Get Instant Help From 5000+ Experts For
question

Writing: Get your essay and assignment written from scratch by PhD expert

Rewriting: Paraphrase or rewrite your friend's essay with similar meaning at reduced cost

Editing:Proofread your work by experts and improve grade at Lowest cost

And Improve Your Grades
myassignmenthelp.com
loader
Phone no. Missing!

Enter phone no. to receive critical updates and urgent messages !

Attach file

Error goes here

Files Missing!

Please upload all relevant files for quick & complete assistance.

Guaranteed Higher Grade!
Free Quote
wave

Threats to Audit Independence Identified

1. 

1. Threats

2. Safeguards

3. Objective Assessment

As per Paragraph 601.1 of APES 110, there is a potential to create a self-review threat to independence as MCA has been involved in providing accounting and bookkeeping services to Barry Muppet’s company, such as processing the journal entries, preparing financial report, and others (1).

As per Section 601.5 A1 of APES 110, a safeguard is to use the professionals for providing these services who are not the audit team members (1).

Audit independence cannot be achieved due to the provision of non-audit services.

As per Paragraph 510.10 A1 of APES 110, there is a possibility to create a self-interest, familiarity, or intimidation threat to independence because the MCA manager’s wife, an immediate family member, has a financial interest in Dubbo Data in the form of shares (1).

As per Paragraph 510.10 A4 of APES 110, the recommended safeguard is to have an appropriate reviewer for reviewing the work of the MCA manager (1).

It is not possible to achieve audit independence because the MCA manager’s objectivity will be impaired in some point considering his wife’s financial interest in the audit client.

According to Paragraph 510.2 of APES 110, a self-interest threat to independence might be created since Shane Lund, the auditor in charge, has an indirect financial interest in Pegg Limited by purchasing units in a managed investment fund where Pegg Limited was among its top 10 shareholdings (1).

The recommended safeguard to reduce this threat to independence is to ensure that the work of Shane Lund is reviewed by an appropriate reviewer. This threat will be eliminated if Shane Lund disposes of the financial interest (1). 

Due to the presence of a material financial interest, it is not possible for Shane Lund to achieve audit independence.

According to Paragraph 520.2 and 520.3 A2 of APES 110, a self-interests or intimidation threat might be created since MCA and MJP have started a new business which should be regarded as a joint venture where the audit firm has a significant financial interest in the client (1).

As per Paragraph 520.6 A2 of APES 110, the only safeguard available to reduce this threat to independence is to eliminate this business relationship with MJP if it wants to retain MJP as a client (1).

Audit independence cannot be achieved as MCA will fail to act objectively at some point.

2. 

1. Ratio

2. Account Balance

3. Assertion

Days in inventory ratio increased from prior year, and it is higher than budgeted and industry value. Since this ratio is substantially above those of industry average and prior year, it can indicate slow-moving or obsolete stock which should be written down (4). Therefore, it would be interesting to further assess this ratio in the planning stage.

The account balance that is most at risk for this ratio is inventory account. There is a likelihood that inventory might be overstated if it needs to be written down due to slow-moving or obsolete stock.

The assertion most at risk for the inventory account is accuracy, valuation and allocation. If there is no write down of inventory because of obsolete or slow-moving of stock, the risk is there that inventory might be valued inaccurately (2).

The debt to equity ratio is higher than the budgeted and prior year value, and it is also greater than the industry average. This high ratio creates the risk that Small Town Sweets will not be able to pay interests to the borrowers when they fall due. It also increase the risk that the company will not be able in paying the debt and thus, will violate the debt covenants (5). Therefore, it would be required to assess this ratio in audit planning stage.

The account balance that is most at risk is interest-bearing borrowings. There is a risk that this account might be understated to avoid violation of debt covenants (6).

The key assertions most at risk are completeness as some portions of the interest-bearing borrowings might have been omitted to maintain a low debt to equity ratio, and classification as this account might be wrongly classified to avoid breaching the loan covenants (3).

The admin expenses/sales ratio is in line with the budgeted figure, and it is lower than prior year and industry average. It represents a risk that these expenses might have been understated to ensure generating a net profit from the operations. Hence, it would be interesting to consider this ratio in audit planning stage.

The account balance most at risk is admin expenses account. If this expense in understated, there is a risk that they might not be stated in the income statement at the appropriate amounts.

The assertions most at risk are completeness and cut-off as this expense might be deferred to next period, and accuracy as this expense might not be stated at the appropriate amount (2).

1. Weakness

2. Justification

3. Business Risk

A range of manual processes for transferring information is a key weakness.

It is important to undertake a control risk assessment for this potential weakness because manual transfer of information can lead to the inaccurate information being sent due to human error. As a result, it is an indicator of a weak IT-related internal control in Body Physics Limited.

If the potential weakness is found to be weak, the main business risk to the company is the transfer of incorrect or wrong information because of an error in the manual processes.

