Auditing: Misstatement On Auditors

Auditing is an examination of books of accounts, legislative records, ledgers and vouchers for business organizations to ascertain the true and fairness in presentation of the financial statements (Caplan and Dutta 2016). Auditors are required to plan the procedures to conduct auditing for the client company that involves the several factors. Audit risk is a threat that an auditor faces while issuing an unqualified audit report to the clients due to the limitations or failure in detecting material misstatements due to fraud or error (Zhang, Yang and Appelbaum 2015).

There are certain factors in an organization that increase the audit risk to form an unqualified opinion by the auditors. In the given case, there are certain factors in the financial report of Forest Ltd. that increase the audit risk in following items.

 (i) Accounts Payable

First factor in accounts payable of Forest Ltd. that increase the audit risk is changes in system of recording and recognizing accounts payable in an integrated package system that created difference in ascertaining the balances. Due to the change in system, the amounts in ledger accounts disclosed differences in currency US$ and AUD$ resulting in disclosing inaccurate balances. Differences in arising the value in two different currency results in incorrect balance due to changes in exchange rates therefore, it is difficult for auditor to gather correct information of the account balance (Mazza and Azzali 2015).

Second factor in accounts payable that increase the audit risk is resetting the credit balances at the beginning of every month in an incorrect manner. This error of recognizing the initial balances of credit accounts required the history of the creditors to be re-entered manually, which is time- consuming as well as chances of errors in manual recording increases. This factor increases the risk of auditing because the auditor may not find the essential and material evidence to check the fairness of the changes in transactions recorded (Koblen, and Lestyánszka Škůrková 2015).

(ii) Commitments and Contingencies

First factor that increase the audit risk in case of commitments and contingencies is complete and accurate disclosure of contingent items and their values as commensurate with the commitments made by Forest Ltd. Since in the given case, it has been found by one the company’s customers that the latest batch of the products woodchips was contaminated with a substance that affects the structure of the product. Hence, it is difficult for the auditors to examine the actual reasoning and balance of the account to generate true and fair view (Bhattacharjee, Maletta and Moreno 2015).

Another factor that affects and increases the audit risk is identification of overdue balance on part of the Forest Ltd’s customer, Wood Ltd. that was not paid since five months. Therefore, it is difficult for the auditor to analyze and examine the correctness of the overdue transaction in the books of accounts and disclosure made in the financial statements.

(iii) Inventory

In case of inventory in the financial statements of Forest Ltd., one of the factors that increase the audit risk is the procedure of recognizing the balance of inventory. Since, the company has changed its accounting system to integrated package the amount of balance might be recognized in incorrect manner. Therefore, the auditor might not able to gather correct and accurate value of the inventories to provide opinion on true and fair view of the company’s financial statements (Chiang, Lin and He 2015).

The second factor of inventory that increases the audit risk is misstatements in recognizing the balance amount in the financial statements. Due to the difference in ascertainment of amount of inventory, the balance of financial position of Forest Ltd. might not be accurate (Chen et al. 2015). Hence, the auditor has to face the risk in forming opinion in unqualified audit report due to the lack in obtaining proper evidence for auditing.  

(iv) Receivables

Accounting of receivables depends on several factors that an auditor has to consider while obtaining the opinion on financial statements. In the given case, the accounting system of receivables has been changed that affected the balance with respect to the changes in currency denomination. Consequently, the amount of foreign exchange fluctuations affects the profit and loss of the company and increase the audit risk (Petherbridge and Messier 2016).

Another factor that influences the audit risk is resetting the initial balance of the debtors at zero value that generates an incorrect closing balance of the accounts receivables. Therefore, it is a major audit risk to prove the fairness and transparency of the financial statement of Forest Ltd. Company.

(i) Accounts Payable

In case of first factor, the adjustment can be made by conducting sampling test for the accounts payables resulted from the change in system of accounting. Sampling test can be conducted either on random basis or by selecting transactions with large values. However, in case of second factor, the audit work may be conducted by checking the ledger recorded manually for the resting initial balances at zero value.

(ii) Commitments and Contingencies

In case of first factor regarding disclosure of contingent liabilities, the process of audit should involve the ascertainment of proper evidences from the management and review on stated contingent liabilities in the financial statements. In the second factor, auditing procedure should include the examination of overdue balances especially in case of Wood Ltd, one of the consumers of Forest Ltd.

(iii) Inventory

The audit procedure in case of inventory involves the examination of procedures to ascertain the values of inventory. Apart from that, the audit plan also includes the examination and verification of registers and ledger accounts for correct valuation of inventory. In case of second factor, the balance carried down in the ledger books for accounting of inventory is to be checked. This procedure is to be conducted to examine the presence of misstatement in the valuation and recognition of inventory.

(iv) Receivables

Auditing process includes the verification of account receivables with respect to the recognition of amounts as per the currency exchange and provisions for exchange fluctuation. This process will help in gathering the evidences for ascertaining the true and fair view of the accounting statements of the Forest Ltd. In case of second factor, the reset value should be verified with the actual receipts of the company’s debtors to generate appropriate evidences for the examination of accounts receivables.

Going concern is a principle or assumption for a business organization that it will continue to operate in future and is one of the conceptual requirements of accounting frameworks (Caplan and Dutta 2016). On the other hand, the auditor of the organization is responsible to review and indicate the organization’s ability to continue as going concern. However, there are no precise procedures to follow for ascertaining opinion on going concern but there are some indicators to identify the going concern problems (Omer, Sharp and Wang 2015).

In case of Forest Ltd., several factors indicate the company may experience the problems on going concern over the next 12 months. First indicator of going concern problem is the possibility of interruption in the business operation for the purpose of replacement belt that is used to transport the woodchips of Forest Ltd. The replacement would approximately take six months and further four months for installation and trial purpose. If a business operation remains interrupted for long period then it is a serious cause on its going concern ability.

The second factor that indicates the going concern problem in Forest Ltd. Company is threat of procuring increased percentage of timber sourced from state forests due to which the production process have been slowed down. Additionally, there was a delay in delivery of woodchips to the Japanese customers, which they imposed compensation and deducted 20% of the amounts payable. This is a serious problem that the company may encounter a problem in going concern.

The third factor that affects the going concern of the company is filing a charge by a protester against the company as he suffered a broken leg due to hit by the product truck. This act affected the sale of company’s products and it might create a problem on the going concern of the company.

Fourth factor that indicates the Forest Ltd. Company may encounter the going concern problem is a claim received from one of the company’s consumers. The charge created by the customer, Wood Ltd was that the product delivered to it was contaminated with microbe, which affects the structure of woodchips.

Another essential factor that indicated the problem on company’s going concern is change in accounting system to fully integrated package due to which the company encountered inaccurate credit balances. Apart from that, the company also faced differences in incorrect balances of its creditors for the initial period.

Lastly, the devaluation in the currency exchange between Australian dollar and Japanese Yen by 3% as well as the devaluation in the economy of Japan by 15% is an essential factor. It is an indicator of problem in going concern for the company because the provision for devaluation if not created then the company might encounter huge losses due to currency fluctuations.

It can be concluded that the case of Forest Ltd. provides audit risk on critical aspects of the financial statements as well as affects the going concern of the company. Changes in accounting system, complains by the environmental groups and charges placed by the consumers are serious factors that affects the company’s going concern.

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