Alwin Earnest and Arthur Young were the founders of Ernst and Young Company. In the year 1906 Arthur together with Stanley, his brother formed their accounting firm, Ernst and Ernst. Both “Ernst and Young” and “Ernst and Ernst” Companies were a success emerging into global marketers. In the year 1924, the two companies allied with prominent British firms to form one of the world's well-known accounting firms. After the death of the two brothers, the two companies amalgamated forming Ernst and Young. The company (Ernst and Young) offers to their customers’ tax, security, business, and audit risk services. In this relation, the company is among the “top four” auditing and accounting services. For audit planning, it is the responsibility of the auditor to decide on whether to accept or decline a new client. Additionally, the auditor should obtain the full understanding with the new client regarding the audit engagement to avoid conflicts and misunderstanding. The essay is going to discuss the audit procedure to be adopted by the auditor in the course of auditing; this will be by the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standard (IFRS)
Audit Steps in Designing and Planning an Audit Program
In designing the audit planning, the auditors of Ernst and Young should first assess the level of risk the business is exposed to. This is the first step in designing the audit program as it provides the auditors with insight on the areas they need to place key attention. In this case, the auditors should pay attention to all the risks the business can be exposed to minimize management liability. The audit program to be created should take into consideration the operating environment of the firm. The second step is for the auditors to access the appropriateness of the procedures and the accounting policies. In designing the audit plan, the auditors of Ernst and Young will want to spend quality time to understand the accounting policies adopted by the company. The procedures to be verified should be about inventory, valuation, and revenue recognition. The third step in designing the audit program is the identification of the areas where the auditors should focus their attention in the course of auditing. Particular attention should be given to areas that are prone to errors and frauds. Therefore, the auditors of Ernst and Young have the responsibility of reassessing the audit plan they designed through the audit period. If necessary, the plan can be expanded or adjusted to help them issue a true and fair opinion (Low, 2004).
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Performance Ratios to be adopted by the Auditors to Determine the Analytical Tests to be adopted
Some of the reasons that will force the auditors of Ernst and Young to perform analytical ratios are the case where the management is not able to explain or provide sufficient evidence on transactions. Also, the audit evidence obtained is insufficient to be relied on by the auditors in drafting the audit report. In such a case, the auditors should focus on current ratios, inventory turnover ratios, and receivable ratios. When the auditors note an increase in current ratios, they should access the customer purchase orders to determine if there exist fictitious receivables. However, when there is a decline in current ratios, the auditor should determine whether the company has understated its closing stock or an overstatement in accruals and the account payables. An increase in inventory turnover should be determined through analyzing the closing stock to determine if they are understated. Finally, the auditors should test the gearing ratio to determine the going concern of the company (Houston, Peters & Pratt, 2009).
Analysis of the Income Statement and the Balance Sheet of Ernst and Young
Before the auditors of Ernst and Young conclude that the accounts prepare by the company portray a true and fair view, they need to make assertions. The assertions to be made should be based on measurement, recognition, disclosure, and presentation of the various items in the income statement and the balance sheet. The first assertion is of occurrence. The auditors should audit the assets and liabilities of the company to determine their existence, and they are accurately recorded in the balance sheet. The second assertion is completeness. The auditors of Ernst and Young should audit the financial statements to determine whether all the transactions are properly recorded and presented. The third analysis is on a valuation of assets. The auditors should ensure all the assets and liabilities are clearly reflected in the balance sheet with their respective amounts. Finally, the auditors should analyze the income statement to determine whether all items are correctly presented in accordance with the regulating standards.
The Audit Risk Model
The audit risk model gives the analysis of the components of the models and the audit risk. The audit risk model is useful in audit planning to minimize audit risk. Sampling is part of the audit risk model. The auditors of Ernst and Young should select items within the population to represent the entire population. The items to be chosen for the sampling should have a known probability in order to establish the materiality of the elements of the population. In this case, the auditors will use both non-sampling and sampling techniques to determine materiality. Sampling methods include random, systematic, and judgmental selections (Houston, Peters & Pratt, 2009).
Responsibility of the Auditors When Issuing an Unqualified Report
An unqualified opinion is clean reports which indicate that the accounts prepare by the company portray a true and fair view. The accounts prepared should be by the reporting framework. In this relation, the auditors of Ernst and Young have the responsibility of stating in the report that, the accounts prepared are in accordance with the GAAP and that, they are applied consistently. Also, the auditors have the responsibility for assuring the shareholders that the financial statements prepared to comply with the regulations and the statutory requirements. Finally, the auditors have the responsibility of assuring the shareholders that, all material matters were adequately disclosed in the financial statements.
Summary and conclusion
It is the responsibility of the auditors of Ernst and Young to provide the shareholders with an honest opinion on whether the accounts prepared to portray a true and fair view. For the auditors to provide the shareholders with such an opinion, proper audit planning is critical. Audit planning is essential as it will guide the auditors on how to conduct the audit. Therefore, the auditors should adequately analyze the books of the company to determine whether they comply with the International Financial Reporting Standard (IFRS) and the Generally Accepted Accounting Principles (GAAP).
References
Houston, R. W., Peters, M. F., & Pratt, J. H. (2009). The audit risk model, business risk and audit-planning decisions. The Accounting Review , 74 (3), 281-298.
Low, K. Y. (2004). The effects of industry specialization on audit risk assessments and audit-planning decisions. The accounting review , 79 (1), 201-219.
