E.C. and Creating Audit Report
1.0 Type of Auditor’s Report
The auditing firm (Deloitte & Touche LLP) gives an independent, unqualified opinion regarding Starbucks’ financial statements as of October 1, 2017. The opinion is based on the 2016/17 financial year as well as the last three financial years preceding the date the report was published, which is October 1, 2017. The evidence adduced by Marshall (2016) shows that an unqualified opinion type of auditor’s report is given when the auditing firm has no significant reservations about the material statements contained in a company’s financial statements. Basically, the analyzed auditor’s report contains three core segments: the introductory paragraph, the scope paragraph, and the opinion paragraph. Specifically, the introductory part of the analysed report gives the timelines for the audit. As Badolato, Donelson, and Ege (2015) show, such information helps the audience to determine the extent to which a company’s financial statements are relevant. Further, the scoping paragraph report indicates the boundaries and limitations of the auditing work. Lewis (2012) shows that such limitations and scope helps the audience to deduce the procedures performed and the extent to which those procedures impact the authenticity of the analysed report. For example, the report shows that the auditing firm operated within the “… standards of the Public Company Accounting Oversight Board” (p. Starbucks, 2017, p. 87). Finally, the opinion part indicates that the auditing firm is satisfied that Starbucks’ financial statements meet the Generally Accepted Accounting Principles (GAAP) reporting threshold.
2.0 Evidence (Or Otherwise) of Non-compliance with GAAP
The auditors did not find any evidence to show that Starbucks engaged in any malpractice, material misstatement, or non-compliance with the GAAP. It emerges that Starbucks did not engage in any form of malpractice when preparing its financial statements. Specifically, the auditing firm indicates in its report that the company “… maintained, in all material respects, effective internal control over financial reporting as of October 1, 2017, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission” (Starbucks, 2017, p. 87). As evidence drawn from the recent work of Tepalagul and Lin (2015) shows, such indictment implies that the company being audited engages in transparent and accountable practices when preparing its financial statements. This finding is based on the reality that the work of an auditing firm is not to prepare a company’s financial statements but to evaluate statements prepared by the company itself to establish their compliance with set accounting standards such as the GAAP for U.S. companies or International Financial Reporting Standards (IFRS) for non-US companies. Even so, since an auditing firm can only provide reasonable assurance to members of the public regarding the integrity of a company financial statements and not the financial health of the company (Marshall, 2016), it is justified to argue that the analysed auditor’s report is a fair representation of the financial condition and position of Starbucks.
3.0 Audit Committee of the Board of Directors
Apart from the auditing report prepared by Deloitte, Starbucks has an internal auditing committee that forms part of its Board of Directors. The analysed report indicates that this auditing committee is comprised of five members, with Melody Hobson as the chairperson. Other members that form this committee include Robert Gates, Joshua Cooper Ramos, Javier Teruel, and Craig Weatherup (Starbucks, 2016). Arguably, all the committee members meet the Public Company Accounting Oversight Board (PCAOB) requirements on independence and auditing-related skills. This argument is drawn from the fact that only members who have the requisite financial knowledge and experience are appointed to the committee. Also, the company provides regular learning opportunities to committee members to enhance their auditing skills (Starbucks, 2018). As evidence drawn from the recent work of Brennan and Kirwan (2015) shows, the work of this committee is to conduct extensive internal oversight of prepared financial statements. Specific information drawn from the Starbucks website shows that such extensive oversight involves monitoring compliance with accounting standards, overseeing the hiring of independent auditors, coordinating internal controls, and overseeing risk management activities (Starbucks, 2018). Typically, the Starbucks auditing committee meets about six times a year to scrutinize the financial statements prepared by the finance and accounting department. As expected, such meetings give the committee much-needed credibility when executing its mandate.
4.0 Audit Committee Actions
The auditing committee acts as a bridge between the external auditing firm and the Board of Directors. As evidence drawn from the analysed report shows, the audit committee selects the audit firm, allocates specific duties to the firm in accordance with GAAP policies, reviews the scope of the auditing work, approves the firm’s fees, and reviews the entire auditing process to ensure compliance with relevant regulations (Starbucks, 2017). In view of Badolato et al. (2014) work on the scope of the auditing process, it is justified to argue that such actions enhance the integrity of the audited financial statements. Even so, reservations expressed by Brennan and Kirwan (2015) regarding the objectivity and independence of auditing committees could be applicable in the Starbucks case. Specifically, the Starbucks auditing committee’s power in selecting and approving external auditing firms’ fees could lower the committee’s objectivity and independence. Tepalagul and Lin (2015) support this argument by showing that some auditing firms could be more focused on winning future contracts with their current clients and disregard crucial material misstatements overlooked by the client’s audit committee. Whilst, both the auditing committee and auditing firm give Starbucks 2017 financial statements a clean bill of health, the above reservations cannot be entirely ruled out.
