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Situations that Require Auditor's Attention

In the business organizations, the occurrence of certain incidents, events and conditions require the work of an audit expert to get to a proper solution. In this context, the International Auditing and Assurance Standards Board (IAASB) offers great assistance to the business organizations by providing the description of these situations or events or incidents that need the help of audit expert. More specifically, IAASB provides the auditors with the indication of the matters that the auditors are required to take into consideration at the time of audit planning (Arens, Elder & Mark, 2012). Thus, it is essential for the auditors to make full use of the obtained information about the companies at the time of sing the audit operations. Most importantly, the auditors are required to possess three major characteristics for doing the audit operations; they are Objective, Capable and Competent. The following discussion shows certain situations that require the work of an audit expert:

Before the process of the audit planning, it is essential for the company assessor to determine the requirement of an audit expert along with the specialized expertise. It is required to obtain the required audit evidences for the smooth going of audit operations. After that, it is required to have the expertise of the auditors for the assessment of the matters related to the taxation issue along with the compliance issues. After that, the viewpoint of the audit experts is essential for the valuation of the assets and liabilities of the companies like fixed assets, creditors and others. In addition, the presence of the auditors is required for assessing the liability of the companies related to various contracts of insurance and benefits of the employees (William Jr, Glover & Prawitt 2016). These common issues can be found in almost every organization.

Issues

Required Revision for Audit

Depreciation on the Fixed Assets

The provided information about DIPL indicates the adoption of straight-line method for depreciation. It implies that DIPL has complied with the techniques of straight-line method in order to charge depreciation on their fixed assets. In addition, it is also essential for the company to properly reckon the impairment value of the assets. Thus, it indicates the necessity  to obtain the service of an audit expert for the proper calculation of depreciation on the fixed assets along with the impairment loss or gain on those assets (Arens, Elder & Mark, 2012).   

Purchase of Inventory Obsolescence and Inventory

The detailed analysis of the information of DIPL indicates the inclusion of the previous year’s inventory in the current year’s inventory and the objective of this action is to cover the expected decline in the value of inventory along with the shortage for inventory. For all these reasons, it is essential for the management of DIPL to obtain the service of an audit expert for the correct valuation of inventory obsolescence (William Jr, Glover & Prawitt 2016).  

The provided information of DIPL indicates the presence of five factors in the business operations that have the ability to affect the materiality of their financial statements. The following discussions show the description of these factors along with explanation and description of their influence on the materiality of the company.  

a. Factors

b. Explanation

c. Description

Fraud Risk: The case study of DIPL indicates towards the immense pressure on the employees from the side of management regarding the implementation of new accounting system. This aspect increases the chances of fraud risk in the company. It needs to be mentioned that fraud risk affect the overall materiality of the companies and DIPL is no exception (Eilifsen et al., 2013).

Most of the errors take place at the time of collecting and processing financial data while preparing the financial statements. This aspect raises the issue of irrational accounting projection that contributes to the misrepresentation of financial information. In addition, errors can also take place while doing the assets and liability valuation in the companies. Different fraud activities affect the overall materially of DIPL along with misstatements of financial information (Chandler, 2014).    

There is lack of coordination between the functions of IT department and the installation of new accounting system. In addition, immense pressure on the employees is there from the management of the company regarding the reconciliation, assessment and implementation of the new system. All these factors have major negative effects on the overall materiality of the financial statements of DIPL.     

Accounting Policies: It is clear from the information of DIPL that the company uses average cost method for the valuation of their raw materials and this method is not appropriate with the business operations of the company. Under the average cost method, the undervaluation of present cost of paper can be seen. This aspect has negative influence in the inventory valuation of the company that can affect the materiality of DIPL (Basu, 2016).  

Materiality is largely affected by the inherent risk factors of the companies. Inherent risk can be developed from the lack of integrity and honesty of the management of DIPL. This factor can lead to material misstatement of financial statements of DIPL that can provide the users with misleading financial information (Arens et al., 2016).   

