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

The Need for an Audit Expert

Audit denotes the method of examining the different financial statements of business organisations for assuring that the financial statements do not contain any type of material misstatement. The identical aspect could be applied for Double Ink Private Limited (DIPL). Certain business areas require the services of an audit professional in the process of auditing. They include the analysis process related to environmental liabilities, analysis of taxation and compliance issues and critical valuation of various classes of assets and liabilities under business combinations. It is crucial for the business firms to take into account certain aspects for using te services of an expert.

In accordance with “ISA 300 Planning an audit of financial statements”, it is necessary for the auditor to have main understanding regarding the various auditing aspects (Badertscher et al. 2017). In this context, “IAS 620 Using the work of an audit expert” cites that it is necessary for the expert to possess knowledge in the accounting and auditing field. The three main factors include capability, competency and objectivity in this aspect. Competency denotes the nature and level of expertise of the audit professionals. For seeking assistance of the audit professionals, the professionals need to possess competency in stated disciplines (Baylis et al. 2017).

Capability denotes the ability of the professionals in applying their competencies in different auditing situations. This denotes that the professionals need to have the necessary resources in order to carry out audit operations. Objectivity, on the other hand, denotes the impact of certain aspects like conflict of interest and business or any other influence on the judgement of audit. Thus, the audit professionals need to possess these three factors in them.

According to the case study of DIPL, few facts have been revealed, which require the services of an expert in audit (Christensen, Glover and Wood 2013). It could be found that there are few inventories and obsolete inventories from the previous year for covering the estimated decrease in value due to the impact of vulnerability in storage. In this area, an expert is needed for assessing the valuation of obsolete inventory. Moreover, it could be observed from the provided case study, it could be found that the organisation applies the straight-line method of depreciation on fixed assets. This necessitates the need for an expert for gauging the overall depreciation amount coupled with impairment of asset. Due to all the above-depicted reasons, DIPL needs to utilise the services of an audit expert in the audit procedure of the organisation.

Answer to Part a:

Factors Affecting Materiality of Double Ink Private Limited

After evaluating the provided case of DIPL, it could be stated that five primary factors affect the ascertainment of preliminary figure for the entire assessment of materiality. These factors are identified as follows:

Fraud risk:

Fraud risk is a significant factor having considerable negative impact on the materiality of the financial aspects of DIPL. The provided case clearly states that despite huge pressure from the DIPL board, the staffs of the organisation have managed in implementing the new IT system. In this case, there might be fraud risk, which could have direct effect on the materiality of the business (Cohen and Simnett 2014).

Accounting policies:

For DIPL, inappropriateness is inherent in valuation of raw materials by utilising the method of average cost. Such method is inappropriate, since there would be rise in the present paper cost from the use of mechanism related to average cost. Such specific aspect has effect on the materiality of the organisation (Dedman, Kausar and Lennox 2014).

Environmental factors:

DIPL has a number of business transactions, which are not taken into account while preparing the financial statements. The mistake could be either deliberate or unintentional (Duncan and Whittington 2014). As a result, it contributes to ineffective and inconsistent planning, sales and marketing activities. Moreover, DIPL has not been able to dissect the impact of micro and macro-environmental factors on the organisation. This factor could influence the materiality computation of DIPL.

DIPL follows a complex process in selecting CEO for the organisation. The process of CEO appointment and transition of the last CEO is not conducted with adherence to the needed standards (Foster 2015). When these aspects are combined together, the organisation might be exposed to various types of risks, which could affect the overall materiality of DIPL.

Novel schemes of cataloguing accounts:

The method of maintaining cash receipts, which the cashier maintains, could influence the materiality of the financial statements of DIPL. In this regard, it is to be noted that the report of reconciliation is to be prepared and presented frequently (Gao 2017). Moreover, the revenue generation of DIPL from textbooks and e-book could have negative impact on the materiality of the financial statements of DIPL.

Answer to Part b:

The mistakes inherent in the financial statements could take place while collecting or processing the collected data from which the preparation of preliminary financial statements is made. Moreover, ineffective accounting estimations are generated due to misinterpretation of various financial factors. Besides this, the accounting mistakes could arise from unsuitable implementation of different accounting aspects pertaining to amount, accounting classification and method of disclosure (Glover, Prawitt and Messier 2016). However, the skills of the auditors over the internal control of the organisations enable in elevating the concern pertaining to the threat of material misstatement.

Impact of Factors on Preliminary Figure for Materiality

In this context, it could be stated that inherent risks could have significant negative impact on the materiality of the organisation. The major aspects, in which the administrative team of the organisation lacks, include objectivity and integrity.  Such specific aspect could have impact on the entire materiality of DIPL. This could influence the status of the organisation, which could mislead the users by providing incorrect information. Besides this, the fraudulent activities due to the excessive pressure on staffs and the execution process of the accounting system could have potential impact on the financial information of DIPL. All these aspects combined together could have influence on the materiality of financial statements of the organisation (Nalewaik and Mills 2016).

Moreover, the complex procedure of the selection of CEO in DIPL could confuse the decision-makers, which could influence the transparency of the organisation. This is a harmful factor associated with materiality of the financial reports. On the other hand, particular accounting procedure used to estimate raw materials could be adjudged as pertinent factor influencing the materiality of DIPL. Due to this reason, accounting processes enable in the analysis of raw materials for providing the users with relevant financial information. In this specific method, the capability of the managers of DIPL in integrating business environment with the different business procedures could be adjudged as a primary factor affecting the materiality of financial statements. When these aspects are combined together, the financial results of the organisation could be reversed. Hence, it is necessary to detect the factors in order to compute preliminary figure for overall materiality.

