Management Planning and Control
To address quality problems, key actions that need to be controlled across the audit division consist of: Preparing financial information using appropriate accounting standards, and applying them consistently Providing unimpressive analysis of the financial information and ensure that it complies with relevant statues or laws Managing the time required to complete each audit Additionally, key results to be controlled include: Financial information is representative of auditor’s knowledge of the business Material matters relevant to the presentation of financial statements are adequately disclosed 2.
Organizational context 2. 1 Organizational strategy P will employ a differentiation strategy based on industry-specialization. Studies have found that compared to non-industry specialist counterparts, industry- peccadilloes auditors can reduce audit production costs, improve audit timeliness, and improve disclosure quality . Additionally, studies have found that many clients switched to industry-specialized second-tier firms as their audit qualities are on par with the Big 4 .
As such, P’s differentiation strategy in providing high quality audits enables them to compete with the Big 4 for their existing clients, as well as smaller and/or higher risk clients avoided by the Big 4. 2. 2 Employee control problems 2. 2. 1 Lack of directions The majority of auditing work is carried out by
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The lack of direct supervision can lead to lack of directions as majority of juniors are trainees and graduates who are inexperienced in dealing with complex problems. 2. 2. 2 Lack of motivation Time pressure is a major cause of employees’ motivational problems. A study has found that auditors sometimes respond to internal time budgets by engaging in laity threatening behaviors such as reducing sample sizes and prematurely signing-off tests . Additionally, auditors may engage in behavioral displacements when dealing with external deadlines, as these deadlines are considered to be non- negotiable . 2. 2. Personal limitations One of the major problems facing auditors is the personal limitations of Juniors. Research conducted prior to the SGF found that booming economies and staff shortages had led to selection of low quality staff . Additionally, time pressures have caused increased responsibilities on the Job, yet less time for proper training. Accordingly, as majority of the audit work is performed by inexperienced Juniors, they are unlikely to discover risks and material items . These factors lead to behavioral displacements, thereby compromising audit quality and causing audit failures and litigation. . 3 Processes and output Audit quality is highly dependent on audit process being documented and carried led audit firms to implement new documenting procedures and practices that increased the standardization of the audit process . Therefore, it is management’s responsibility to understand the auditing process and documenting procedures as resented in the Appendix. In terms of outputs, partners engage in real-time, verbal- based reviews of subordinates work over the audit process . Partners often rely on intuition and professional Judgments to identify risky areas of outputs .
However, research have noted that partners are concerned with managing the audit firm’s image both externally and internally, and thereby are reluctant to take action against junior staff who engage in quality threatening behaviors . 3. Management Control System 3. 1 Action controls 3. 1. 1 Predation reviews – Audit Management Information System (MA’S) To promote audit quality and reduce the effects of time pressure on Junior auditors, an information system will be used to document the stages taken to complete the audit process.
Previous auditing information systems allow Junior staff to advance through the audit process by simply check-listing their own work. This has been shown to not necessitate to the amount of material data gathered for a high quality audit . To obtain more control over the Juniors’ actions, P will allocate managers and partners to the approval process, thereby ensuring that sufficient data has been gathered at ACH stage of the audit process before proceeding to the next stage. This is a tight control mechanism as reviews are conducted frequently and in detail by managers.
Additionally, it partially transfers the responsibility of time budgets from Juniors to managers and partners of P. It addresses Juniors’ lack of directions by setting sub- goals to satisfactorily complete the audit process, and partially offset time budget related behavioral displacements . 3. 1. 2 Action accountability and Redundancy – employee/partner involvement In many accounting firms, audit planning is only conceived by higher levels of management . However, research found that employees are more motivated to achieve targets when managers involve them during the planning process (Bikes,et al. 2010). In light of this, P&S will implement a tight control mechanism to address Juniors’ lack of direction and personal limitations by including them in setting audit goals, time budgets, and the selection of specific tasks within their capabilities in the audit process. It has also been shown in other firms that a greater level of involvement is needed by audit supervisors in assuring quality audits . As such, P will implement a redundancy-based control mechanism and sign partners and managers to be more involved with Juniors during fieldwork.
This will allow for loosely controlled informal communication amongst the audit team and resolve any possible concerns or questions. This will address the personal limitations of the Juniors as they gain experience in problem solving techniques through the directions provided by their supervisors. 3. 2 Result controls 3. 2. 1 Audit reviews Audit reviews are seen as the main determinant of audit quality . To ensure that the audit process is on track, P will tightly control quality results through the implementation of formal reviews via an interactive control system.