It can be clearly seen that the inventory valuation process of DIPL under average cost method is not appropriate for the company. Thus, the overall materiality of DIPL can be affected with the inappropriate assumption in the inventory valuation mechanism. In addition, this total process affects the audit process of the company and thus, it is needed to use the work of an audit expert.   

Environmental Factors: The missing of several accounting transactions can be seen in DIPL at the time of recording them in the financial statements. This aspect contributes to inappropriate planning of the company’s selling and marketing activities. In addition, micro and macro environmental factors have not been considered for DIPL (Louwers et al., 2015). These aspects have a combined effect on the materiality of DIPL.   

As per earlier discussion, the growing pressure on the employees of DIPL from the management for the implementation of new accounting system increases the chances of fraud risk in the organization. These fraudulent activities have the ability to create negative effects on the overall materiality of the financial statements of DIPL.   

It can be observed that DIPL has adopted inappropriate methods for financial accounting. Two examples of this wrong financial accounting system are the omission of accounting transactions and the incapability of the management of DIPL to consider the effects of major macro and micro environmental factors. With the effect of this, the users of financial information of the companies will not get true and fair information. In addition, this aspect can affect the overall materiality of the company (Knechel & Salterio, 2016).

CEO Selection: As per the provided information, DIPL has a complicated process for the selection of CEO. Requisite schemes have not been followed at the time of the selection of the new CEO and the transition of the old CEO. Moreover, this total process has taken place after the due date. All these aspects together expose the employees of DIPL to numerous business risks (Houghton & Campbell, 2013). Thus, there is a possibility that the overall maternity of DIPL can be affected.    

The process of appointing the CEO of DIPL is a lengthy process. Hence, this selection process of DIPL jeopardize the overall transparency of various aspects of DIPL and because of this, the overall materiality of DIPL can be affected.     

The selection and transition process of CEOs in DIPL is an ineffective process and it is inaprooiate at the same time. This aspect leads to various risks for the company. This particular aspect has negative impact on the overall materiality of DIPL. In this situation, it is essential to have the viewpoint of an audit expert (Bell & Griffin, 2012). 

Cash Receipts and Expenses: From the case study of DIPL, it can be observed that the company uses electronic system for accepting a large portion of their expenses. With the help of this, the accountants are able to download the receipts from the mails. For all these reasons, there is required to have consistency so that they it can be done on frequent basis. Apart from this, DIPL’s process of generating revenue from e-book marketing, republishing and others have major effects on the overall materiality of the company (Eccles, Krzus & Watson, 2012).

The case of DIPL indicates that the overall materiality of DIPL can be affected with improper bookkeeping process of their raw materials as the company has adopted inappropriate method of inventory valuation. In addition, the management’s inability to consider the major environmental factors also have impact on the materiality of DIPL.

The use of electronic system for payments can affect the process to maintain the accounting transactions and the presentation of reconciliation statements. All these aspects together can contribute towards the downfall of the accounting system of DIPL. In addition, it has negative impact on the true and fair presentation of the financial statements to the users of financial information (Arens et al., 2016). As a result of this, overall materiality of DIPL can be affected.   

References

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

Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2016). Auditing and assurance services. Pearson.

Basu, S. K. (2016). Auditing & Assurance. Pearson Education India.

Bell, T. B., & Griffin, J. B. (2012). Commentary on auditing high-uncertainty fair value estimates. Auditing: A Journal of Practice & Theory, 31(1), 147-155.

Chandler, R. (2014). Auditing and assurance. London School of Economics. London.

Eccles, R. G., Krzus, M. P., & Watson, L. A. (2012). Integrated reporting requires integrated assurance. Effective auditing for corporates: Key developments in practice and procedures, 161-178.

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

Houghton, K., & Campbell, T. (2013). Ethics and auditing (p. 354). ANU Press.

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.

Stuart, I. (2012). Auditing and assurance services: an applied approach. McGraw-Hill Higher Education.

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

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[Accessed 01 March 2024].

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