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Nature of Audit Planning

Describe about the Audit Planning for Business Implementation.

The Audit Planning is conducted at the beginning of the audit process so that the overall audit strategy could be implemented. It helps the auditor to ensure that appropriate attention is given in different areas; the problems are identified promptly and the work is appropriately coordinated. As per Para 9 of ASA 300, it is stated that the audit plan developed by the auditor should include the nature, timing and extent of assessment and audit procedure (Carson et al., 2016).  In the given cases, the main audit planning issues that should be addressed in the audit planning documents are identified and discussed below.

The City Ltd is a property developer that has currently many projects in progress. However, the company has failed to secure any buyers for the projects. In such a situation, the auditor should check the manner in which the work in progress is treated in the financial statement of the company. The properties are under construction so that they can be sold therefore the work in progress is in the nature of inventory (Steyn, 2013). The audit planning should include physical verification of properties under development so that the existence of such properties reflected in the financial statement can be identified. The issue of appropriate classification of inventory should be identified in the audit plan. The auditor should verify whether the properties that are scheduled to be completed after 12 months are classified as noncurrent inventories. The third issue that the audit planning must identify is the method of ascertaining the value of work in progress. The AASB 102 in Para 9 it is stated that the inventories can be measured at the lower of cost or net realizable value (Sin et al., 2015). The audit planning should provide appropriate procedure so that the method used for valuing the inventory could be identified. Based on the above discussion the three audit planning issues that need to be addressed in the audit planning documents are existence of the property under development, classification and valuation of property under development in the financial statement (Jones et al., 2012).

In the given case, Web Ltd has purchased new software that is useful for financial analysis and management reporting. The financial analysis and reports provided by the software acts as a basis for making important financial decisions. Therefore, it is important for an auditor to verify the authenticity of the report generated by the software. The audit-planning document should include procedure so that the auditor can obtain an understanding of the working of the software (Singh et al., 2014). This understanding can be obtained after the auditor runs a test check of the software and evaluates the result. If the result of the test suggests that the report and analysis generated by the software is correct then the auditor is not required to conduct further audit procedure in the same issue. The auditor in such a case can rely on the result of the software and the decision taken based on the result of the software. On the other hand, if the result of the test conducted by the auditor on the software is not satisfactory. Then the auditor should plan further audit procedure to find the reason for such mismatch in result (Karaibrahimoglu & Cangarli, 2015). The auditor is also required to review the decision that the management has made based on the report of the software. Based on the above discussion it can be said that the audit planning issues that should be included in the audit planning documents are testing of the correctness of software. In addition to this if, the software is not operating properly then further audit procedure for evaluating the decision made based on the result of the software.

Key Audit Planning Issues

In the given case, Beauty Pty Ltd is a manufacturer of skin and cosmetic products. The company established a retail outlet overseas for selling the products. The company has transferred inventory in overseas outlet so that the lead-time for delivering goods can be reduced and the inventory can be used as a sample for marketing (Alzeban and Sawan, 2016). The observation of inventory is an acceptable auditing procedure but in case of inventory that are overseas it is not possible. Therefore, in such a case the auditor should verify the quantity of closing inventory in various overseas outlets. In order to do so the company should develop a plan to check the records relating to goods transferred to the outlets, records sent by the outlets of goods sold or used as marketing material and the closing inventory as per the record sent by the out let. The above-mentioned documents should be reconciled to establish whether there are any discrepancies. If any discrepancies are found then the planning document for audit should include further audit procedures (Powell et al., 2013). The auditor should verify that the items of inventory that are used as sample for marketing is treated as advertisement expenses. Based on the above discussion it can be concluded that there are two issues that the auditor should address in its planning documents this are reconciliation of inventories overseas and accounting treatment of inventories used as marketing samples.

