2014). Internal audit quality: Developing a quality assurance and improvement program. New York, NY: Wiley.

Posavac, E. J. (2016). Program evaluation: Methods and case studies (8th ed.). New York, NY: Routledge.

Santiso, C. (2015). Why budget accountability fails? The elusive links between parliaments and audit agencies in the oversight of the budget. Brazilian Journal of Political Economy, 35(3), 601-621. Web.

The Definition of Risk-Based Auditing (RBA) and Its Importance

Internal auditing has several important functions, one of them being the ensuring of appropriate governance, control, and risk management. Risk-based auditing (RBA), as one of the types of the internal auditing process, involves the thorough analysis and management of threats that can undermine the organization’s successful work. RBA is becoming more and more popular with auditing companies (Chou, 2015).

Faser defines RBA as “designed to be used throughout the audit to efficiently and effectively focus the nature, timing, and extent of audit procedures to those areas that have the most potential for causing material misstatement(s) in the financial report” (as cited in Chou, 2015, p. 140). RBA eliminates the possibility of threats that may occur in operations performed by the company.

One of the spheres on which RBA has a particularly positive effect is the internal control systems implementation. According to Nyarombe, Musau, Kavai, and Kipyegon (2015), RBA has the potential to enhance the financial statement reporting process and assurance. RBA concentrates both on recorded and unrecorded problematic issues, so it aims to identify business risks and taking control of them. The time needed for RBA depends on the level of the risk area (Nyarombe et al., 2015).

The higher the risk level, the more substantial control is needed. Except for the establishment of the risk level, RBA allows assessing and adding value to the process of financial reporting. To be able to perform these functions, the auditor should have the advanced vision of the customer’s business and activities (Nyarombe et al., 2015). The required knowledge can be obtained through the company’s approaches to managing, operating their business, and arranging the internal and external environments. With the help of the gathered data, the auditor can create a program consisting of the most efficient and productive combinations of responses to critical situations.

Internal auditing is a valuable method of measuring the effectiveness of the internal control of the company. To prepare such a report, the manager needs to assess the control’s design and effectiveness. As Johnstone, Gramling, and Rittenberg (2014) remark, the internal risk-based audit can play an important role in this process. The risk-based method of the internal control evaluation over financial reporting incorporates the following steps:

1. the identification of financial reporting risks and measures to eliminate these threats (the establishment of financial reporting risks; the identification of controls reducing the risks; the evaluation of the effectiveness);
2. the assessment of the operating effectiveness of internal control (the selection and testing the measures taken to evaluate the operating power);
3. the provision of a report on the validity of internal control (the assessment of control shortcomings; the administration of public disclosure of the report) (Johnstone et al., 2014).

RBA is an integral component of the risk-based safety management system. As McKinnon (2017) notes, this system should be coordinated with the risks originating at the workplace. Various types of businesses have different risks, so there is no unified system for all industries. However, implementing RBA in the organization enables the management team to decrease the likelihood of risks happening due to their timely identification and prevention.

Therefore, it is possible to conclude that the significance of RBA cannot be overestimated. Internal control systems benefit from RBA greatly since it enables these systems to improve the reporting process of financial statements. The identification of risks makes it possible to mitigate them (Griffiths, 2016). The role of RBA in key risk mitigation is continuously increasing (Coetzee & Lubbe, 2013). The decision of managers to report to RBA when evaluating threats to their organizations testifies the effectiveness of this approach.

