Trial balance gives a summary of all general ledger accounts opened within an accounting period. The general ledgers are arranged according to their account numbers. The trial balance has debit and credit columns. Closing balances in the general ledger accounts are recorded in these debit and credit columns. There are several ways of preparing a trial balance. The first approach is the total method. Under this method, the totals of credit and debit entries in a general ledger account are recorded in the trial balance. The second approach is the balance method. Using this approach, the balances in the general ledger account are recorded in the trial balance. The final approach is the compound method. This approach combines both the total and the balanced approach (Haber 2004).
The trial balance is a vital tool for analyzing the accounting information of a company. First, the trial balance is the foundation for preparing the final accounting reports such as a statement of income, the statement of financial position, and the cash flow statement. Secondly, the trial balance aids in identifying errors. It provides an initial point for identifying errors committed when preparing books of accounts. When the debit totals do not match with the credit totals, it implies that there is an error in the trial balance. Thirdly, the trial balance summarizes all the financial transactions of an entity. It provides a user with a summarized view of all transactions that were carried out within a financial period. Finally, the trial balance enables a user to check for completeness and accuracy of financial transactions recorded for a given period (Brigham & Houston 2009).
Audit trail
An audit trail denotes the ability to present a complete track of a selected financial transaction. It is the ability to identify each step when processing a transaction from start till completion of the transaction. Keeping a trail of a transaction entails providing supporting documents for all the steps involved in processing the transaction. In the contemporary business world, it is necessary to have an audit trail not only of financial transactions but also of all other key processes in the business. For instance, an audit trail may entail tracing data stored in electronic form. This ensures a smooth flow of work and accountability. Audit trails can be used for two purposes. These are either to support regular operations of the system or to act as a cover (Vance 2003). In supporting a regular system, the audit trail helps to ensure that there is no interference with the data stored. These interferences can be caused by fraudsters or hackers.
An audit trail is important to a business in several ways. First, they enhance personal accountability because employees in a business are personally accountable for the steps they execute in a transaction. This promotes the behavior of employees because they know that they are liable for the actions they undertake. Secondly, audit trails help in improving systems in a business. This can be noted after an occurrence of a technical problem because audit trials can point out the time and how the technical problem occurred. Therefore, it is useful in reconstructing the system. Thirdly, audit trails help in identifying unauthorized access into the system. When an audit trail is used to support the system, it can tell in real-time when unauthorized access is made in the system. Finally, the audit trail aids in analyzing a problem that is, to find out its cause and other necessary information that might be required (Kymal 2007).
References
Brigham, F & Houston, F 2009, Fundamentals of financial management, South-Western Cengage Learning, USA.
Haber, J 2004, Accounting dimistified, American Management Association, New York.
Kymal, C 2007, Conducting effective process-based audits: A handbook for ISO/TS 16949, Paton Professional, United States of America.
Vance, D 2003, Financial analysis and decision making: Tools and techniques to solve. McGraw-Hill books, United States.
External auditors present audit reports to companies and governments whilst following the laws on the financial statements of the organization. They ought to be members of well known accountancy agencies. External auditors are appointed by the organization to carry out the audit. Most countries rely on audits from other countries. Organizations could carry out their own audits but it seems like most prefer external audits. Both choices have their pros and cons. The advantages may outweigh the disadvantages but through this project, we will get to know which one is worth the risk (Neely and Cook 79).
Justification
These are generally the issues with defects in financial reporting and have been for a very long time. Every year the organization has to do through similar questions when considering the external audit for the Board (Summers, Sweeney and Wolk 1). To have a competent CFO with CPA certification is always a plus for most organizations but the CAO would be treading on dangerous grounds to be without the training. There is a challenge for many multinationals to direct and control their overseas operations that leads to a platform that renders them an opportunity to carry out uniform financial reporting. To have a successful auditing process, the firm (customer) has to ensure a complete involvement with every aspect of the audit including the ability to present the necessary documentation as to and when needed (Summers, Sweeney and Wolk 1).
Literature Review
When financial reporting errors are detected especially in multibillion dollar companies that may expose the stakeholders to unprecedented magnitude of loss, the general public are at loss on what may have gone wrong in spite of presence of a plethora of organizations that purport to take their interest at heart. However, there may be several reasons for the perceived negligence. First, there may be a lack of knowledge of the industry, a lack of technical knowledge in matters relating to the industry, a terrible attitude, where they wouldn’t listen but always acted as if they knew best, significant turnover, poor managers who failed to guide and supervise staff or review work papers properly. “Furthermore, there may be an inability to direct and control the actions of affiliates overseas, resulting in poor coordination and substandard work or worse still, a reticence to call the tough shots” (Brody and Frank 216). These challenges leave a gap which can easily result in organizations, making mistakes that if not detected by the external examiners may end up a source of fraud (Brody and Frank 216). The literature review section will handle the scholarly work in chapter two where it will scrutinize documents and already published literature, which relates to this study. This entails past literatures from those scholars who worked on external auditing and their problems. This study will also encompass the importance of literatures that encouraged relying on works of auditors from other countries. This research is one of a kind as it is a maiden research in the country. Most researchers dwell on the importance of auditing neglecting the few problems that may have impact on the economy (Zhang, Pawlicki, McQuilken and Titera 199).
