Audit Agency: participants’ interactions

To properly support participants’ businesses, agencies need to have updated information on the financial and operational health of these businesses. Agencies also need to know whether businesses have implemented the necessary controls, checks, and balances necessary to reasonably avoid loss, harness information and the community’s economic infrastructure, and benefit from various professionals at hand to offer their services. The Audit Agency provides the necessary information through internal and automated audits and provides a platform through which audit professionals can work and collaborate.

Audit practice in the community

External auditing

Financial reports are one of the tools that community agencies and businesses rely upon to make decisions about other businesses. These financial reports may however be biased, contain material inaccuracies, and misrepresent facts. To check the reliability of reports, and their completeness, and therefore make well-informed decisions, it is necessary to audit these reports. External audits aim to give an unbiased opinion about reports.

In modern accounting and audit practice, businesses contract auditors to render opinions about their books of accounts on an annual basis. External auditors, besides giving an opinion on the completeness and accuracy of financial reports, may also recommend changes in operations and reporting to boost a business’s efficiency and reporting accuracy.

The one year that it takes to conduct an external audit may be ideal in some circumstances, but it may be too long in others to be effective. In other cases, the business deals in a highly volatile industry, and present significant risk. In all these incidents, the frequency of an audit is still one year. Part of the reason that audits are done annually is because of the extensive checks that have to be done, and the analysis of information, that it is practically very expensive to do them more frequently.

The community prioritizes the use of technological tools, especially artificial intelligence (AI), in auditing. AI helps auditors to be more effective in their work through automated data analysis, which can comb through extensive amounts of data in a short time, and therefore provide a more accurate picture than normal randomized analytical checks.

AI is also used to detect fraud and anomalies in financial reporting and operations. AI-based tools help in risk assessment, predictive analysis, and planning an effective audit. Continuous compliance monitoring may be a difficult and expensive task to undertake but can become an effortless undertaking through AI.

Even though AI is extensively applied in audits for businesses in the community, professional auditors are a key element in their effectiveness. Professional skepticism is a key element of professional auditing, and can only be exercised by auditors. Additionally, auditors can make complex interpretations from data that has already been synthesized by analytical tools. Unlike machines, auditors can interact personally with their clients, learning more that can significantly influence the quality of help they can offer.

Regulatory requirements, such as those from tax authorities, will most likely require professional auditors to perform audits, or at least supervise the automated AI-powered analysis. There are ethical considerations at play too, since professional auditors are subject to the professional rules governing their trade.

Unlike normal practice, external audits on businesses are conducted regularly, sometimes being done as frequently as monthly, if the business’s circumstances call for it. This helps in knowing the health of businesses all the time, and thereby engaging them with an informed view. In some instances, businesses that are in industries that are risk-prone will be audited more frequently.

Internal audit

Whereas external audits focus on financial reports, which are only prepared periodically, internal audits observe and monitor operations and processes. Operations and processes are performed every day of a business’s existence. It is therefore necessary to continually audit them to ensure they are working as envisaged. For this reason, an internal audit is a process, while an external audit is an event.

In the community, businesses are guided in their daily operations by business plans that are regularly updated to take into account environmental issues and the business’s circumstances. Business plans are used in internal audits to show how consistently a business is abiding by the plan, and what needs to be done to adapt the plan to the business’s current needs.

Community agencies and other businesses need to be assured that a business has strong enough internal controls that prevent fraud while allowing for the optimal utilization of resources. To this end, one of the internal audit’s key roles is to test the efficiency of internal controls and regularly help businesses to improve them.

Just like external audits, internal audits are also automated for the most part. Technology has allowed auditors to use automation not only in financial reporting, but also in auditing contracts, processes, innovation initiatives, and other non-financial elements of a business that significantly impact a business’s success. Audit tools are employed with the oversight of a professional auditor, for the sake of interpretation, professional skepticism, and to pick out areas where the technology can be improved further.

Audit professionals

Businesses in the community use the Audit Agency’s automated system, which is powered by AI and other technological tools to carry out frequent internal and external audits. The audit reports that the system generates help professional auditors in planning and deciding on the scope of their work during audits.

Businesses contract internal and external auditors to regularly examine audit reports that are generated by the agency’s system. These reports are crucial because rather than the traditional audit approach, where an auditor typically chooses a random sample to focus on and determine the overall picture, the system is theoretically able to analyze the entire financial report as its data set. This way, no item will be inadvertently left out.

Internal audit reports are also prepared through the system regularly. They will focus on how a business complies with its business and marketing plans, bylaws, and applicable laws, including tax obligations, risk exposure as a result of R&D, factoring services, and other significant undertakings. The role of the internal auditor will be to examine the report and based on the data analysed, render their opinion.

The automated system can identify anomalies through its analysis. However, it is unable to give a professional opinion, while in many cases, it may be unable to properly interpret findings, making human intervention important.

The Audit Agency will accredit audit professionals so that they can operate audit businesses in the community. Accreditation will follow training and assessments, where the auditor’s expertise and professional credentials will be examined. Regularly, as the agency may decide, auditors will undergo training to update their skills.

The agency will also create a platform through which auditors can collaborate with professional bodies, under whose auspices they will develop auditing principles and regulations that are unique to the community, given its different business environment.

Interactions with participants

The Audit Agency, audit professionals, and participants will extensively interact. The agency’s interaction with participants will mainly be through the automated system. In some circumstances, regulatory presidents, who also serve the IP and Legal agencies, may also interact with participants where the automated system is unable to help. Some of these instances are illustrated here:

Illustration 1: Auditing a business

Jeff recently joined the community, after having successfully run a machinery-operator business that started when he began the process of joining the community. Once he joined, he prepared a business plan with assistance from the Business Planning Agency. This plan was approved, after which he was able to receive assistance in equipment and factoring from the Business Operations Agency.

