HI6026 Audit Assurance And Compliance

Introduction

Auditing nowadays is important for each and every company to certify its financial statement that it is free from any misstatements and discrepancies. For most of the companies it is mandatory by rules and for some it is optional but none the less they conduct an audit to show its stakeholders that the company has accountability and transparency (Zadek, Evans and Pruzan 2013).

This assignment has two questions dealing with two significant area of an audit process. The first question deals with ASA 620 which states when an audit can render the services of an expert and when the opinion of the expert can be regarded by the auditor as creditable. The second question deals with materiality of a transaction which is completely on the auditor to determine as per his judgement. As per this assignment, a case study is given of DIPL Company engaged in publishing, printing and advertisement work. The financial statement is also given with figures of last three years given. The purpose of this assignment is to analyze the role of auditor in determining whether an expert’s opinion is needed or not and also determine five transactions which are material and discuss why the transactions are material.

Answer 1

Audit is an independent process of investigation of books of accounts by an person who has with required qualifications in order to determine whether the books of accounts are showing true and fair view or not (Bymes et al. 2015). The person who conducts an audit is called an auditor. The main responsibility of an auditor is to ensure whether the financial statements show true and fair view or not (Haupt and Ismer, 2013). Many Companies have wrong conception that the main responsibility of an auditor is to detect fraud, but this is not the case. An auditor always prepares a plan about how he is going to conduct the audit step by step.

In the case study given, audit is to be conducted on Double Ink Printers Ltd (DIPL) for the year 2017. DIPL is engaged in printing of books, magazines and advertising material for publishing, educational and advertising industries. The audit procedures include vouching of income and expenses and verification of assets and liabilities. As an auditor of the company it is the responsibility of the auditor to confirm or deny if all information recorded are accurate and relevant. The auditor can check all the requirements which involve accounting and auditing procedures. But certain areas like valuation of fixed assets as given in the question cannot be valued by the auditor. This will require an expert’s opinion on which the auditor can rely on.

As per Auditing Standards (ASA) 620 Using the Work of an Expert, an auditor can use the work of an individual or an organisation  in a field of expertise other accounting or auditing, when the work is used to assist the auditor in obtaining sufficient appropriate audit evidences(Auasb.gov.au, 2017). For this purpose it is essential that definition of expert must be cleared, an expert is an individual or an organisation whose has knowledge and experience in a particular field other than accounting or auditing. This ASA describes the situations where an auditor can call in the work of an expert in order to obtain sufficient appropriate audit evidences.

In the given case study the auditor is skeptic about the values of fixed assets as given in the background and also in the financial records. As per the opinion of the auditor there may be overestimation scenario in the values of fixed asset. There has been significant increase in the value of stock as compared to 2016. It was around $8394750 in 2016 and by the end of 2017 it has almost become double $15572062. Thus valuation of fixed asset does not fall under the expertise of an auditor. In such a situation the auditor need to call an expert who can either confirm or deny his doubt about the value of fixed asset.

In a process where the auditor requires the opinion of an expert the auditor’s nature timing and extent of such procedures will differ (Kuenkaikaew and Vasarhelyi 2013). In such cases the auditor need to consider the following:

1. The nature of the matter to which expert’s work is related
2. The risks of material misstatement in the matters where expert opinion is needed
3. The significance of the report of the export and how will it affect the auditor’s report.
4. The auditors knowledge of previous expert’s report if there was any
5. Whether the experts follows the required quality standards which the auditor follows

The auditor of DIPL will appoint an expert who is competent in the valuation of fixed assets. The auditor will also assess whether the expert has necessary competence, capabilities and objectivity for the auditor’s purpose. The auditor will also make sure that the expert is independent in his approach by making an enquiry in his interest and confirm that he is not related with the company in any way. As per ASA 620 an auditor must have an understanding of the expert’s field which will enable the auditor:

1. To determine the objectives, nature and scope of expert’s work for the audit purpose.
2. To evaluate the adequacy of the work done by the expert. The evaluation process will include:
3. The auditor will check the reasonability and relevance of the findings of the expert and whether those findings are consistent with other audit evidences.
4. If the expert work uses assumptions and methods then the auditor needs to ensure the relevance and reasonableness of those assumptions and methods.
5. If the expert work requires source data then the auditor must check the relevance, completeness and accuracy of the source data.

Therefore as per the case study and the arguments presented in ASA 620, the auditor needs to call an expert for valuation of fixed assets and determining whether the value as depicted by the financial statement is showing appropriate and true figure or if there is any misstatement. The expert will then apply his skills and expertise and determine whether the data as shown in the financial statements show true and fair view or not and then the expert will submit his report to the auditor. The auditor has the option either to accept or rely on the report submitted by the expert if all the conditions as mentioned in ASA 620  is satisfied with regards to experts or the auditor can reject the report and rely on other corroborative audit evidences in order to form an opinion. ASA 620 also states that auditor need not need to attach report of the expert in auditor’s report unless it is a legal requirement for that particular company.

