Category: Auditing

Introduction

To ensure that customers will be provided with high-quality services that align with all international or regional standards accepted, organizations in different spheres need to apply for accreditation. This process involves many stages, and this is why specialists supposed to be responsible for the current status of an organization have to consider a wide range of details related to documentation and performance of a company. Speaking about the accreditation of a clinical laboratory organization, it is necessary to state that there are a number of tasks that need to be fulfilled during the preparatory stage that precedes submission of an application to get a new accreditation certificate. These tasks include measuring performance indicators and juxtaposition of the particular statements, solving problems related to external and internal auditing, choosing the accrediting body, and submitting an application (“Frequently asked questions,” 2014). Besides, members of teams handling such issues have to be aware of the requirements that have to be met for the renewal of the accreditation certificate.

Performance Indicators and Benchmarking

Measuring performance indicators remains an important part of the preparation process before the accreditation of an organization. A performance indicator is a measure that helps to make a conclusion concerning the success rate of a company or of the particular task fulfilled by members of an organization. Speaking about this measure, it is necessary to consider that it is closely interrelated with such notions as defect percentage that should be as low as possible and the company’s tendency to achieve important goals within short periods of time (Micheli & Mari, 2014).

More importantly, in reference to organizations related to medicine and healthcare, it needs to be stated that feedback received from customers should be taken into consideration as well. In general, there is a variety of ways to define the given measure. Nevertheless, in order to choose the method that would be the best for a particular organization, for example, a clinical laboratory, it is necessary to rely on the basic values of a company and the most important aspects related to its work. Thus, as for such an organization, it may be necessary to consider the integrity of laboratory equipment, the percent of laboratory tests that have been conducted successfully, or periods of time needed in order to implement new types of equipment and start providing customers with additional services (Plebani, 2017). Importantly, measuring performance indicators can provide specialists with additional information on tasks related to the company’s activity that need to be redesigned and performance weaknesses in general.

As for benchmarking, this term usually refers to a process that involves comparing different measures and evaluating the level of success of a certain project or organization in general. Also, it may include comparing the company’s performance to one of the other organizations working in the field. Thus, there is such type of benchmarking as internal that involves making a comparison between operations performed by a company (for instance, different types of clinical tests). Although such a process helps to improve performance, it is much more effective to compare the resulting quality of operations performed by a company and level of customer satisfaction to the ones reported by a leading competitor of the given organization.

Internal and External Auditing

In reference to the process of accreditation, auditing needs to be paid increased attention to because its results have a significant influence on application processing. As for external auditing, it is conducted by a specialist who is not related to the organization being accredited. Such a specialist is required to keep track of financial and organizational operations related to the performance of a company in order to make a conclusion concerning its current financial position (Turpen & Dyer, 2015). In the case of laboratories, external auditors have to review operations used to conduct tests and define if operations and materials used during the work align with standards of the country or international standards. Internal auditing, as is clear from the term itself, involves a check run by one of the specialists from the company. In fact, internal auditing often precedes the external one and helps to prepare for independent checking. There is no doubt that the positive result of external auditing significantly increases the company’s chances of success; nevertheless, it also involves certain risks such as leak of data on unique laboratory assessments.

Accrediting Body Selection

The selection of accrediting bodies is an important task as the goodwill of the body is extremely significant because it often defines perceptions of the accredited organization. In the majority of countries, there are special bodies responsible for accrediting organizations related to particular spheres. Nevertheless, such an option as international accreditation becomes more popular. In reference to laboratories, there is a particular standard known as ISO/IEC 17025 defining the rules of their accreditation. Meeting this set of standards could be regarded as a mark of distinction, and this is why it is more appropriate to choose international accrediting organizations such as IAS or UKAS located in the United Kingdom. Also, choosing the accrediting body, one has to familiarize himself with the information on requirements and application processing to estimate the chances of success.

Applications and Requirements

To submit an application, our organization needs to contact representatives of the accrediting body chosen and ask them to provide additional information. A lot of such bodies provide clients with an opportunity to submit an application on official websites. Usually, submitting an application, organizations provide accrediting bodies with access to data on their management systems and inspection results reported by external and internal auditors (“UKAS online application,” 2017).

As for additional requirements for certificate renewal, all the files and folders attached to the application form should be organized and scanned for viruses. Information that needs to be reported during filling in the application form includes the status of an organization, address, contacts, financial metrics, documents confirming previous inspections, reports, and information on managers and representatives of a company (“Requirements for renewal of accreditation,” 2016). Importantly, nothing should be omitted as it may lead to an extension of application processing time. Another detail that is relevant to the given case is that specialists from accrediting body chosen should be provided with all the information that is actual; therefore, if certain facts change (for instance, there are different organizational practices implemented into the work of laboratory), the organization is supposed to inform the accrediting body as soon as possible and provide new documents if necessary.

Conclusion

In the end, accreditation procedure requires companies to use different resources including financial ones as this service can sometimes be costly (“Facts about laboratory accreditation,” 2016). Accreditation involves a lot of advantages as it encourages the improvement of customer service quality, increases the level of trust in the laboratory, and has a positive influence on its competitive ability. Despite that, there are certain drawbacks related to paperwork, service cost, and possible delays in processing applications. To simplify the process and guarantee positive outcomes, our organization is recommended to apply the method of competitive benchmarking, invite an independent specialist to conduct auditing, and prepare necessary documentation in advance.

References

Facts about laboratory accreditation. (2016). Web.

Frequently asked questions related to the A2LA ISO 15189 clinical laboratory accreditation program. (2014). Web.

Micheli, P., & Mari, L. (2014). The theory and practice of performance measurement. Management Accounting Research, 25(2), 147-156.

Plebani, M. (2017). Quality in laboratory medicine: 50 years on. Clinical Biochemistry, 50(3), 101-104.

Requirements for renewal of accreditation. (2016). Web.

Turpen, R., & Dyer, H. (2015). Working with external auditors: A successful relationship between internal and external auditors depends on collaboration and open communication to achieve the shared goal of effective audit service. Internal Auditor, 72(1), 17-19.

UKAS online application (2017). Web.

Introduction

In the current economic environment, there are a number of antecedents affecting the analysts and auditors’ forecasts concerning the economic performance of a particular company. According to Bradshaw, Richardson, and Sloan, there is a strong association between the high accruals of a particular company and the earnings problems caused by earnings management in that company (45). Overall, one of the common interpretations of such correlation refers to the linkage between the analysts and auditors’ forecasts and earnings management practices aimed at meeting the expectations of those forecasts.

For that reason, it is important to examine various factors that can be linked to the reasons and explanations of how those forecasts can affect the future performance of a particular company, including whether the connotations of the forecasts represent the incentives for earnings management or there are some other internal and external reasons predetermining the practices of earnings management in financial accruals among various companies’ executives.

The hypothesis development

It is important to point out the fact that GAAP violations are documented in auditor turnover, which is why it is significant not to confuse the role of auditors’ statements. However, in the case of analysts’ forecast, there is a certain level of expectations applied to the companies. In case the executives of those companies are not able to perform good enough to reach that benchmark, there is a strong possibility of lowering of the stock prices, as well as executives losing some of their benefits.

However, in the situation, when a company introduces some practices of earnings management, especially, by using financial accruals, to meet the analysts’ expectations, the consequences relating to the company’s performance and earnings problems are also highly possible. The standard approach to the incentives concerning analysts and auditors’ forecasts affecting the practices of earnings management and, as a result, negatively influencing the company’s performance, has several important factors. Firstly, the expectations that the analysts and other outside audiences define the approaches used by the firms’ managers who practice earnings management.

