The second business risk is the overstatement or understatement of the requirement of spare parts. Since spare parts arrive from distant places, proper assessment of the quantum of purchase is vital as it can result in disrupting the smooth flow of resources, thereby minimizing the quantum of purchased equipment (Heeler, 2009). Further, the company financials would depict a wrong figure due to such complication, thereby resulting in loss of competitive advantage in the market because the adequate quantum of equipment would not be prevalent to cater to customers’ needs. Besides, the amount of interest income that could have been gained in lieu of correct anticipation of demand of spare parts cannot happen.
For the first risk, the auditor must examine whether company equipment and spare parts are covered under insurance agreements because carrying of spare parts to customers’ places can lead towards theft or fraud. Besides, the auditor must also take the cost influence of such insurance into consideration. Further, the auditor must also observe whether the company to gain from insurance claims conducts unethical activities. Lastly, since mobile contractors go far areas, the auditor can himself travel to customers’ place to evaluate the cost, and compare the same with that of mobile contractors, thereby safeguarding company’s trust upon the auditor and falsification of facts (Heeler, 2009).
In relation to the second risk, the auditor must take corrective actions to identify whether the product’s sale price needs to be depicted as an expense in P/L account or whether must be minimized by expenses of the spare parts. Moreover, the auditor must also scrutinize the maintenance contracts in order to determine what parts can be shown as expenses and vice-versa (Cappelleto, 2010). This is because wrongly stating expenses of spare parts as revenue can enhance the company’s revenues, and vice-versa.
Cappelleto, G. 2010, Challenges Facing Accounting Education in Australia, AFAANZ, Melbourne
Gilbert, W. Joseph J & Terry J. E 2005, ‘The Use of Control Self-Assessment by Independent Auditors’, The CPA Journal, vol.3, pp. 66-92
Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting, Pearson Press
Holland, K. & Lane, J 2012, ‘Perceived auditor independence and audit firm fees’, Accounting and Business Research, vol. 42, no. 2, pp. pp.115-141.
Kaplan, S. & Williams, D 2013, ‘Do going concern audit reports protect auditors from litigation? A simultaneous equations approach’, The Accounting Review, vol. 88, no. 1, pp. 199-232.
Tepalagul, N. & Lin, L 2015, ‘Auditor Independence and Audit Quality A Literature Review’, Journal of Accounting, Auditing & Finance, vol. 30, no. 1, pp.101-121.
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