Research Questions
The following research questions form the focus of this study:
Were the directors content with the fact that the external work of auditors was of high quality?
Have the directors received the required knowledge and understanding of the “business and industry; the organization’s performance and financial condition; and the related accounting and reporting”? (Zhang, Pawlicki, McQuilken and Titera 200).
“Were the directors able to apply that knowledge; did they ask appropriate questions to get clear answers “of the integrity of the filings with the regulators?” (Savage and Callaghan 112).
Methodology
This is a sensitive question that requires total discretion and brutal honesty among the key organizations and players. The study will involve random sampling of 20 organizations as listed on the stock market but from five major sectors of the economy. Each sector shall produce 4 key organizations. From these organizations atleast three persons, from finance, audit and the board shall be interviewed. Pretested questionnaires shall also be prepared and used where time constraints disqualifies interviews (Brody and Frank 215).
Data Analysis
The data will be organized and analyzed to give the answers to the question of the problems of relying on auditors from other countries. The comparison will be further drawn to indicate the nature of the said organizations. Data analysis tools for social research such as SPSS shall be utilized (Savage and Callaghan 111).
Conclusions
From the literature so far reviewed, it is evident that the latest trend by many organizations to carry out external audits, which to a certain extent, brings down the economy any employment rates of qualified public accountants. The objectives stated above shall come to pass if this study is successful and well read. Despite the limitations, the research ought to be carried out. Both the primary and secondary methods of data collection shall be of value to the study. A research like this one has never been carried out. Auditors and firms are hence ignorant on problems that face them. With this approach the results of this study will strengthen the communication among all the parties concerned (Hermanson, Hill and Ivancevich 39).
References
Brody, Richard, and Kimberly Frank. “The Future of the Certified Internal Auditor and the Internal Auditing Profession.” Journal of Education for Business 75.4 (2000): 215-219. Print.
Hermanson, Dana, Callahan Hill and Daniel Ivancevich. “Information Technology-Related Activities of Internal Auditors.” Journal of Information Systems 14.1 (2000): 39-54. Print.
Neely, Pamela, and Jack Cook. “Fifteen Years of Data and Information Quality Literature: Developing a Research Agenda for Accounting.” Journal of Information Systems 25.1 (2011):79-108. Print.
Savage, Arline, and Joseph Callaghan. “Peacock, Eileen Accounting for the Development Costs of Internal-Use Software.” Journal of Information Systems 18.1 (2004): 111-126. Print.
Summers, Scott, John Sweeney and Carel Wolk. “Problem-Solving Style and Fit in Consulting and Auditing.” Journal of Information Systems 14.1(2000):1-15. Print.
Zhang, Li, Amy Pawlicki, Dorothy McQuilken and William Titera. “The AICPA Assurance Services Executive Committee Emerging Assurance Technologies Task Force: The Audit Data Standards (ADS) Initiative.” Journal of Information Systems 26. 1 (2012): 199-205. Print.
Thomas, W. & Wedemeyer, P. (2013). Clarifying the standard for group audits. Journal of Accountancy, 58(1), 23-25.
This article appears in this month’s edition of Journal of Accountancy. The article is authored by two CPAs with advanced education and expertise in accounting. The article features the latest addition to the Generally Accepted Auditing Standards (GAAS). This latest addition by the Auditing Standards Board is specified in AU-C600 Standard (Thomas & Wedemeyer, 2013). According to this article, this standard is meant to provide clearer guidelines for accounting projects involving group audits. Group audits refer to projects in which most of the work is performed by various auditors but only one auditor expresses the group’s opinion.
This article is very informative and it covers important issues that make group audits a challenge. Examples of these problems include the risk of having errors in financial statements done by a group. This risk was previously addressed in the AU-C 315 and 320 standards. This new standard also addresses the risk of managing decentralized audits and the risk arising when consolidating statements from such audits. The goal of these new regulations is to make sure that the group’s auditor has the necessary tools to effectively deal with the above risks.
The article also does a good job in outlining the responsibilities of a group auditor under the new standards. This article sheds light into what will be expected from group auditors. For instance, the group’s auditor will have to be accountable for the job done by other auditors. In addition, the group auditor will also have to adhere to a specific set of communication requirements (Thomas & Wedemeyer, 2013).
This article is very informative and thorough. The authors deliver a systematic analysis of these new standards. The article also gives very useful practical applications of these new standards. The article is a significant contribution to the existing GAAS.
McKenna, F. (2012). Already behind the eight-ball: Auditors of broker-dealers are a disaster. Forbes, 112(2), 76-77.
This article was authored by Francine McKenna and was published in the Forbes magazine. The article’s author is a CPA who has contributed to other financial publications such as Accountancy Magazine, The Financial Times, and Boston Review. The article is about the recently released report on the activities of firms that audit broker-dealers. According to the article, the report discovered a myriad of contraventions by the auditors of these broker dealers.
One of the most interesting issues brought to the surface by this report is the fact that all of the twenty-three firms that were being audited had some violations (McKenna, 2012). It was also the first time for most of these firms to be audited. The article also highlights the special responsibilities bestowed upon the auditors of broker-dealers. The violations outlined by the report are covered by the Generally Accepted Auditing Standards (GAAS).