Among the most common cases of earnings management, there is an approach, in which the company’s performance does not reach the threshold of expectations, and the managers are likely ‘to borrow’ the profits from the upcoming fiscal periods. However, there is also an opposite variant of GAAP violation, when the performance of the company is expected to be lower than it is in reality, and the managers can delay the earnings reporting.

However, Bradshaw, Richardson, and Sloan also offer the third explanation of such interdependence, suggesting that the incompetence of analysts and auditors’ forecasts can result in financial reporting that involves unrealistic prognosis and demands that could not be otherwise expected from a particular company (47).

Nevertheless, Bradshaw, Richardson, and Sloan claim that there is a body of evidence not compliant with the idea that executives and their financial decisions are affected by the analysts and auditors’ forecasts to such an extent, suggesting that “investors respond to current earnings without fully appreciating the current accounting choices for future earnings and cash flow” (47). Thus, the main hypothesis is that errors in auditors’ forecasts show no intermediate linkage to the future cash flows that are primarily associated with financial accruals.

For that reason, various scenarios of managerial decisions and investors’ choices should have included different variables, such as earnings persistence, accrual reliability, accrual relevance, a degree to which earnings are managed, stock prices, recognition of sales revenues, etc. in order to be associated with the analysis and forecasts of auditors since they are mainly based on the accruals. Moreover, levels of accruals can be linked to the auditor’s change (Bradshaw, Richardson, and Sloan 50).

Data and Results

The most of the data gathered by Bradshaw, Richardson, and Sloan includes the financial statements of Compustat database (51). Among the required parameters used for the analysis, there were such metrics as “increase in accounts receivable, increase in inventory, decrease in accounts payable and accrued liabilities, decrease in accrued income taxes”, and either decrease or increase in the assets and liabilities (Bradshaw, Richardson, and Sloan 51).

The analysis showed that GAAP violations are likely to be linked to a variety of accruals, but in terms of auditing, there is a correlation noticed by Bradshaw, Richardson, and Sloan that those violations are compliant with increased auditor turnover (65). Such correlation was confirmed by the test of the relation between various accruals and auditors’ opinions. Finally, the results confirm the hypothesis that investors are not likely to expect the negative consequences regardless of the current financial reporting. The linkage of using earnings management and change of an auditor is a typical pattern, whereas correlation between forecasts and investors’ decisions is negative.

Conclusions

Overall, earnings management practices are not directly affected by the auditors and analysts’ forecasts but rather executives act out of the need to misallocate the resources. The correlation between change of an auditor and using earnings management to increase the stock prices is more substantial than between forecasts and investors’ decisions.

Works Cited

Bradshaw, Mark, Scott Richardson, and Richard Sloan. “Do Analysts and Auditors Use Information in Accruals?” Journal of Accounting Research 39.1 (2001): 45-74. Print.

Abstract

Four Season Company is a five-star hotel and resorts firm. It sits at the top of the hospitality industry offering various services, for example, the basic bed and breakfast, holiday packages, conference facilities, and so on.

These services are provided in more than one country given that we are present in Europe, Asia, the Gulf Region, Continental USA and Canada. It is imperative to note that our challenges encompass several factors from political, economic, social, environmental, geographic, and cultural, among many others. This paper will attempt to discuss the environmental protection challenges facing this organization in all aspects possible (Four Seasons Official website).

Environmental protection challenges of Four Season Company

Given the nature of our business, it is suicidal not to keep abreast with changing circumstances and new ways of doing things. As an organization, we face various challenges that cut across several factors and boundaries. The first challenge, which to our understanding is the greatest, is the increasing environmental awareness by the consumers. This increase in awareness has affected policies in our organizational plans.

The tourist demands are increasingly becoming complex, and this has necessitated that we adopt new ways of thinking and ways of doing things (Abbey, 1998, p.36). As stated above, environmental awareness means that many people and potential clients become more concerned about Four Seasons’ environmental protection policy. Therefore, their demand for better products with less carbon footprint is now more than ever before.

As an organization, we recognize this factor; however, implementing new green initiatives affects our organization’s policies and planning, which are at the core of our operational code. It is, therefore, a challenge to integrate the emerging trends with the day to day operations without compromising on the quality of our services and our prices (Mountinho, 2010, p.1).

Currently, partly due to the interdependence of many groups in society, the social involvement of business has increased. Thus, modern organizations have more social responsibilities and social participation in the society’s activities (Besser, 2002, p. 14). Social responsibility of an organization, popularly known as corporate social responsibility (CSR), entails its treatment and social relations with people inside itself, outside, and the wider societies that affect and are affected by its activities.

In one sense, corporate social responsibility refers to the social implications of business decisions made by an organization. It involves serious consideration by the management of an organization of the impacts of a company’s actions on society (Besser, 2002, p. 16). It is social responsiveness or the ability of an organization to relate its operations and policies to its social environment and natural environment in ways that are mutually beneficial to the organization and all stakeholders including shareholders, employees, customers, suppliers, authorities and the wider society (Besser, 2002, p. 62).

Our organization is and has been, under increased pressure during the last one decade from our clients, environmental groups, and concerned authorities to do business in a way that is environmentally, as well as, socially friendly (Hengst, 2011, p.2; Four Seasons Hotels, Barbados, Environmental and Social Strategy, 2009, p.12). Failure to comply with the mounting pressure threatens to strain our relations with authorities concerned with environmental protection and risk imposition of extra taxes upon our organization, thereby increase our operational costs (Staley, 2007).

It can also dissuade customers, employees and shareholders from associating themselves with our organization especially those who would like to identify with companies that recognize and appreciate that their neighbours are not strangers but people who matter because they comprise their target audience, as well as suppliers, shareholders and other notable stakeholders.

Employees, customers, and shareholders are respected Four Season’s stakeholders who continuously put a lot of pressure on Four Seasons. Internally its employees would like to see their efforts being appreciated through commensurate remuneration and provision of decent working conditions through which they can experience a meaningful life (Step Project, 2011, p.301). Our customers would like to get value for their money and associate with a company that is conscious of environmental preservation and able to keep their safety. The need to do business in an environmentally responsible manner has made environmental responsibility a way of life for our company.

For example, in the year 2001, the company joined the International Hotels Environment Initiative (IHEI) (Hengst, 2011, p.2). It has also been rewarding its hotels that excel in environmental protection found in 25 countries. As part of our environmental initiatives, we educate our staff regularly on matters related to environmental protection, our environmental protection policy and government regulations related environment (Olsen, West, & Tse, 2007, p. 19). We also inform our clients about our policies on environmental protection.

Conclusion

As discussed, in the above document, our operations are affected by a myriad of issues and factors. As a world-class organization, we innovate at all levels of our policy development and operational undertakings. We face setbacks, but we manage to avoid serious problems arising from running an organization of this magnitude.

References

Abbey, J. R. (1998). Hospitality sales and advertising. USA: Educational Institute, American Hotel & Motel Association.

Besser, T. L. (2002).The conscience of capitalism: business social responsibility to communities. Westport, CT: Greenwood Publishing Group.

Four Seasons official website. About Four Seasons. Web.

Four Seasons Hotels, Barbados, Environmental and Social Strategy. (2009). Barbados, Four Seasons Hotels, Environmental and Social Strategy. Web.