Jeff then prepared a marketing strategy, operating guidelines, and financial management policies. The Audit Agency got in touch with him through the regulatory president who serves him. The regulatory president discussed his business needs briefly, and advised him to engage an internal audit professional for more help. From a list of accredited internal auditors, Jeff picks one, based on what he feels is the auditor’s special experience in the industry Jeff operates in.

Internal audit

Jeff sat down with the internal auditor. They discussed the various processes that Jeff performed in the operation of his business. On a near-daily basis, various tasks are performed, such as fertigation, periodic pesticide application, irrigation regulation, temperature within the rose plants’ greenhouse, as well as periodic soil-health examinations. Once the rose flowers are ready, they are cut, and packed in a packhouse, before being shipped to customers.

On the business end, Jeff undertakes various marketing efforts to get the product to the market, including adverts, engaging with other farmers to boost rose flowers’ popularity, and engaging with retailers to have the product on their shelves. Once he makes a sale, mostly on credit terms, he sends an invoice, which is then factored in by the Business Operations Agency. With the funds, he can invest more in automation, so that he relies less on manual labor, is more effective in production and looking after plants, and has the opportunity to innovate in systems that can make his work easier.

The internal audit contractor uses the automated to understand more about the internal controls as well as streamlining of operations that Jeff can put in place to boost efficiency and prevent losses. He comes up with a few of these, aimed at production–efficiency in fertigation by preparing schedules and ensuring they are followed, and assigning a contractor the task, irrigation schedules accompanied by regular humidity and soil moisture content checks, to optimize both water usage and plant water needs, and regular, well-defined visits by an agronomist to examine the health of plants and any areas that may need intervention.

These and other internal controls are documented and help the automated system draw an internal audit plan, determine the frequency of audits, and involve Jeff more in the process by interacting with the system. Regularly, the internal audit professional engages Jeff and the system and provides updates to the internal controls that have been discussed.

External audit

Jeff prepares financial statements with assistance from the Accounting Agency’s automated system as well as a professional accounting contractor. The financial statements are produced regularly, before being consolidated at the end of the year, and help community agencies to determine the sort of assistance he needs to thrive in his business. The financial statements also enable Jeff in financial planning, and in establishing the tax and related obligations that he needs to pay.

For the financial statements to be usable, however, they need the opinion of a professional auditor. With the help of the regulatory president, Jeff again looks for an external auditor. The external auditor will help set up reporting guidelines that financial reporting has to follow. The auditor will also advise on the frequency of external audits, which will be greatly helped by the Audit Agency’s automated system.

Besides financial audits, the customers that Jeff has engaged need regular farm audits to see how Jeff is running his farm, including how he operates with other contractors who work with him, the type of chemicals he applies, and the frequency of application, and whether he implements the best practice in farming as he produces the roses.

Jeff contracts an external auditor to audit his financial records monthly, advising on checks and balances, the health of his business, and any areas in need of attention. Every year, Jeff also contracts another auditor who specializes in farm audits, and whose report helps Jeff gain certification as one of the best farmers in the community in various respects.

Both auditors extensively use the reports that the automated system provides after analyzing huge amounts of data on Jeff’s business, including the health of the business, his operations, relationships with contractors and clients, and services from community agencies. Jeff participates closely in the exercise, by imputing information, as well as providing access to the auditors and the system so that it can make sound analysis.

Illustration 2: Audit professional

Martin is a certified public account (CPA), who is also registered by the Public Company Accounting Oversight Board. Before he joined the community, Martin practiced as an auditor for several years. He joined the community after securing a client who was a participant, who introduced him to the workings of the community and suggested that he should join.

Training and accreditation

As part of the process of joining the community, where he was required to have a successful business, Martin underwent rigorous training on audit practice in the community, which is markedly different from normal audit practice. For instance, businesses in the community do not own any physical assets. They also do not own account receivables, meaning that some normal audit checks will not be applicable.

After training, Martin is invited to fill out and submit a self-review, which helps the Audit Agency to vet Martin based on his experience, qualifications, and areas of expertise. The tool also examines Martin’s adherence to ethics and professionalism, establishing whether he has ever been banned or penalized for unethical conduct.

The Audit Agency constitutes a panel of audit professionals who work in the community to vet Martin, after which, if successful, he is registered to work in that community. The registration is also shared with other communities, so that in the event Martin moves, or secures a client in another community, the process will not be repeated.

Besides training, Martin is provided with avenues through which he can learn more about the automated system that he will rely on for most of his data analysis, as well as testing controls, and auditing processes. He is also required to be well acquainted with the technological tools that the system uses and engage in further professional development to boost the quality of services that he offers his clients.

Audit practice

Martin is put on a list of internal and external auditors that businesses can contract for their audits and related consultancy services. Each entry includes important details including Martin’s professional experience, his areas of specialization, academic credentials, his rates, and reviews from clients. Participants consult the list as they contract an auditor.

Once Martin enters into an agreement with a client, he first assesses them to understand how much they understand about audit practice, as well as their business’s processes and reporting. He also obtains information about a business from the participant and community agencies’ automated systems. He uses the Audit Agency’s automated system to synthesize information and to establish audit plans and systems that allow future internal and external audits to be easy.

As a business, Martin is open to enter into agreements with several businesses. His ability to do so depends on how well he is able to utilize the automated system for his needs. It also depends on the quality of his services, which will attract more clients, and enable him to increase his rates, even in the face of competition.