Auditing Challenges For Fair Value Measurements Essay.

Receivables

Question:

Discuss About The Auditing Challenge Fair Value Measurements?

Account – Receivable is the sum that is receivable by the organization with respect to provide the products and services. Consequently, the record related with the record receivable is the credit sales account. The ratio of account receivable is computed by measuring the net sales on credit for the normal receivable time.

Analysis – it has been investigated from the given contextual analysis that every one of the exercises related with receivables are performed by officials assigned for undertaking the receivables. For instance, the client may return any purchased product owing to any fault in the product, in the wake of taking note of down the reason of return and finish of documentation, the credit note for the client is raised by the trade receivable assistant. Further, the posting of journal and additionally receipts from the indebted individuals are passed on to him, who set up the bank store slip. Hence the associated risk is regarded as high (Knechel & Salterio, 2016)..

Risk related to audit – as every one of the exercises identified with the receivables are performed by the trade receivable assistant, there associated a risk that the receivable might be misused by the agent or the receivables may recorded at lesser sum.

Audit steps for risk minimization – to lessen the dangers related with debt claim of GPSA different exercises related with the receivables must be isolated among different representatives

Accounts – the venture will be changed over to money with the time of 3 months to a year. It is accounted for as the current asset and regarded as money or money reciprocals. Associated account with the current investment is the current investment.

Analysis – speculations are exposed to various accounting framework under various accounting approaches and the treatment will likewise be unique, consequently, risk related with current investment is regarded at medium level.

Audit hazard – the inalienable review chance that might be related with the present speculation is that the venture is made without considering the hazard and return factor (Louwers et al., 2015).

Audit steps for risk minimization – the arrival from the venture must be checked on routine basis. Further, the past development patterns of the speculation might be assessed before making the investment.

Accounts – the involved account with the property assets are the depreciation account and the account of fixed asset

Current Investments

Analysis – if the assets related to property are not appropriately recorded or the depreciation is not accounted for accurately, it will have incredible effect on the annual financial statement. In this way the risk related with the property resource is high (Jett et al., 2014).

Risk related to audit – the reviewer may not separate the benefits that were being used for over 180 days and under 180 days amid the year if the property assets were not recorded appropriately.

Audit steps for risk minimization – the asset record should be examined appropriately to check the sale and buy of the property resources. Further, the impairment, deletions and additions shall be checked appropriately.

Accounts – specifically, the accounts associated with the intangible assets are the patent, goodwill or any rights.

Analysis – the intangible assets shall be evaluated to understand the recognition method and the value. Further, the evaluation shall also be carried out to find out whether the intangible asset has indefinite life or some specific period of life. Thus the associated risk with the intangible asset is considered as high.

Risk related to audit – as the intangible assets do not have any physical existence the fair value and useful life determination of the intangible assets is considered as a complex task. Thus the associated risk with intangible asset is considered as high (Görener, 2017).

Audit steps for risk minimization – fair value of the intangible assets must be analysed by the experts related to accounts. Moreover, process for analysing and measuring the fair value shall be controlled properly.

Accounts – it is found that the research carried out by GPSA was not considered as successful and therefore, the expenditure related to the research and development will be debited under the profit and loss account. However, it was further found that the development was considered as successful and therefore shall be capitalized.

Analysis – there is very less difference among the determination of expenses related to development and research as unsuccessful and successful. Further, as the expenses associated with the research and developments are high the risk association will also be considered as high.

Risk related to audit – the research and development expense is exposed to the inherent risk of segregating the expenses as unsuccessful or successful. Further, it is also found that there is risk related to determination of exact amount spend for research and development (Martin, Sanders & Scalan, 2014).

Property Assets

Audit steps for risk minimization – all the records of the research and development expenses shall be analysed properly and periodically. Moreover, before considering the research as unsuccessful or successful, the management shall carry out proper market research.

Return on equity – the shareholder’s profitability with regard to the equity are in risk as the return on equity ratio of the company indicates that the company’s efficiency in generating income from shareholder’s investment is decreasing. It is evidential from the fact that the return on equity ratio is in decreasing trend and fell to 7.19% from 22.17%.

Return on the total asset – this ratio is stating that the company’s ability to EBIT is decreasing as the ratio fell to 4.86% during 2017 from 15.51% during 2015. It exposes the company with the profitability risk.

Net profit margin ratio - this ratio is stating that the company’s ability to EBIT is decreasing as the ratio fell to 10.38% during 2017 from 17.85% during 2015. It exposes the company with the profitability risk.

Interest earned times – this ratio is indicating that the company is not efficient in saving sufficient amount to earn income from interest. It is evidential from the fact that the return on equity ratio is in decreasing trend and fell to 7.19% from 22.17%

Account receivable days – the company is exposed to the bad-debt risk as the account receivable time increased to 83.07 days from 53.24 days.

Current ratio – the increasing current ratio to 1.80 indicates that the company is inefficient in utilising the working capital

Debt to equity ratio – the company is exposed to the risk related to investor and creditor’s payment as maximum amount of the company will go for interest payment. This is evidential from the fact that the company’s leverage ratio is as high as greater than 1.

