Determination of the requirement of an expert
The issue that is presented in the question is that whether the requirement for an expert is necessary in executing the task of auditing of DIPL. In order to understand whether an expert is needed or not it is important to understand the expertise or skills that an assessor comprises of. An assessor comprises of the following skills:
However, the issue that has been highlighted in the case study requires an expert who can, in all probabilities help the firm in its audit proceedings (Anderson, 2016). Therefore, an expert who should be appointed for the particular task needs to have enough knowledge and insight into the theoretical and technical aspects of auditing and accountancy. In order to justify, the need of an expert the requirement to collect enough evidence is important. Moreover, the selection of an expert also depends on the objectivity and the capability of the concerned individual (Choudhary, 2017). An external review will always require the involvement of an enquiry process which may be hampered by the association of the hired expert with the entity. The assessor is also required to determine the level of competency and satisfactoriness that is expected to e obtained from the job in order to determine the scale of performance of the expert on the basis of which he will be evaluated.
After the proper scrutiny and analysis of the provided case study of DIPL it can be understood that the purchase of inventory obsolescence as well as the inventory account has been not included in the current year in order to compensate for the reduction in the value because of storage vulnerability. Therefore, in order to approximate the value of obsolescence, the decision of the assessor should be that the service of an expert is required in the auditing process of DIPL.
Five factors that would influence the determination of the preliminary figures of materiality
Materiality indicates the different factors separately or in total that is regarded as highly important in terms of the representation of the financial statements in true and fair view of the company that are prepared in accordance to the financial standards. Evaluation of the functions of DIPL that has been provided in the case study helps in the identification of the five factors that may influence the preliminary figures of materiality. The factor that has been cited as the major reason of materiality in the books of accounts are the errors of material misstatements that may occur separately or in total and have huge impact on the fair value of the financial statements. Material misstatements refer to the disproportion of the financial accounts due to the omission of specific amounts or transactions either deliberately or by mistake.
Fraud risk that affect the materiality
The impending risk of fraud in the financial statements is the primary factor that is regarded as a major reason that adversely affects the overall materiality of the financial assertions of DIPL. However, it has been further revealed in the case study that the top-level management at the DIPL that is the Board of Directors has put extreme pressure on the IT department of the company on account of which the IT personnel have managed to establish a new accounting system. These activities essentially have exposed business of DIPL to diverse risk frauds that may lead to immateriality.
Environmental factors that affect materiality
As revealed by the case study there have been numerous transactions that have not been properly recorded in the books of accounts. This means that at the time of preparation of the financial statements there have been omission of certain transactions either deliberately or on account of mistake on the part of the administration of DIPL, in charge of preparing the financial statements. Essentially, this has led to inconsistency or barrier in the process of effective planning in terms of marketing strategies and sales activities. Furthermore, the failure of DIPL to find the value of the micro intentions added to the reason of occurrence of materiality (Khan, Serafeim, & Yoon, 2016).
Difficulties in the process of selection of the CEO that influenced materiality
The process of selecting and appointing a chief executive officer in the organization of DIPL is highly complex and crucial. To be more precise the process of appointment of the new CEO of the firm along with the transition for the previous CEO and the new activities undertaken by William Jackson involved a high degree of risk as the executed processes were not in accordance to the planned strategies. Moreover, the procedures were started at a delayed date leading to a faulty decision making by the CEO and the resignation of the staff might also expose the firm to varied risks which might in turn affect the materiality of the entity (Moroney & Trotman, 2016).
Accounting policy affecting materiality
The method that had been adopted by DIPL for the purpose of valuation of the different raw materials on the basis of average cost mechanism in all probabilities is faulty. Therefore as disclosed by the case study of DIPL, it can be evidently stated that the adopted procedure for the inventory valuation of the raw materials at average costs was not appropriate (Eccles, 2014).
Factors related to cataloguing accounts that affect materiality
Lastly, the important factor that influence the materiality in the financial statements of the firm is the procedure that has been adopted for the proper maintenance of the recording of the cash receipts by the cashier of the company. It should be further stated that most of the transactions that DIPL has gone through, can, be recorded with the help of an electronic system of payment. The method of maintaining a document of receipt that has been provided in the email should be downloaded and the accountant should present reconciliation of the whole batch. The reconciliation by the accountant should be prepared more often and should be carried out till the end of the accounting period. Moreover, the firm DIPL generates its revenue with the help of marketing the e-books, printing and republishing of the text books, this may very evidently affect the materiality (Sytnik, 2013).
