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An Evaluation of the Role of Audit Committee in a Public Company

An Evaluation of the Role of Audit Committee in a Public Company

In this paper, I will review the auditing procedures executed in Ambleside, one of the oldest retail stores in the UK. This audit report aims to enhance the organization’s performance, which has declined due to several reasons, including increased industry rivalry and unfavorable technological advancements. In reviewing the audit procedure, this report will detail the verification procedure for software and PPE (property plant equipment). Moreover, I will assess the role of the audit committee in the organization and its effectiveness in promoting corporate governance. Lastly, I will assess the inclusion of going concern in Ambleside’s financial reporting and the auditors’ role in inspecting this element. Lastly, I will explore approaches in enhancing the audit committee’s credibility with stakeholders. The essentiality of the audit committee’s role in enhancing corporate governance and safeguarding shareholders’ interests cannot be overestimated.

Part One

Verification of Software

The substantive audit procedure I would perform in the verification of the software would entail ascertaining adequate disclosure, valuation as per the purchase, review of the amortization procedure, and assessing the impairment losses incurred. The evaluation of adequate procedures would comprise assessing the inclusion of the software assets in the balance sheet under the appropriate heading (Bansal and Sharma, 2016, p. 103). The recording of these assets should be in line with the conventional reporting of software owned by the business. The particular expenses arising from software, for instance, maintenance and updating, should be correctly debited to the software account (Council ,FR, 2012). The transactions arising from this asset should be consistent with its purchase cost, as indicated in the receipts and purchase agreement. Given that the software is depreciated on a straight-line basis over five years, I would amortize the software and compare my results to the values indicated in the financial statements. Additionally, I would evaluate the balance sheet to assess whether the software incurred an impairment loss during the period. From this analysis, I would establish the precision in software reporting in the financial statements.

Verification of PPE

The substantive audit procedure I would perform in verifying PPE would entail evaluating the physical existence and property valuation, ascertaining the ownership of the business, and assessing whether it’s free from asset charges. In ascertaining the physical existence, I would inspect the PPE reported in the balance sheet and also count and assess their working condition (Jallow, Sarens, Abdolmohammadi, and Lenz, 2012, p. 20). In proper valuation, I would ascertain the value indicated in the balance sheet since the period of purchase and assess the precision of the associated depreciation. Moreover, I would compare the market value of the PPE in comparison to that included in the balance sheet. In determining business ownership, I would ascertain whether the firm owns the PPE by checking the purchasing receipt, warranty contracts, and voucher agreements (Li, Mangena, and Pike, 2012, p. 98). These documents should indicate Ambleside PLC’s name. The second step would entail evaluating whether the firm’s lenders have a claim on the PPE as collateral.

Part Two

Role of the Audit Committee

The audit committee plays a crucial role in safeguarding shareholders’ interest in public companies. In doing so, the audit committee rigorously reviews the financial statements, implements internal control, enhances risk assessment and management, improves compliance and enhances internal audit. In reviewing the financial statements, the audit committee rigorously evaluates the critical accounting policies implemented by the firm and the reason for their execution (Marra, Mazzola, and Prencipe, 2011, p. 205). The committee also examines the financial statements in reviewing the judgments and estimates arrived at by management in the preparation of these financial statements. If the audit committee raises issues with components in these documents, discussions are held with the management to determine better ways to process the statements or resolve issues identified (Norman,Rose, and Rose, 2010, p. 546). The audit committee ensures the organization’s effective implementation of internal controls through oversight of the disclosure controls procedures, financial reporting, and the methods used to produce the required certificates. Thirdly, the audit committee oversees the compliance of processes in the organization by evaluating the firm’s code of conduct.

The Effectiveness of Ambleside’s Audit Committee in Promoting Corporate Governance

Given the audit committee’s role in ensuring the effective implementation of corporate governance, I evaluated the effectiveness of Ambleside’s audit committee in conducting this role. In enhancing the effectiveness of corporate governance, the committee rigorously evaluates the financial statements before their release. Moreover, it conducts a periodical review of procedures used to prepare these documents. The audit committee ensures that Ambleside’s financial reporting complies with accounting standards (Osman, Turmin, Muhamad and Hussain, 2016, p. 3733). The audit committee also continuously evaluates the internal controls implemented by the firm to ensure their effectiveness. Even so, Ambleside exhibits several weaknesses, which include failure in the execution of risk assessment and management. Risk assessment involves identifying major risks that Ambleside faces, while management entails establishing techniques in dealing with the same. The audit committee should oversee risk management and delegate this task to other committees to enhance the firm’s viability.

Part Three

The Viability of Ambleside as a Going Concern

The International Standard Auditing (ISA) 570 entails the auditor’s responsibility in auditing organizations’ financial statements to use going concern assumption by management in reporting the company’s financial performance. In evaluating Ambleside’s continuity, I reviewed the company’s financial statement, particularly the balance sheet and income statement. The balance sheet revealed crucial information regarding the company as a going concern (Sun, Salama, Hussainey, and Habbash, 2010, p. 29). Firstly, the sharp decline in the company’s assets raised concern over the business’s viability. Secondly, the noncurrent liabilities were more significant than long-term assets, which raises questions about the business’s ability to service its long-term obligations. Additionally, the current assets were equal to the current liabilities, which signifies the business’s ability to fulfill its short-term obligations (Carson, Simnett, and Trønnes, 2011, p. 45). At the same time, the business needs to increase its short-term assets. Instead of retained earnings, the business incurred a retained loss, which increased significantly from 31st January 2019 to 31st January 2020. Moreover, the business has not established strategies to reduce its current liabilities. Lastly, the management has not laid out steps to be followed in the event of solvency.

