Auditing theory and practice Essay Example | Topics and Well Written Essays - 2500 words

Auditing theory and practice - Essay Example The company follows (assumption) international accounting standards (IAS) and international financial reporting system (IFRS) for accounting and presenting its financial statements. In addition, since the company operates in UK, all the relevant UK laws and regulations are applicable for its operations, financial statements development and reporting along with disclosure requirements. The company is facing stiff competition in the perfect competition market in which it operates. This has caused the company to reduce its selling price in order to remain competitive in the marketplace. This cost cutting has adversely affected the sales revenue growth rate and hence, the profitability. This is a prominent business risk that the company has been unable to satisfactorily deal with; as a result, the company has to bear a loss in 2005. In addition, another glaring risk is the ownership structure of the firm and demise of the majority shareholder Mr. Kale. This might lead to power struggle in the company which ultimately results in loss of productivity and negative politics. Together these five areas can be used to gather insightful information about the company’s internal control environment and its effectiveness in preventing, detecting or mitigating risks to the company. The control environment refers to the overall organisation structure and values system. The commitment of top management is mandatory, and control environment study provides assurance about top management’s philosophy and operating styles. These are reflected in company’s policies, strategies and operating procedures. The auditor should conduct detailed interviews with top management and should study the company documentation to gather information about the control environment of the company; as top management is ultimately responsible for implementing and operating the corporate governance structure for the company. Studying the control environment with a view to identify management’s