Overview

In the field of auditing, the role of the external auditor is paramount to ensuring a quality audit that meets the standards and expectations of the auditing industry. In addition to their knowledge of auditing standards and legal requirements, external auditors also follow a specific series of steps that build on each other logically. These steps begin even before the client is accepted, because the external audit firm needs to ensure its staff has sufficient familiarity with the industry being audited. After client acceptance, the external auditing firm becomes familiar with the client’s organization and internal controls. They develop an audit strategy and audit plan. They test the internal controls, gather audit evidence, document the evidence, audit the financial statements, and examine contingent liabilities. Combining these factors, the external auditor formulates an opinion letter and communicates the results to the client. If proper procedures are not followed, or if auditors act unethically and do not follow independence standards, audit failure can be the result. This can lead to litigation against the auditing firm and client. Audit failure can also mislead investors and creditors, potentially impacting the stock price of the client. To appreciate the global impact of audit failure, consider this: In the early twenty-first century, there were eight large auditing firms in the world known as the Big Eight. (Crane, 2011). That number has since been reduced to four, as these firms were caught in major audit failures, and they now no longer exist.

For the final project, you will work through components of a case study in which you will assume the role of a lead auditor at Willis & Adams. Your firm has been approached by EarthWear Clothiers to perform an audit. In your role as lead auditor, you will evaluate internal and external factors to determine client engagement, develop an audit plan, determine recommendations for improving internal controls, and communicate the audit opinion. You will not be required to perform the audit tasks themselves.

The project is divided into three milestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final submissions. These milestones will be submitted in Modules Three, Five, and Seven. The final product will be submitted in Module Nine.

In this assignment, you will demonstrate your mastery of the following course outcomes:

Evaluate internal and external factors for determining client engagement aimed toward reducing audit failure

Develop an audit plan in order to reduce audit failure by utilizing auditing standards

Determine appropriate recommendations for improving internal controls based on the audit of financial statements

Communicate financial audit opinions on financial reporting based on audit evidence, documentation, and evaluation

Prompt

For the final project, you will assume the role of lead auditor at an external auditing firm, Willis & Adams. The firm is reevaluating its client list and audit procedures. You will be responsible for supporting the continued engagement of a current client, EarthWear Clothiers, and planning the audit of this organization’s financial statements. You will evaluate and recommend improvements to internal controls, and communicate the audit opinions to the senior management of the organization.

Specifically, the following critical elements must be addressed:

Client Engagement: The external auditing team has been approached by a client to do their yearly audit. You are responsible for evaluating the factors associated with the organization and the external auditing team to determine why it would be appropriate to move forward with the client request.

Evaluate the corporate structure and annual report of the organization, and summarize your findings.

Evaluate the following information related to the external auditing firm, and summarize your findings:

Independence

Knowledge of client industry

Staffing capabilities

Assume your firm has decided to move forward. Referring to your evaluation of internal and external factors, explain why it would be appropriate for the external auditing team to accept the client audit request, using examples to support your response.

Planning the Audit: Select one of the organization’s business objectives and create an audit plan of the organization’s financial statements. Use the information from your preliminary review and auditing standards to support your plan.

Using your selected business objective, create an audit plan of the organization’s financial statements that addresses the following, and support each with the appropriate auditing standards:

Business risks

Management assertions

Audit risk

Internal controls

Effect on audit procedures

Determine materiality by conducting a preliminary risk assessment, and explain which factors were used in making this determination.

Internal Control: Evaluate the following components within an organization for gaps in internal controls, and explain how each can be improved:

Control environment

Risk assessment

Information system

Control activities

Monitoring activities

Communication: Create a letter to management that identifies any gaps in internal control and provides resolution. In addition, in a separate section of your submission, include audit opinions of both the internal controls and the financial statements of the organization.

Prepare a letter to management that clearly communicates internal control deficiencies or material weaknesses, and provide recommendations to remediate concerns.

Prepare an audit opinion of internal controls, and explain the impact it has on the audit of financial statements.

Prepare an audit opinion of financial statements, and explain why the opinion is appropriate based on findings in the audit.