Consider the case of Starbucks, given the ticker symbol: BWLD on the NASDAQ. STARBUCKS’ corporate headquarter is in Minneapolis, Minnesota, but it was incorporated in Columbus, Ohio. The company is currently headed by Kevin Johnson, while the CFO is Scott Maw. The external auditor is Deloitte & Touche LLP. The American company has never given declared dividends on its common stocks, a policy established to preserve cash for development and other working capital needs. This company owns and operates chains of restaurants and franchises that show their flagship product-chicken wings that are laced with their distinct seasonings and tangy sauces. Their flagship product is laced with signature seasonings and sauces; STARBUCKS can provide what appears to be the same product as their rivals but different in taste. In 2016, STARBUCKS’s audited financial statements reported revenues, total costs, and expenses, earnings before income taxes, tax expense, and Earnings attributable to STARBUCKS of $1.99 billion, $1.85 billion, $0.13 billion, 0.039 billion, and 0.094 billion respectively. However, since 2019, Ernst & Young has won the tender to audit BHP’s financial accounts 2019. Ernst & Young is s scheduled to replace Deloitte & Touche because of new regulations that have since made it mandatory for companies to rotate their statutory auditors. In 2016, STARBUCKS paid $720000 a decrease from the $977000 paid in 2015.
Deloitte & Touche’s Audit Report
The auditor expressed an opinion on asset valuation and determined that the carrying amount of plant, property, equipment, intangible assets, and investment was acceptable. The auditor also expressed an opinion on taxation and considered that the level of tax provisioning and other disclosures of that kind were acceptable. Finally, they expressed an opinion on an extraordinary item, through losses attributable to the project and considered the level of positioning and related disclosures reported by the company to be acceptable.
Two audit partners signed the auditor’s report. According to the statements expressed by the auditors, the entire report details their opinion on STARBUCKS’ financial reports and disclosures. However, there were two incidental opinions on the remuneration report. The one from London’s office indicated that the auditor’s opinion on the part of the remuneration report was that it was properly prepared and consistent with American Companies Act. The one from Washington also indicated that the remuneration report was consistent with American Corporations Act.
Regarding the Audit Committee
The current total number of members of STARBUCKS’s audit committee is four. All the members of the committee are independent members. The company must obtain approval from the committee on any non-audit services conducted by the external auditor. After that, the committee has the mandate to determine whether the provision of non-audit services by the external auditor should be approved or not and later make a report to the board on any issue of which the committee considers an improvement is required and make relevant recommendations to the board.
Many mistakes might not occur because of deliberate or malicious decisions against the defendants but may be the inevitable results of omissions or material concealment by employees of the company. Nevertheless, in some situations, while the mistakes are not intended, they are the result of a standard of conduct that is less than that which is important in protecting other investors and the company from unreasonable damage. There are four essentials that must be considered for the plaintiff’s claim to make a successful negligence case. First, the auditor should owe the third party a duty of care, which the auditor breached, and the third party suffered damages, and the breach of duty by the auditor should be considered as not only a legal cause but also an actual cause of the damages on the third party (Vona, 2012). The defense to a negligent case might comprise a standard of care owned between the two opposing parties in a court of law and the extent to which the accuser contributed to their own mistakes, perhaps arising from the accuser’s negligence.
Auditors are tasked with the duty of acting in a way that prevents an unreasonable risk to their clients and other third parties that depend on their client’s disclosures to make material investments or donations. The standard that establishes the nature of the duty of care must be objective but depend on the particular circumstance that relates to a mistake, although they are often exercised in a flexible way. For instance, the standard of care in many situations is that of a reasonable auditor of ordinary rationality in the usual situation (Knechel, Krishnan, Pevzner, Shefchik, & Velury, 2012). This means they have to be cautious, thoughtful, and risk-averse to block placing other people in unreasonable harm’s way. From such definition, one can observe that the nature of the situation can impact the standard of care: in an emergency situation, there are things that can be taken differently from others where there is sufficient time for consideration and thoughtful actions.
