Introduction
When conducting an audit, it is essential to develop a framework depending on what type of audit is being undertaken and the concerns of the auditors with regards to the company under audit. In the examination of financial statements, the financial reporting framework should be used. Most companies use the Generally Accepted Accounting Principles (GAAP) in their financial accounting activities, and auditors should use the same upon realization. In this case, we will be auditing Microsoft corporation, and the financial reporting framework will be used. From their annual reports, it has been noted that the company uses GAAP, which is vital in ascertaining which kind of framework to select in the audit of the company’s financial statement.
Microsoft company was established in Albuquerque in the year 1975 by Bill gates. In 1981, it became a corporation and Bill Gates as the technology advisor to the company. Over the years, Microsoft Corporation has launched many technological elements like Windows and MSDOS ("Microsoft Annual Report 2018", 2018) . In the 2018 annual report, the company recorded high revenues and assets, which makes it maintain its competitive advantage in the technology industry. The revenues totaled to $110.4 billion and the operating income totaled to $35.1 billion. The returns to the shareholders was $21.5 billion.
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Audit Framework
When assessing risks for clients, auditors should evaluate the nature of business for the client. It is crucial to determine how risks affect your clients as they impact companies differently. Determination of both internal and external risks is also necessary. External risks include factors such as customer relations, technology, and competition (Whittington & Pany, 2016). The management of Microsoft have developed their means of measuring performance and reviewing their budget. They have set up their methodologies of establishing a scoreboard to oversee their customers, financial aspects, and growth opportunities. Therefore, they are aware of the different risks they are facing as a business, and they include credit risks, exchange costs, share prices, interest rates, and product prices. Some risks may be avoided but can have a negative influence on the consolidated financial statements. In Microsoft, an internal control model known as Value-at-risk has been set up to assist in assessing and controlling market risks.
Auditors usually face different risks during the audit process which include control, detection and inherent risks. Control risks is the risk that possible material misstatements will not be prevented or detected by the internal controls of the organization. Detection risks deals with the incapacity of audit procedures not able to detect material misstatements. Inherent risk involves capability of material misstatements arising in financial statements due to errors.
Mitigating risks in Audit
As an auditor, it is best to hold a thinking session when desiring to mitigates certain risks. The procedures of risk assessment stipulate that auditors should have a thinking session to evaluate the size and nature of misstatements. Understanding whether the internal controls are functioning effectively is another way of mitigating risks (Bills, Huang, Lin, & Wood, 2019). For Microsoft, it may also be essential to conduct electronic research. The good thing about the company is that it operates in the technology industry, and any information can be acquired from an internet search, like politics, current issues, and market trends. In the mitigation of audit risks, the application of audit risk model is essential in managing such risks.
Areas of Focus
At first, it may be required to focus on qualitative and quantitative disclosures with regard to market risks. If a company has established internal and external controls to measure risks, there is a high chance an auditor will not miss material misstatement. Various external factors subject the company to different risks, and due to weaknesses of some controls, errors would occur, leading to inaccuracy (William, Glover, & Prawitt, 2016). Therefore, assessment of the statement of comprehensive income is vital. The statement of financial position is another account which should be tested for and the cash flow account. Internal misstatements usually occur in such areas.
Outline of Tests and Procedures for Microsoft
A balance sheet audit is carried out to check for accuracies in valuations and assess special transactions. Auditors can use the bank statement records, inventory records, and tax returns documents. Risk based audit will be performed on the income statement to check for errors and confirm management assertions such as completeness, existence, and understandability. The auditor can check documents such as purchase vouchers, journal vouchers, and sales receipts. The same audit procedure will be performed on the cash flow statement.
Other material tests include the following.
Examination of tangible assets
Review of documents and records
Performing analytical procedures
Observation of procedures and processes
Recalculation to ensure mathematical accuracy.
Written evidence established outside the organization and given to the auditors
Sampling Techniques
In the case of Microsoft corporation, random sampling techniques are desirable for assessing qualitative and quantitative disclosures regarding certain risks. The method can be used in the income statement. Stratified sampling is another audit approach which is applicable for the balance sheet items as they are classified into different parts. Block sampling techniques can be applied on cash flow account to select consecutive items for testing. The company has set up its internal control model; it is, therefore, crucial to employ a such sampling techniques to ascertain whether such controls are working (Swart, 2018).
Documentations Required
Form 10-Q
Form S-1 up to S -11
Form 19-K
Forms filed with SEC containing audited financial statements such as statement of comprehensive income, statement of financial position, cash flow statement, statement of changes in equity, and notes to accounts (Krishnan, Krishnan, & Song, 2016).
Form 8-K explanations
Levels of Assurance on Audit Reports
Auditors can give reasonable, limited, and absolute assurances. For reasonable assurance, the subject matter conforms to a particular criterion. It thus a high level and positive assurance. In limited assurance, enough evidence has been gathered, but the subject matter is credible in given situations. It is a negative and moderate level of assurance. Absolute assurance cannot be provided by the engagement team, whether to review or audit. Typically, when financial reports are presented according to GAAP, the assessment team will not give an assurance. This is the case where the company does not have an accounting clerk to assemble financial statements. Therefore, the auditor, after completing the audit, will issue a limited assurance.
Impact of Internal Control on Business.
Internal controls are crucial and have effects on the overall business. For instance, they aid in detecting misstatements and frauds (William et al., 2016). Set controls on compensation will ensure staff is paid on time, with the precise amount, and any inaccuracies are avoided. However, it costs the business if they have instituted such controls, and they fail to fix the issues. In addition, it can hinder the work of detective controls as they do not discover the issues until they have already begun. Therefore, the company can institute preventive and detective controls to manage errors and fraud.
