Depreciation Practice and Public Policymaking

Question: Discuss about the Depreciation Practice and Public Policymaking. Answer: Introduction: Auditing is a process where the auditors of a business take some samples of the financial documents of the business; and then test and verify them so that all the material misstatements can be identified, if any. After that, the auditors give their independent opinion about the audit result of that particular business. This whole process is called the planning and execution of audit program (Glover, Prawitt and Messier 2014). One of the main aspects of the audit program is to find the audit issues that give the necessary direction to the auditors. The auditors need to find out the hidden audit issues from the audit situation; and then, they need to mention it in the audit documents. Hence, it can be said that it is the utmost responsibility of the auditors to find out the audit issues so that they can be documented in the audit files and necessary actions can be taken. The given case study states that City Limited is one of the major property developers Australia. However, the main operation of the company is based in Brisbane. It is mentioned in the case study that an economic downturn is going on the central business district of business in the property development sector. Another reason that is supplying fuel in this economic downturn is the abundance of city office spaces. In this particular case, there is a lot of responsibility of the auditors and the first responsibility of the auditors is to identify the audit issues in the whole situation. Hence, in this regard, the responsibility or the job of the auditors is to conduct a detailed analysis on the total situation and find out the audit issues of the situation. There can be various reasons that lead to the downturn in the property development sector. Some of the reasons can be the high rate of unemployment; the high rate of interest in the home loans; a severe recession period in the econom y of the country; the halt in the rise in the population of the country; slowdown in the foreign investment; the change in the rules and regulations by the government and many others. In this case, the auditors need to find out which of the above reasons are the potential audit issues in the given situation (Seawright 2013). There are various kinds of reasons for which a business or organization considers to buy a new computer set or a new software. One of the basic reasons for the buying of a new computer is to smooth the various business operations of the organization. The given case study says that Web Limited has bought a new computer system for the organization. The company has bought the new system for two reason; they are to make the financial analysis of the company more effective and to improve the quality of management reporting. In this situation, some audit issues need to be identified by the auditor of the organization. The first aspect that the auditors need to consider is to verify the capability of the new computer system. This can be tested by running the new system so that it can be seen the system is assisting in the financial analysis and management reporting. Apart from this, there are various other audit issues that the auditors need to maintain. They are to manage the policies for the new system; to manage the access of the users; to manage the various kinds of security issues relating to the new system; to configure the networks and many others (Holm and Zaman 2012). These audit issues need to be considered by the auditors of Web Limited. Many crucial issues need to be considered at the time of opening a new overseas sales outlet. The provided case study states that Beauty Private Limited has established a new overseas sales outlet. The basic audit issue in this regard is to analyze and evaluate the possibility of profitability of the new outlet. On the other hand, it needs to be made sure that the transfer of the inventories will reduce the lead-time of the business. Reducing the lead-time is an important aspect as it helps to make the business more effective towards their customers. The auditors of the company should analyze that the strategy of free distribution of samples. This strategy needs to be perfect for the success of the business (Prawitt, Sharp, and Wood 2012). The auditors of Beauty Private Limited need consider these audit issues. Audit approach refers to a risk analysis methodology that analyzes the effects of envi0ronment in which they are operating. This is a part of the internal control of an organization. There are two types of audit approach. They are Test of Control Approach and Substantive Approach. Both these approaches cannot be used in the same condition. The nature of the situation demands the choice of the audit approach. These situations are discussed below: Test of Control Approach: Test of control approach is used to analyze the effectiveness of the business control that is used by the client for the prevention and detection of material misstatement in the financial reports of the company. The test of audit approach assists the auditors to decide whether to depend on the test system of control of the client or not. In case the auditors find that the system of control of the client is not effective and weak, then the auditor decides to adopt substantive audit approach that increase the cost of the whole audit program (Johnstone, Gramling and Rittenberg 2013). In the process of test of control approach, the auditors perform two three kinds of operations. They are re-performance, observation and inspection. The auditor does re-performance operation in order to identify the control used by the audit client and their effectiveness. In order to observe the control elements of a business process, the auditors use observation approach. In the inspection stage, the auditors use to test different kinds of documents to verify signatures, stamps and others. Substantive Approach: The auditors adopt substantive audit approach at the time of weak internal control system of the audit client. In substantive approach, the auditors use to test and verify all the business documents of the audited client without depending on the information provided by the management of the organization. The auditors place zero reliance on the control system and information of the audit client (Knechel 2016). In this case, the auditors have to organize a detailed analysis of the various business documents of the organization. This is the situation where substantive audit approach is applied. There are three kinds of risk in auditing. They are inherent risk, control risk and detection risk. Inherent risk is the kind of material misstatement that arises due to errors and omissions. There is not any part of internal control in this kind of risks. Control