Assessment of audit risk is an important step in audit profession. The auditors express audit risk as wrong opinion on the analysis of the financial statements of the companies. Three types of audit risks can be seen; they are Inherent Risk, Control Risk and Detection Risk. Inherent risk considers as the risk of material misstatements of the financial statements caused by errors and omission due to the internal control failure (Coetzee & Lubbe, 2014). Business entities having complex business operations have higher inherent risks and internal control cannot protect or detect inherent risks. All these aspects of inherent risk are applicable for MaxSecurity Limited (MaxSecurity).
There are some major inherent risks in the business operations of MaxSecurity. The complex nature of the manufacturing costing process of MaxSecurity indicates towards the presence of inherent risks. In MaxSecurity, the presence of a complex manufacturing costing procedure can be seen for the manufacturing of high-tech armor-plated personnel carriers. This highly complex manufacturing process of MaxSecurity creates scope for errors as costing values can be omitted in the process. These errors can affect the financial statements of the company that can lead to the material misstatements in the financial statements (Ruhnke & Schmidt, 2014).
Apart from the above area, the presence of old costing system creates inherent risk in the business operation of MaxSecurity. From the earlier discussion, it can be observed that MaxSecurity uses a complex production process of high-tech armor-plated personnel carriers. For this reason, the company requires an accurate advanced costing system in order to support the complex manufacturing procedure. In MaxSecurity, as the old costing system is in the operation for manufacturing process, the company has to face the major risk of the omission of the crucial costing related information as the system does not have the capability to develop a database for gathering all the information of the manufacturing process (Jha & Chen, 2014). Apart from this, the system has not the ability for the integration of cost information with the balances of general ledger. All these aspects lead to material missstements in the financial statements.
MaxSecurity operates in a highly competitive business environment and this particular aspect is the potential of inherent risk in the audit operation. Thus, this risk can be considered as the industry risk of the company. The occurrence of this risk can be seen due to the presence of extreme pressure of the industry on the business operations of MaxSecurity (Griffiths, 2016). It needs to be mentioned that it is not possible for effective internal control to diminish this risk. These are the inherent risks of MaxSecurity.
It is required for the auditors to do the planning of every step of the audit operations. In this process, it is needed for the auditors to take into consideration all the necessary factors of material misstatements. With the assistance of materiality assessment, the auditors become able to select the required audit procedures in order to reduce the audit risk in acceptable level (William Jr, Glover & Prawitt, 2016). For this reason, the auditors are needed to take up the procedures of preliminary materiality assessment for the determination of materiality level. The following discussion shows the necessary aspects required to consider by the auditors for the preliminary materiality assessment of MaxSecurity:
It is required for the auditors to measure the reliability of provided information by the management of MaxSecurity as this information assists in the audit process. It is the obligation of the management of MaxSecurity to deliver the auditors different information about crucial aspects; like basis of preparation of the financial statements, complied accounting standards and others. For this reason, the auditors are needed to take up the testing of internal control for the verification of the management’s information (Eilifsen & Messier Jr, 2014).
In the next process, it is necessary for the auditors of MaxSecurity to consider the crucial aspects indicating the deviation in the normal business operations of MaxSecurity. As per the provided information, the production of high-tech armour-plated personnel carriers is the main business operation of MaxSecurity. For this reason, the main part of the revenue of MaxSecurity should come from the sale of these carriers. However, the auditors of MaxSecurity has encountered with the fact that the company has eared large amount of revenue from other business operations apart from the sale of plates (Mio, 2013). Thus, it is the obligation of the auditors to review this deviation from the actual operations.
At the same time, the auditors are needed to consider the qualitative factors of financial reporting while assessing the preliminary materiality as the auditors use the level of material misstatements in the preliminary assessment of materiality. Thus, the auditors are needed to consider the five qualitative factors of financial statements. First, the auditors are needed to take into consideration the inadequate description of accounting standards and policies as it can mislead the users (Eilifsen & Messier Jr, 2014). Second, all the factors affecting the integrity of financial reporting needs to be considered. Third, it is needed for the auditors of MaxSecurity test the internal control in order to find the weaknesses in it as it can cause major material misstatements in the financial reporting of MaxSecurity. At the same time, it is needed for the auditors of MaxSecurity to test the overall accounting and financial accounting process of MaxSecurity. Hence, these are all the aspects required to be taken into consideration for preliminary material missstements (William Jr, Glover & Prawitt, 2016).
The confirmation of debtors provides a detailed documented report about the presence of accounts receivable in the accounting operations of Medical Services Holdings Group (MSHG). In the presence of positive replies from the debtors, the auditors obtain external evidence related to accounts receivable. Moreover, the evidence about the rights and obligations related to debtors can be obtained from the process of debtor confirmation. It provides evidence on the fact that whether MSHG actually owes the amount from the debtors or not. It is not possible for the entities to obtain reliable evidence about the allocation and valuation of the debtors because the debtors do not provide the assurance to pay their dues to the entities (Leung et al., 2014).
