Subject: Finance and Accounting
Topic: AUDITING
Language: English (U.S.)
Pages: 2
Instructions
Q1 Because this is inventory week, will those of you who have been on inventory audits share some of your war stories for either the enjoyment of us old auditors or for the classmates who have never had the pleasure of auditing inventory? From your adventures, we will learn about the pitfalls and great plays of auditing inventory. Q2 We have very hot topic this week, let us start discussing what the auditors must do to meet their obligations under professional auditing standards related to the observation of inventory? Q3 Audit committees of public companies have many responsibilities in today’s financial reporting environment. Among those responsibilities are hiring the company’s external audit firm, overseeing the company’s financial reporting processes, and meeting with management to understand decisions around accounting and auditing matters and so forth. Please explore the Internet to find information on the audit committee made available by a corporation, and answer the following questions. 1. What are the committee’s responsibilities related to financial and business risks? 2. How many times does the committee meet on an annual basis? 3. What authority does the committee have in carrying out its responsibilities? Q4 What is one contingency that would concern an auditor, and how would the auditor become aware of this contingency? Q5 What are the highest priorities to consider when acquiring another company, business, or other organization? Q6 Good initial discussion regarding priorities to consider when acquiring another company. Let's further discuss the reasons why a company would choose to consider an IPO. What would be the reasons not to consider an IPO?

Auditing

Question 1:

I was once mandated with the responsibility of counting meat carcasses for one of my employer’s clients. The carcasses were being stored in an area that was the size of two Olympic size swimming pools. They were arranged in rows from the entrance of the warehouse to the very back. This meant I had to wade through the carcasses in order to get an accurate count. The place was not designed for walking room between the rows so I had to use my gloved hands to push through the meat. The place smelled horrible and the sight of the meat carcasses gave me nightmares for weeks on end. Three hours later, I was covered in blood and cow guts and at the point of vomiting inside the warehouse. Luckily, I got out just in time and ended up vomiting outside the building.

Question 2:

Auditors have several obligations when it comes to observing inventory according to the rules prescribed under the professional auditing standards. For starters, the auditor must be present when the client is counting his inventory for the year-end balances. Secondly, the auditor must carefully observe the counting procedures of the client to determine if these procedures are concurrent with industry standards. Thirdly, the auditor needs to inquire from the client’s personnel about their counting procedures. This will help him determine if the personnel are using the right counting procedures as well. The last thing he needs to do is to conduct his own tests (independent) of the physical counts

Question 3:

a). The major role of the audit committee of the company is to ensure the company’s financial integrity for the sake of the shareholders. The members of the committee have to identify any financial risks, analyze them, and find ways to mitigate them before they can become an actual event. The committee is also responsible for determining how appropriate the company’s risk management strategy is (Lyvov, 2009).

b). The committee meets about three times in a year to discuss the financial audit reports provided by the company’s internal auditing team as well as to assess any financial risks that might have developed during the previous or current financial quarters.

c). The committee is mandated by the board of the company to carry out its activities. The committee is also authorized to carry out its activities through several Federal laws that include the Sarbanes-Oxley Act of 2002. Authority is also granted through the committee’s charter that outlines the duties and responsibilities of the committee.

Question 4:

An example of a contingency that would concern an auditor is income tax disputes. One way that the auditor can become aware of this contingent liability is by conducting a thorough analysis of the income tax expense. Amounts that are unusual or non-recurring should be examined further to determine if they pose an actual tax liability threat. The most obvious approach to identifying such a contingency is to go through the internal revenue reports generated throughout the last couple of years. This might give the auditor an indication of the most prevalent disputed tax  issues in the company.

Question 5:

Due diligence is the most crucial priority for a company that is planning to acquire another one. Due diligence refers to the evaluation of the company’s legal, business and financial affairs in a bid to determine legitimacy. Due diligence will include identifying the seller’s motives for selling his company, reviewing all the financial records of the company, reviewing all third party contracts and contacts, assessing employee contracts, reviewing any leases, deeds, or mortgages, inspecting all the inventory, and assessing intellectual property. The buyer should also comb through all the relevant government filings as well as identify and review all pertinent documents that establish the company as a legal entity (Novotny, 2013).

Question 6:

There are several reasons why a company would choose an IPO. Public companies usually get better rates compared to private ones when it comes to issuing debt. A public company can always sell more stocks if there is a public demand for them meaning that the company can continue raising funds for as long as possible. Going public also makes acquisitions and mergers much easier to do. Finally, going public translates into liquidity for the company making it easier to establish certain programs including the employee stock ownership programs.  

There are instances when a company can decide against an IPO despite its trappings. If the business is still small then it might not be a worthwhile venture. The costs of going public can be prohibitive if the business is not generating millions every month or so. The costs that can be attributed to an IPO will vary based on the size and complexity of the company. Most investors would consider buying stock in a company that is making at least $ 100 million (Bram, 2010).

References

Bram, T. (2010, Aug. 26). Three signs your business should consider an IPO. Available online< https://www.americanexpress.com/us/small-business/openforum/articles/3-signs-your-business-should-consider-an-ipo-1/> Retrieved on 14 October 2015.

Lyvov, B. (2009). The role of the audit committee. Available online< https://www.kpmg.com/RU/en/topics/Audit-Committee-Institute/Publications/Documents/toolkit/1_The%20role%20of%20the%20audit%20committee_eng.pdf> Retrieved on 14 October 2015. 

Novotny, J. (2013). Significance of due diligence process when acquiring a business. ExitPromise. Retrieved on 14th October 2015 from http://exitpromise.com/due-diligence-process-when-acquiring-a-business/