Discuss about the Audit Assurance for Practice & Theory.
Analytical procedures are the activity which enables the auditor to ascertain evidence for conducting audit activities for an organization. These are the methods which provide the knowledge about the authenticity of the transaction undertaken by the organization to carry on its activities. It is helpful in determining that the transactions are genuine and or undertaken for conducting the activities of the business organization. In order to prepare plan and to ascertain the direction in which the audit activity is to be conducted auditor performs different methods in a comprehensive manner to check the transaction which are not related to the company, check whether there is any fluctuation in the past years by the company (Christensen, et. al., 2012).
These analytical procedures work as an evidence to perform planning. This helps the auditor in taking decision about the activities which are to be deeply checked and which are taken as less concern. On the basis of results on analytical procedures of auditor get the knowledge about the strength of the internal control procedure of the company. It's on the basis of this activity it is ascertained that internal the auditor can plan the audit according to the results obtained. If if auditor comes into knowledge that internal control procedures are weak and the areas which are need to be checked in detail then the auditor specially studies the item in detail.
Analytical procedure a very important in conducting Audit and preparing report by the auditor in order to provide true and fair view of the financial statement can be given. Conducting the test on the transactions helps the auditor in determining the fraud and error conducted by the company or misstatements in the financial statements (Brown-Liburd, et. al., 2015).
In the present case company is paying ebook storage fees which have been substantially increased from 2013 to 2015. To check the viability of the fees paid the auditor should check the past records and the change in Trend of the company. Bad debts have been increased from the past years so the auditor should check the increase in number of debtors and the reason for the nonpayment of the due amount. Why the company has not been able to collect the amount from the debtors in past years which has led to the increase in provision for bad and doubtful debts of the company.
In order to check the cash availability of the company it is necessary to check the actual balance with the cashier and teller with the cash statement and bank statement. It is also necessary to check the minimum balance the cashier should possess and the areas where he is using and applying the cash. It is also very necessary to check the actual balance of stock with the company. Actual verification should be undertaken for the stock in the warehouse where the stock is kept and matching it with the actual balance in books of accounts.
It is also important to check the payment made to employee so that and you payment should not be made to them which are outside the company's policy. Women should be made on the actual receipt received from the employees for the payment made by them. Auditor should check the basis on which the payment is made to them to check the strength of the internal control system of the company.
All these methods provide us the result for the analytical procedure applied on the audit process. These results help the auditor to plan the audit and areas which are to be taken major concern by him. On the basis of plan made and the audit activity conducted the auditor prepares the report which shows the true and fair view of the financial statement (Budescu, et. al., 2012).
Auditor has to face many inherent risks while conducting audit for any organization. Inherent risk are the risk which hard to detect by the auditor as these risk are dependent on the structure of the company and are hard to be avoided. If the internal control system of the organization is strong the inherent risk will be less and vice versa. Two types of inherent risk in DIPL which act as inherent risk are:
- Segregation of duties: This is the act where the activities are distributed to different employees so that a single activity is not handled by a single person. This reduces the chances of conducting fraud by one person as the activity is divided between different person so one person do not have all the authority to handle transaction. In the present case the company is not segregating their duty which creates inherent risk for the auditor as he has to judge this risk and the error which can be made while recording transaction.
- Misstatement: This can happen in any type of organization whether big or small. Any person conducting accounting activity can create error while recording transaction whether intentionally or not intentionally. So this becomes inherent risk for the organization and for the auditor as well. To overcome with this error auditor should check the capability of the person appointed for recording and conducting accounting activity. This will help the auditor in ascertaining the degree of error which can occur in the books of accounts and financial statements.
The above inherent risk affects the opinion of auditor as the auditor is totally based on the results of the audit activity conducted by him. This will also affect the true and fair view of the financial statement of the company.
DIPL is a firm conducting printing activity. The form takes orders through online basis so it is very important to check the actual delivery with the orders received and should also perform manual activity in recording all these transactions up on orders being delivered. This will help the form to match the orders received the delivery is made. This will also lessen the chances of fraud in the organization. This also affects the reporting of financial statements by the firm. The Other important issue with the firm face is the recording of inventory as the inventory is ordered from different countries Australia as well as some other Asian countries. So it is very important to record the transaction as per the currency required. Conversion of currency should be properly made and the auditor should check the chances of fraud committed by the organization in converting the value of stock to the home currency (Hammersley, et. al., 2011).
All the above errors affect the opinion of the auditor and the audit activity conducted by him. Auditor views are based on the results obtained by the audit procedure and if fraud and error is present in the financial statement it will be difficult for the auditor to provide true and fair view on the financial statement. If this error is not detected by the auditor in due time it will affect the reporting of the auditor’s report and the opinion would not be true and fair for the stakeholders. So it is very necessary that the auditor should communicate with the person charged with governance and should correct the errors and fraud detected by him. Only when the auditor find that the financial statement are free from misstatement then only clean report can be prepared.
- Brown-Liburd, H., Issa, H., & Lombardi, D. (2015). Behavioral implications of Big Data's impact on audit judgment and decision making and future research directions. Accounting Horizons, 29(2), 451-468.
- Budescu, D. V., Peecher, M. E., & Solomon, I. (2012). The joint influence of the extent and nature of audit evidence, materiality thresholds, and misstatement type on achieved audit risk. Auditing: A Journal of Practice & Theory, 31(2), 19-41.
- Christensen, B. E., Glover, S. M., & Wood, D. A. (2012). Extreme estimation uncertainty in fair value estimates: Implications for audit assurance. Auditing: A Journal of Practice & Theory, 31(1), 127-146.
- Hammersley, J. S., Johnstone, K. M., & Kadous, K. (2011). How do audit seniors respond to heightened fraud risk?. Auditing: A Journal of Practice & Theory, 30(3), 81-101.