An Internal Quality Review Committee (ISRC) comprising of a team of subject matter experts will by the Public Company Accounting Oversight Board (2012) . To ensure that the formal review procedure is free from bias, reviewers will be external to the assigned audit. This is akin to the formation of internal audit committees implemented in the Bellagio Casino Resort case study . Formal reviews will be attained through questionnaires, audit team interviews, and reports at different stages of the audit. Reports will be formulated by the Audit Management Information System (discussed in Section 3. 1 . ) at certain intervals of the audit process to summaries the material data gathered, as well as any events that may influence the outcome of the audit. Questionnaires and audit team interviews will also be used to ensure that the audit team fulfill the requirements of the audit process, and bring to light any concerns about quality of the audit. The quality of the results will be assessed against auditors’ individual KIP, which will be discussed in Section 4. 2. 2 of this report. Those achieving laity results can be motivated by being considered for a part of the bonus pool and opportunities for promotions.
Feedback from the reviews will provide employees with directions and knowledge of the expected quality of outcomes during the audit process and future audits. Additionally, Juniors may actively seek out education and training to overcome personal limitations to achieve the aforementioned incentives. 3. 4 Personnel controls 3. 4. 1 Training and provision of resources Personal limitations due to lack of technical skills is one of the major problems facing junior auditors in relation to audit quality .
Accordingly, many auditors believe auditing firms are not providing sufficient training and resources in different areas of accounting . To overcome this problem, P&S will implement mandatory professional development pathways for auditors to attain their CA/CPA accreditation. Additionally, P&S will implement an Internal Education Program (PEP) that addresses auditing issues, alongside other accounting and management related training modules to expand the wealth of resources available. This is aligned with “Personnel Management” aspect of quality control outlined by the Public Company Accounting
Oversight Board (2012). This training program addresses the employees’ personal limitations whilst providing direction on how to attain desired audit quality through education. Training will be tightly controlled through the connection with an individual KIP to be discussed in Section 4. 1. 2. 4. Kips 4. 1 Financial 4. 1. 1 Organizational – legal expenses Litigation often occurs in cases of large audit failures. Whilst empirical studies of 25 years found average failure rates to be below 1% on an annual basis, the costs associated with litigation can be substantial (Francis, 2012, Gregory, 2012, Fitzgerald, 012).
As such, legal expenses and liabilities can serve as a P’s KIP for audit quality. Performance levels will be measured by the amount of legal expenses in the current year against a performance target, determined by a discounted historical average of legal expenses using an effective discount rate. Levels of performance will be assessed on whether the baseline legal expenses are breached, and on a normal distribution to determine how far the current year’s expenses deviates from the historical mean.
This KIP is relevant to results control, and will drive quality-seeking specially as research shows partners are particularly concerned with conserving company image . 4. 1. 2 Individual – individual training expenses To complement the training control identified in Section 3. 4. 1, an adequate training budget will be allocated to ensure those Juniors who meet the pre-requisites for CA/ CPA undertake those courses, and those without to undertake bridging courses and later obtain their CA/CPA qualifications.
The budget will also include an amount that can be expensed towards the Internal Education Program (PEP). Juniors will be allocated an individual training budget, which will determine their KIP. They will then be assessed on how much of their training budget is utilized in comparison to their KIP. This is relevant to action accountability, and can motivate behaviors toward gaining CA/CPA accreditation as well as other continuous professional development initiatives. 4. 2 Non-financial 4. 2. Organizational – growth in client base To assess P’s organizational performance against its differentiation strategy, the according KIP will be the percentage of growth in client base. The KIP will determined by benchmarking a combination of P&S’s own historical growth rates and other second-tier accounting firms in the industry-specialist field. This relative method of measurement is akin to the Station case study Growth in client base will be attributed to P’s quality of services and company image as conveyed by marketing efforts.
This KIP will be communicated from the executive level, as a tone at the top control. This will effectively steer organizational behavior towards a performance culture by motivating both the management team and Juniors to provide high quality audits exceeding the levels of the Big 4 and second-tier competitors. A similar approach was observed in a case study where non-financial Kips were utilized to achieve growth targets through strategic emphasis on quality . 4. 2. 2 Individual – rate of identification for material items A key outcome of high quality audit is the identification material risks.