Hengst, W. (2011). Hotels Care: Community Action Responsibility for the Environment. Web.

Mountinho, L. (2000). Strategic Management in Tourism. Oxfordshire: CABI.

Olsen, M., West, J., & Tse, E. (2007). Strategic management in the hospitality industry (3rd Ed.) Upper Saddle River NJ: Pearson Prentice Hall.

Staley, O. (2007). Four Seasons Hotels agrees to bid from Gates and Alwaleed. New York Times. Web.

Step Project. (2011). Four Seasons Hotel, Perthshire, Scotland: Sustaining a Positive Working Environment. Web.

Introduction

The purpose of this proposal is to present the problem statement and objectives for secondary research that will be conducted to examine accounting and auditing strategies adopted by Abu Dhabi National Oil Company (ADNOC). Two questions take center stage. The first one pertains to accounting and auditing standards that the ADNOC Group of Companies currently has. The second question is whether the group’s inner control policy and approaches to account reports and financial reviews need to be improved in order to be able to compete with other companies. The proposal also provides the details of the industry selected for the research, as well as details related to ADNOC. The SWOT analysis will be performed to propose a background for understanding business and accounting issues in ADNOC. The relevant course learning outcomes, methodology, and plan of action are also discussed in the proposal.

Details of Chosen Industry

The gas and oil industry is the leading sector in the United Arab Emirates (UAE). In 2014, the revenues from this industry comprised 24% of the country’s gross domestic product (GDP), up from 18% in 2004; in terms of total general government revenue, oil and gas accounted for 65% in 2014 (International Monetary Fund, 2015, p. 3-4). The UAE produces approximately 3.7 billion barrels of oil per day (International Monetary Fund, 2015, p. 8). Oil exports are especially important: in 2011, they accounted for 77% of the UAE’s state budget (Global Data, 2016). Within the country, the oil and gas industry, including its petrochemical sector, is dominated by state-owned companies (Global Data, 2016). Therefore, much attention should be paid to researching specific accounting and auditing practices in this industry, in order to focus on principles of conducting business and preparing financial statements at the state level.

Details of Chosen Organization

ADNOC is a state-owned company that operates in the oil and gas industry of the UAE. The company was founded in 1971, and today, it unites more than 20 subsidiaries, known as the ADNOC Group of Companies, that operate in the oil and petrochemical sectors of the UAE (ADNOC, 2016). The ADNOC Group of Companies includes such firms as Abu Dhabi Company for Onshore Oil Operations (ADCO), Zakum Development Company (ZADCO), and Abu Dhabi Marine Operating Company (ADMA-OPCO), among others (World Market Intelligence, 2014). These companies monitor upstream, midstream, and downstream operations. The focus is on the exploration and production of oil and gas products, as well as on the production of petroleum products. Currently, ADNOC “manages and oversees oil production of more than 3.15 million barrels per day (bpd), ranking it the 12th largest oil and gas producer in the world” (ADNOC, 2016, para. 4). The group manages 95% of the UAE’s proven oil reserves and 92% of the country’s gas reserves (ADNOC, 2016, para 3). The overall number of employees working in subsidiaries is more than 20,000 people (Global Data, 2014). ADNOC has been selected for the study because it is the largest national oil and gas company in Abu Dhabi.

SWOT Analysis

In order to identify problems in practices and strategies followed by ADNOC in terms of accounting and auditing, it is necessary to perform a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis:

Strengths

• Subsidiaries of the ADNOC Group of Companies have internal auditor teams that include experienced specialists.
• Auditors report to the Supreme Petroleum Council in order to guarantee the complex analysis of data (ADNOC, 2015).

Weaknesses

• Subsidiaries adopt accounting standards according to which they prepare financial statements, depending on the sector and the tasks to address.

Opportunities

• There are many opportunities to improve accounting and auditing procedures, as well as the company’s internal control policy, with a focus on the comments provided by the Supreme Petroleum Council (ADNOC, 2015).

Threats

• If some of the subsidiaries choose to record data according to standards that differ from the approach followed by other companies, auditors, and the Supreme Petroleum Council can experience problems with analyzing the data.

Problem Statement and Research Objectives

The presence of several accounting and auditing standards that are followed, not only in different countries but also in different sectors and industries within one country, allows for speaking about challenges faced by internal and external auditors when they review accounting reports (ADNOC, 2015). The reason is that the same accounts can be recorded in accordance with different standards, including IPSAS and IFRS, among others. Therefore, it is important to study how such large national companies as ADNOC can address the identified problem.

From this point, the study aims to state whether the problem of following different accounting and auditing standards and policies is related to ADNOC, and can be discussed as a challenge for the company in terms of financial planning.

Research Objectives

• Examine what accounting and auditing standards are followed by the ADNOC Group of Companies. The significance of this objective is explained by the necessity to analyze the mechanisms and obtain data that will be fundamental for future enhancement. Without understanding the current state of affairs, it is impossible to plan short- and long-term actions.
• Analyze if there is a necessity of improving internal control policy, as well as approaches to completing accounting reports and financial statements. This objective is chosen in order to evaluate the actual situation. In the context of different standards, it is equally possible that changes will bring more challenges or improve the setup. Thus, it is necessary to estimate the advantages and disadvantages and come to a conclusion.

Relevant Course Learning Outcomes (CLOs)

The current study is related to the theory of accounting and auditing procedures in different types of organizations, and the following learning outcomes were selected to guide the research and examination of the problem:

1. BUS4113, CLO 3 – Compare the various accounting treatments of current assets.
2. BUS4123, CLO 1 – Explain the principles of auditing and professional standards of auditors.
3. BUS4123, CLO 3 – Evaluate internal control policies and procedures adopted by organizations.

BUS4113, CLO 3 can be discussed as linked to the research, because it is necessary to examine accounting procedures, principles, and treatments followed in different subsidiaries of ADNOC, and to state whether these strategies are similar and whether they allow the complex analysis of reports. BUS4123, CLO 1 is correlated with the necessity to explore and discuss professional auditing procedures followed in state-owned companies. BUS4123, CLO 3 supports the necessity of the evaluation of internal auditing procedures followed by ADNOC, in terms of their effectiveness.

Research Methodology

Secondary research based on qualitative methodology is selected for the study. It is planned to conduct a case study analysis in order to examine patterns of using accounting treatments and auditing standards in ADNOC. The case study will be based on secondary sources and the collected corporate data. Secondary sources will include journal articles, newspaper articles, industry reports, and studies of accounting treatments and auditing procedures adopted in the United Arab Emirates. The information received with the help of examining the secondary data that are presented in the company’s reports will be analyzed and compared while using percents and histograms to illustrate the tendencies observed in the company (Global Data, 2014). Much attention should be paid to finding out what problems in recording data and completing financial statements exist, and what auditing strategies are followed in the company.

Plan of Action

1. Selection of the research topic – 2 weeks.
2. Literature review – 4 weeks.
3. Problem statement – 2 weeks.
4. Formulation of research objectives – 1 week.
5. Development of the proposal – 2 weeks.
6. Secondary research – 6 weeks.
7. Analysis of data – 4 weeks.
8. Research writing – 4 weeks.

Conclusion

This proposal provides the problem statement, objectives, and methodology for the planned research regarding accounting and auditing principles adopted by ADNOC. The objectives of the study are correlated with the course learning outcomes, and they serve to achieve the purpose of the research. The plan of action with the set deadlines is also included in the proposal.

