What is The Auditing profession? Explain.
The Auditing profession has evolved from just being routine checking of books of accounts to the essential tool for corporate governance. The role of an auditor has evolved over time due to change in various factors like information technology, increasing volume of transactions, complexity of laws, globalization and changing business operation due to increased use of technology etc. In the late 1990’s and 2000’s the audit profession was facing credibility crisis due increasing cases of corporate collapse, failure of business and fraudulent reporting. The changing circumstances and technological changes has forced the auditor to adopt technology affectively in the auditing process so that the existing challenges faced by the auditor could be effectively mitigated (Bentley et al. 2013).
The computers and networks mainly provide the information needs of the auditors. In order to be effective it is important for an auditor to have knowledge about using the computer as an audit tool, have knowledge about the audit-automated system and understand the business process including the way it operates. The auditor can also use the technology for effective audit administration. The automated tools provided by the advancement of technology have helped the auditor to increase its productivity. In this essay, an attempt is made to understand the challenges faced by the contemporary auditor due to increased use of technology in the business operation (Homocianu and Airinei 2014).
Impact of technology on business
The technological advancement has revolutionized the way business conduct their operation. The advancement of technology has provided the small companies the same level playing field with the large companies. The businesses are effectively using technology to increase the productivity of the employees by reducing the human labor and increasing importance is given in process automation. This reduces labor cost of business operation and the business can chose to increase its operation by expanding technology. The market in which a business operates has also expanded rapidly due to changing technology. The business has gained access to market all over the world with the help of internet. The advancement of internet has a far reaching on business as it has changed the way in which a business operates (Kotb et al. 2012).
Meaning of E commerce
The E commerce refers to electronic commerce and it is the direct result of advancement of internet and modern technology. The process of buying, selling and trading service, product and information’s over computer network and internet is called E commerce. The electronic commerce can be defined in many ways in which it is put to use. The most important functions of the E commerce are market creation, supply chain management, transfer of money, online ordering and selling (Healy et al. 2012).
Impact of online purchase and selling on business operation
The use of internet and ecommerce has enabled the business to purchase and sell online. It is important for a successful business to purchase its goods, capital assets and other useful material from best source at best possible price. The internet provides useful data and information that has given the business the ability to do market research before purchase of the product. The business can also check the prices from suppliers selling goods online so the business can easily compare the prices. In purchase of capital assets, business can use internet technology for online tendering so that best price can be obtained and the most suitable supplier can be chosen. The functioning of purchase department has changed due to use of internet. Before the internet era, the access to the information was limited therefore; exposure to the market was also limited. In order to find the suppliers the purchasing department had to gather information from various sources (Kotb et al. 2012). It was both time consuming and costly process. The tendering process was similarly followed but it was manual process. The entire process of issuing notice of purchase, submitting the tender, evaluating the tender forms and choosing the supplier was done manually, which is now entirely conducted using internet. The inventory management is a complex process and before implementation of technology, it was more complex. In most cases due to miscommunication and unavailability of current data, there was mismatch in demand and supply of the material. In such circumstances, emergency purchase of goods has to be conducted so that production is not hampered. The emergency purchase of goods bypass all the purchasing process and it is also more costly. The implementation of technology has helped business to manage its inventory in amore better way and online purchase has helped to reduce the cost. Based on the above discussion it can be said that online purchasing has positive impact in business operation (Mullainathan et al. 2012).
The primary objective of the business is to earn profit and selling is the key function that helps the business to attain its primary objective. The online internet technology has provided the business wide market. A business is no longer limited to the locality of its operation but with the help of online selling it can sell goods in far away markets. The advancement of internet selling has therefore provided the business access to global market. This increased and uncertain demand has changed the operation of the business (Arel et al. 2012). Earlier the demand of the goods was easily estimated as the operation was localized but as the market has globalised the demand cannot be easily estimated. Therefore, the company has to maintain provision for increasing or decreasing production rapidly. The online selling has helped business to reduce cost and the price of the product vas various intermediaries in the process has been eliminated and the good is directly delivered to customer. The online selling has positively impacted and changed the business operation.
Risk of online purchasing and selling
The Trade Practice Act 1974, the Australian Security and Investment Commission Act 2001 provide the fair trading legislations that require a business:
• Not to conduct business and its operations in a way that is misleading;
• Should not provide misleading information regarding goods and services provided;
• Should not engage in coercing consumers at the time of purchase and sell of goods;
• Should engage in a contract that reasonably protects the rights of the interest;
• Goods and service supplied or provided should be in accordance with the description;
• Goods should be of marketable quality;
• The service provided should be of reasonable care and skill.
The Australian Consumer and competition Commission is responsible for administration of Trade practice Act (TPA). The ACC encourages all types of business that also includes online business to implement TPA as an important management tool because compliance of this act is considered as a good business practices (Ward 2016). Therefore, it can be said that compliance with the provisions of Trade practice Act is important for reducing the risk of online purchasing and selling.