As dictated by SAAB 1031 , omission of material items can adversely affect the financial decisions of the users of the financial statements. The KIP will be determined by the number of material items identified by the Internal Quality Review Committee as discussed in Section 3. 2. 1 . This will then be compared to the number f items identified by the Juniors and assigned a percentage. The percentage will then be normalized across P&S to assess whether the Juniors meet or exceed the expected audit quality.
This is relevant to result control and can motivate Juniors to reduce quality threatening behaviors, and take measures to address personal limitations to achieve the expected audit quality. 5. Evaluations 5. 1 Audit Management Information System (MA’S) The initial implementation of the AMISS will be costly, due to direct costs relating to training expenses as well as indirect costs of time taken for documentation and approval. Negative attitudes from Juniors may also arise due to the tightness of control and close scrutiny of their performance. However, these costs will decrease as auditors become more seasoned in the use of MA’S.
A further future benefit will be gained from the documented knowledge retained from the results of the approval process . Another potential cost is behavioral displacements arising from partners where they simply reverberates approvals in order to meet their own time budgets . Process through tight results control, where a reward or punishment is passed on to partners based on audit quality. 5. Action accountability and Redundancy – employee/partner involvement Involving Junior employees in planning of the audit allows Junior staff to gain a greater understanding of the audit process at a minimal cost to P&S.
Additionally, it allows them to work more efficiently and motivates them to complete tasks due their increased level of responsibility (Bikes et al. , 2010). The main limitation is the level of involvement that the employee may partake, as may not assert their opinions. Increasing senior management’s involvement in the audit process or granting additional support to the audit team will decrease the time instant imposed by the external budget, whilst at the same time provide a clear direction for the Juniors (Audit Committee Leadership Network, 2012).
However the involvement of seniors may create negative attitudes within Juniors due to the increased pressure to perform satisfactorily. Additionally, there is the likelihood of juniors retaining concerns to avoid possible punishments. The possible limitations caused by the involvement of Juniors and seniors will diminish over time as a level of trust is generated, thereby allowing for more open informal communications (Bikes et al. , 2010). 5. Audit review As the audit review utilities pre-existing knowledge of partners and supervisors, there will be limited direct costs.
However, it may increase time pressure for partners and the audit team partaking in the review (Coral et al. , 2003). In response, this can be offset by reviewing the time needed to complete future stages and attaining additional resources as required. Additionally, personal limitations will decrease over time as feedback is generated, thereby making this process more time-efficient. However if the feedback is negative, it may decrease motivational levels within the department. This can be counteracted by the use of Kips as a motivational tool for performance improvements.
A cost associated with a KIP based on material data gathered can lead to behavioral displacements caused by immaterial quality issues being neglected . Additionally the tightness of quantifiable measures can lead to indirect costs such as negative attitudes. However, the benefits of emphasizing the identification of material items outweigh the costs of forgoing smaller quality shortcomings. It can create monetary benefits such as generating new businesses and avoiding legal expenses. Recommended future solutions may involve lowering he quality targets to be more attainable. 5. Training and provision of resources The key benefit of training is that it improves audit quality by equipping auditors with the technical skills to deal with complicated issues . It can also lead to greater time efficiency as less time is spent correcting mistakes, and improvements in the speed of data collection. This creates cost savings as majority of auditing firm’s costs are associated with employees’ time of labor . Conversely, trainings incur direct, out-of- pocket expenses . It can also be time consuming and lead to indirect costs by teetering auditors away from their core duties .
Additionally, as training is linked to individual’s KIP defined in Section 4. 1. 2, the responsibility of a cost centre budget is passed back to individual employees. A potential cost is gamesmanship where juniors may create budgetary slacks in attempts to decrease training involvement, or choosing only high cost training modules that may not be relevant to their field of devote more time and resources to improve audit quality. Additionally, CA/CPA curriculums are relatively structured, and are less prone to employees’ manipulation.
As such, the benefits of responsibility delegation and training fulfillment will improve the overall quality of audits, and outweighing the potential costs. Recommended future action may involve tighter controls in the range of training modules available to employees where only modules relevant to their field may be chosen. 5. 5 Time budget Internal time budgets have been widely used by other accounting firms as a performance indicator of the audit . This has resulted in increased pressure on the audit team, who then partake in behavioral displacements . As such, P will not implement specific controls for internal time budgets.