References

ADNOC. (2015). 2014 ADNOC sustainability report. Abu Dhabi, UAE: ADNOC Health, Safety, and Environment Division.

ADNOC. (2016). About ADNOC. Web.

Global Data. (2014). Abu Dhabi National Oil Company – power – deals and alliances profile. London, UK: Author.

Global Data. (2016). Abu Dhabi National Oil Company – oil & gas – deals and alliances profile. London, UK: Author.

International Monetary Fund. (2015). United Arab Emirates: Selected issues. Washington, DC: Author.

World Market Intelligence. (2014). Abu Dhabi National Oil Company – company capsule. London, UK: Progressive Media Group.

Background Information and the Stakeholders

The background for this case is as follows. The company under focus is the investment fund named “GL Beyond Income Fund” (further referred to as the Fund). The management of the Fund was provided by Daniel Thibeault and his registered investment advisory company, GL Capital Partners LLC (further referred to as GL Capital). Another stakeholder is the accounting firm BBD. It is represented by two auditors, Kouser and Dougherty, who were supposed to perform an audit of the Fund for the fiscal year 2014.

By the time of the audit, Kouser was an engagement partner at BBD and was in charge of the Fund’s audit for the 2014 fiscal year. Dougherty was an audit manager at BBD, with responsibilities including executing the audit program, audit planning, and staff supervising within the limits of the audit. A further company involved in the case was TAFT Financial Services (TAFT), which was also under the control of Thibeault.

The key issue that needs to be taken into consideration in the case of this audit was the fact that Thibeault and GL Capital committed fraudulent acts on The Fund and financiers involved in the company. The fraud lasted for at least two years, from 2013 through to late 2014. A minimum of $16 million of the Fund’s money was stolen. During this period, Thibeault was creating fabricated loans and misappropriating the money of the investors. The loans were redirected to his bank accounts. As Thibeault could not use his personal data for fictitious loans, he used those of his friends and acquaintances without informing them and without permission. He marked these loans in the records and books of the Fund with a special code TA, which meant that TAFT was involved with these loans.

The Causes for the AAER

The major reason for the AAER was the violation of auditing standards accepted by the Public Company Accounting Oversight Board. However, there were other causes that led to the problem. First of all, Kouser and Dougherty did not have any experience in auditing funds involved in consumer loans. Also, neither of them had worked with factoring transactions in the LAOH Notes, which were necessary for the audit process.

There were many delays because data about the LAOH Notes could not be confirmed on time. This resulted in further delays in the audit report, which was issued almost four months later than the audit finished. Besides, only Kouser managed to meet Thibeault during the audit; Dougherty never met him.

Still, the failure to follow the auditing standards accepted by the Public Company Accounting Oversight Board (PCAOB) became the main cause for the AAER. PCAOB standards require an understanding of peculiarities of the functioning of the entity which is audited. Also, it presupposes professionalism in planning and performing the audit, as well as report preparation. Moreover, these standards demand evaluation of all the activities performed by an entity and their impact on the financial statements of the company.

However, the auditors failed to understand the presence of TA loans and their significance to the Fund, while there were 22 TA loans during the 2014 fiscal year, amounting up to $8.5 million. The auditors also failed to understand and find proof of information about the LAOH Notes. Some other violations of the PCAOB standards included failure to analyze the internal controls of the Fund and the inability to choose a representative sample of the assets of the Fund.

One more reason for the AAER was that the auditors failed to find meaningful and suitable evidence for the audit. Every opinion and conclusion in the report by the results of the audit is supposed to be supported by evidence from the company’s documentation; the auditors failed to provide this. Finally, the mistake of the auditors was the failure to prepare the audit documentation according to the standards. The audit should have been supported with documentation, which reflects its purposes, sources, and conclusions. However, Kouser and Dougherty did not prepare the necessary documentation on time, and it did not meet the standards.

Possibilities for Auditors to Prevent the AAER

Although there were many violations of the audit procedure, some failures could have been avoided and, as a result, the AAER could have been prevented. First of all, BBD could have appointed more experienced employees to perform an audit in a big Fund. In the case that there were no employees familiar with the peculiarities of the Funds’ activity, Kouser and Dougherty could have done more preparation before the audit. They needed specific knowledge about funds providing consumer loans and peculiarities of their documentation. Secondly, both auditors could have followed the standards accepted by the PCAOB.

They could have been more attentive to the planning process and more careful when studying the Fund’s documentation. Where they were not able to understand the records, they could have consulted more experienced colleagues. Finally, both auditors could have been more responsible and have prepared the necessary documentation on time and within the standards. All these possibilities could have revealed the fraudulent activity and prevented the AAER, which led to significant problems in the professional activity of both auditors.

We live in the age of financial frauds. Income statement and revenue manipulation has become a common instrument of generating profits. Companies either fail to comply with the basic financial reporting standards or consciously violate them. Recent corporate scandals in America suggest that businesses lack effective procedures to prevent financial fraud. Auditors have long been regarded as a reliable protection against financial frauds. External audit functions were developed to help organisations and businesses detect and eliminate the risks of unethical financial behaviours. This however is no longer the case: only a well-developed internal audit function, as well as changes in corporate governance and culture, can secure businesses from the risks of financial crime.

At the beginning of 2011, BASF published a new external auditors’ report. KPMG AG, the organisation responsible for auditing BASF, presented the results of the recent financial analysis (BASF, 2011). The documents checked by external auditors included the balance sheet and income statement, statement of recognised income and expense, the development in stockholder’s equity form, cash flow statement, and the Notes to the Consolidated Financial Statements (BASF, 2011). The audit was conducted in compliance with the generally accepted standards of financial audit and §317 German commercial code (BASF, 2011). According to the auditors’ report,

the audit included assessing the annual financial statements of those entities includes in consolidation, the determination of entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by management, as well as evaluating the overall presentation of the Consolidated Financial Statement and Management’s Analysis. (BASF, 2011)

No serious violations were detected, and the auditor decided that BASF gave a fair view of its assets and financial situation (BASF, 2011). However, the case of BASF raises a number of issues, including the relevance of the external audit function and its implications for financial security in business.

Auditors have long been regarded as a reliable protection against financial frauds (Jamal, 2008). This however is no longer the case. Financial fraud is management fraud, and misbehaviors are part of the human condition (Jamal, 2008). External auditors used to give firms a sense of confidence and provide comfort to shareholders worried about their investments and earnings. Having outside members on the board of directors was found to significantly reduce the likelihood of financial statement manipulations (Beasley, 1996). However, it is high time the myth of an omnipotent external auditor gave place to realistic ethical expectations.

External auditors cannot prevent financial misbehaviours, which stem from problems in organisational culture and governance. Organisations that outsource the entire internal audit function are less likely to detect and report fraud than those, which have their own internal auditors (Coram, Ferguson & Moroney, 2008). Internal auditors can control and monitor financial environment within organisations, thus adding value to organisations’ financial decisions (Coram et al, 2008).

Certainly, that internal auditors add value through monitoring firms’ financial environment does not mean that contracting outside fraud security services is not relevant. Firms, especially large ones, need to assess their financial situation from different angles. External auditors can add to organisations’ knowledge of their financial state, but how to make external auditing effective is a difficult question. For example, firms could undergo a forensic audit once in three-five years (Jamal, 2008).