The other pertinent issue raised by the article concerns the void created by unprofessional audit firms. According to the author, it is better to have few professional audit firms as opposed to having many unprofessional ones. Most of these are small firms who have “faked” their way to the top. The article attributes this trend to a laxity in regulation by the regulatory bodies. Interestingly, this blame seems to be shifting from the big firms to the small firms.
This article is a good analysis of audit firms that deal with broker-dealers in the United States. However, the author seems to hold a bias against the upcoming firms. Overall, the article’s detailed account of the report is convincing enough for anyone to notice that adequate regulation is lacking.
References
McKenna, F. (2012). Already behind the eight-ball: Auditors of broker-dealers are a disaster. Forbes, 112(2), 76-77.
Thomas, W. & Wedemeyer, P. (2013). Clarifying the standard for group audits. Journal of Accountancy, 58(1), 23-25.
According to International Standards on Auditing (ISA) 520, analytical procedures entail reviewing the financial information of a company by analyzing the association between financial and non-financial data (Burke, 2009). Carrying out analytical procedures is important because it creates a relationship between the historical financial data of the company and the current information. Thus, an auditor will have a better understanding of the financial statements of the company. It also assists in comparing the results of the company and those of the industry. An auditor needs to perform analytical procedures at the planning stage so as to have a better understanding of the company and its business environment. The procedures facilitate categorizing uncommon transactions or events that may affect the fair view of the company’s financial statements (Public Company Accounting Oversight Board, 2015). Finally, the analytical procedures help an auditor to reduce the risk of possible material misstatement to a low level.
Tax / income before taxes = 50 / 230 * 100 = 21.74%
Tax rate for 20×4 = 21.74% * (100% – 5%) = 20.65%
Uden Supply Company
Income statement.
For the year ended 20×4
Amount in $000
Sales
10,800
Cost of goods sold
7,701
Gross profit
3,099
Sales commissions
760
Advertising
211
Salaries
1,124
Payroll taxes
207
Employee benefits
188
Rent
63
Depreciation
73
Supplies
32
Utilities
24
Legal and accounting
43
Miscellaneous
15
Interest expense
276
Net income before taxes
83
Income taxes
17
Net income
66
Estimated effect of misstatement
The estimates sales for the year 20×4 are $10,800 thousand. The reported rate of gross profit is 31%. Thus, the resulting gross profit is $3,348. Based on the calculations above, the estimated gross profit is $3,249 thousand. Thus, the effect of the misstatement is that the gross profit is overstated by $99 thousand (Dicksee, 2009). The income before taxes will also be overstated by $77.
Materiality
At the planning stage, it is important to come up with the materiality level of a company. The auditor needs to use both sampling and non-sampling techniques when determining the materiality level of a company. Under-sampling technique, the auditor may use the statistical sampling methods to determine the sample size (Rittenberg, Johnstone, & Gramling, 2012). The auditor then ascertains if the sample selected contains material misstatement (Kumar & Virender, 2006). The results of the sample are used to make an inference about the entire population. In the case of the non-sampling technique, the auditor will use personal judgment to determine the materiality level of the company. It is advisable to use both techniques so as to come up with a comprehensive position on the materiality level (Russell, 2007). Other than estimating the materiality level, an auditor can also the standard threshold of 5%. Thus, omissions or misstatements that fall below this threshold are often considered immaterial. The overstated gross profit ($99 thousand) is equivalent to 42.13% of net profit before tax ($235 thousand). The percentage is greater than 5%. This implies that the misstatement is material.
References
Burke, A. (2009). Introduction to audit planning. Web.
Dicksee, L. (2009). Auditing: a practical manual for auditors. South Carolina: BiblioBazaar.
Kumar, R., & Virender, S. (2006). Auditing: principles and practice. New Delhi: Prentice-Hall of India Private Limited.
Rittenberg, L., Johnstone, K., & Gramling, A. (2012). Auditing: a business risk approach. Boston: Cengage Learning.
Russell, J. (2007). The internal auditing pocket guide, second edition: preparing, performing, reporting, and follow up. New Mexico: ASQ Quality Press.
The information gathered from audits, internal and external helps organizations in determining the accuracy of the financial data, adherence to all regulatory requirements, and identification of any misgivings / misreporting on part of the information owners.
Audits are however useful only in cases when the roles and responsibilities of the audit function and of the individuals governing the function is clear and transparent and there are no constraints hindering the performance of the audit process.
This paper, through research, discusses the role of the relationship(s) that exist between the finance director(s) and the auditors, from different aspects. Relationship dilemmas that exist between the roles and individuals have been identified and the resulting effects on the overall audit process.
Research Methods
Qualitative research has been carried out for this project in an aim to identify behaviors and attitudes that result from the relationship between the two roles, auditor and finance director. For preliminary purposes, secondary research has been resorted for preparing interviews and refinement of research objectives.
Research Methodology
Investigative research, carried out with the purpose of identifying the relationships between individuals or roles, is usually best facilitated through the use of interviews. The initial part of the research was supported through exploratory / preliminary research, highly useful for structuring interviews. Secondly, based on the responses from previous studies, semi-structured interviews were carried out in two phases: the first was relatively controlled, while the other was aimed to be free.