As per the provided information, the trade receivable balance was $3974569 and it is a material balance. The payment terms for the large part of the debtors are 14 days and the small debtors are due for 60 days. From this fact, it can be seen that there is ineffectiveness in the process of credit approval and the collection of outstanding amounts from the debtors. It needs to be mentioned that the auditors can obtain correct evidence about the existence of the debtors as 5 medical practitioners owe 60% of the total debtors. In spite of this, the auditors are needed to conduct further audit procedures for obtaining reliable proof related to the valuation of the debtors (Knechel & Salterio, 2016).
In addition to the big debtors accounts, the presence of small accounts of debtors can be seen in the company that consists of 40% of the total debtors. It can be observed that there are major issues with these small balances of debtors as the allowance period of 14 days has already been crossed for the collection of these balances. The debtor confirmation process assists the auditors in obtaining correct evidences in order to ensure their evidence, but there is a need for other processes in order to do valuation of the balances of these accounts (Duncan & Whittington, 2014). The provided case states that there is a direct consideration of the allowance of doubtful debts against the trade receivable accounts. This particular aspect demands a transaction test from the auditors. In addition, the auditors are also required to run a check for finding the reasons for ineffective credit control. In the presence of all these aspects, it is the additional responsibility of the auditors to review the receipts of the debtors. After that, the auditors are also needed to conduct analysis on the characteristics of the debtors account in order to obtain proper evidence for the correct valuation of the debtors of Shady Oakes (Knechel & Salterio, 2016).
As per the provided case study, it can be seen that the auditors of Chan and Partners is not going to use debtor confirmation results as the only evidence of audit. The main reason is that it is not possible for the auditors to obtain sufficient evidence from debtor confirmation about the allocation and valuation of the debtors. Another two major reasons for not selecting debtor conformation as only audit evidence are the presence of materiality in debtor balance and the fact the smaller debtor balance is due (Christensen, Glover & Wood, 2013).
In this particular case, the requirement of the auditors is the review and testing of data, assumption and methods adopted by the management of Shady Oakes in order to obtain the reasonable assurance about the accenting treatment of debtors. At the same time, the auditors are required to make discussion with the management of the company for understating their adopted procedures and approaches for the recognition of doubtful debt. Thus, for the auditors, the requirement is to take up further audit procedures in order to ascertain the value and allocation of debtor balances (Chambers & Odar, 2015). Thus, certain additional procedures are required to be taken up by the auditors like analysis of the receipts of the debtors and invoice for verifying the debtors balances.
The relevance of this case can be seen with the Auditing Standard ASA 230 Audit Documentation. The objective of this audit standard lies in the examination of timing, nature and extent of needed audit techniques in order to classify and value the debtor account balances in business entities. In the presence of this audit standard, the identification of all the crucial matters related to the debtor account needs to be done by the auditors (Shah & Nair, 2013). After that, compliance with all the required audit standards is needed by the auditors. Moreover, the auditors must review all the related information about debtor balance for Shady Oakes. Lastly, the auditors need to write all these test results in a document.
Hence, based on the above discussion, it can be seen that the auditors of Chan and Partners will not be able to use debtor conformation as the only evidence for the audit operation of Shady Oakes. The existence of internal weakness in the collection of due amount from the debtors can be considered as the major reason for this. Thus, the auditors are required to ensure the correct collection of dues from the debtors. It will helps in bringing transparency in the whole process of debtor collection (Minuti?Meza, 2013).
References
Chambers, A. D., & Odar, M. (2015). A new vision for internal audit. Managerial Auditing Journal, 30(1), 34-55.
Christensen, B. E., Glover, S. M., & Wood, D. A. (2013). Extreme estimation uncertainty and audit assurance. Current Issues in Auditing, 7(1), P36-P42.
Coetzee, P., & Lubbe, D. (2014). Improving the efficiency and effectiveness of risk?based internal audit engagements. International Journal of Auditing, 18(2), 115-125.
Duncan, B., & Whittington, M. (2014, September). Compliance with standards, assurance and audit: does this equal security?. In Proceedings of the 7th International Conference on Security of Information and Networks (p. 77). ACM.
Eilifsen, A., & Messier Jr, W. F. (2014). Materiality guidance of the major public accounting firms. Auditing: A Journal of Practice & Theory, 34(2), 3-26.
Griffiths, P. (2016). Risk-based auditing. Routledge.
Jha, A., & Chen, Y. (2014). Audit fees and social capital. The Accounting Review, 90(2), 611-639.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.
Leung, P., Coram, P., Cooper, B. J., & Richardson, P. (2014). Modern Auditing and Assurance Services 6e. Wiley.
MINUTTI?MEZA, M. I. G. U. E. L. (2013). Does auditor industry specialization improve audit quality?. Journal of Accounting Research, 51(4), 779-817.
Mio, C. (2013). Materiality and assurance: building the link. In Integrated Reporting (pp. 79-94). Springer, Cham.
Ruhnke, K., & Schmidt, M. (2014). Misstatements in financial statements: The relationship between inherent and control risk factors and audit adjustments. Auditing: A Journal of Practice & Theory, 33(4), 247-269.
Shah, M., & Nair, C. S. (Eds.). (2013). External Quality Audit: Has it Improved Quality Assurance in Universities?. Elsevier.
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic approach. McGraw-Hill Education.
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download