Just another way to ensure financial and accounting compliance is to require publicly traded companies to purchase fraud insurance and give insurance companies freedom to hire external auditors (Jamal, 2008). In light of the global financial instability, firms may turn to financial manipulations, in order to stay profitable. In this situation, only a well-developed internal audit function coupled with fraud insurance can guarantee ethical accounting and financial decision-making in organisations.

References

BASF. (2011). Auditor’s report. BASF. Web.

Beasley, M.S. (1996). An empirical analysis of the relation between the Board of Director composition and financial statement fraud. The Accounting Review, 71(4), 443-465.

Coram, P., Ferguson, C. & Moroney, R. (2008). Internal audit, alternative internal audit structures and the level of misappropriation of assets fraud. Accounting and Finance, 48, 543-559.

Jamal, K. (2008). Mandatory audit of financial reporting: A failed strategy for dealing with fraud. Accounting Perspectives, 7(2), 97-110.

Market Potential

South Korea is a newly industrialized country with a GDP of about 897 billion dollars, most of the people in South Korea depend on agriculture for their survival and due to industrialization they have in the recent past started to focus on the use of natural resources i.e. coal iron ore limestone graphite and kaolinite. South Korea actually has now become one of the most industrialized countries in the world.

This is because most of the electronics used in different parts of the world are from South Korea, more especially in Africa, which forms the largest market for South Korea’s electronics. The market of South Korea consists of the agricultural focus where they need to emphasize more on the production of agricultural products like fruits root crops and barley. On the other hand they have also to improve on the production machinery and transportation equipment, steel and also mining. The current market for South Korea is the Republic of China, Saudi Arabia, and Japan. The market potential of South Korea is to focus more on growing economies of Africa and middle east more especially on developing African countries that need their industrial machinery to develop.

Penetration of urban and rural markets

Most companies use different strategies to penetrate markets. We have two types of markets in one given country and those are the rural and urban markets. The two have to be approached differently. Just as international companies have to adapt their marketing strategies to local conditions, the companies should also ensure that urban marketing strategies assist them to penetrate rural markets. South Korea for example produces consumer electronics and many machine tools; they should make these electronics for the rural people. This is called production adaptation – making goods/products that meet rural or urban preferences there are several ways:

• The Company can produce a regional version of a product i.e. a rural utility vehicle (customized).
• They can also produce a country version or a product that is accepted through the country.

That is a country can produce a city version of its product i.e. a beer to meet (Munich tastes or Tokyo tastes) ands another to meet rural tastes. This should not be done to meet only tastes but rural superstitions or beliefs too.

Product uses: Consumer buying habits

The aim of marketing is to meet and satisfy target consumer needs and wants. Consumer buying habits are the ways individuals; groups and organizations select, buy, use and dispose of goods, services ideas, and experiences to satisfy their needs and desires. Companies in newly industrialized Countries like S. Korea need to understand how people purchase goods in order to profit from them.

Studying consumers provide clues for developing new products, product features, prices channels, messages and other marketing mix elements hence in South Korea for example, being a NIC country, the buying behavior can be influenced by:

Cultural factors like social classes reflect the preferences for goods due to income of people, education, and occupation. Markets should design products tailored to meet the needs of people in various social classes.

Other factors that can affect the consumer buying habits are social factors like family, reference groups, role models, friends, neighbors, and workmates. These are those people with whom a person interacts and this also affects the buying habits. For example in families in South Korea, the man is seen as the breadwinner and the wife is the agent for purchase of most goods like food, sundries and clothings. However markets should realize that women are also gaining power in household purchasing power hence it should be realized that there are people who have greater influence in the family on choosing various products. Other factors are personal factors like age, sex, occupation, lifestyle, personality and self-concepts. Psychological factors also affect the consumer’s buying habits like, perception, learning beliefs and attitudes.

Products use Patterns

Product use will naturally determine whether a person is satisfied or not. Satisfaction is if the product matches with the uses. If it doesn’t then the customer is disappointed then he will be delighted and these three will make the customer to be loyal or not.

Product Feature Preferences

Product features are some of the important aspects that customers look for when making purchases. Take for example a customer who wants to purchase a car. He/she must take to considerations features like speed, comfort, and availability of spare parts. Most products are offered at varying features characteristics and functions. Companies should ensure they learn the features that consumers desire and the costs of adding these features to their products. Product features also assist customers in evaluation of alternatives in the purchase decisions.

On the spending and product preferences of South Korea we can say that most people find South Korean electronics and industrial machinery attractive they should hence focus more on trying to retain such consumers. The reason to this type of consumer preference is attributed to the various spare parts and the ease to use such machines from South Korea as opposed to other countries.

Major Problems to Product Acceptance

Customers are either satisfied or dissatisfied with a product. Once a customer is satisfied, then he or she will buy again but if the customer is dissatisfied, then major problems arise. Problems to product acceptance arise due to the product not meeting their needs. Consumers will only accept a product that can solve their needs. Dissatisfied customers can abandon or return the product or can seek public action by complaining to lawyers or other interest groups. If the product is not good they can also resell it or find new uses for the product. Companies should hence be very careful in production or introduction of new products to the market, they should try to overcome such problems that companies face in introduction of new products like, age, consumer spending habits, cultures and subcultures, availability of raw materials, government policies and regulations and tax

Companies Distribution

Company’s distribution channels to sell the distribution of their goods channels include intermediaries who assist to sell goods so that they can reach all the final users. They are a set of interdependent organizations involved in the process of making a product or service available for use to end-users.

Traditionally the only distribution system was physical distribution but today in most countries like South Korea. We have seen the advent of the channels of distribution system where we have different intermediaries. Channels of distribution are better than direct marketing and physical distribution. They perform the most important during of moving goods from the producers to consumers.

Retailers

These are those final intermediaries in the channel of distribution and as involved in selling goods to end-users. There on the most important intermediaries because they are in touch with the final user hence they have vital information about consumers.

Methods of Operation

Retailers received goods from wholesalers and in town sell them to final end-users. Retailers operate in the form of self-service stores, self-collection, and full service. They take the form of specialty stores, department stores, supermarkets, convenience stores, discount stores etc. They have more information about customers than other forms of intermediaries.

Wholesale

These are the intermediaries who buy goods for resale or for the purpose of business and they buy goods from the manufacturers in large quantities. They can also be manufacturers but not retailers.

Methods of Operation

Their deal with business customers and not end-users so they have larger transactions than retailers do. They also cover large areas than retailers. Apart from selling, wholesalers transporting and financing. They also give credit to retailers.

We have three levels of distribution:

1. Zero level – manufacturer – consumer
2. One level – – wholesaler – consumer
3. 2 level – manufacturer – wholesaler – retailer – consumer

The most appropriate distribution channel for South Korea is the two-level distribution channel that involves all the two intermediaries because it will ensure that goods are distributed to all parts of the economy.

Types of competition

There are majorly two types of competition-direct and indirect. The direct competition involves two companies that have similar products in the same market. This type of competition is successful where there is a large market and consumers are enlightened the second type is indirect where two companies have similar products in the same market but they use different approaches to advertising, pricing packaging and distribution.

The success of the second type of competition depends on buyer awareness and loyalty. Competition is good because it brings about fair regulation in terms of taxes and product regulations it also leads to development of strong brand names that have their own unique packaging, patents and copyrights. It also assists to eliminate monopoly.It also makes manufacturers give customers discounts in order to lure them into buying their goods these discounts are like trade discounts, cash discounts, quantity discounts,

References

Buckley P (2003),, Globalization and the Multinational enterprise, in Faulkner et al The Oxford handbook of Strategy: Corporate strategy (ed.), Vol. 2.

