Audit: Internal Control of Abc

3. Internal control of ABC

Situation/issue: 

Billings to PPI has been tripled in the last year. On one hand, it shows that PPI, to some extent, lacks integrity, which enhances the audit risk. An auditing firm should be prudent to conduct audit work for a client lacking of integrity, because it is more likely to have material misstatements. On the other hand, it reveals that there are some problems with the collection of billings in ABC. The outstanding receivables should be reviewed periodically to ensure the collectability.

Principles/rules: 

According to CAS 200, auditors should obtain sufficient appropriate evidence to reduce audit risk.

Comments/suggestions: 

ABC should thinking about whether to continue to audit for PPI since the audit risk is high. If the answer is yes, ABC need to collect more evidence and provide a higher assurance level. Besides, in order to enhance the collectability, ABC should improve its accounting system and review outstanding receivables periodically.

4. Scope of service

Situation/issue:

ABC found opportunity from providing PPI professional work beyond auditing and is considering to enlarge its scope of service by adding consulting, which means ABC is going to provide auditing service and consulting service at the same time and the auditor will not be independent when these two services are provided to a same client

Principles/rules:

According to SOX, an audit firm cannot provide consulting service to their audit clients.

Comments/suggestions:

ABC need to consider again whether they want to expand their scope of service by adding consulting. If they really want to do consult, make sure that they are not providing consulting service to their audit clients, otherwise it will violate SOX since the independence issue rises. For example, if ABC is going to keep auditing for PPI, they cannot provide consulting to PPI. Or if ABC would like to conduct consulting to PPI, ABC has to give up their auditing service to PPI.

5. Going public

Situation/issue:

PPI has recently gone public and is now listed on the TSX. Then two issues come up.

1. As the PPI has gone public, their financial statements will be disclosed to public and investors are going to make decision by reading the financial statements and audit report. The audit report may not to be widely used before when PPI is a private firm, however, now if ABC does not detect some material misstatements, the information may be misleading for investors to make a decision and ABC may have lawsuit. Therefore, the audit risk is higher than before.
2. Accounting standards may be changed. PPI could choose either ASPE or IFRS to do accounting records