The use of internet for purchasing and selling online has provided business with many advantages like savings in time, cost and effort. In addition to these benefits, the online operation has also put business in many risks (Padia and van Vuuren 2012). The risk in online purchase is given below:
• There is a risk of fraud in online purchase.
• There is a risk that goods supplied are not in accordance with the specification.
• In case of damaged goods, there is a risk that the online supplier may not replace the goods.
• There is a possibility that goods purchased may not be delivered within the specified time.
The risk associated with online selling of goods is given below:
• The customer may not pay for the goods or may delay in making payments.
• The customer may return the good that will increase the operating cost of the company.
• If the goods is damaged or lost in transit then the company will have to replace the good. It will increase its operation cost and the company will have to face loss of reputation.
Effect of risk on financial statement
There are no specific Accounting standards for online transactions. The existing standards are applicable. The accounting standards that are related to online purchasing and selling of goods are AASB 118. AASB 102 and AASB 15 and other standards that deal with the preparation and presentation of financial statement are also applicable in case of online business. In case of online selling of goods, the AASB 118 is applicable. The AASB 118 states in Para 14 that revenue should be recognized when the risk and reward of ownership of goods is transferred, the entity does not have control over the goods, the revenue can be measured, the economic benefit will flow to the entity and the cost can be measured reliably. The new AASB 15 will be applicable for all the financial report prepared after 1 January 2017. This new standard will supersede the AASB 118. In case of purchase of goods and holding them as inventory, AASB 102 is applicable. In Para 10 of the AASB 102 it is provided that the cost of inventory should include cost of purchase, conversion costs and other costs that are required to bring the inventory at the present location and condition. These standards should be appropriately followed for recognizing purchase and sales. It is the responsibility of the auditor to verify that the accounting standards for purchasing and selling of goods are adhered.
The will full misrepresentation of facts and figure related to finance and operation of business is referred to as fraud. If the misrepresentation of the financial data is due to mistake then it is referred to as misstatement (Homocianu and Airinei 2014). The misstatement and fraud both affect the true and fair representation of financial statement. There is a possibility that online purchase and selling will led to misstatement of financial information the instances are given below:
• The business might purchase goods that are not up to the standard or the goods may be of such a poor quality that it cannot be used in operation. As the online supplier is not willing to return the goods, so these are included in the stock. This will lead to incorrect figures of inventory that in turn will affect the profit.
• There are many online fraud suppliers that act as a seller but are really scams. They agree to provide goods at the best price and usually take part payment for supplying the goods. The goods are never supplied thus creating loss of money and time to the company. The purchasing department in order to hide its inefficiency and lack of judgment does not show these expenses but are accounted in differently.
• The online delivery of goods sometimes takes times that are unreasonable or unplanned. This may cause operational inefficiencies or even shutdown of production. Therefore, to mitigate this business could purchase few goods on emergency from local suppliers at higher price so that production could be continued. In order to hide this inefficiency or extra money paid for emergency purchase the management could arrange with local supplier. The local supplier agrees to supply goods at high price in times of emergency and when the company from the online suppliers receives goods then units purchased from local suppliers are sent to local suppliers and the additional expenses are shown as incidental expenses (Troshani and Rao 2014).
• The goods sold on line that are returned by customer are removed from sales and are included in stock.
• The goods sold online to customers that are not paying and are not willing to pay are not written off as bad debt but are still included in the debtors.
Identification of fraud and misstatement by the Auditor
Auditing is a process that refers to verification; inspection and examination of operation and financial information in order to ensure that financial statement adequately reflect the operation of the company. In general, principle the auditor is not responsible for identification of error and fraud of the company. The main function of the auditor is to state whether the financial statement prepared by the company is true and fair. In order to perform the function the auditor is generally required to identify misstatements that in the financial statements (Mgbame et al. 2012).
The auditor can identify low quality goods in the stock through physical verification of stock in the store. Further the slow moving or non-moving stock can also identified if the auditor advices the business separate register for such stocks.
In order to purchase goods generally an advance is required to be paid to the suppliers before the goods are delivered. In case of online frauds this advance moneys are sometime shown as expenses in the accounts. This can be easily identified if the auditor uses the process of vouching. In the vouching process the auditor, check the authenticity of the expenses by crosschecking the voucher and the bill.
If the goods are purchased from local higher rates but are shown as original purchase. The auditor can identify this by cross checking the store register and production register with the invoices raised by the supplier and the recorded maintained by the gatekeeper. If only the purchasing department conducts the fraud then it can be easily identified. Further vouching process can also be applied for checking the expenses.
The debtors that are not paying can be verified by the debtor-ageing schedule. The goods returned that are included in stock can be identified by checking the store register and also physical verification of goods.
The above discussion has shown that internet has immensely benefitted the business by introduction of online purchasing and selling. The benefits of the internet also brought certain disadvantages that made the business vulnerable to fraud and error. In conclusion, it can be said that the auditor can easily identify the fraud and error in financial statement so business should continue online purchase and sale without getting affected by the risk.
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