Selection of an Auditor
The auditor’s unique behavior can be a concern when their work is taken to have been influenced or compromised by certain other factors, such as the presence of personal relationships. Under certain situations, a special duty can arise for the auditor to protect the third party from possible damages when they do their work with diligence. The auditor’s duty can change from various sources, including contractual relationships and professional roles between them and the third party (Pallisserry, 2012). For instance, the contract the auditor with enter with the new auditor can provide protection in case third parties decide to go after them. This can specify high standards for the third parties, and they can sue the auditors for professional for less than the required levels of performance for professional misconduct, which might have been the proximate cause of the harm.
The general factors to consider when accepting a new auditor are many folds and are driven by certain key considerations. The integrity of key leaders, such as the organization’s CEO and the other people charged with governance of the entity (the board), is vital. The attitudes of these key players in the organization will be reflected in the aggressive interpretation of standards, internal controls, and audit fees and in the limit of the scope of work to be done (Bell & Griffin, 2012). Take note that the organization provides receipts to people who have donated money so that they can claim a tax refund. Moreover, the organization does not issue receipts, raffle ticket sales, or for clients’ payments to attend fundraising dinners. Such a reputation might be bad for business.
It is important to consider the nature of client operations. From the nature of STARBUCKS’s operations, it is possible that an auditor can reach an inaccurate audit conclusion. When assessing the level of risk associated with STARBUCKS’s operations, it is possible that the auditor can ignore the company has internal controls. A well-oiled and functioning internal control system ordinarily mitigates such a risk. When making the decision on acceptance, it is important to consider the strength of the internal controls when evaluating STARBUCKS’s control risk. In this scenario, the work of the auditor is cut out to assess how susceptible the financial statement assertions are to material misstatement, given the nature of the operations of the client (Christensen, Wood, & Wood, 2012).
Perceived Strengths in Corporate Governance
Remember that good governance exists in an organization when the management of resources and the affairs of the entity are conducted in a way that can be defined as open, transparent, answerable, and just (Chung, Farrar, Puri, & Thorne, 2010). Accountability is the fundamental feature of good governance, and for the organization, this is represented by the existence of the board of directors made up of three members. Essentially, the board of directors is an accountability system that provides oversight over the operations and activities of an organization on behalf of the other members. Having two independent directors sitting on the board is a strength that can only be considered tentatively as an approach to provide oversight to the operations of STARBUCKS.
Delegation is another approach often used by organizations to achieve a solid framework of corporate governance. The manner in which the company is organized makes it apparent that the company has set job specifications for certain offices to meet the purpose organization’s purpose The CEO, who reports to the board, is in charge of the operation of the entire organization, but is specifically responsible for the purchases of fixed assets and negotiates for other serious payments such agreements. The CEO has a partner whose role relates to coordinating raffle ticket sales and organizing activities involved in fundraising. Then there is the third employee at the firm who doubles up as the accountant and the bookkeeper.
Overview of Perceived Inherent and Control Risks
Remember that inherent risk refers to the risk that cannot be protected or detected by STARBUCKS’ internal control system (Adams & Simnett, 2011). Such a risk can happen because of the nature of the operations, transactions, and business of STARBUCKS. At times, the nature of a business can link the complexity of financial transactions and need high involvement and decisions. The inherent risk is ordinarily high when a transaction even entails highly with the human decision. The nature of STARBUCKS business is complex, which creates inherent risks. STARBUCKS’s offerings are multifarious, and there is the possibility that they might not meet user requirements. Complex products require certain levels of knowledge, even for the directors of the organization and donors. Take the case of receipts that are not issued for the sale of raffle tickets and for clients’ payments who have attended fundraising.
How the Risks might affect strategy
With such huge risk related to the operations and nature of STARBUCKS’s business, this changes the auditor’s approach strategy and plan towards the auditing process. Strategy and planning are two twin concepts, which are not synonymous, but they imply the process that the auditor can take to look into the risk and issues against which they align the auditing priorities for the organization. The audit process implies the alignment of units, teams, sections, or even functions to higher-level strategies (Arens, Elder, & Mark, 2012). For an auditor, the best strategy is all about attaining the auditing goal in the most efficient and effective way. Moreover, the strategy is all about meeting the mission comparatively better.
The information transmitted from the case study is that strategic planning entails the process involved in understanding the challenges and issues affecting the client and making a determination on the most efficient and effective way of meeting their audit needs. From the onset, it is important to hold a premise that a good strategy translates to focus, which in turn translates to accountability and results. Each process carries the strategic plans developed by the company, which act as a guide towards the delivery of the business objective and directing the work streams at the organization. Smaller teams within the bigger may not need to create their own strategies, but it appears that there are situations that can warrant small teams to think strategically, in which case, they are forced to follow best practices that drive and structure their strategic thinking processes.