Even in the presence of the IT general control procedures, some of the business users who administer the business processes like payroll, inventory and purchasing may not adhere to these control procedures (7). It is a key potential weakness to consider.

Since the business users who administer these key processes do not adhere to the IT control procedures, it is the indicator of a weak internal control system within the company. The detection or prevention of fraud may not be possible by this weak internal control. Hence, it is required to undertake a control risk assessment.

The business risk to the company due to this weakness is significant business and reputational damage, financial impacts and adverse regulatory actions.

No formal process is there in Body Physics Limited to periodically test the backup process for evaluating how effectively it could recover information. It is a major weakness to consider.

The absence of this key process indicates the ineffectiveness of the IT-related internal control of the company. Such control may not be able to detect or prevent fraud (8). Hence, it is needed to undertake a control risk assessment.

Failure in backing up the data effectively could lead to the adverse commercial outcomes. It could lead to financial loss, loss of customer, reputational damage and adverse regulatory outcomes.

  1. In order to maintain normal operations, effective and well-planned back-up and recovery strategies should be put in place in Body Physics Limited. This particular control should function through different backup and recovery options, such as on-premise systems, cloud-based services, or hybrid solutions (9).
  2. The company needs to ensure that every business user strictly adhere to the IT general control procedures implemented by the IT Division. It requires establishing an appropriate control environment by providing the staff and users with adequate training on compliance.
  3. Since the company uses various manual processes to transfer, download and storing data, the data centres must be protected from unauthorized access and unplanned environmental events. It requires controlling the access to the data centres by biometric access technologies, keypad access, or passwords.
  1. As per the provided information, in the past 9 months, there has been a 25% decline in the volume of orders from South Korean customers because of the COVID-19 pandemic. It creates the pressure on the senior management of Mayfield to maintain the expected level of sales. Moreover, an increase in Chinese competitors who have undercut their price by 25% puts more stress on Mayfield’s ability to generate a profit. Therefore, these pressure situations might work as an incentive for the management to overstate sales revenue so that the expected level of profit can be achieved (10).
  2. The assertion that is most at risk for the sales revenue account is accuracy because of the possibility of overstatement in this account. It implies that the transactions related to sales revenue in Mayfield might not have been recorded appropriately, and the related disclosures might not have been measured and described appropriately (2).
  3. A sample of sales invoices would be selected and it would be verified with the supporting documents to ensure that Mayfield has accurately prepared them. After that, sales invoices would be traced to sales journal and accounting records to ensure that the company has recorded them in the correct amount.
  1. As per the provided information, the extended payment terms have been requested by two major customers of Mayfield because of the COVID-19 pandemic. It implies that these customers are experiencing difficulties in paying the amounts due to Mayfield. If these customers are facing difficulties, an increase risk is there that the amount due from them is not recoverable, and hence, account receivable is overvalued. In this context, the language difference is a key challenge which make it highly unlikely to use debtor confirmation to confirm the outstanding balances at year-end (11). Therefore, the possibility that accounts receivables is overstated cannot be ignored (2).
  2. The assertion related to accounts receivable most at risk is accuracy, valuation and allocation since this account might be overstated. It means that the amount of accounts receivables recorded in Mayfield’s account is mathematically incorrect and the balance does not reflect the actual economic value.
  3. It would be needed to review of aged trial balance and undertake the follow-up procedures for the amounts overdue from those two major customers, such as reviewing the subsequent receipts and discussing about the ability of those customers to pay. Furthermore, the present period’s accounts written off and the allowance for doubtful debts as percentage of accounts receivable and sales would be compared with the prior year’s percentage. This trend would be evaluated in view of the present economic condition and what is known about Mayfield and the industry it operates.

As per the provided scenario, around 25% of the year-end stock is expected to be held at the central warehouse of Amaroo Pty Limited and the rest of the year-end stock is spread evenly across seven retail outlets. The company will carry a full stocktake at all locations at the year-end. In order to test the existence and completeness assertions of inventory, it is important to consider the year-end stock at all seven retail outlets and the central warehouse. Therefore, the population should be the complete stock listing report which includes information about the stocks in each retail outlet and central warehouse.

In order to test the existence and completeness assertions at each location, the random sampling technique should be used as this sampling technique ensure that all items in the population have an equal chance of selection (12). The auditor should choose numbers from the table of random numbers by computers or should pick up the numbers randomly from a drum.

The completeness assertion should be paid more attention because of the high risk that the inventories are bought by the company by the purchases are not recorded into the inventory account. This could be because of unintentional error or intentional fraud and both leads to the understatement of inventory.

The first CAAT is the use of software for interrogating and examining the data file of the client. Hence, software can be used for performing various procedures to obtain the required audit evidence on different aspects (13).

The second CAAT is the software which the audit firms either purchase or develop to obtain the required data. For example, Active Data for Excel could be used by the firms as it includes the advanced data analytics capabilities to obtain the required audit evidence.  