In the first phase post-exploratory research, individuals from both sides, audit and finance function were interviewed. Secondly, in an aim to understand the chemistry of the relationships that exist between the representatives or nominated individuals of both functions, key persons were identified on the basis of convenience sampling and interviewed, in a semi-structured manner. Once this information collection was completed, key stakeholders from both sides were interviewed and the interview session was structured so as to allow them to freewheel and express their overall opinion about the relationship, contingencies and constraints between the two functions. Finally, this research project aimed to propose a new structure of managing this complex set of relationships between the two highly different entities.
Comparison & Contrast
The overall objective of both research projects is similar, to identify and learn from the relationships between two entities of the same nature, investigative and protective. Research methodology employed for both, was qualitative, through interviews, mostly semi-structured to allow respondents to discuss their points of view.
A major difference between the two projects, however, was the method in which research and data collection was actually carried out. In the first project, the research objectives and questions were narrowed using literature reviews, while in second, similar information gathering was done through exploratory research, with interviewing at an initial stage.
Secondly, the amount of time dedicated for interview sessions is different. In the project for internal auditor report’s availability and disclosure, less time was dedicated overall. In the project to learn the relationship between the finance director and the auditor, multiple rounds were conducted, aimed to uncover mistakes / errors in previous sessions.
Conclusion
In my personal view, both of these research projects were of significant importance, but in different circumstances. One research stresses the importance of disclosure and transparency of internal audit process and the auditor’s report to external stakeholders, auditors, shareowners and the importance of information transparency in governing functions responsible for managing financial information of the firm. Interviews were conducted to facilitate the process.
I feel that the duration designated to literature review should have been less and that dedicated to interview sessions should have been higher, since interviews were semi-structured, which could have allowed participants / respondents to share their experiences vividly, as well as thoughts and opinions about the impact of the transparency of the audit findings to external stakeholders.
The second research identifies the relationship an auditor has with financial director of the firm. The beauty of this project has been to identify how the owners of each process control and manage multiple faceted relationships at the same time. This research was more elaborative and directive in that it is more organized. A small amount of time was dedicated to exploratory research, structuring of the interview and the research objectives and questions, arrangement of interviews and finally different sessions for studying different relationships.
These projects differed in their objective of determining the usefulness of interview process and the information available. While the first research project only served the purpose of providing interpretive information, the second one, being more elaborative, ensured that it is both interpretive, for researchers and simultaneously deductive / directive, allowing researchers to suggest new models for improving relationships between the finance directors and the auditors.
An audit refers to a planned, organized and documented process that provides a business or an organization with a means to evaluate its performance. It provides the business or the organization with information concerning the quality of its products, customer services and management. This information is important in either improving or supporting its operations in order to get desired outcomes. Business auditing refers to the process of going for business logic and objects. Auditing is carried out for various reasons such as to evaluate the tasks done weekly, monthly or yearly. There are various types of audits which include the operational audit, financial audit and compliance audit (Gardiner & Harrington, 2001). The operational audit analyzes the business activities to assess its performance in order to come up with ideas on how to improve resources. The financial audit analyzes financial records and operations related to finance in order to determine where the records follow the acceptable principles of accounting. The compliance audit aims to analyze whether the established policies are followed in running the business (Simmons, 1995).
Main body
Auditing aims to increase the value and to improve operations of an organization. It also helps the organization to work on the objective by providing an organized approach to assess and work on managing risks, improving and controlling the process of governance. Auditing presents several impacts in business operations which are observed in terms of effectiveness, responsibilities and in the setting of goals a business.
Auditing gives a business a way of evaluating how effective its operations are. This is because the information presented after auditing can be used to compare past and present operations. For profit making organizations, it provides the business with an idea of whether it is making profits or losses. Auditing is also a means of carrying out business operations in a transparent manner since the records of accounts are included. This ensures that no fraudulent practices are carried out (Robertson & Frederick, 2001).
Apart from providing accountability, auditing also provides a means to proof the reliability and integrity of operations and financial information carried out in a business. This is because a thorough evaluation is carried out in all departments of the business. It also ensures the effectiveness of business operations by providing information on any risk that may be facing the business in terms of governance, information, and operation information. Alerting the management on the risks that the business may be exposed to gives the business the confidence to pursue goals as the risks are managed or avoided (Shah, 2007).
The main area of auditing in many businesses is financial department. However, there are other non-financial aspects that go hand in hand with the evaluation of the financial department. These include the evaluation of performance management, ethics in the organization, governance process, and the communication department (Internal Audit Report, 2009). The assessment done during auditing looks at how adequate and effective the above mentioned departments are in achieving the goals of the business. Thereafter, the areas that are identified to be wanting are rectified and those that found effective are improved or supported. Auditing ends up enabling the business to be effective since there is controlled operations. It assures the management on accuracy and reliability of any financial information and reports in the business. It also provide a reliable source of information on the safety of assets, maximized use of resources, proper use of policies in the business and it also provide a framework when setting any objective in the business (Nosworthy, 2001).
Responsibilities
Auditing provides a means of controlled operations, in a business; it ensures that resources are efficiently and reasonably utilized. This means that operation values are established and any deviation from the set standards is acknowledged, examined and passed to persons responsible in order for corrections to be done. Auditing thus plays a major role in ensuring that responsibilities are properly handled. It also helps the managers to find out if the controls over operations in the organization are carried out according to the policies set to achieve goals. This is done through the report given by the auditors which includes any factors that may be inhibiting the business from achieving the set goals. Once the factors inhibiting achievement of the goals are identified, they are analyzed and corrective measures are put in place (Cascarino & Esch, 2007).