Microsoft Corporation Audit Report
| Risky parts which may significantly impact Financial Reports | Controls by Management | Audit Approach |
| Qualitative and Quantitative disclosures pertaining to market risks. | The value-at-risk model has been set up to assess market risks | use of observation on procedures and processes. A random sampling of internal controls to confirm they are functioning correctly to prevent economic risks. |
| Conclusion: they are not complete. | ||
| Effect: may significantly impact the consolidated financial statements. | ||
| Value of assets | Microsoft has set up internal controls which assess any risks associated with assets at a reasonable cost. They ensure assets are protected from losses, and any disposal losses or unsanctioned use is prevented. | Analytical procedures were conducted by the audit team to confirms the totals on asset values. Recalculations were done to ensure accuracy. Inspection of the physical asset was also done, counting of inventory ensured accuracy and confirmed management assertions. |
| Conclusions: they are free of misstatement | ||
| Assets are accurately and adequately stated. | ||
| Value of liabilities (Long term debt and Accounts payable) | An independent audit firm has been contracted to perform an internal audit. The goal is to ensure financial statements complies with the Public Company Accounting Oversight Board (PCAOB) | Substantive analytical procedures were conducted. Reconciliation of income statement and balance sheet was done. Tests were done on long term debt and account payable to spot any misstatements. Also, recalculations were done to confirm mathematical accuracy. |
| Conclusion: Liabilities are free from misstatements | ||
| Their values have been accurately and clearly stated |
Report of an Independent Auditor
To: The BOD of Microsoft Corporation
We conduct an independent audit for Microsoft Corporation in accordance with the PCAOB of the United States. The standards established by the guidelines require the auditor to plan and conduct a review to acquire acceptable assurance whether the financial reports of the company contain substantial misstatements. The audit procedure involves the examination on the grounds of testing, evidence supporting any disclosures in the financial reports. Auditing also consists of the assessment of accounting principles and management assertions and analyzing the presentation of financial statements. In this case, we believe the audit procedure conducted provides reasonable assurance, in our opinion.
The consolidated financial statements of Microsoft Corporation are presented fairly, and the results from our assessment confirm that the company has adhered to the established accounting principles and the GAAP of the United States
The internal controls conform to the PCAOB. Analytical procedures on both the balance sheet and income statement were conducted to ensure accuracy. In addition, the reconciliation of each account was done. The overall value of assets was reviewed, and inventory inspection is done to ensure the correct amount was presented. The internal control model set up by Microsoft Corporation was independently assessed to confirm they were actively evading any possible risks. In our independent auditor's report, the controls are effectively functioning to control risks. However, after reviewing the controls using a random sampling technique, the controls are not in a position to manage potential economic risks.
If misstatements were discovered, the management should be allowed to fix them and develop internal controls to prevent further misstatements. This would depend on whether the misstatements are severe and whether they were fraud errors. Once management becomes aware of inaccuracies and possible misstatements, it is their duty to comply and fix them. If they do not desire to fix them, the concept of evaluation materiality is employed.
For the workings of internal controls, the element of the control environment is used. The control environment is defined by procedures, principles, and structures which assist people in accomplishing their tasks (Cangemi, 2016). I would work with transactional-level controls. It entails control over every transaction on a distinct level, which comprises general and application levels. This control will ensure one person does not deal with an entire process, such as payroll, and different parties are involved at each stage. Segregation of duties and rotation are other controls that would be effective.
Ethical Issues
Auditors are expected to conform to established principles to ensure the audit process is done in a consistent manner. Ethical issues arise when auditors are hired to perform an audit. Integrity is one of the concerns. An audit aims to give truthful opinions regarding the financial position of the company. Auditors should, therefore, be impartial and unbiased. If cases of conflict of interest arise, they should not form an opinion as they would be subjected to biasness. Another issue of objectivity may arise when auditors have friendships or other close relationships with employees in the company they have been hired to audit. Confidentiality issues arise when auditors cannot maintain the secrecy of the information the company has given them. Lastly is the question of competency. Auditors should be qualified before engaging in the practice (Fiolleau, & Kaplan, 2017). They should, therefore, not comment on the financial statements if they think they are unable to formulate educated opinions.
References
Bills, K. L., Huang, H. W., Lin, Y. H., & Wood, D. A. (2019). Internal Auditor Turnover, Financial Reporting Quality, and Audit Risk Assessment. Financial Reporting Quality, and Audit Risk Assessment (September 2019) .
Cangemi, M. P. (2016). Views on internal audit, internal controls, and internal audit’s use of technology. EDPACS , 53 (1), 1-9.
Fiolleau, K., & Kaplan, S. E. (2017). Recognizing ethical issues: An examination of practicing industry accountants and accounting students. Journal of Business Ethics , 142 (2), 259-276.
Krishnan, J., Krishnan, J., & Song, H. (2016). PCAOB international inspections and audit quality. The Accounting Review , 92 (5), 143-166.
Microsoft Annual Report 2018. (2018). Retrieved 2 December 2019, from https://www.microsoft.com/en-us/annualreports/ar2018/annualreport
Swart, J. J. (2018). Audit methodologies: developing an integrated planning model incorporating audit materiality, risk and sampling (Doctoral dissertation, North-West University).
Whittington, O. R., & Pany, K. (2016). Principles of Auditing & Other Assurance Services. New York: McGraw-Hill Education.
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic approach . McGraw-Hill Education.
