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Question 1:

As part of your planning process, you are considering whether you will need to use the services of an expert in the audit of Double Ink Printers Ltd (DIPL).

Required:

Based on the background information contained in the case, explain whether it will be necessary to use the work of an expert in the audit of DIPL. 

Question 2:

You are at the planning stage of the audit of Double Ink Printers Ltd (DIPL) for the year ended 30 June 2017 and have been asked by the audit manager to assists determine the materiality levels.

Required:

(a) Referring to the background information contained in the case, identify five factors that would influence your determination of the preliminary for overall materiality for the 2017 audit of DIPL.

(b) Explain why the factors identified in (a) above are relevant to your calculation of the preliminary figure for overall materiality. (5 marks). 

(c) Describe how the factors identified in (a) above will influence your preliminary for overall materiality in the audit planning process.

Auditing and its Importance in DIPL

1. Auditing refers to the process of inspecting various financial statements of the business organizations in order to ensure that the financial statements are free from any kind of material misstatements. The same aspect can be applied in case of Double Ink private Limited (DIPL). There are some areas in business that need the work of an expert in auditing process. They are the appraisal process of environmental liabilities; evaluation of various taxation as well as compliance issues; complex valuation of different kind types of assets of the companies as well as the liabilities under business combinations and many others. At the time of using the work of an expert, it is necessary for the business organizations to consider some of the major aspects. According to ISA 300, Planning an Audit of Financial Statements, the auditor should have major understandings about different aspects of auditing (accaglobal.com 2017). In this case, IAS 620, Using the Work of an Auditor’s Expert states the fact that the expert should have knowledge in the field of accounting as well as auditing. In this aspect, three of the major important factors are Competence, Capability and Objectivity. Competence refers to the level and nature of expertise of the audit expert. In order to take the help of an audit expert, the expert should have competence in stated disciplines (iaasb.org 2017). Capability refers to the expert’s ability to apply their competence in various audit situations. It implies that the expert should have the required resources for performing audit operations. Objectivity refers to the effects of various aspects like interest conflict, biasness or any others influence on the audit judgment. It is required for the experts to have these three factors in them.

The case study of DIPL reveals some facts that need the work of an expert in audit (Arens, Elder and Mark 2012). It can be observed that there are some inventories and inventory obsolesce in the stock from prior year in order to cover the anticipated decrease in value due to effects of storage vulnerability. In this area, there is a need for an expert in order to assess the value of inventory obsolesces. In addition, the observation of provided case of DIPL, it can be seen that depreciation is charged on the fixed asset based on straight-line basis. In this context, it is required to have an expert in order to measure the entire amount of depreciation along with asset impairment. For all these above stated reasons, it is necessary for DIPL to use the work of an expert in the audit process of the company. 

Factors Influencing Preliminary Figures for Overall Material Assessment

2. a) From the provided case study of DIPL, it can be observed that there are five major factors that would influence the determination of preliminary figure for overall material assessment. The following discussion shows the description of these five factors:

Risk of Fraud: Fraud risk is a major factors having major negative influence on overall materiality of DIPL’s financial aspects. According to the case study of DIPL, it can be observed that under extreme pressure from the board of DIPL, the employees of the company managed to implement the new IT system. In this case, there is a chance of fraud risk that can affect the materiality of the company (Arens, Elder and Mark 2012).

Accounting Policies: In case of DIPL, inappropriateness is there in the raw materials valuation by using average cost method. This method is inappropriate as there is increase in current cost of paper from the use of average cost mechanism. This particular aspect affects the overall materiality of the company (William Jr, Glover and Prawitt 2016).  

Environmental Facts: Many business transactions can be seen in DIPL that have not been considered at the time of the preparations of financial statements. This is done either by mistake or deliberately (Knechel and Salterio 2016). This aspect contributes to the inconsistent and ineffective planning, marketing and sales activities. In addition, DIPL also failed in the evaluation of the effects of macro and micro environmental factors on the business. This process affects the materiality calculation of DIPL.  

Selection Procedure of CEO: In DIPL, very complicated process can be seen regarding the appointment of CEO. The whole process of appointing the CEO and transition of the previous CEO has not been done by complying with required standards (Louwers et al. 2015). All these aspects together expose the company to different kinds of risks and thus, the materiality of DIPL can be affected.  

Novel Schemes of Cataloguing Accounts: The process to maintain cash receipts by the cashier of the company can affect the materiality of financial statements of DIPL. In this context, it needs to be mentioned that the reconciliation report is required to be prepared and presented on a more frequent basis (Plambeck, Taylor and Zhang 2012). In addition, the revenue generation of DIPL from e-book and textbooks can have adverse influence on the overall materiality of financial statements of DIPL 

b) Mistakes in the financial statements arrive at the time of collection or processing the acquired data from which preliminary financial statements are prepared. In addition, inappropriate accounting estimations are generated from misinterpretation of different financial factors. Apart from this, accounting mistakes can also be generated from ineffective implementation of various accounting aspects related to amount, accounting categorization, process of disclosure and many others (Usnick and Usnick 2013). However, the expertise of the auditors over the internal control of the companies helps in the elevation of the concern related to the threat of material misstatement.