Monitoring of activities helps to verify the progress of the business towards the goals. This calls for commitment of the personnel involved in the various departments and eventually responsibilities are assured in the process. Auditing follows four major steps: planning, collecting evidence, examining evidence and finally issuing the report. It can thus be an effective tool in detecting any vices in a business such as corruption or fraudulence. This can be detected if there is documentary evidence that is missing because during auditing recorded information is used to assess the past activities carried out. It thus act as a tool to emphasize responsibilities since every personnel in the business is accountable to certain areas in the final report of audit (Taylor & Glazen, 2000).
Desired outcome
One main objective in carrying out auditing is to come up with an opinion of whether the available operating systems are sufficient and reasonable in assuring achievement of the desired outcome. Auditing helps to discourage abuse or misuse of the resources in a business or an organization. This is through encouraging accounting of any operation carried out in day to day activities of the business (Cutt & Murray, 2000).
Auditing plays the role of ensuring that the suggested rules and regulations are practiced thus it acts as the device to evaluate compliance of the activities with the guidelines. Generally, auditing is very critical in sustaining and ensuring implementation and success of the business policies. The final report provided by the auditor(s) acts as a precedent in the activities or actions that would follow. For instance, if the report shows a down trend of the business in terms of utilization of resources, this calls for serious steps being taken in the affected department while if there is improvement in the performance, a means of supporting this is provided (Ampomah & Collier, 2007).
Conclusion
Auditing is a major component in a business that aims to achieve certain set goals. The auditing report plays a major role in making decisions concerning the operation of the business such as whether to lend money, extend credit or to increase the stock. The role of auditing is to examine the links involved in the business activities through a systematic order and ensuring that there are no hindrances in achieving the goals of the business.
References
Ampomah, S. & Collier, P. (2007). Management accounting-risk and control strategy. New York: NY. Butterworth-Heinemann.
Cascarino, R. & Esch, S. (2007). Internal Auditing: business & Economics. New York: NY. Juta and Company Ltd.
Cutt, J. & Murray, V. (2000). Accountability and efficiency evaluation in non-profit organizations. London. Routledge.
Gardiner, K. & Harrington, M. (2001). Occupational hygiene. London. Wiley-Blackwell.
Internal Audit Report (2009). Audit of Business Continuity Plans. Canada. Canada boarder services agency.
Nosworthy, B. (2001). Role of the Auditor General in Public Accountability. New York: NY. Universal Publishers.
Robertson, C. & Frederick G. (2001). Auditing. Plano, TX: Business Publications.
Shah, A. (2007). Performance accountability and combating corruption. London. World Bank Publications.
Simmons, M. (1995). Internal Audit Objectives: A Comparison of the Standards with the Integrated Framework for Internal Control. United States.CIA CFE.
Taylor, D & Glazen, G. (2000). Auditing: Integrated Concepts and Procedures. 7th. Ed. New York: NY. John Wiley & Sons.
The world of business lives according to its rules and laws, and there are certain periods, usually connected with inflation and financial instability when such important aspects of the business as audit face the necessity of reforming and restructuring. The current paper considers the case study of one of the numerous savings and loans (S&Ls) in the United States in the 1980s. The research of the Lincoln Savings and Loan Company allows a better understanding of the audit practices used in business on the whole and real estate transactions in particular. The major focus of this paper is the critical analysis of the audit procedures that Lincoln Savings and Loan applied in its business relations with Wescon and Emerald Homes companies.
Analysis of Auditing Procedures
Description
Thus, when dealing with Wescon, Lincoln Savings and Loan auditors relied on their knowledge of SFAS 66 requirements and studied the company’s documents for conformance to the above requirements and the possibility for the full profit recognition of the Wescon transaction. As well, the auditors studied the Wescon transaction’s structure and concluded that the down payment of 25% conforms to SFAS standards and respectively the transaction’s profit can be fully recognized (Erickson, Mayhew, Felix, 1999, p. 15). The auditing of the Emerald Homes transaction involved the combination of the EITF 86-29 and SAFS 66 criteria applied to the transaction, its terms, down payment share, and the investigation of the possibility of the transaction financing by EH (Erickson, Mayhew, Felix, 1999, pp. 15 – 16).
Critical Analysis
At first sight, the auditing procedures used by Lincoln Savings and Loan auditors rise no controversy and seem to be proper, but a more detailed consideration leads the analysis into doubts about the actuality of the claims made by the sides that allegedly illegally participated in Wescon’s and Emerald Homes’ transaction financing. In other words, what differs the procedures implemented by Lincoln Savings and Loan auditors from the traditional auditing is their belief in the above-mentioned possible financers without actual checking of the transactions’ history and tracing of the funding flows in and out Wescon and Emerald Homes. Thus, apart from the evident proper structure of the auditing procedures used, the lack of investigation and excessive reliance upon the companies’ confirmations is the main weakness of the Lincoln Savings and Loan auditing process.