Cravens and Piercy, (2006) Strategic Marketing McGraw Hill, 8.

Faulkner and Campbell (2003), The oxford Handbook of Strategy: A strategy overview and Competitive strategy (ed.), Vol. 1.

Internet Center for Management and Business Administration Inc., (2004); Vertical Integration. Web.

Johnson G, Scholes K and Whittington R, (2006), Exploring Corporate Strategy, Prentiance Hall.

Mintzberg H et al, (2003), the strategy Process- Concepts, Contexts Cases Prentice Hall.

Parekh D.R. (2005); corporate strategies and logistics: logistics executives need to help corporate boardrooms understand logistics implications; American shipper.

Quinn J B, (2003), Strategic Change: Logical Incrementalism, in Quinn and Mintzberg, The Strategy Process, Prentice Hall.

Rugman A and Verbeke A, (2004), “A Perspective on Regional and Global Strategies of Multinational enterprise”, Journal of International Business studies, p. 3 35-318.

Thompson, AA, Strickland, AJ & Gamble, JE; (2007), Crafting and Executing Strategy: Concepts and Cases, 15th ed, McGraw-Hill Irwin, Boston.

Methods and Direction of Corporate strategy Development. Web.

The audit of any retail store needs to consider a variety of factors to make the assessment accurate and meaningful. Therefore, an evaluation team should effectively cooperate in providing information that could be used for further improvement. Communication among audit team members and with retail store representatives should be fruitful. It is possible if certain team building and business communication techniques are acquired by evaluation experts.

The effectiveness of any team is likely to increase in case mutual trust and respect are evident among its members. Businesses have already realized that efficient teams positively affect companies because they increase their competitiveness levels in the market (Saraswat & Khandelwal, 2015). The rotation of tasks is one of the most popular methods to enhance overall productivity. Function rotation means that a worker has similar levels of responsibility in the same operational area but with another set of duties (Gowsalya & Jijo Francis, 2017).

In the case of retail store evaluation, such transitions appeared rather effective because each team member could substitute and help one another when necessary. Nevertheless, the local store representatives did not agree with the assessment. Given that this audit was made to help the retail store to perform better, the “analytic hierarchy process could be used in flexible decision making to help people to set the priorities” (Aydin, Eryuruk, & Kalaoglu, 2014, p. 15). Thus, stating the problem and identifying the criteria influencing performance allows choosing the best alternative that could help to accomplish goals and success further.

The audit process should be performed independently to reveal the points for improvement. Even if the evaluation team did everything correctly due to high levels of mutual respect and understanding, it would be necessary to portray the results in the right way to the retail store representatives based on effective collaboration. Thus, a comparison of the previously set benchmarks with actual outcomes allows identifying which factors negatively influence the performance and what operation areas need further improvement.

References

Aydin, S. D., Eryuruk, S. H., & Kalaoglu, F. (2014). Evaluation of the performance attributes of retailers using the SCOR Model and AHP: A case study in the Turkish clothing industry. Fibres and Textiles in Eastern Europe, 22(5), 14-19.

Gowsalya, R. S., & Jijo Francis, J. (2017). A study on employee job rotation. International Journal for Research Trends and Innovation, 2(5), 205-210.

Saraswat, M., & Khandelwal, S. (2015). Impact of team building exercises on team effectiveness. International Journal of Marketing and Human Resource Management, 6(3), 89-97.

Executive Summary

Independence of auditors has been criticized vehemently during post HIH, Enron and other scandals. Various legislative reforms to bring back the sanctity of independence were introduced in different countries like CLERP 9 in Australia and Sarbanes Oxley Act in U.S. Before introduction of amendments and changes in the corporation legislation in 2004, recommendations of CLERP 9 were reviewed and analyzed under different studies and the important among those was the analysis and recommendations of HIH Royal commission report.

In this write up, the independence of auditors have been viewed in wake of the recommendations of HIH Royal commission report as considered under CLERP 9 act that become effective from 1 July 2004. It would be revealed in this essay that in order to ensure the independence of auditors most of suggestions and recommendations of HIH royal commission report have been incorporated in the corporation legislation via CLERP 9.

Introduction

Independence of auditors during the conduct of audit is an auditor’s privilege to maintain the sanctity of auditing conduct. It is true that auditors’ image suffered a set back during the recent scandals, but efforts like introduction of CLERP 9 in Australia and SOX in US and other legislations in other countries is an effort to bring back the auditors’ privilege of independence. The amendments under CLERP 9 act mostly resemble recommendations made by HIH Royal commission that has been critically discussed here in this essay especially with references to legislative changes and additions brought in by CLERP 9 from the point of view of maintaining independence of auditor. It is argued that “the passage of CLERP 9 through parliament is a major step forward in corporate governance that will improve the transparency and efficiency of Australian business.”(Ross Cameron, 2004)¹

Discussion

The Company Law Economic Reform Program (Audit Repot and Corporate Disclosure) Act, 2004 (CLERP 9) became effective from 1 July, 2004. The changes that have been effected vide CLERP Act, particularly relating to independence of auditors fall into the categories of

1. general auditor independence requirements,
2. specific auditor independence requirements,
3. restrictions on auditors being employed by an audit client,
4. auditor rotation for listed companies.

When businesses do well, auditors need not worry about their reputation; but when business fair unexpectedly the auditors are expected to reason out the causes of failures through the independent conduct of audit. In order to do this onerous job, the auditor must possess certain qualities and one of those qualities is that statutory auditor must act independent of client during the performance of auditing duties. “Professional independence is a concept fundamental to the accountancy profession.

It is essentially an attitude of mind characterized by integrity and objective approach to professional work.”(Kamla- Raj, 2005)² Though statutory auditors are appointed by the shareholders but it is seen as per past experiences that they work under the pressure of directors or senior management of the company and produce reports that does not offend the wishes of management.

The statutory independence requirements of auditors before the introduction of CLERP 9 in 2004 were rather very straight forward. The conditions or requirements for the appointment of auditor of a company were that auditor should not have been an officer of the company; and auditor or any company in which auditor had substantial interest should not have owed $5000 or more to the company in which the appointment was being considered. As per the provisions of Ramsay report these previsions were not adequate to maintain the independent stature of the auditors. Based on the recommendations of Ramsay report and the findings of HIH Royal Commission, CLERP 9 reforms were introduced casting a net on independence of auditors more widely and extensively.

The HIH Royal commission report identified a number of breaches that caused the failure of HIH Insurance Group and one of those were those provisions of Corporation Act that affected the independence of auditors. Observing the importance of independence of auditors in different concerned and connected financial fields, “Mr. Justice Owen emphasized the importance of audit function and capital market as whole and the reliance placed on the audit function by users of financial statements. In finding this, he thought that the CLERP 9 standard, which requires that a reasonable person, informed of all relevant circumstances, would conclude that auditor is not independent, was too high.

Rather, the standard should be stated in terms that auditor would not be independent if a reasonable person might conclude that the auditor’s independence might be impaired.” (Richard Alcock and Carl Bicego May 2003)³ The HIH report also desired that it should be clarified that independence criteria needed to be applied to both individual auditors as well as to audit firm undertaking the audit assignment.