The below-stated discussion would reveal the way the identified factors affect preliminary figure for the entire materiality in the process of audit planning:

Fraud risk:

During the implementation of IT machine, the responsible manager of DIPL has not conformed to the needed standards and procedures. Besides this, the board of the organisation has exerted considerable pressure on the staffs in order to investigate and reconcile the novel system. Thus, the overall materiality of DIPL is affected in this way (Peters and Romi 2014).

Accounting policies:

The adopted process of average cost for valuation of inventory is not suitable for DIPL. Due to this reason, the inappropriate assumptions and mechanisms influence the overall process of accounting of the organisation. When these aspects are merged together, it could have impact on the materiality aspect of the financial reports of the organisation (Shah and Nair 2013). Due to this, the auditors of the organisation need to encounter various problems for carrying out the audit-related operations.

Conclusion

Environmental factors:

Another major reason behind the material misstatement in DIPL is the incapability of the management of the organisation in considering the impact of both micro and macro-environmental factors. Moreover, the materiality of the organisation is influenced because of the omission of few main financial transactions. Due to this reason, the users of financial information could not evaluate the actual financial condition of the organisation (Wilkinson and Coetzee 2015). Thus, these influential dynamics together influence the process of audit planning and the process of audit assessment. In this procedure, each aspect of environmental factors have influence on the materiality of the financial reports of DIPL.

Selection process of CEO:

Since the procedure of selecting the CEO of DIPL is complex, it could influence the materiality of the financial information of DIPL.

Novel schemes of cataloguing accounts:

When the expenses are carried out through the electronic system of payment, they could affect the presentation and preparation of the total assertion of financial reports. In this regard, the inability of the organisation in recording the receipts as well as reconciling the statements increases the likelihood for the accounting collapse and that of the system of administration. Due to this, the financial assessment could not depict the precise financial point of view in the context of the organisation. Thus, this factor could have direct impact on the entire materiality of the financial statements of DIPL (William Jr, Glover and Prawitt 2016).

From the above discussion, it could be said that there are few inventories and obsolete inventories from the previous year for covering the estimated decrease in value due to the impact of vulnerability in storage. In this area, an expert is needed for assessing the valuation of obsolete inventory. During the implementation of IT machine, the responsible manager of DIPL has not conformed to the needed standards and procedures. Besides this, the board of the organisation has exerted considerable pressure on the staffs in order to investigate and reconcile the novel system.

The major aspects, in which the administrative team of the organisation lacks, include objectivity and integrity.  Such specific aspect could have impact on the entire materiality of DIPL. This could influence the status of the organisation, which could mislead the users by providing incorrect information. Another major reason behind the material misstatement in DIPL is the incapability of the management of the organisation in considering the impact of both micro and macro-environmental factors. Besides these, the fraudulent activities due to the excessive pressure on staffs and the execution process of the accounting system could have potential impact on the financial information of DIPL. All these aspects combined together could have influence on the materiality of financial statements of the organisation.

References:

Badertscher, B.A., Kim, J., Kinney, W. and Owens, E.L., 2017. Audit Procedures and Financial Statement Quality: The Positive Effects of Negative Assurance.

Baylis, R.M., Burnap, P., Clatworthy, M.A., Gad, M.A. and Pong, C.K., 2017. Private lenders’ demand for audit. Journal of Accounting and Economics.

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

Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A Journal of Practice & Theory, 34(1), pp.59-74.

Dedman, E., Kausar, A. and Lennox, C., 2014. The demand for audit in private firms: recent large-sample evidence from the UK. European Accounting Review, 23(1), pp.1-23.

Duncan, B. and Whittington, M., 2014, September. Compliance with standards, assurance and audit: Does this equal security?. In Proceedings of the 7th International Conference on Security of Information and Networks (p. 77). ACM.

Foster, B.P., 2015. Impact of Non-Audit Assurance Level (Compilation versus Review) on Production Management of Private Manufacturing Companies. Academy of Accounting and Financial Studies Journal, 19(2), p.91.

Gao, J., 2017, August. An Investigation on the Engineering Process Oriented Approach to Aerospace Quality Assurance Compliance in Manufacturing SMEs. In Advances in Manufacturing Technology XXXI: Proceedings of the 15th International Conference on Manufacturing Research, Incorporating the 32nd National Conference on Manufacturing Research, September 5–7, 2017, University of Greenwich, UK(Vol. 6, p. 452). IOS Press.

Glover, S.M., Prawitt, D.F. and Messier, W.F., 2016. Auditing and Assurance Services: A Systematic Approach 10th.

Nalewaik, A. and Mills, A., 2016. Project Performance Review: Capturing the Value of Audit, Oversight, and Compliance for Project Success. CRC Press.

Peters, G.F. and Romi, A.M., 2014. The association between sustainability governance characteristics and the assurance of corporate sustainability reports. Auditing: A Journal of Practice & Theory, 34(1), pp.163-198.

Shah, M. and Nair, C.S. eds., 2013. External Quality Audit: Has it Improved Quality Assurance in Universities?. Elsevier.

Wilkinson, N. and Coetzee, P., 2015. Internal audit assurance or consulting services rendered on governance.

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

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