Mistakes in Financial Statements

In this aspect, it needs to be mentioned that inherit risks have major negative effects on the overall materiality of the companies. In case of DIPL, it can be observed that the administration team of the company lacks integrity and objectivity. This particular aspect can affect the overall materiality of DIPL bye affecting the status of the company and mislead the users by providing wrong information. Apart from this, the fraudulent activities as a result of massive pressure on employees and the execution procedures of accounting system can potentially affect the financial information of DIPL. As a result, all these aspects can affect the materiality of financial statements of DIPL (Ye and Simunic 2013). 

In addition, the complex process of CEO appointment in DIPL can make the decision-makers unclear by affecting the organizational transparency. This is also a harmful factor for materiality of financial statements. On the other hand, the specific accounting process used for the estimation of raw materials can be considered as a relevant factor affecting the materiality of DIPL (Christensen, Glover and Wood 2013). This is because accounting processes help in the raw material analysis and provide the users with necessary relevant information. In this particular way, the ability of organizational managers of DIPL to integrate business environments with various business procedures can be considered as a major factor toasts the materiality of financial statements. All these aspects together reverse the financial outcomes of the companies.  

c) The following discussion shows how the identified factors influence preliminary figure for overall materiality in the audit planning process:

Risk of Fraud: At the time of the implementation of IT machine, the responsible manager of DIPL has not complied with the required procedures and standards. Apart from this, the board of DIPL put extreme pressure on the employees for the reconciliation and examination of novel system. In this way, it affects the materiality of DIPL (van der Werf, Verbeek and van der Aalst 2012).  

Accounting Policies: Adopted average cost procedure for inventory valuation is not appropriate for DIPL. For this reason, the unsuitable assumptions and mechanisms affects the overall accounting process of the company. All these aspects together can affect the overall materiality aspect of the financial statements of the company (Arens, Elder and Mark 2012). As a result of this, the auditors of the companies have to face severe problems while conducting the audit operations.

Environmental Facts: The inability of the management of DIPL to consider the effects of micro as well as macro environmental factors is a major cause for material misstatement. In addition, materiality of DIPL is also affected due to the omission of some major financial transactions. As a result of this, the users of financial information fails judge the actual financial condition of DIPL (William Jr, Glover and Prawitt 2016). All these factors together affect the audit planning process along with the audit assessment process. In this ways, all these aspects of environmental facts affect the overall materiality of the financial statements of DIPL.     

Selection Procedure of CEO: The process of appointing the CEO is considered as a complicated process and this process can affect the materiality of the financial statements of DIPL.

Novel Schemes of Cataloguing Accounts: Carry out of the expenditures with the help of electronic payment system has influence on the preparation and presentation of overall assertion of financial statements. In this context, the incapability of the company to record the receipts and reconcile statements raises the chance for the collapse of the accounting as well as administrative system. As a result of this, financial assessment fails to show the exact financial viewpoint. In this way, this aspect can affect the overall materiality of financial statements of DIPL (Arens, Elder and Mark 2012). 

References

Accaglobal.com. (2017). Using the work of an auditor’s expert. [online] Available at: https://www.accaglobal.com/content/dam/acca/global/PDF-students/2012s/sa_may11_cat8_fau_expert.pdf [Accessed 9 Dec. 2017].

Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated approach. Boston: Prentice Hall.

Christensen, B. E., Glover, S. M., and Wood, D. A. 2013. Extreme estimation uncertainty and audit assurance. Current Issues in Auditing, 7(1), P36-P42.

Condon, K., At&T Intellectual Property I, LP, 2012. Method and system of auditing databases for security compliance. U.S. Patent 8,095,962.

Iaasb.org. (2017). Revision of ISA 620 “Using the Work of an Expert” – Draft Outline. [online] Available at: https://www.iaasb.org/system/files/meetings/files/1838.pdf [Accessed 9 Dec. 2017].

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

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

Plambeck, E.L., Taylor, T.A. and Zhang, Q., 2012. Supplier evasion of a buyer’s audit: Implications for auditing and compliance with labor and environmental standards. Working Paper.

Usnick, L. and Usnick, R., 2013. Compliance program auditing: The growing need to insure that compliance programs themselves comply. Southern Law Journal, 23, p.311.

van der Werf, J., Verbeek, H. and van der Aalst, W., 2012. Context-aware compliance checking. Business Process Management, pp.98-113.

William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic approach. McGraw-Hill Education.

Ye, M. and Simunic, D.A., 2013. The economics of setting auditing standards. Contemporary Accounting Research, 30(3), pp.1191-1215.

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