is the kind of risk that arises due to the lack of control system of the audit entity. Here is not any part of omissions or fraud in it. Detection risk is the kind of risk that arises due to the failure of the auditor to detect the material misstatement in the financial documents (Knight 2012). Based on the above discussion, it can be said that substantive approach is applicable for the inherent risks as this risk arises due to omission and fraud. Test of control approach is applicable for control risk as these kinds of risks arise due to the weakness in the internal control system of the audit client. Lastly, substantive approach will be applicable in case of detection risk, as the auditors need to examine more samples to detect the material misstatement in the financial documents of the organization. Maintaining various aspects of depreciation is lying on the hands of the audit client as depreciation is totally the matter of inter control system of the company. It is the responsibility of the management to set up the depreciation method and the percentage of depreciation. Hence, it can be said that the auditors will use the test of control approach for the accuracy and completeness of depreciation, as the auditors need to test the internal control system of the audit client. However, the auditors can use substantive approach if they think that the internal control system of the client firm is not effective and there is a strong need to adopt the substantive audit approach. It can be happened that there is some kinds of omission or fraud in the value of depreciation at the end of the year. To avoid these kinds of situation, the auditors sometimes use the substantive approach of auditing at the time of making the balance sheet (Drew and Dollery 2015). As discussed earlier, auditing is an important aspect for every business organization. The process of auditing helps to establish clarity in different financial and accounting operations of an organization. On the other hand, one cannot deny the importance of the communication of accounting information in an organization. Accounts is a critical process which helps to keep records of all financial transactions of an organization; it helps to verify the source of every income and expenses of the organization which is essential to the auditors of the organizations. The effective communication of accounting information indicates that the auditors and other relevant persons of the organization have the proper access of all the necessary accounting information. At the various stages of auditing, the auditors need different kinds of accounting information; and for this purpose, the proper communication of accounting information is a must need. There are numerous benefits of the effective co mmunication of accounting information in an organization (Hall 2012). The first benefit is reliability. Different kinds of accounting data and information provide reliability in the audit process as it gives the auditors the necessary direction to continue their jobs. Based on the communicated accounting information, the auditors can detect the material misstatement in the financial and accounting documents of the organization. On the other hand, based on this information, the auditors can judge that whether the material misstatement is due to the lack of internal control of the audit firm or due to any kind of fraud or omission. The second benefit is analytical tool. The communicated accounting information can be used as an effective analytical tool to understand the financial position of the company. The auditors are sometimes instructed to comment on the financial position of the audited firm. In that kind of situation, the auditors have to analyze the business information of the organization that is provided by the accounting communication system. Based on the analysis of the information, the auditors comment on the financial situation of the audit client. The third benefit is that the effective communication of accounting information passively helps the organization too gain the trust of the investors. The investors take the investment decision based on the declaration of the auditors report in the ann ual report of the organization. In the presence of all necessary accounting information, the annual report of the organization reflects the true financial image of the business organization and helps to attract the attention of the investors (Lobo and Zhao 2013). These are the three major benefits of the effective communication of accounting information to the auditors. The companies can implement proper communication of accounting information by some specific ways. One of the ways is the implementation of accounting information system in the organization. The role of accounting information systems is to gather, process, deliver and store all the accounting information in an organization for various parties. It is desired in every organization that the auditors will get all the necessary information from the management to carry on the audit process. Hence, from the above discussion, it is clear that success of the audit process in an organization vastly depends on the delivery of accounting information of that organization. This discussion is a clear evidence of the fact that there is a connection between auditing and the communication of accounting information. References Drew, J. and Dollery, B., 2015. Inconsistent depreciation practice and public policymaking: Local government reform in New South Wales.Australian Accounting Review,25(1), pp.28-37. Glover, S.M., Prawitt, D.F. and Messier, W.F., 2014.Auditing assurance services: a systematic approach. McGraw-Hill Education. Hall, J.A., 2012.Accounting information systems. Cengage Learning. Holm, C. and Zaman, M., 2012, March. Regulating audit quality: Restoring trust and legitimacy. InAccounting Forum(Vol. 36, No. 1, pp. 51-61). Elsevier. Johnstone, K., Gramling, A. and Rittenberg, L.E., 2013.Auditing: A Risk-Based Approach to Conducting a Quality Audit. Cengage Learning..Auditing: A Risk-Based Approach to Conducting a Quality Audit. Cengage Learning. Knechel, W.R., 2016. Audit quality and regulation.International Journal of Auditing,20(3), pp.215-223. Knight, F.H., 2012.Risk, uncertainty and profit. Courier Corporation. Lobo, G.J. and Zhao, Y., 2013. Relation between audit effort and financial report misstatements: Evidence from quarterly and annual restatements.The Accounting Review,88(4), pp.1385-1412. Prawitt, D.F., Sharp, N.Y. and Wood, D.A., 2012. Internal Audit Outsourcing and the Risk of Misleading or Fraudulent Financial Reporting: Did Sarbanes?Oxley Get It Wrong?.Contemporary Accounting Research,29(4), pp.1109-1136. Seawright, D.D., 2013. Overcoming internal audit issues with professionalism and integrity.Journal of Business Cases and Applications,7, p.1.