Reference List

APES 110 Code of Ethics for Professional Accountants (including Independence Standards) [Internet]. Apesb.org.au. 2022 [cited 24 April 2022]. Available from:

https://apesb.org.au/uploads/home/02112018000152_APES_110_Restructured_Code_Nov_2018.pdf

Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement [Internet]. Auasb.gov.au. 2022 [cited 24 April 2022]. Available from: https://www.auasb.gov.au/admin/file/content102/c3/ASA315_03-20.pdf

Levy HB. Fighting Fraud—and Serving Famous Frankfurters—for Over a Century. CPA Journal. 2016;86:6-8.

Kaka EJ. Covid-19 and auditing. Journal of Applied Accounting and Taxation. 2021 Mar 31;6(1):1-0.

Alzoubi ES. Audit quality, debt financing, and earnings management: Evidence from Jordan. Journal of International Accounting, Auditing and Taxation. 2018 Mar 1;30:69-84.

Sharma R, Gupta S, Kumar D. Satyam Computer Scam–Pre and Post Diagnosis. International Journal of Marketing & Financial Management. 2016 Dec 16;4(9):53-68.

Han S, Rezaee Z, Xue L, Zhang JH. The association between information technology investments and audit risk. Journal of Information Systems. 2016;30(1):93-116.

Kewo CL, Afiah NN. Does quality of financial statement affected by internal control system and internal audit?. International Journal of Economics and Financial Issues. 2017;7(2):568-73.

Chudasama DM, Sharma LK, Sharma NS. A comparative study of information systems auditing in Indian context. facilities. 2019 Apr;1:7.

Zhitlukhina OG, Rakutko SY, Berezhnova EI, Selezneva EY, Belik EV, Shalaeva NI, Denisevich EI, Belik NV, Saenko ZE, Sultanova AA. Issues of Falsifying Financial Statements in Terms of Economic Security. International Journal of Environmental and Science Education. 2016;11(17):10163-76.

Edmonds M, Miller T, Savage A. Accounts receivable: An audit simulation. Journal of Accounting Education. 2019 Jun 1;47:75-92.

Auditing Standard ASA 530 Audit Sampling [Internet]. Auasb.gov.au. 2022 [cited 24 April 2022]. Available from: https://auasb.gov.au/media/ggwcjhpk/asa_530_12_21.pdf

Pedrosa I, Costa CJ, Aparicio M. Determinants adoption of computer-assisted auditing tools (CAATs). Cognition, Technology & Work. 2020 Aug;22(3):565-83.

Cite This Work

To export a reference to this article please select a referencing stye below:

My Assignment Help. (2022). Addressing Threats To Audit Independence And Testing Inventory Existence And Completeness Is Crucial In This Essay.. Retrieved from https://myassignmenthelp.com/free-samples/busn3002-auditing/risk-for-the-sales-revenue-account-file-A1E68B2.html.

"Addressing Threats To Audit Independence And Testing Inventory Existence And Completeness Is Crucial In This Essay.." My Assignment Help, 2022, https://myassignmenthelp.com/free-samples/busn3002-auditing/risk-for-the-sales-revenue-account-file-A1E68B2.html.

My Assignment Help (2022) Addressing Threats To Audit Independence And Testing Inventory Existence And Completeness Is Crucial In This Essay. [Online]. Available from: https://myassignmenthelp.com/free-samples/busn3002-auditing/risk-for-the-sales-revenue-account-file-A1E68B2.html
[Accessed 14 July 2024].

My Assignment Help. 'Addressing Threats To Audit Independence And Testing Inventory Existence And Completeness Is Crucial In This Essay.' (My Assignment Help, 2022) <https://myassignmenthelp.com/free-samples/busn3002-auditing/risk-for-the-sales-revenue-account-file-A1E68B2.html> accessed 14 July 2024.

My Assignment Help. Addressing Threats To Audit Independence And Testing Inventory Existence And Completeness Is Crucial In This Essay. [Internet]. My Assignment Help. 2022 [cited 14 July 2024]. Available from: https://myassignmenthelp.com/free-samples/busn3002-auditing/risk-for-the-sales-revenue-account-file-A1E68B2.html.

Get instant help from 5000+ experts for
question

Writing: Get your essay and assignment written from scratch by PhD expert

Rewriting: Paraphrase or rewrite your friend's essay with similar meaning at reduced cost

Editing: Proofread your work by experts and improve grade at Lowest cost

loader
250 words
Phone no. Missing!

Enter phone no. to receive critical updates and urgent messages !

Attach file

Error goes here

Files Missing!

Please upload all relevant files for quick & complete assistance.

Plagiarism checker
Verify originality of an essay
essay
Generate unique essays in a jiffy
Plagiarism checker
Cite sources with ease
support
Whatsapp
callback
sales
sales chat
Whatsapp
callback
sales chat
close