The HIH Royal Commission report also pointed out the resultant effect of non- audit services on the independence of auditor. In this regard it was suggested that auditor should be required to make a self review of the effect of other non- audit services on auditor’s independence. This was highly important suggestion because of involvement of direct pecuniary benefits while performing non- audit services.

When auditing is conducting by same auditor who is also rendering some other non- audit services to the same audit client, then, frankly speaking, some portion of auditor’s independence would be in danger of getting impaired, unless the auditor conducts a self check on the conduct of his auditing functions. This is what HIH Royal commission report intended when making a suggestion of self review by the auditor providing non- audit services as well.

Taking account of such a danger on the independence of auditor when other non audit services are also being rendered, the recommendations of CLERP 9 included two actions. First, fee paid to auditors for audit and non- audit services be mandatory disclosed in annual report; and secondly the audit committee should provide a statement in annual report that the committee was satisfied with independence of auditor during the conduct of audit keeping in view other non- audit services being provided by the same auditor. It is important to note that HIH Royal commission report never recommended the prohibition of such non- audit services being rendered by the same auditor.

The services that could affect the independence of auditors as stated in the HIH Royal commission report included the services of keeping accounts and preparation of financial statements, valuation services, internal auditing, assignment of temporary staff with audit client, legal services, services that support some ongoing or other litigations, providing or making arrangement for the provisions of senior management staff, and above all the arrangement of finances for the audit client.

Another matter that was discussed in great depth of HIH report was the employment associations of auditors with the audited company. According to HIH report such associations create a sort of familiarity threat to the conduct of audit and thus destroy the independence of the auditors. The view at that time in HIH report was that discussion paper of CLERP 9 was insufficient, and the report made following recommendation which were not fully taken care of while introducing the necessary amendments in the Corporation Act:

• Senior staff of audit firm should be rotated at least after five years. The recommendations of CLERP 9 discussion paper related only to junior staff.
• HIH report suggested that recommended waiting period of 2 years by CLERP 9 discussion paper needed to be extended to 4 years for the purpose of auditing staff to join the board of audited company. Further 2 years waiting period should also be made applicable to partners of audit firm who did not participated in conducting the audit
• It was suggested that not more than one of the total partners be appointed on the board or senior management of the audited company by following above waiting period.

The HIH report also recommended that the language of audit report should be plain English. It is presumed that such a suggestion was required because the financial statement users are scattered over all concerned sections of the society speaking different languages, and English is common international language.. Moreover the report also suggested that audit report should also include a review on operations and financial activities of the company. On this issue critics felt that this is like asking for extra and further explanations in audit report from the auditors, as already the report contains the provisions to make necessary qualifications on financial statements; and certainly this can only be based on such a review conducted by the auditors.

As already stated above that the Corporation Act amendments, based on CLERP 9 reforms, have specified both general and specific requirements to safeguard the independent status of the auditors.

The focus of general requirement is to avoid the situation of ‘conflict of interests situation’. These requirements, set out in ss. 324CA-CC are applicable to individual auditors, to each and every member of audit firm and to all directors of audit corporation. A ‘conflict of interest situation’ implies the existence of a situation where under the auditor is not in a position to exercise an impartial and objective judgment during the conduct of audit, or at least reasonably it can be concluded that the situation so exists for the auditor to conduct audit deliberations objectively and impartially.

This situation may occur due to auditor’s relationships with the company or its directors or with management of the company. If auditor has knowledge of such a ‘conflict of interest situation’ then he has to inform ASIC about this within a period of seven days, otherwise the auditor would be committing an offence under the act by accepting or conducting the audit knowingly the existence of ‘conflict of interest’ situation. The interesting part of the newly included legislation is that auditor would also be committing an offence even if he had no knowledge about the existence of ‘conflict of interest situation’ unless the auditors have in place a quality control system to analyze and make auditor aware such a situation.

Then there are very specific requirements of the law to check the independence of the auditors. The specific requirements are related to relationships of the auditors and others connected with auditors with the company to be audited or being audited. The relationship list is very exhaustive and basically covers the role relationships, property relationships, and financial relationships. The role relationships cover such relationships where the auditor was an employee of the audited company.

The property relationships cover such instances where auditor has an asset that can be considered as an investment in the audited company. Finally, the financial relationships are the relationships where the auditor owes money to or the money is owed by the audited company. This exhaustive list covers around nineteen such relationships between auditor and the person associated with audit and the audited company.

The persons associated with audit include persons with whom different roles of property and financial relationships apply. The covered associated persons are family members of audit team members and also of the non audit services suppliers to the audited company. Furthermore, s. 307C casts a responsibility on the auditor to provide information to the directors of the company about any contravention about the independence requirements of the auditors. These provisions act as detrimental force to pursue any auditing activity that contravene the newly introduced and existing legal provisions safeguarding the independence of auditors.

Further there are very distinct efforts to maintain and improve the independence of auditors. “It is not enough merely to impose new requirements on auditors. Companies must bear some responsibilities for ensuring their external auditors bring an independent mind to the task of auditing financial reports.”(Senator Chapman, 15 June 2004)⁴

Conclusion

‘CLERP 9 is considered to be an answer to the HIH debacle and development overseas.’ (Kehl, 2002)⁵ CLERP 9 is revolutionary in its approach, but the success of any legislation is dependent on its implementation. In others words, these are companies and auditors themselves who are really capable of bringing back the lost reputations of auditors by adhering to the provisions of CLERP 9. That is the only way to restore the independence of auditors and the lost faith in the pronunciations of audit reports.

List of References

1. Ross Cameron, Passage of CLERP 9 Signals New Era in Corporate Governance, Treasury Portfolio Ministers, No. 023. Web.
2. Pade Adrebigbe, Auditor’s Independence and Corporate Fraud. 2008. Web.
3. Richard Alcock and Carl Bicego, The HIH Report and CLERP 9, Find Australia Law, 2003. Web.
4. Senator Chapman, Comments while releasing the two part report CLERP 9 Bill 2003. Media Release Parliamentary Joint Committee on Corporations And Financial Services. Web.
5. Kehl, CLERP 9, 123 School Work. 2008. Web.

Introduction

There are many users of the financial statements of the Australian company, Petsec The users include the stockholders, the customers, the suppliers, the creditors, the banks and other lending institutions, the government regulating agencies, the government taxation agencies, the community, the employees, the labor union, the managers, the board of directors, and others. They will use the financial statements for their decision-making activities. These users rely heavily on the external auditors and internal auditors to give their professional opinion on the truthfulness and fairness of the financial statements in compliance with international accounting standards being implemented in Australia (Houston, and Reinstein 2001, 75). The following paragraphs clearly explain audit risk and the corresponding audit plans.

Body

PETSEC ENERGY is involved in the oil as well as gas discovery, development, and production business in the Gulf of Mexico and the Gulf Coast. It has also oil drilling operations in the United States and the Beibu Gulf in mainland China. The company’s Its head office is located at Level 13 1 Alfred Street, Sydney Australia. The company was able to invest in the Mobile Bay 953 lease. It has two oil fields.

Non Financial Inherent Risks

The Energy Current is the news for the business of energy. The news stated that Petsec oil of Australia had a decrease in revenue to the tune of twenty-two percent. The sales figure this second quarter of 2008 $30 million. This is lower by twenty-two percent when compared with the first quarter’s sales figures. In addition, petroleum production had slowed for the same time period. The company’s U.S. Gulf drilling operations had reached a complete stop stage. The company spent US$ 12.5 million (Ibid). There is an inherent risk that management may close down one or more of the oil wells in order to decrease production and thereby result in the current decrease in sales. The audit plan here is to personally visit the wells and have an ocular inspection.