LSL Auditors’ Evidence
Description
The evidence that Lincoln Savings and Loan auditors managed to collect during their auditing procedures applied to Wescon and Emerald Homes include the transactions’ volumes, their down payment shares, the sources of financing, the transactions’ eligibility for profit and revenue recognition, and compliance with SAFS 66 and EITF 86-29 requirements. In more detail, the Wescon transaction’s value was $14 million, while the down payment amounted to $3.5 million which conforms to the SAFS 66 requirement of at least 25% down payment for real estate transactions. The auditors also found out that the payment term was less than 20 years and that the $20 million loans associated with the Wesson transaction were not intended for the down payment financing (Erickson, Mayhew, Felix, 1999, p. 15). As for the Emerald Homes transaction, the auditors managed to determine that the total transaction volume was $26.1 million, while the down payment requirement provided by criteria SAFS 66 and EITF 86-29, i. e. 25%, was also complied with in the form of a $6.5 million share. The terms of the transaction also included the necessity for payment to be carried out in less than 20 years. Finally, the Lincoln Savings and Loan auditors stated that the $25 million loans for the transaction involving EH and AMCOR were not related to the audited Emerald Homes transaction (Erickson, Mayhew, Felix, 1999, pp. 15 – 16).
Evaluation of the LSL Auditors’ Evidence
The evidence gathered by the Lincoln Savings and Loan auditors can be characterized dually. On the one hand, the auditors managed to get the precise figures describing the transactions’ volumes and structures, down payments, and payment terms. On the other hand, these numerical data are likely to be incomplete while the confirmations about the legal nature of the transactions and down payment financing were obtained from the firms that were allegedly involved in the down payment financing against the SAFS 66 and EITF 86-29 criteria. Therefore, the evidence collected by the Lincoln Savings and Loan auditors can be evaluated as insufficient and not reliable enough to make conclusions about the conformity of transactions to the real estate investment regulations.
Auditing in Real Estate Sales
General Notions
Drawing from the above presented specific data and their analyses, it is obvious that the auditing procedure in the area of real estate sales is not an easy task. The more knowledge of auditing one gets, the greater number of questions arise regarding the policies of auditing real estate transactions. If applied to Lincoln Savings and Loan, these ideas also work as the practices that the auditors used to monitor the Lincoln Savings and Loan’s activities in Wescon and Emerald Homes transactions lacked focus and completeness. In other words, auditing the transactions, the auditors inquired about the financials but stopped halfway to identifying down payment financing sources being satisfied by the confirmations from Garcia and EH claiming their non-involvement in the situations.
Recognition of LSL revenue
A special aspect of the auditing policies that extensive knowledge can develop is the question of profit and revenue recognition in full or in parts. Conventionally, the income of a company is fully recognized as its revenue for the period after this company provided its goods or services to the business partner and obtained the respective payment for this in full. As well, this company and its partner mustn’t have any long-lasting business obligations under the contract that provided the recognized revenue to the company. In Lincoln Savings and Loan’s case, the income from Wescon and Emerald Homes transactions could not be fully recognized due to two reasons. First, Lincoln Savings and Loan did not obtain the full payment but only the 25% downpayment. Second, business partners had long-lasting liability with Lincoln Savings and Loan to pay the full transaction volumes for less than 20 years.
Conclusions
Based on the above considerations, the work of the auditors in the case of Lincoln Savings and Loan transactions with Wesson and Emerald Homes should be considerably criticized as the auditors have made serious mistakes. First, they left incomplete the task of further investigating the actual sources of the down payment financing in the above-mentioned transactions. Second, they recommended the full recognition of Lincoln Savings and Loan’s revenue while the situation provided two basic conditions that should have been prevented from revenue recognition, i. e. incomplete payment, and long-lasting business liability.
Works Cited
Erickson, Merle, Bryan W. Mayhew, and William L. Felix, Jr. Cases in Strategic-Systems Auditing: Lincoln Savings and Loan. KPMG/University of Illinois, 1999. Print.
Dunkin’ Donuts is one of the famous franchises in the world that serves coffee and donuts, bagels, munchkins, muffins, cookies, and other bakery goods. Dunkin’ offers a range of 52 types of donuts and numerous flavors of coffee to its customers all over the world. Dunkin’ Donuts serves approximately 3 million people every day worldwide. The mission of Dunkin’ Donuts is that it will work hard to be the dominant retailer of high-quality donuts, bakery products, and beverages in the market in which they choose to compete. The mission statement has helped the company to grow and develop itself and has also helped it to come this long way that is from where it started out to be a single coffee shop to where it is now having somewhere around 7988 outlets worldwide. (Dunkin’ Donuts, 2008)
The General Objectives or Goals of the Organization
Dunkin’ Donuts has certain objectives for itself, and the management of the company is working very hard to achieve those objectives and to make the company a strategically successful organization. The objectives are as follows:
Aims to be a leader in the donuts and beverages industry.
Provide top-quality products and services to its customers.
Give the customer the best experience.
To stay above the competition.
Maintain long-term relationships with the suppliers so that there is an uninterrupted supply of coffee
Dunkin’ Donuts strives to establish itself in every market niche.
The goal of Dunkin’ Donuts Brands is to become a leader in the food industry worldwide. Dunkin’ Brands plans to do that by giving its customers a better version of a quick dining experience with new product choices and a reasonable price.
The Marketing Environment
Dunkin’ Donuts has to make sure that they are practicing ethically and in a social environment or not. Dunkin’ Donuts is known as the no.1 retailer today in hot and ice regular coffee and its donuts. This basically shows Dunkin’ Donuts has the strategic ability to adapt to the changing forces resulting in the environment. The company is committed to the environmental responsibility of a community. Dunkin’ Donuts follows environmental regulations and promotes cleanliness within its surroundings.
