1. The Auditor of the DIPL before commencing the audit needs to determine the procedure which is too followed at the time of audit to ensure that there is no material misstatement in the financial statement of the company. The Auditor at the time of planning stage needs to determine in advance the area of the business which is too examined during the audit to frame opinion over the true and fair presentation of the financial statement of the entity (DeFond & Lennox, 2011). Also, the auditor of the DIPL should obtain sufficient evidence to ensure that there is no error in the financial statement of the company.
The Auditor of the DIPL can include the preliminary audit procedure to create the better understanding of the nature of the business and plan the timing nature and extent of the audit procedure used at the time of the audit. The Analytical procedure involve involves evaluation of the both financial as well as non-financial information which is the required phase of the audit. The key objective of the procedure is to identify and the transaction of the client business and the financial statement account which are likely to contain the error.
The Auditor of the DIPL needs to need to perform the analytical procedure at the planning stage of the audit to direct the attention towards the area of the potential problem to avoid the risk of missing something important. As stated in the accounting standard the auditor needs to apply the analytical procedure at the planning stage of the audit and design the subsequent audit procedure accordingly. The following are the few of the area over which the auditor of the DIPL needs to concentrate during the Audit.
Cash – after looking at the financial statement of the DIPL it was observed that there is a huge decline in the cash balance of the company from the past year (Hammersley, 2011). So the auditor at the time of audit needs to examine the same as it will create impact over the liquidity position of the company. Also, the auditor needs to examine the check over the cash receipt and the payment to ensure that there is no default at the time of recording the cash transaction.
Inventories – The Company has reported increased inventory so the auditor needs to examine the reason behind why the company has shown increase inventory. Also, the company needs to ensure that the company is recording the inventory as per the applicable accounting standard. In order to examine the check over the stock, the auditor can conduct the manual check at the company warehouse and inward and outward slip at the factory gate.
Property, plant, and equipment – The Auditor also need to examine that the company has recorded the new assets as per the accounting standard. Also, they need to examine that the depreciation on the increased assets are charged as per the relevant standard and are in the same proportion.
Intangible assets – the books of DIPL has shown the intangible assets of 975000 which needs to examine by the auditor that they are recorded as per the AASB 138. Also, the auditor needs to ensure that the company has recorded the same at the appropriate value.
Bad debts – There was a significant increase in the company bad debts during the year so the auditor needs to work concentrate on the same and identify the reason behind the increase. Also, the auditor needs to ensure that the company is creating enough provision to cover the bad debts as the failure to same will create impact over the company future working (Hammersley, 2011). Also, the auditor should collect the document of the evidence.
Employee payment – The auditor at the time of audit should also conduct the check over the payment which is made to the employee by checking the employee register. The auditor needs to ensure that the company is not creating the fictitious employee for the purpose of minimizing its profit.
Revenue and receipt – The Auditor needs to conduct the test check to examine that the revenue disclosed by the company is related to the company. Also, the receipt of the revenue from the E-manual can be verified by checking the same from the manual receipt (Knechel & Salterio, 2016). Also, the auditor needs to ensure that company is charging the revenue to the period to which it relates.
The application of the analytical procedure will help the auditor to identify the area over which they need to focus and plan the audit process accordingly. The procedure involves checking the figure of the financial statement which has major changes from the past year (Hammersley, 2011). The auditor should also examine the internal control system of the DIPL as it is also the part of the analytical process to identify the shortfall in the business. Also, it helps in identifying the area where detail check needs to be conducted and more evidence are required to be collected to validate the transaction. If the auditor finds that the internal control of the DIPL is a week then he needs to conduct the detail examination of the transaction. On the other hand, if he finds that the company has strong internal control system then he will limit his check over the limited area.
From the above study, it is identified that the analytical procedure is the important part of the auditor planning procedure and helps him to formulate the step which is followed by the audit. So the auditor should create the best process which helps in concentrating on all the key area of the business and framing the opinion over the true and fair recording of the financial transaction.
2. The inherent risk is the risk of the error and omission at the time of preparing the financial statement due to factor other than lack of internal control system. The inherent risk generally occurs over the area where the situation is complex and requires a high degree of assumption and financial estimates ((Böhme, et. al., 2015). The auditor generally assesses the likelihood of the material misstatement before considering the effectiveness of the internal control of the company. In the case of DIPL, the business of the company is continuously changing and the inventory of the company is continuously becoming obsolete as are not valued appropriately so may be the possible inherent risk for the auditor (Przepiorka & Diekmann, 2013). If the auditor discovers the material misstatement in the previous audit than there is the possibility of occurrence of the same during the current financial year, therefore, may be the possible inherent risk for the auditor. The two of the possibilities inherent risk which can occur at the DIPL are as follows-
Material misstatement – In spite of the proper internal control system there is the possibility of the occurrence of the material misstatement due to an error in recording the transaction. For this, the auditor needs to examine few of the transaction of the business where there is complexity in recording the transaction and possibility of occurrence of the error (Lumpkin & Dunn, 2011). For avoiding the inherent risk the auditor should examine the transaction and evidence reporting the same.