The ASA 330 “The Auditors Response to Assessed Risks” in Para 4 the meaning of the terms substantive audit procedure and test of control is provided. The audit procedures that are designed to detect material misstatement at the aeration level are known as substantive audit procedure.  The substantive audit procedures includes test of details and substantive analytical procedure. The audit procedures that are designed to evaluate the effectiveness of control in detecting, correcting and preventing material misstatement at the assertion level is known as test of control. In Para 6 of the ASA 330 it is stated that the auditor shall design and perform the audit procedures depending on the assessed risk of material misstatement at the assertion level (Cashin et al., 2015). The auditor shall perform test of control if the auditor’s assessment of material risk includes an expectation that the controls are operating effectively. In addition to this, it is believed by the auditor that the substantive audit procedure alone is not sufficient by the auditor to provide sufficient audit evidence at the assertion level. The auditor shall perform substantive audit procedures irrespective of the assessment of risk of material misstatement at the assertion level.

Audit Planning for City Ltd

Three types of risk inherent risk, control risk and detection risk have been identified in the given case. The risk that is inherent to the auditing procedure is known as inherent risk. There is a risk that the internal control system may not be sufficient to prevent or detect material misstatement and it is known as control risk. The risk that the substantive audit procedure adopted by the auditor may fail to detect the material misstatement and it is known as detection risk (Friedman, 2016). The audit procedures adopted by the auditor is dependent on the assessment of risk that are identified at the assertion level. As per Para 18 of ASA 330 it is stated that auditor is required to perform substantive audit procedure irrespective of the level of risk assessed for every material class of transaction, account balance and disclosure. The auditor performs the test of control if the auditor expects that the established control is sufficient for detecting, correcting or preventing material misstatement. 

In the given case, the auditor performed some substantive audit procedure and test of control for obtaining audit evidence related to disclosure and the existence of finance lease. The preliminary risk assessment procedure suggests that there is medium inherent risk, control risk and detection risk. As there is medium detection risk, so the auditor should perform more substantive audit procedures (Humphrey et al., 2013).

In the given case, the audit procedures adopted by the auditor for measuring and determining the completeness of depreciation expenses are test of control and minimum substantive audit procedure. In the assessment of risk, it can be seen that there is low inherent risk and control risk. However, the detection risk is high so it can be said that more substantive audit procedure should be adopted (Humphrey et al., 2014).

In the given case, significant test of control and minimum substantive audit procedure is performed for obtaining audit evidence relating to rights and obligations relating to vehicles. The risk assessment suggests that there is low inherent risk, medium control risk and    high detection risk. As detection risk is high so more extensive substantive, audit procedure should be performed. On the other hand, as the control risk is medium so less reliance should be placed in the test of internal control (Kumar & Mohan, 2016).

In the given case for audit of valuation of vehicles, complete reliance was placed on substantive procedure. The risk assessment procedure suggest that there is high control risk so the decision to not to adopt test of control is justified.

Audit Planning for Web Ltd

The audit procedures that should be adopted for verifying the depreciation expenses are:

  • The auditor should verify the opening balance of the fixed assets from the audited balance sheet of previous year;
  • The auditor should check the cash statement and bank statement to ascertain whether any assets have been purchased in the current year;
  • The auditor should verify the depreciation method used in the current year with the previous year;
  • The computation of depreciation should be checked;
  • It should be  verified that the depreciation is appropriately reflected in the financial statement;
3. The financial report or financial statement is the formal record of financial activity of an organization. In this report or statement, the financial information’s are presented in a structured manner (Abdullatif & Kawuq, 2015). The attributes or qualitative characteristic of financial report or statement are:

The financial information provided in the statement should be easily understandable by the users of the financial statement. The first quality of finical statement is understandability.

The financial statement should contain relevant information’s that are useful to the users of the financial statement. The second quality of financial report is relevant information.

The financial statement should not be misleading and must be free from material misstatement. The third quality is reliability of information provided.

The financial information provided in the statement should be comparable with the previous year’s financial information. The fourth quality of financial report is comparability of financial information’s.