They also support charitable programs and have taken many steps in promoting and supporting their community. Dunkin’ Donuts has sponsored educational programs and also provided funds for different events such as the Special Olympics, AYSO soccer teams, etc. They are in relation with a non-profit organization called “Coffee Kids,” which supports impoverished families in coffee-producing countries like Mexico and Central America. In 2008 the organization went green and opened its very first LEED outlet. (Dunkin’ Donuts, 2008)
The Customers It Serves
Dunkin’ Donuts serves approximately 3 million people every day worldwide. Dunkin’ Donuts has three target markets. They are as follows:
Target Markets
Adults
It will include professionals, i.e., doctors, bankers, etc., people who generally like to drink coffee.
Teenagers
It’s a place for them to hang out, have Lattes, donuts, etc.
Children
They are targeted for munchkins
The Products
Dunkin’ Donuts offers a range of 52 types of donuts and bakery items and numerous flavors of coffee to its customers. Dunkin’ Donuts has somewhere around 16 products that they serve to their customers. They are as follows:
The Products
Fall Flavors
Pumpkin Latte, Pumpkin Muffin and Pumpkin Donut.
Iced Teas
Original, Peach and Raspberry
Bacon Lovers
Bacon Lover’s Supreme Omelet Sandwich
Pizza and Sandwiches
Personal Pizzas (supreme, cheese, and pepperoni) and Flat Bread Sandwiches ( ham & Swiss, three kinds of cheese and turkey, cheese & bacon)
White Hot Chocolate
White Hot Chocolate and the original Hot Chocolate
Tropicana Coolatta
Lemonade, Strawberry, Coffee, and Vanilla Bean
Indulgent Iced Lattes
Iced Caramel Swirl or Iced Mocha Swirl
Hot Coffee
Original, Vanilla Spice, Hazelnut, Blueberry, Raspberry, French Vanilla, Toasted Almond, Coconut, Caramel, and Cinnamon
Iced Coffee
Original, Vanilla Spice, Hazelnut, Blueberry, Raspberry, French Vanilla, Toasted Almond, Coconut, Caramel, and Cinnamon
Turbo
Dunkin’ Donuts Turbo Hot
Latte Lite
Hot or Iced Latte Lite
Sausage Supreme
Sausage Supreme Omelet Breakfast Sandwich( includes eggs& vegetables, sausage, andAmerican cheeseon a plain bagel)
Supreme Omelet
Supreme Omelet breakfast sandwich ( includes bacon and American, Swiss & Monterey Jack cheese, green & red peppers, scallions, mushrooms, and hash brown potatoes with scrambled egg on a croissant)
Cookies
Chocolate Chunk, Peanut Butter Cup and Oatmeal Raisin
Flavored Coffee
Hazelnut, Blueberry, Raspberry, French Vanilla, Toasted Almond, Coconut, Caramel, and Cinnamon
The competitor of Dunkin’ Donuts is Starbucks and Costa Coffee. Starbucks is one of the market leaders in the food industry through its vertical integration strategies. Starbucks specializes in coffee only, and it works very hard to retain its customers.
Costa Coffee is also one of the competitors of Dunkin’ Donuts. And it also specializes in coffee, but it also sells other products as well.
Workers deviance is behaviors by organization’s worker that inhibit the ability of the organization to attain its objectives. These behaviors also go against organization norms and expectation on workers. Worker deviance is a major problem in the four major accounting firms. Accounting fraud is one of the serous frauds in United States (Jelinek, R., and Jelinek, K, 2008, 232). This entails manipulation books of account with an aim for attaining a certain objective. The Enron accounting scandal met the country with a surprise. Sarbanes-Orley act of 2002 was viewed as part of the solutions to accounting frauds. Although this act is successful in oversight and holding public accounting and auditing firms accountable for their services, it has made provision of accounting and auditing services demanding.
Accounting is one of the most demanding professions. Accountants and auditors have to deal with large number of documents and data at a very tight deadline. The demands on worker in accounting firms make the work to be stressful. The Sarbanes –Orley (SOX) added more demands in accounting diligence. Demands to accounting firms by the act are passed down to workers leading to higher work load and stress. In consequence, this has increased work stress that could contribute to more workers deviance.
There is a shortage in supply accountants in the country. The demand for accountants is far more that supply of professional accountants. The imbalance has led to competition for accountants by the four accounting firms (Jelinek, R., and Jelinek, K, 2008, 232). In consequence, this situation contributes to workers deviance in accounting firms in two ways. Shortages of accountants give accountants a sense of job security. They are assured that their firms are reluctant to fire them even when they show defiance. They are also assured of getting another job in another firm. This leads to irresponsibility and deviance among workers. On the other hand, shortages of accountants have led to competition for worker among accounting firms. Thus, there is increase in workers leaving one firm to another competitor firm in pursuit of better pay or working conditions. When a worker leaves a firm, work load for other workers left increases leading to work stress that can lead to workers deviance.
Solution to this problem entails encouraging more individuals to take accounting and a profession. The major hindrance to new entry is the 150 hours demanded on accounting students. The rule should be made lighter to make the duration required to study as an accountant to be less.