Badolato, P.G., Donelson, D.C. & Ege, M. (2014). Audit committee financial expertise and earnings management: The role of status. Journal of Accounting and Economics, 58(2-3), 208-230.
Brennan, N.M. & Kirwan, C.E. (2015). Audit committees: practices, practitioners and praxis of governance. Accounting, Auditing & Accountability Journal, 28(4), 466-493.
Lewis, L.D. (2012). The power of accounting: What the numbers mean and how to use them. London, Rutledge.
Marshall, D. (2016). Accounting: What numbers mean. New York, John Wiley & Sons Publishing.
Starbucks (2016, November 16). Starbucks Corporation: Board of Directors and Board Committee list. Starbucks. Retrieved From: https://www.starbucks.com/about-us/company-information/corporate-governance/board-committees-list/
Starbucks Plc. (2017, October 01). Starbucks fiscal 2017 annual reports. Starbucks. Retrieved From: https://s22.q4cdn.com/869488222/files/doc_financials/annual/2017/01/FY17-Starbucks-Form-10-K.pdf/
Starbucks Plc. (2018, June 26). Starbucks Corporation Audit and Compliance Committee charter. Starbucks. Retrieved From: https://www.starbucks.com/about-us/company-information/corporate-governance/
Tepalagul, N. & Lin, L. (2015). Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1), 101-121.
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E.C. and Creating Audit Report
Select a publicly traded company using the U.S. Securities and Exchange Commission (SEC) EDGAR System at http://sec.gov/edgar/searchedgar/companysearch.html and submit to the instructor for approval. Please note that each student must research a different company. Once the instructor has approved the company selection, obtain the Annual Report (Form 10K) and Proxy Statement (Form DEF 14A) of the company for the immediate past fiscal year. Review these documents in addition to Earnings Releases and other financial information available on the company’s Investor Relations website to evaluate the following items.
Independent Auditor’s Report
- Based on the selected public traded company, what type of auditor’s report was issued on the financial statements.
- What kind of evidence the auditors found that indicated the company did not follow Generally Accepted Accounting Principles (GAAP).
- Identify members of the Audit Committee of the Board of Directors, its functions, and number of meetings held.
- Determine if the composition of this committee satisfies Public Company Accounting Oversight Board (PCAOB) requirements in terms of independence and accounting knowledge.
- Review the audit committee report and discuss Committee actions. Determine how these actions ensure the integrity of the audited financial statements.
Independent Registered Public Accountants
- Identify the company’s independent registered public accounting firm.
- Determine how long this firm has served as the external auditors.
- Determine other services, if any, provided to or on behalf of the company.
- Determine fees paid to this firm by type of service provided.
- Discuss changes in or disagreements with the accountants on accounting and financial disclosures, if any.
Reports of the Independent Registered Public Accountants
Review the report of the independent registered public accounting firm on internal controls. Determine if the report and its contents meet the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and the PCAOB.
Review the report of the independent registered public accounting firm on the audited financial statements. Determine what type of opinion was issued and whether the work performed meets the criteria of COSO and the PCAOB, in addition to GAAP and GAAS.
Prepare a 10-12 page research paper (excluding title page, abstract, references page, and appendices containing financial analysis) in APA format that presents the findings of your analysis of the company’s SEC filings. Your paper should also discuss the following:
- The type of auditor’s report that was issued.
- What kind of evidence the auditors found which indicated the company did not follow Generally Accepted Accounting Principles (GAAP).
- Roles, responsibilities, and objectives of internal and external auditors.
- Types and assessment of audit and Internal control risks.
- Ethical standards in auditing and the implications of unethical behavior.
- Internal control system, its role in a business and its significance in the auditing process.
- Use of computer assisted auditing techniques.
- GAAS, GAAP, PCAOB, and COSO requirements for audits of publicly traded companies.
In addition to the SEC Forms, a minimum of five (5) peer-reviewed academic or professional references must be used in the paper.
Please submit your assignment.
Your assignment will be graded in accordance with the following criteria. Click here to view the grading rubric.
For assistance with your assignment, please use your text, Web resources, and all course materials.
10-12 Pages Double Spaced , Times New Roman
Please allow for a title page at the beggining and a reference page at the end which doesn’t inlcude the 10-12 pages.
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