Auditing is the independent examination of financial information of an entity to provide an opinion whether the financial information provides a true and fair view. The Para 3 of ASA 200 it is stated that the purpose of audit is to enhance the confidence of the users in the financial statement (Knechel, 2016). The management is responsible for preparing the financial statement and the auditor is responsible to check and verify the information provided. The auditor should perform audit procedures to ascertain that the financial statement is presented in accordance with the applicable accounting standard. Thus, audit ensures that financial information presented is understandable. The auditor is require to check the validity of the information presented in the financial statement (Carson et al., 2013). The auditing procedures are performed to check whether the financial information’s provided in the report are relevant and correct. The performance of test of detail by the auditor helps the users to ensure that the information provided is reliable. The accounting standard requires that the accounting policies adopted should be followed constantly and if there is any change in the accounting policy then it should be appropriately reflected in the financial statement. The auditor is therefore required to verify the comparability of financial information. The above discussion have shown that the auditing function will ensures that the qualitative characteristic of financial information is maintained. Therefore based on the above discussion it can be concluded that there is a positive relationship between auditing and accounting information.

Reference

Abdullatif, M., & Kawuq, S. (2015). The role of internal auditing in risk management: evidence from banks in Jordan. Journal of Economic and Administrative Sciences, 31(1), 30-50.

Alzeban, A. and Sawan, N., 2016. The Relationship between Adherence of Internal Audit with Standards and Audit Fees. Journal of Financial Reporting and Accounting, 14(1).

Carson, E., Australia, U. N. S. W., Simnett, R., Vanstraelen, A., & Trompeter, G. (2016). Assessing Initiatives to Improve the Quality of Group Audits Involving Other Auditors.

Carson, E., Simnett, R., & Vanstraelen, A. (2013, September). Auditing the auditors: An international analysis of the effectiveness of national inspection regimes on audit quality. In The University of Auckland Business School Seminar.

Cashin, A., Buckley, T., Donoghue, J., Heartfield, M., Bryce, J., Cox, D., ... & Dunn, S. V. (2015). Development of the nurse practitioner standards for practice Australia. Policy, Politics, & Nursing Practice, 1527154415584233.

Friedman, H. L. (2016). Capital market development and the (perceived) strength of auditing and reporting standards. Browser Download This Paper.

Humphrey, C., Loft, A., & Samsonova-Taddei, A. (2014). The rise of international standards on auditing. The Routledge Companion to Auditing, 161.

Humphrey, C., Samsonova, A., & Siddiqui, J. (2013). Auditing, Regulation and the Persistence of the Expectations Gap. The Routledge Companion to Accounting, Reporting and Regulation, 163.

Jones, K. L., Aier, J. K., Brandon, D. M., Carpenter, T. D., Caster, P., Lisic, L. L., & Pevzner, M. B. (2012). Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the PCAOB Rulemaking Docket Matter 029: PCAOB Release No. 2011-007, Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits: Participating Committee Members. Current Issues in Auditing, 6(1), C1-C6.

Karaibrahimoglu, Y. Z., & Cangarli, B. G. (2015). Do auditing and reporting standards affect firms’ ethical behaviours? The moderating role of national culture. Journal of Business Ethics, 1-21.

Knechel, W. R. (2016). Audit quality and regulation. International Journal of Auditing, 20(3), 215-223.

Kumar, E. P., & Mohan, B. (2016). Origin And Development of Auditing. PARIPEX-Indian Journal of Research, 4(9).

Powell, D. A., Erdozain, S., Dodd, C., Costa, R., Morley, K., & Chapman, B. J. (2013). Audits and inspections are never enough: a critique to enhance food safety. Food Control, 30(2), 686-691.

Sin, F. Y., Moroney, R., & Strydom, M. (2015). Principles?Based versus Rules?Based Auditing Standards: The Effect of the Transition from AS2 to AS5. International Journal of Auditing, 19(3), 282-294.

Singh, H., Woodliff, D., Sultana, N., & Newby, R. (2014). Additional evidence on the relationship between an internal audit function and external audit fees in Australia. International Journal of Auditing, 18(1), 27-39.

Steyn, B. (2013). The adequacy, use and compliance with internal auditing standards–South African perceptions in comparison with other specific regions. Southern African Journal of Accountability and Auditing Research, 15(43-52), 43-52.

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