Finance in a Global Perspective
Essay Preview: Finance in a Global Perspective
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Pre-engagement ActivitiesDocument with reasons why your firm can continue as auditors.Whether a public accounting firm decides a new audit engagement or to continue with current engagements involving the following policies and procedures:Obtain and review financial information about the prospective auditee organization to determine the purpose and the basis of accounting being used.Our firm obtains financial information about Tiffany—annual report, and we will base on our audit to express an opinion on these financial statements. Meanwhile, we also conducted our audit in accordance with Canadian generally accepted auditing standards which require us to comply with ethical requirements and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.Evaluate the public accounting firm’s independence and ability to comply with other relevant ethical requirements with regard to the prospective auditee.Our auditors can comply with independence standard framework strictly from CICA, IFAC and CGA. At the same time, they can make correct decision based on ethical requirement of independence and objective of audit work, and ensure audit work of Tiffany will be accomplished without biases. Consider whether the public accounting firm has the competence and resources to perform the audit, including any need for special skills.Our firm owns enough resources like information systems auditing and our auditors have accounting and auditing background and abundant professional knowledge and skills. Obtain information from management in order to understand the business and its risks, and to assess whether the manager and those charged with its governance are willing and able to accept responsibility for preparing financial statements.According to Tiffany annual report, we acquire some information about this company’s business and its risk from management. In addition, manager has adequate ability and controls to analyze and take some actions to reduce risk of error and fraud.Consider whether the engagement requires special attention or involves unusual risks.Our firm concentrates on audit work about Tiffany Company’s general financial statements, so there is no special attention or unusual risks required in engagement.Search for information about the organization by looking for news reports or other information to get any indicators relating to the integrity of principal owners, managers with its governance.Our firm collects some news reports about Tiffany Company, which helps us to confirm manager’s reports accordance with news reports. Therefore, these indicators show the integrity of principal managers with its governance.Document why your firm is independent from your audit clientAudit independence is an absence of interests that create an unacceptable risk of material bias with respect to the reliability of financial statements. If an auditor is affected by any bias or interest, he or she cannot make a professional or business judgment objectively. In a word, auditors are expected to be unbiased and impartial.
There are five threats to standard frameworks for independence:Self-review— providing assurance on his or her own work. The relative information is from Tiffany Company’s annual report, so our auditor does not prepare the original data used to generate financial statements or prepare other records that are the subject matter of the audit engagement.Self-interest—benefiting from a financial interest in a client. Our firm or a member of the audit team cannot benefit from a financial interest in, or other self-interest conflict with, an audit client.Advocacy—promoting a client’s position or opinion. Our firm does not perceive promotion or is compromised by Tiffany Company.Familiarity—becoming too sympathetic to a client’s interests. Our firm or a member of the audit team has not a close relationship with an audit client, its directors, officers or employees.Intimidation—being deterred from acting objectively by actual or perceived threats from a client.Our firm faces a relative good audit environment, and does not be deterred from exercising professional skepticism by threats, actual or perceived from Tiffany’s directors, officers or employees.In a word, our firm is independent from Tiffany Company, because during the period of the audit, our members of firm is a business partner, a director or an employee of Tiffany Company, and no benefits owned or controlled of Tiffany Company. Meanwhile, there is no close relationship between us. In addition, we have not been a receiver, liquidator or trustee in bankruptcy of Tiffany Company or any of its affiliates within two years of his proposed appointment as auditor of Tiffany Company.3. Document your firm’s risks from accepting your audit client engagement.How widely distributed are the audited financial statement?If widely distributed to the public, such as for a publicly listed company, risk from accepting engagement is higher. As for Tiffany & CO. it is a publicly listed company. The financial statements are widely distributed, which result in accepting higher risk.How is the financial condition of the auditee?Tiffany’s financial results in fiscal 2012 did not meet shareholder’s expectations. Worldwide gross profit declined by 5% from prior year, net earnings declined 11%. In general, financial condition is poor, result in high risk of accepting engagement.How trustworthy is auditee management?All financial statements of Tiffany are reported by an independent public accounting firm, which means the risk of accepting is low.How complex is the financial reporting required?Tiffany has complicated or unusual accounting requirements, such as foreign manufacturing operations, maintains investments in, and provides loans to, foreign businesses and relies to an extent on foreign third party vendors and suppliers. As result, the auditee is subject to the risks of doing business outside the USA, and the risk of accepting engagement will be higher.How knowledgeable are the people likely to be using the financial statements?As a publicly listed company, the financial statements are widely used by institutional investors as well as Wall Street analysts; therefore, the users are relatively knowledgeable with financial statements and the risk is of taking this job is relatively high.Factors affecting the auditor’s risk from accepting engagementImplications for the auditor’s assessmentHow widely distributed are the audited financial statements?Higher risk, a publicly listed company of higher reputation riskHow strong is the financial condition of the auditee? Higher risk, financial condition is poorHow trustworthy is auditee management? Lower risk, management is trustworthyHow complex is the financial reporting required? Higher risk, Tiffany has complicated and unusual accounting requirementsHow knowledgeable are the people likely to be using the financial statements? Lower risk, information user are relatively knowledgeable and sophisticated4. Engagement Letter