Challenges of the RBA Implementation

External Issues

1. The application of the audit control system is too broad. RBA is a good idea, but sometimes, it may involve too many tasks and cover too many areas. If the management of the company does not eliminate the number of these spheres, the process of implementation may be problematic.
2. RBA may be time-consuming. Depending on the firm’s size, the number of employees, and the variety of processes, the introduction of RBA may take up much time. Frequently, companies neglect this issue when considering their audits, which results in spending additional resources and extra time.
3. Some technical aspects of RBA may be too complicated for the company to understand. Not all firms have specialists that can cope with RBA independently. At the same time, these organizations may not have additional financial means to hire someone to perform this job for them. As a result, the needed solutions are not found, and the employees may feel disorganized and upset.
4. The internal control system in the firm may have serious weaknesses. Whether it is a current problem or some deficiency left from the previous financial manager, there may be some obstacles in the internal control system that can hinder the successful RBA implementation. Such faults may include the insufficient amount of data, documentation filled incorrectly, or lacking sources of financial information.
5. The cost of the procedure may be considered unjustified. One of the major external challenges in the process of deciding whether to perform RBA is the issue of its cost. For a small company, the whole process may seem too expensive, and the manager may find it irrational to launch RBA.

Internal Issues

1. The lack of management support. In some firms, the employees may understand the significance of RBA, but the manager may not see it. Such a paradox may happen if the manager is new to the company or if their sphere of knowledge does not correspond to the organization’s goals. The lack of support from the manager may result in their refusal to implement RBA, which may lead to adverse outcomes.
2. The insufficient number of team members. Sometimes, a company may be too small to allocate several employees or even one for RBA processes. In such cases, the responsibilities are shared among several people, and it may be difficult to collect a sufficient database. Additionally, such a division of duties may result in numerous misunderstandings and arguments, which will not do the company any good.
3. The lack of willingness to study and develop. Frequently, employees are resistant to change, and they may feel opposed to RBA implementation. This factor is particularly pertinent to old companies with conservative views. Sometimes, even the manager of such an organization may not feel positive about RBA. This issue may result in overlooking serious drawbacks in the firm’s processes.
4. Fraudulent schemes or corruption. If there is some illegal activity going on in the firm, it is possible, or even expected, that the person or people engaged in that activity will be opposed to RBA implementation. Such employees will do everything possible to interfere with audit processes.
5. The lack of business knowledge. On some occasions, RBA is performed by employees that are willing to assess their company’s weaknesses but, unfortunately, they do not have enough skills and experience to do that. These may be either the individuals that have worked in the company for only a short period of time or the people whose area of expertise does not include the performance of financial assessments.

Recommendations to Solve the Challenges

• It is necessary to explain to the employees that internal controls and RBA are highly significant for the company’s successful functioning;
• To reduce the resistance of workers, it is necessary to inform them in advance that the audit will be performed;
• Every employee should be given enough time to prepare and understand the goals of RBA, as well as be allowed to ask questions in case they do not understand something;
• To avoid a broad audit system, the manager should review the processes taking place in the organization thoroughly and focus on those that have the greatest value;
• Employees should be allowed to participate in the decision-making process: this will empower them and may offer some insights for the manager that he or she could have overlooked;
• If the number of employees is too small, it is necessary to prepare a plan of actions, where every team member will be allocated to specific functions;
• To overcome the lack of knowledge and resistance to obtain it, the management should come up with a step-by-step program of employee education that will gradually prepare people to changes.

References

Chou, C. D. (2015). Cloud computing risk and audit issues. Computer Standards & Interfaces, 42, 137-142.

Coetzee, P., & Lubbe, D. (2013). Improving the efficiency and effectiveness of risk-based internal audit engagements. International Journal of Auditing, 18(2), 115-125.

Griffiths, P. (2016). Risk-based auditing. New York, NY: Routledge.

Johnstone, K. M., Gramling, A. A., & Rittenberg, L. E. (2014). Auditing: A risk-based approach to conducting a quality audit (9th ed.). Mason, OH: South-Western Cengage Learning.

McKinnon, R. (2017). Risk-based, management-led, audit-driven, safety management systems. Boca Raton, FL: CRC Press.

Nyarombe, F., Musau, E. G., Kavai, I., & Kipyegon, K. (2015). The effect of risk based audit approach on the implementation of internal control systems: A case of Uasin Gishu County. International Journal of Business and Management Invention 4(1), 12-32.