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FAC512 Financial Analysis - Free samples to Students

A is employed as the external auditor of B Ltd.   He assesses the operation of the internal audit department,  part of the internal control system, of B Ltd. and finds the following:
 
a.In the first few months of operation of the internal audit department, the department reports to the chief financial officer.   Later, the department reports to the chief executive officer who is the chairman of the board of directors.
 
b.Over the past year, about 90% of the work program of the internal audit department was achieved.
 
c.The head of the internal audit department have years’ of experience as financial controller and audit manager. The staff of the department include an experienced auditor, accounting graduates taking professional examinations or assistants completing part-time accounting degrees.
 
d.The audit programs of the department are written based on the standards of the Institute of Internal Auditors.
 
e.The board of directors have doubt as to the value of the internal audit department.  They think that the focus of the department’s work should be on improving the efficiency of operations, rather than on checking compliance with rules and regulations.
 
f.The internal audit reports produced by the department have received little attention in the board meetings.
 
(a)Prepare a report on the overall assessment of the internal audit department.
(b)Recommend whether the work of the internal audit department should be relied on.

Answer:

Introduction

Internal control is defined as the system of accounting and auditing that would help in to ensure that the company is achieving its overall objectives effectively and there are no discrepancies in the management of the company. It helps in providing an assurance that the financials of the company are reliable and they are prepared to the best of ability of the management of the company and there is no loophole in that. The internal controls are examined by the external auditors to provide their opinion whether these internal controls have been placed accurately or not and to the best of the ability of the company. It will help in ensuring that the overall risk element with respect to the company is low and the management is functioning to the best of their abilities and the external auditors can depend on the internal controls to take effective decisions with respect to the company and its financial (Alexander, 2016). When w


e see closely it can be seen that in cases where the internal controls are not strong enough there are high chances of fraud from the management and the management might take undue advantage of their position to fuel the overall operations of the company for their personal satisfaction. In this case we are assessing the internal control system of B ltd where we see that the company is apparently having a very strong internal audit system in place that has been working from past many years to deliver a proper control in the functioning of the company (Abbott & Kantor, 2017).

As external auditors there are few points that we need to consider when we deal with such types of examination namely:

  • The auditors need to check whether the company is having proper internal controls in place or not that would help in the overall internal audit of the company.
  • The auditors need to check whether these controls are timely updated to keep them in sync with the overall operations of the company.
  • The auditors need to check how effective has the management of the company been in making sure that these controls are operating effectively.
  • Controls are that elements that removes any possibility of any fraud in the company, it will keep a check on the moral of all the employees along with the actions of the management of the company.
  • Strong controls will ascertain that the company is not facing any issues with management and execution of work(Boghossian, 2017).

a.In case of B ltd the company is having a strong internal control system, in which over the past few years 90 percent of the overall work of the department was achieved. It was also seen that the people who were managing the system where having years of experience which made them apt for this role of control and functioning. The overall programs of audit of the company were based on the international standards of auditing that made them feasible enough to be executed in the long run. Previously the internal audit department was reporting to the CFO but now they would be reporting to one of the directors. There are managing the department that includes auditing experts, professional graduates and people with years of experience in this field thus that made their overall work very reliable and handy. It was seen that the board of directors believed that the aim of the department with respect to audit should be to increase the overall efficiency of work and not focus on mere compliance with work that are based on rules and regulations. They felt that the audit department was not functioning to the best of their ability. The board of directors gave little importance to the overall audit report in board meetings, they did not consider it good enough. When we analyze all this closely we see that this perception of the board is wrong, the main aim of the audit department is to see that the internal controls of the company are in place and that should follow the requisite rules and regulations (Chariri, 2017). Companies cannot ignore the statutory compliance that they need to deal with but considering the same the company needs to give importance to efficiency with respect to management of the company to produce effective results. The aim of the audit department should be that their work is done in such manner that the rules are complied with and efficiency is also achieved in case of the company. There are few areas in which the audit department needs to work, they should see to it that people who are managing the internal department of audit for the work should be experienced but along with that they should be able to adapt to changes as and when required to fulfil the needs of the company. We see that most of the people who are working there are having years of experience which is a good aspect but saying that it is very important that they must not be change resistant.

One more very important point mentioned is that companies can achieve 90 percent of their goals in sync with the internal audit department works, but the aim should be that 90 percent of the goals should be achieved as that ten percent would raise chances of risk that might cause a lot of loss (Chron, 2017). One more thing that the internal audit department needs to change is that they should report to all the board of directors in a meeting instead to channeling their work through one director. This will give that director undue advantage and they can take use of that to influence the work of the company.

The work of the internal audit department should be relied on, because there past records have been good, they have been able to achieve 90 percent of their overall goals in relation to the company. They are having years of experience and have provided quality work thus that needs to be considered. And given the fact that internal controls are very important for companies to function effectively. It will help them to achieve all their goals and produce good results(Gray, 2018). Given the fact that the internal department of the company is more concerned with compliance with statutory rules and regulations is good as that will help in saving the company from unnecessary issues. It can be put forth that all the points related to the internal department of B ltd is positive enough hence the management should have no issue in delaing with them as it will help in providing quality results. It is extremely wrong if the management is putting less importance to the reports of internal audit because it will increase the chances of risk and fraud for the company. It will hamper the growth of the company in the long run. The management will not be able to suffice to the needs of the regulatory world. As an external auditor, the dependence on the internal controls of the company is huge, hence it is important that the internal audit department of the company should function effectively so that in the long run the possible profitability can be achieved(Maynard, 2017).

Conclusion

Audit is the independent examination of the books of the company to know whether the financial statements are correct or not and given importance to that is very important for the overall success of the company. If there are any issues in the internal controls of the company the management will only suffer and they will fail on several aspects which will be responsible for the loss of the company. Hence the crux would be that new people should be appointed, rotation of work must be there, effective changes should be implied so that in future the chances of risk is minimum. And the internal audit report of the company must be considered by the management and should not be ignored in any case.

References

Abbott, M. & Kantor, A., 2017. Fair Value Measurement and Mandated Accounting Changes: The Case of the Victorian Rail Track Corporation. Australian accounting Review.

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), pp. 244-253.

Chariri, A., 2017. FINANCIAL REPORTING PRACTICE AS A RITUAL: UNDERSTANDING ACCOUNTING WITHIN INSTITUTIONAL FRAMEWORK. Journal of Economics, Business and Accountancy, 14(1).

Chron, 2017. five-common-features-internal-control-system-business. [Online] Available at: https://smallbusiness.chron.com/five-common-features-internal-control-system-business-430.html[Accessed 07 december 2017].

Gray, D., 2018. 'Extraordinary turnaround': Big miners pushing ASX towards 10-year high. The Sydney Morning Herald.

Maynard, J., 2017. Financial accounting reporting and analysis. second ed. United Kingdom: Oxford University Press.

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