The inherent risk generally occurs when the proper care is not taken at the time of recording the transaction due to the weakness of the internal control system. In the given case the auditor needs to examine the inventory where there is the possibility of inherent risk as the company may overvalue or undervalue the inventory.
Person charge with the governance – There is an inherent risk if the person charges with the governance don’t have complete knowledge of the transaction then he will fail to record the transaction. Therefore the auditor at the time of conducting the audit needs examines the person performing the certain role in the organization have complete control over the same (Schultz, et. al., 2010). The auditor can check the authenticity of the transaction by examining the past record of the company. In the given case the error may be in the payment receipt from the cheque through mails. The cashier Judy Banes record the transaction in the inwards remittance of the error and communicate the same with Gay Chan for the account receivable ledger. There is complication involved in recording the transaction so there me possibility that sometimes the cashier fails to record the transaction received through mails which will lead to the inappropriate presentation of the financial statements. Also, the auditor needs to ensure that no single person is provided complete control over the transaction as it creates the possibility of fraud.
3. a) The Auditor at the time of planning needs to identify all the possible risk to frame the opinion over the true and fair view of the financial statement. The first factor due to which the error can occur is due to the change of the nature of the business which creates impact over the recording of the inventory. The DIPL is receiving the raw material from Asia and Australia which create difficulty in recording the transaction due to the difference in the currency. Also, the allowance created by the company to cover the loss at the time of storing the inventory may not be enough which will create impact over the working of the company. Also, the company at the end of the year close the invoice on 27 June to value the stock and the stock sent to the customer are not sent which create difficulty in recording the transaction. Also, there may be a possibility that the company in order to commit fraud may not consider the goods which are sent in transit. So the auditor needs to check all the transaction which took place during the year as there is the possibility of fraud during the period. The other area where there may be the possibility of error can be a change in the IT system. As the company has not the enough staff to reconcile and test the new system prior to year end which may create the possibility of fraud between the periods (Rittenberg, et. al., 2010).There was a huge problem in the new accounting system and the existing system software as the company fails to allocate the transaction to the correct period. The auditor needs to consider this risk at the time of planning the audit process to avoid the error at the time of conducting the audit. The auditor needs to examine these risks in detail and should obtain sufficient evidence to overcome the audit risk of inappropriate reporting over the financial statement.
b) The auditor of DIPL needs to plan and make changes in the process as per the risk factor identified during the audit to make adequate reporting over the financial statement of the entity. If the risk factor is high the auditor needs to conduct the detail examination of each of the transaction and should collect enough evidence to support the transaction. If the auditor finds that the management has not provided enough support at the time of obtaining audit evidence than the auditor can frame the qualified opinion. On the contrary, if the auditor finds that the management has provided enough evidence in relation to the area where there may be the possibility of fraud than the auditor can frame qualified opinion over the same (Contessotto & Moroney, 2014).So, it is necessary for the management to assist the auditor at the time of audit so that he can frame opinion over the financial statement. The auditor can frame clean report if he is satisfied that the company has followed all the accounting principle and regulation and has a good internal control system.
References
Böhme, R., Christin, N., Edelman, B., & Moore, T. (2015). Bitcoin: Economics, technology, and governance. The Journal of Economic Perspectives, 29(2), 213-238.
Contessotto, C., & Moroney, R. (2014). The association between audit committee effectiveness and audit risk. Accounting & Finance, 54(2), 393-418.
DeFond, M. L., & Lennox, C. S. (2011). The effect of SOX on small auditor exits and audit quality. Journal of Accounting and Economics, 52(1), 21-40.
Hammersley, J. S. (2011). A review and model of auditor judgments in fraud-related planning tasks. Auditing: A Journal of Practice & Theory, 30(4), 101-128.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.
Lumpkin, J. R., & Dunn, M. G. (2011). Perceived risk as a factor in store choice: an examination of inherent versus handled risk. Journal of Applied Business Research (JABR), 6(2), 104-118.
Przepiorka, W., & Diekmann, A. (2013). Individual heterogeneity and costly punishment: a volunteer’s dilemma. Proceedings of the Royal Society of London B: Biological Sciences, 280(1759), 20130247.
Rittenberg, L. E., Johnstone, K. M., & Gramling, A. A. (2010). Auditing: A business risk approach.
Schultz, J. J., Bierstaker, J. L., & O’Donnell, E. (2010). Integrating business risk into auditor judgment about the risk of material misstatement: The influence of a strategic-systems-audit approach. Accounting, Organizations and Society, 35(2), 238-251.
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