As per the professional standards, firms or auditors should develop policy or criteria on the basis of which materiality judgement can be taken without much deviation (Edgley,  Jones and Atkins 2015). In practice auditors must establish materiality judgement for clients with similar business circumstances. There are three major steps which auditor must take to establish a preliminary judgement about materiality. These are mentioned below:

1. The auditor must establish a preliminary judgement by choosing a base which is multiplied by curtained percentage factors (Clikeman and Diaz 2014). The results which will appear will be the basis on which judgement on materiality must be made. The factor percentage will depend on the judgement of the auditor. These factors will vary depending on qualitative factors and also on relevance.
2. The next step is to allocating the chosen transactions and calculating the factor percentages on the basis of which judgement on materiality is to be taken. The auditor needs to plan the scope of audit for the rest of the transactions.
3. The next steps is estimating the misstatements and comparing the totals to get the preliminary judgement about materiality. When the likely material misstatement is less than the auditor can conclude that the financial records are presented fairly. On the contrary if the material misstatement is relatively more than the auditor will conclude that financial statements are not depicting true and fair view.

It is always preferable that total assets or total revenues are taken as bases for determining materiality because these factors are more stable and varies rarely from year to year. Sometimes problem arises while considering net income or any of its variants as base when the company is not earning profits. In the given case study the base year to be considered is 2016. The five factors which will affect the preliminary judgement on materiality as per the auditor are Cash, Account Receivables, Inventories, Property, Plants and Equipment and Profit after Tax (PAT).

The sources which are mentioned in the above paragraph are identified because of the reason mentioned below:

1. Cash: For any business the cash flow of the company is considered to be important. As per the case study the cashier Judy Bones recorded a lot of cheques through inwards remittance register and these are then recorded and in accounts receivable ledger. The company follows regular updating of Cash and account receivable accounts. In the end of each month a bank reconciliation statement is prepared which suggests that the information so recorded is reliable. Moreover the value of cash is in 2017 is $347120 which is less than the cash which was in last year that is $517788. This indicates to the auditor that they are material in nature.
2. Account receivables: The second most important consideration is debtors account or account receivables (Eilifsen and Messier Jr 2014). The amount as shown in financial records for 2017 is $5073309 as compared to last year $4320000. This is an indicator which suggests that the credit sale in current year is more as compared to last year. The amount is significantly more in monetary terms so naturally it is material. In an auditor minds such transactions can be manipulated.
3. Inventories: Inventories are the stock on the bases of which a business manufactures it final product. In the present case study, the stock of inks, paper and binding materials are inventories (Griffin, 2014). In any business auditor always check stock of inventory, their consumptions and purchases for any discrepancies. Besides this the figure as given in the financial statements is comparatively more than last year that is $4180500. The figure is significant in monetary terms and hence it is material.
4. Property, Plant and Equipment: The auditor suspects the valuation process of fixed asset and even the depreciation charged is of significant amount (Eilifsen and Messier Jr 2014). In this case the auditor needs to confirm whether the method of charging of depreciation is appropriate or not. Then as explained the view of an expert is required in the above case for confirming the valuation criteria. After expert’s confirmation the auditor will move the process of verification where accuracy of the data presented in the financial statement will be assessed (Cao, Chychyla and Stewart 2015). Therefore it can be concluded that the transactions of fixed asset is material. Plus it forms a major part of Non Current assets, therefore there is no doubt that it is a material area.
5. Profit after Tax (PAT): Most of the businesses consider PAT as an indicator of the growth of business. Even with stakeholder, a good PAT indicates that the company is going in the right direction. This is also the amount out of which a part is distributed as profit as another part is reinvested as retained earnings. It is quite obvious this will also be considered as a material figure by the auditor.
6. The above mention factors are material enough to affect the auditor’s report and also stakeholder’s decisions.
7. Cash: The amount of cash shows the turnover cycle in the company. Cash flow Statements forms a part of financial records where only cash inflows and outflows are given importance. Just by looking at these statements a person can deduce whether a business is functioning properly or not. Hence auditor needs to consider these and check its accuracy.
8. Account Receivables: In most of the businesses the sales usually takes place in credit and maximum part of sales is credit. Hence the auditor statement can be influenced by such a factor.
9. Inventories:  It is very common for any auditor to consider a business stock. A proper record of all stocks should be maintained along with losses and abnormal losses as well.
10. Fixed assets: Verification process is to be applied on it and accuracy is to be checked. Most of the times manipulations are done in this item only.
11. PAT: This is the final outcome of business from where profits are distributed and sometimes cooking of profits is done to show the financial statement in a better position. The auditor must be careful in case of these figures.

Conclusion

From this assignment it can be concluded, the auditor will be considering the services of an Expert in determining whether the valuations of fixed assets are done properly or not. The second thing which is identified is the five transactions which are material as per the opinion of the auditor. The assignment also states the reason why the selected transactions are material and how it influences the auditor’s decision and opinion. 

Reference

Auasb.gov.au. (2017).https://www.auasb.gov.au/admin/file/content102/c3/ASA_620_27-10-09.pdf

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