Determination of the relevancy of the above mentioned factors for the calculation of materiality
Mistakes take place in the accounting statements while collecting and processing the information that is required for the preparation of the financial statements. Inaccurate accounting estimations may arise from misapprehension of various factors including oversight. Particular accounting principles like categorizing a single transaction in terms of its amount and the way in which it is disclosed or reflected may be vulnerable to accounting mistakes. Frauds committed while accounting cover a wide area which ultimately leads to misstatements in the financial accounts. The only way to mitigate such an error or fraud in the books of accounts is by implementing apt and efficient internal controls within the corporation.
Materiality is also affected by the inherent risks which acts as a significant factor that has an effect on materiality. The administration of DIPL, as revealed in the case study does not possess both objectivity and integrity. This may definitely affect the working of the entity and have a negative impact on materiality which will further mislead the stakeholders of business. The occurrence of fraudulent activities may be due to the extreme pressure that is put on the employees and also due to the procedures of the novel accounting system that may potentially affect the financial information, thus becomes relevant for the determination of materiality.
The method by which the CEO of DIPL has been appointed also is a highly complex and unclear process that has made the entire process of decision making faulty. This also can be considered as a potential factor that affects materiality (Edgley, Jones & Atkins, 2015).
Moreover, the accounting treatment that has been utilized by the administration of DIPL for the valuation of the raw materials is very well regarded as a primary factor influencing materiality. This is because the accounting processes that have been appointed in the valuation of the raw materials wrongly reflect or reveal the financial condition of the corporation.
Determination of how the factors will affect the overall materiality in the audit planning process of the firm
Fraud risk affecting materiality – the executive of the IT department of the firm was completely dissatisfied with the implementation process of the machines in the organization. Moreover, extreme pressure was put on the staff of the firm for reconciliation and assessment of the novel system.
Accounting policies affecting materiality – the valuation of the inventory possessed by DIPL was not appropriate and effective as it was done on the basis of the average costs. Furthermore, the inaccurate estimations and the methods of valuation might heavily influence the process of accounting. This issue can not only influence materiality but also affect the process of audit.
Environmental factors that affect materiality – the management of DIPL is not able to assume the macro and micro facets and the exclusion of particular financial transactions either deliberately or on the account of error lead to a misstatement in the financial accounts. This in turn hinders the true and fair view off the company that the financial statements are essentially required to reflect, thus, affecting the users of such statements as well. Even the entire planning process of the firm along with the auditing proceedings may also be affected by such an error or misstatement in the financial report of the corporation. The misrepresentation of the financial statements, jeopardize the entire financial proceedings of the firm and affects the preliminary figures of materiality hugely (Griffin, 2014).
Materiality due to the method adopted for the appointment of the CEO – the process by which the new CEO of DIPL has been appointed appears to be highly complex. Thus, the process should be more transparent and have a high degree of clarity.
Factors related to the novel system – the expenditures that have been executed with the means of electronic payment system does affect the methods adopted for the maintenance of the details in regards to the receipts and assertion of the reconciliation. But the administration at DIPL seems to be incapable of the process of recording the receipts of the cash and the reconciliation of the statements which may lead to a financial disaster due to the careless omission or exclusion of the specific business amounts which may lead to huge budgetary variances. This might again lead to the deterioration of the true and fair view reflected by the financial statements of the company. Therefore, the assessor may not be able to identify a particular perspective in regards to the financial assertions in different material sides.
References
Anderson, U. L., Doxey, M. M., Geiger, M. A., Gist, W. E., Janvrin, D. J., & Polinski, P. W. (2016). Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on FASB Exposure Draft of Proposed Accounting Standard Update: Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material: Participating Committee Members. Current Issues in Auditing, 10(2), C1-C9.
Choudhary, P., Merkley, K. J., & Schipper, K. (2017). Direct Measures of Auditors’ Quantitative Materiality Judgments: Properties, Determinants and Consequences for Audit Characteristics and Financial Reporting Reliability.
Eccles, R. G., & Krzus, M. P. (2014). The integrated reporting movement: Meaning, momentum, motives, and materiality. John Wiley & Sons.
Edgley, C., Jones, M. J., & Atkins, J. (2015). The adoption of the materiality concept in social and environmental reporting assurance: A field study approach. The British Accounting Review, 47(1), 1-18.
Griffin, J. B. (2014). The effects of uncertainty and disclosure on auditors’ fair value materiality decisions. Journal of Accounting Research, 52(5), 1165-1193.
Khan, M., Serafeim, G., & Yoon, A. (2016). Corporate sustainability: First evidence on materiality. The accounting review, 91(6), 1697-1724.
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