Trade receivable – at the end of each of the month, the receivables are reviewed and reconciled with debtor’s control information.

Doubtful debts - While setting up the subsequent arrangement for the balance considering the doubtful debts, in the examples where the adjust is over as far as possible, the shipment of further products to that specific client is withheld if a base recommended sum is not gotten.

Password security - While the updated IT framework was getting introduced, the monetary controller, the administration and the director of sales were effectively included to evaluate the accomplishment of the framework. Further, the application programs were entirely secured with secret password for accessing the programs

Intangible Assets

Bonus payment - The payment of bonus to the administration staffs are explored by the investors of the organization and at whatever point there is any change with the month to month spending plan, the individual dependable is solicited to clarify the reason from fluctuation

Allowance of rebate - Discount permitted to the esteemed clients is approved by director of sales before renewing the suitable rebates to the clients.

Analysis of ageing - Aged investigation for receivables is set up by the PC toward the finish of every month, thinking about every one of the solicitations that are handled into the framework. The matured investigation is additionally examined by the budgetary controller and the receivables due for over 90 days are isolated and the exchange receivable representative is made a request to express the explanation for the postponement in instalment

Engagement of single individual for various tasks – All the tasks related with receivables is performed by the exchange receivable assistant as it were. For instance, the client may return any purchased product owing to any fault in the product, in the wake of taking note of down the reason of return and finish of documentation, the credit note for the client is raised by the trade receivable assistant. Further, the posting of ledger and receipts from the indebted individuals are passed on to him, who set up the bank store slip. Playing out every one of the exercises by a similar individual opens to the danger of misrepresentation, blunder or misappropriation whether deliberately or unexpectedly.

Database access – Though strict secret key is connected to control the entrance on the projects identified with IT works, the entrance to the database is not watchword secured which thus will open the framework to unapproved access (Hay, 2015).

Manual conveyance notes – For despatching the tiles to the client's manual notes for the conveyance are raised that opens the framework to deliberate or inadvertent mistake with the conveyance sum. Further, the manual framework is helpless to extortion or misappropriation.

It is the procedure of the audit that analyse the system of internal control and its efficiency in preventing and detecting the client company’s material misstatement or error. As per the outcome, the auditor plans his audit and can set the level of reliance on the client’s internal control system. The test of the control are differentiated as below –

• Observation – for the purpose of observation, the process of business and the associated internal control are evaluated
• Re-performance – for re-performance, any new transaction is started for analysing the efficiency of internal control (Eilifsen et al., 2013).
• Inspection – the related documents like signature, stamps and authorization are checked to analyse the system of internal control.

• Bonus payment – under this, the observation approach shall be used
• Protection through password – inspection approach shall be used for password protection
• Discount allowance – for this purpose, the re-performance strategy shall be applied
• Trade receivables - for this purpose, the re-performance strategy shall be applied
• Aging analysis - for this purpose, the inspection and observation strategy shall be applied
• Doubtful debts - for this purpose, the re-performance strategy shall be applied

• As the clerk of trade receivable is solely answerable for all the activities connected with the trade receivables, there may be risks of intentional or unintentional misstatement, fraud or error (Cannon & Bedard, 2016).
• The bank receipts are reconciled with the trade receivables at the closing of every month. However, for a crucial item like receivable, the reconciliation process shall be carried out more frequently.

• As the journals related to sales are prepared on monthly basis, it exposes the risk that the documents may be misstated or misplaces (Barton & Bruder, 2014). 
• As bonuses are paid on the basis of sales volume, this exposes the risk that fictitiously the sales will be shown at enhanced value
• For selling the tiles, the company issues manual notes of delivery. However, the manual notes are exposed to the risks of misstatement fraud or error.

Reference

Barton, H., & Bruder, N. (2014). A guide to local environmental auditing. Routledge.

Cannon, N. H., & Bedard, J. C. (2016). Auditing challenging fair value measurements: Evidence from the field. The Accounting Review, 92(4), 81-114.

Eilifsen, A., Messier, W. F., Glover, S. M., & Prawitt, D. F. (2013). Auditing and assurance services. McGraw-Hill.

Görener, A. (2017). Risk Based Internal Audit. In Risk Management, Strategic Thinking and Leadership in the Financial Services Industry (pp. 261-275). Springer International Publishing.

Hay, D. (2015). The frontiers of auditing research. Meditari Accountancy Research, 23(2), 158-174

Jett, J. R., Peek, L. J., Fredericks, L., Jewell, W., Pingleton, W. W., & Robertson, J. F. (2014). Audit of the autoantibody test, EarlyCDT®-lung, in 1600 patients: an evaluation of its performance in routine clinical practice. Lung cancer, 83(1), 51-55.

Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.

Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing & assurance services. McGraw-Hill Education.

Martin, K., Sanders, E., & Scalan, G. (2014). The potential impact of COSO internal control integrated framework revision on internal audit structured SOX work programs. Research in Accounting Regulation, 26(1), 110-117.