The above data shows the comparative market cap, and the closing stock market price.

The same stock market figures above show that Petsec Oil has a very high market cap. Its market up is 62.43 M US$ figure. Another Australian oil company is Mosaic Oil. Its market cap is higher than the Petsec The Oil Research Ltd has the highest market cap. The market cap of Oil Research amounted to only $5.79 billion. In addition, the stock market price of Petsec had decreased from its prior stock market price. This shows that the people have lost interest in the company. The audit plan here determines the laxity or completeness of the internal control as a basis for the audit program(Power,1977,3).

Further, the non -financial inherent risk here shows that the owners or accountants could have manipulated the financial statements to cover up a higher decrease in the company’s net income amount. The audit plan here is to vouch if all sales accounts are backed up by delivery receipts. The customer signs here indicating that he or she had received the goods shipped to them. And, the auditor should look at the supporting documents like the second copy of the official receipts to determine if nonexistent sales amounts were recorded(Arens & Loebbecke, 1997,177)

The above table shows that the 2005 quarterly report shows that the company did better in terms of generating net profits. Likewise, the company’s return on assets has a better picture because the quarterly data shows that the return on average assets for the quarter amounting to 20.19% is definitely higher than the annual figure. This holds true also for the return on average equity. The company’s quarter average equity amounting to 27.36% is higher than the annual figure of 15.19%.

The above graph shows that the company’s stock market share has been on a downward trend. This is not good for the company. A very good reason for such a decline in stock market price is that people are no longer interested to invest in Petsec Australia Oil stocks. One major factor that contributes to this decline is the financial statement of the company. The decline in the profits of the company as emphasized by Australian Financial Review articles like the Energy Current stated that Petsec oil of Australia had a decrease in revenue by as much as twenty-two percent.

The quantitative inherent risks focus on the financial statement accounts (Whittington & Pany, 1995, 130). The audit plan starts with ranking the 2007 Petsec financial statement balances as to inherent risk. Certain accounts in the financial statements are classified as high inherent risks. The 2007 Petsec cash & equivalents balance is the most inherent because it is easy for the cashier to pocket the cash. Another very inherent risk is that is clearly explained here is the Petsec trade receivable. The cashier can collect the money from the customer and write –off his account balance. Then, the cashier can now embezzle the money. The cashier of Petsec Oil may embezzle money if internal control is not strong.

The above table shows that the 2007 receivables turnover of 3.7 times had increased from the prior year’s receivables turnover amounting to 3.6 times. This shows that there is could be an inherent risk where receivables have been collected per accounting records but the cash could have been stolen. The audit plan here is to check the official receipts, the delivery receiving report signed by the customers, and determine if all receivables written off are authorized by management.

The Inventory turnover shows that the 2006 figure of 10.7 times is better than the 2007 figure of only 10.4 times. This shows that there is an inherent risk that inventory could there are some of the corresponding inventory sold is still recorded as part of the ending inventory. The audit plan here is to physically inspect if the inventory end tallies with the inventory end per accounting records. The above ratio also shows that the Gross Property Plant and equipment turnover figure did not change when compared with the figures of the prior year, 2006. This shows that there is a regular buying and selling of these assets a few years for the year.

The inherent risk here is that the accounting books will show that the company owns these properties, plants, and equipment when in fact they could be nonexistent. The audit plan here is to physically inspect if the assets are in place. Also, legal documents like official receipts, deeds of sale, and statements of accounts will have to be vouched to determine the authenticity of the recorded property, plant, and equipment amount.

The depreciation figure above shows that the 2007 data is 7.90% of the related property, plant, and equipment. This is definitely lower than the 2006 figure of only 7.60%. The inherent risk here is that the company had decreased the 2006 figure in order to decrease the depreciation expense account. The sales figure is deducted amounts that include the costs of sales, the marketing expenses, and the administrative expenses.

A decrease in expenses would definitely give the show an increase in net profits. The audit plan here is to physically observe if the property depreciation analysis figure is realistic. To be realistic, the auditor must determine if the property, plant, and equipment net of the book depreciation amounts are fair. A fully depreciated property, plant, and equipment are still being used to its maximum strength by the company show that the depreciation computation was in error.

Conclusion

There is an audit risk where Petsec’s accountant and /or its management may present a fraudulent financial statement characterized by overstating its inventory end of resulting in a fraudulent increase in net profits. Another inherent risk is the overstatement of Petsec’s revenue accounts an amount higher than the actual figure. The accountant or management can also connive to understate the actual Petsec liabilities. This would result in a fraudulent increase in stockholders’ equity. The accountant and management can also connive to decrease its actual total operating expense amounting to in order to show a fraudulently higher net income. An adverse opinion is needed if the fraudulent accounts are material (Behn, Kaplan, and Krumwiede 2001, 13).

Further, the financial statement accounts of Petsec that are classified as high inherent risk accounts involve the following characteristics:

1. There is difficulty in auditing transactions and balances.
2. There are complex computations. A good example is the interest expense computation for long-term loans.
3. There is a difficulty in implementing accounting issues for some business transactions.
4. There is a problem with how to value certain business transactions

Fraud is an intentional error while an error is an unintentional mistake. One possible reason for the auditor’s difficulty in detecting fraud or error is because the management of the company connives with the accounting, the marketing, the production, and other persons in the organization to come up with a fraudulent financial statement (Sharma 2004,1).

For example, the management gives its approval to the cashier not to issue official receipts to its customers in order to reduce the income taxes that the company has to pay. Consequently, a physical count would result in the audit findings such as an overstatement of the inventory end resulting from the cashier’s fraudulently unrecorded sales transactions or not (Fargher, Mayorga, and Trotman 2005,1).

Works Cited

Arens, A., Loebbecke, J., 1997. Auditing an Integrated Approach, Prentice Hall, Sydney Australia.

Behn, Bruce K., Steven E. Kaplan, and Kip R. Krumwiede. 2001. Further Evidence on the Auditor’s Going-Concern Report: The Influence of Management Plans. Auditing: A Journal of Practice & Theory 20, no. 1: 13.

Fargher, Neil L., Diane Mayorga, and Ken T. Trotman. 2005. A Field-Based Analysis of Audit Workpaper Review. Auditing: A Journal of Practice & Theory 24, no. 2: 85+.

Johnson, Eric N., Jane Baird, Paul Caster, William N. Dilla, Christine E. Earley, and Timothy J. Louwers. 2003. Challenges to Audit Education for the 21st Century: A Survey of Curricula, Course Content, and Delivery Methods The 2000-2001 Auditing Section Education Committee American Accounting Association. Issues in Accounting Education 18, no. 3: 241+.

Power, Michael. 1997. The Audit Society: Rituals of Verification. Oxford: Oxford University Press.

Sharma, Vineeta D. 2004. Board of Director Characteristics, Institutional Ownership, and Fraud: Evidence from Australia. Auditing: A Journal of Practice & Theory 23, no. 2: 105+.

Whittington, R, Pany, K. 1995. Principles of Auditing, London, Irwin Press, Energycurrent. Web.

Finance. google. Web.

Corporate information. 2008. Web.