Audit Procedures That the Auditor Should Undertake

ISA 570 offers the road map for auditors in evaluating a business’s going concern basis. They include acquiring sufficient evidence regarding the effective use of the management’s going concern basis. It concludes the existence of material uncertainty to both events and conditions, which raises doubt on the business continuity as a going concern, and evaluates the implications of the report released by the auditor on the business’s continuity (Yassin and Nelson, 2012, p. 15). ISA 570 requires that the auditor consider issues that threaten the company’s going concern. The auditor should discuss with the management whether they have conducted an assessment to identify issues that considerably affect a business going concern. In the event a business has not conducted this analysis, the auditor guides the management towards the procedure. These issues include current obligations, net liabilities, borrowing facilities, loss of key customers or suppliers, legal proceedings, etc. (Unegbu and Kida, 2011, p. 305). If the management has performed the assessment, the auditor is tasked with gathering data to ascertain the information included in these documents. The additional audit procedures require that the auditor also determine the effectiveness and adequacy of the information regarding the organization’s going concern. The auditor is also tasked with assessing the business plans of solvency, including debt restructuring, delaying and reducing expenditures, increasing capital, etc. Based on these evaluations, the auditor then writes a report detailing the company’s ongoing concern and preparedness in case of solvency.

Part Four

Strategies for Improving the External Auditor’s Credibility

Due to Ambleside’s declining financial performance over the years and the inaccuracy of its financial statements, its stakeholders are concerned with the quality of service offered by the external audit. Moreover, the shareholders have not been receiving a regular payout of the stocks, given the decline in profitability. They expect external auditors to enhance the company’s performance and procedural transparency. In regaining the confidence of stakeholders, external auditors should enhance internal controls executed by the organization to mitigate fraud and error in financial reporting (Council ,FR, 2012). This way, the financial reporting displays a true and fair view of the company’s financial performance. Secondly, auditing should enhance compliance with the organization’s reporting concerning accounting and industrial policies. In doing so, the auditor should proactively identify issues that could lead to legal cases. The external auditor should ensure credibility by evaluating bookkeeping practices and assessing the precision of financial figures reported. Moreover, the auditors should maintain minimal relations with the management and internal auditors to avoid coercion. The external auditors should criticize the company’s accounting procedures to inspire the organization to adopt more effective practices in financial reporting. The external auditors should double-check the company’s financial statements, journal entries, and vouchers to identify errors (Bansal and Sharma, 2016, p. 103). Most importantly, the external auditors should implement policies that mitigate fraud by both the management and internal auditors.

Conclusion

From the analysis, the audit committee’s role is to enhance corporate governance in safeguarding shareholders’ interests. Ambleside has experienced a decline in its financial performance over the years, which is to be rectified through effective auditing to identify the true picture of the financial performance. At the same time, the auditors are tasked with winning shareholders’ trust by enhancing their credibility.

References

Bansal, N. and Sharma, A.K., 2016. Audit committee, corporate governance and firm performance: Empirical evidence from India. International Journal of Economics and Finance8(3), p.103.

Carson, E., Simnett, R. and Trønnes, P.C., 2011. International consistency in audit reporting behaviour: Evidence from going concern modifications. Report to International Auditing and Assurance Standards Board.

Council, F.R., 2012. The UK corporate governance code. London, September.

Jallow, K., Sarens, G., Abdolmohammadi, M.J. and Lenz, R., 2012. Factors associated with the internal audit function’s role in corporate governance. Journal of Applied Accounting Research.

Li, J., Mangena, M. and Pike, R., 2012. The effect of audit committee characteristics on intellectual capital disclosure. The British Accounting Review44(2), pp.98-110.

Marra, A., Mazzola, P. and Prencipe, A., 2011. Board monitoring and earnings management pre-and post-IFRS. The International Journal of Accounting46(2), pp.205-230.

Norman, C.S., Rose, A.M. and Rose, J.M., 2010. Internal audit reporting lines, fraud risk decomposition, and assessments of fraud risk. Accounting, Organizations and Society35(5), pp.546-557.

Osman, M.N.H., Turmin, S.Z., Muhamad, H. and Hussain, R., 2016. Auditor characteristics and the issuance of going concern opinion. International Business Management10(17), pp.3733-5250.

Sun, N., Salama, A., Hussainey, K. and Habbash, M., 2010. Corporate environmental disclosure, corporate governance and earnings management. Managerial Auditing Journal.

Unegbu, A.O. and Kida, M.I., 2011. Effectiveness of internal audit as instrument of improving public Sector management. Journal of emerging trends in economics and management sciences2(4), pp.304-309.

Yassin, F.M. and Nelson, S.P., 2012. Audit committee and internal audit: implications on audit quality. International Journal of Economics, Management and Accounting20(2).

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Question 


An Evaluation of the Role of Audit Committee in a Public Company

Write a report:

  • Task one is more developed

    An Evaluation of the Role of Audit Committee in a Public Company

    An Evaluation of the Role of Audit Committee in a Public Company

  • Task two: Make reference to CA code and company example
  • Task three: Back it up with some evidence in the financial statements e.g. calculation of necessary ratios. look at the previous year First compare with the UK market
  • Task four: Choose a relevant companies examples which is due to audit failure

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