Accounting as a profession was highly valued and accountant highly esteemed before Enron and other accounting scandals. These scandals and reaction to the scandals led to public criticism and distrust on accountant. Jokes shared by members of public over accountants imply that accountants are scandalous and cannot be trusted (Jelinek, R., and Jelinek, K, 2008, 232). The oversight board established by SOX made demand that accountants would not be allowed to head the authority. Also, commissioners to the oversight authority were made to held mostly by not accountant. This created a perception that accountant trust to the public. The effect of this public criticism is that most accountants do not enjoy their work as they did. In addition, they view additional demands by oversight board as punishment leading to deviance.
Reclaiming the lost public image of the big four accounting firms is the only way to win back public confidence. Thus, the big four should publicize the positive measures they taken since the occurrence of Enron scandal. This may win back public confidence and remove public enemy perception on accounting.
Reference List
Jelinek, R., and Jelinek, K. Auditors gone Wild: The “other” problem in public accounting. New York: Kelly School of Business Press, 2008.
Lau, A., and Wong, R. KingJewels: ethical leadership in practice. Hong Kong: Asia Case Research Centre, University of Hong Kong, 2006.
Auditing and accounting are based on ethical and moral rules of the profession and are subjected to principles of honesty, fairness, and objectivity. The auditing organization should follow strict codes of ethics and moral principles to meet organizational principles and business needs. Their codes of ethics are usually based on moral and social responsibility issues, fair treatment of customers and colleagues (Buchholz and Rosenthal, 1998).
Auditing and Assurance Responsibilities
The main problem is that individual and corporate clients served by auditing professionals will have no choice but to rely upon their lawyers for expert advice. On the other hand, the renewed responsibility of auditors demands that they report fraud and financial problems caused by false financial statements and inadequate accounting principles. This norm is important for modern business organizations as they try to hide their revenues and illegally reduce the tax burden. In this situation, auditing professionals should assume to have a command of a complicated and changing subject matter; that is why they have been hired. But this also means that individual and corporate clients are rarely able to evaluate the professional’s competence (Beauchamp and Bowie, 2003).
The need to report fraud and other discrepancies is a need for auditors and the state. These strict accounting and auditing norms will help the government to prevent fraudulent practices of business organizations. Professionals are assumed to have a command of a complicated and changing subject matter; that is why they have been hired. But this also means that clients are rarely able to evaluate the professional’s competence. In any event, the professional expert is expected to serve the client’s and not his own (or his firm’s) best interests. Public confidence is based upon this foundation of trust (Boatright, 1997). Codes, and their enforcement, play a strong role in maintaining such public confidence. Auditing services have a special reason to desire public support of their endeavors: businesses whose financial statements are audited pay for the auditing services (Gay and Simnett, 2007).
The proposed principles of responsibility and auditor’s duties will ensure objective and fair auditing procedures. Those who receive and rely upon published financial information must be confident of the independence of the professionals who conducted the audit. The new codes of auditing standards come at a time when business, in general, is feeling pressure to have a code of ethics. Most auditing employees work in the business environment and those who do not interface with it. They therefore might find themselves confronted with two codes that could even be contradictory. Many auditing services will bristle at the notion of laypersons regulating the profession. There is a not-so-subtle warning in statements such as these; the proper response to criticism is to ascertain any truth in the criticism. Where fault is found, correct it. To ignore this advice is to risk the specter of having outsiders do it for the profession, perhaps in a heavy-handed way. A public organization is finding itself increasingly in the glare of publicity surrounding several issues of professional responsibility (Donaldson et al 2002). Despite efforts at developing certification procedures and codes of ethics, those not in public practice have faced skepticism about their claims to professionalism (De George, 19990. The primary problem is that the National Association of auditing services employees and the Institute of Internal Auditors have precious few recourses available to enforce their codes of professional ethics. Moreover, the certificates they issue are not required for the practice of the profession. Many have questioned whether the necessary elements for professionalism are even present in these groups (Carroll and Gannon, 1997).
Conclusion
In sum, the struggle for professional recognition for auditing services employees in either the managerial sphere or in internal auditing still has a long way to go. On the other hand, the struggle in the public sphere will be one of protecting the profession’s already well-established professional reputation. The most prominently publicized are the responsibility of detecting fraud and the appropriateness of auditing the same firm for whom one has provided auditing services. Auditing employees are also being asked to re-examine their perspective of who receives their service.
Bibliography
Beauchamp, T., and Bowie, N. (eds). 2003, Ethical Theory and Business, 7th edn, Upper Saddle River, NJ: Prentice Hall.
Boatright, J. 1997, Ethics and the Conduct of Business, 2nd edn, Upper Saddle River, NJ: Prentice Hall.
Buchholz, R. and Rosenthal, S. 1998, Business Ethics, Upper Saddle River, NJ: Prentice Hall.
Carroll, S. and Gannon, M. 1997, Ethical Dimensions of International Management, Thousand Oaks, CA: Sage.
De George, R. 1999, Business Ethics, 5th edn, Englewood Cliffs, NJ: Prentice Hall.
Donaldson, T., et al. 2002, Ethical Issues in Business, 7th edn, Upper Saddle River, NJ: Prentice Hall.
Gay G. & Simnett R.2007, Auditing and assurance services in Australia. 3rd Edition (revised). Mcgraw Hill