Audit Planning Process: Nature Of Business, Risks And Collection Of Audit Evidences

1. As per the Case Study provided in the question, Alexis Dunbar is a staff auditor who is engaged in the audit of three companies which are given below in details:
2. As per the requirement the first situation matches with Audit 2. As per the situation the auditor had placed extensive reliance on the internal control of the company and when the test of control was performed it revealed that there was certain control risk which arise. Therefore, the auditor increased the substantive tests for transactions like account payable(Griffiths, 2016).
3. As per the case which is given, it matches with Audit 1 engagements. In this case extensive tests of control were performed and fairly analytical procedure was also conducted. The auditor does not require external confirmation to confirm account payable balances(Messier, Glover & Prawitt, 2015). Hence, it can be said that the internal control of the company in this case is very strong (Jali, Abas & Ariffin, 2017).
4. As per the case given in the question, it matches with the engagement which the auditor enters in Audit 3. The auditor is certain that the company does not have an effective internal control structure. Hence the reliance on the internal control of the company will be minimum. The auditor applies substantive procedure test in order to establish the true and fair view of the entries(Glover, Prawitt & Drake, 2014). The company is smaller in size as compared to the other two audit engagements and yet the time taken on the audit is more than the previous two engagements which suggests that there might be possibility of fraud or error therefore the auditor has increased audit procedures on the account payable area to confirm or dismiss the possibility of frauds (William Jr, Glover & Prawitt, 2016).
5. The other factors which likely affect the auditor’s approach towards the audit of acquisition and payments and account payables for the three different audit engagements are nature of the business, size of the business, complexity of the transactions and similar other factors. In all cases the nature of the business will be determining the auditor’s approach towards the audit and also affect his reliance on the internal control system. The size of the business is also another factor as mention in the 3 audit engagements, two out of three business are medium sized companies and one is small. It is quite natural that the auditor will be conducting more audit procedures in medium size firms and not that much in small sized business in normal circumstances(Yang & Jia, 2013). The complexity of the transaction is also a case to be considered as depending from business to business the complexity of transactions might differ.
6. The supervisors of Alexis can help her in better understanding of the financial statements of the companies by providing the audit documentation or working paper of previous year so that Alexis can understand the nature of the business as well as take assistance from the work of the previous auditors of the company. Alternatively, they can also advice Alexis to first obtain a basic understanding of the nature of the business and then proceed with the audit planning process.

As per the question, during an audit planning process the auditor analyzes the nature of the business, assess the potential risks involved in the business, perform preliminary analytical procedures and also decide the source through which audit evidences are to be collected. The audit planning process can be sub dividend into areas where specific activities are required which are discussed below:

1. Accepting Client and Performing initial audit planning: The auditor will be determining the users of the financial statements of the company and also sending the client the engagement letter stating the terms of engagement of the audit. The auditor also needs to identify whether any specialist will be required in the audit of the company such as an expert.
2. Understanding Client’s Business and Industry: The auditor will be touring the plants and office of the client to get a knowledge of the operations of the business. The audit will also be reviewing the accounting policies of the business so that the auditor can understand the policies which are followed by the company.
3. Assess Client’s business risks: For the purpose of assessing the client’s business risks, the auditor will be reviewing the risk management controls and procedures of the business. It also includes identifying potential related parties which are not disclosed but will be requiring disclosure.
4. Preliminary Analytical Procedure: For such a purpose the auditor will be comparing the key ratios of the company with the industry competitors. 

1. The case study provided states that Two Time bank has made a contract with Solution IT to host all financial reporting application of the bank. Two Timer Bank has also made a contract with Solution IT to provide a highly secure environment for data transmission from a data center. The various risks which the business faces due to such an arrangement are given below in details:
2. Other businesses which are similar to Two Timer Bank has also contracted with Solution IT to host application from the same data center. There is a risk that there might be a mix up by the Solution IT of the for application which is to be hosted and thus resulting data swap, data mix up and other related problems(Knechel & Salterio, 2016).
3. The bank personnel are the ones who enter the data, run application on the IT system provided by Solution IT. There is a risk that the data might be wrongly entered which will be result in errors. Such errors cannot be rectified by such a software.
4. With the implementation of the IT system and installment of the same, the internal control of the Banks will strengthen as the system will automatically run the data and provide reports, summarizing every detail. Even though there is a risk which is associated with the manual entry of data in the system which might be wrongly entered by the employee, the IT system will be appropriate for the Banking business. The internal control of the business will be effective and efficient as it will be able to provide every data which is entered in a summarize and report form(Badara & Saidin, 2013). In addition to this, the arithmetical accuracy of the information entered can also be established. Thus, it can be said that with the introduction of the IT system Two Timer Banks will have better internal control system.
5. As per the question Two Timer Bank has contracted Solution IT to host the accounting applications and also provide a data center from where data can be send and received. In such circumstances after the installation of the IT system the internal control of the Bank will be strong and therefore the auditor will be able to rely on the reports which are generated by the system. However, the auditor will at first be testing the system in order to ensure that the system is working effective or not(Pizzini, Lin & Ziegenfuss, 2014). The auditor can also enquire to Solution IT to get a basic idea about the working of the system and identify id there are any risks involved with the same.

1. The eight functions of Sales and Collection cycle are Processing customer orders, Granting credits, Shipping Goods, Billing customers and recording sales, Processing and recording cash receipts, Processing and recording sales return and allowances, Writing off Uncollectible accounts, Providing for bad debts. The cases which are given in the questions are analyzed below:
2. In case of Universities where the main customers of the business are the students of the university. In case of a university, the customers are the students of the university. The courses which are offered and which are applied by students can be considered a processing of orders. Granting Credits in this case as full payment of course fee is necessary and no credit is allowed. This is not also applicable as the university is providing educational services and therefore there is no goods involved. The shipping goods does not apply to such a business. In the case of University, when the student enrolls for a course, he needs to clear his fees and this is considered to be sales of the business. The billing for the services is to be done in advance for the student. The cash which is generated from fees collected from part time and full-time students which are mostly tuition fees are recorded accordingly. Processing and recording Sales return and Allowances is not applicable to the business as university do not provide any refunds of fess(Osadchy & Akhmetshin, 2015). Writing off of uncollectable accounts is not applicable in such a business and therefore bad debts also does not arise.
3. In the case of Aroma Coffee business, the order processing is done when the customers order coffee or teas from the business. The business does not grant credit for the products which are provided by the business. The shipping of goods for Aroma Coffee is not applicable(Whitehouse, 2014). The customers are billed for the orders which are made by the customers and similarly record the sales and cash is received for the products. In case of any problems in the coffee, the business will provide free coffee if the claim is genuine. There is no uncollectible accounts or bad debts for the business.
4. In case of a Physician services, the patients make appointments with the Physicians where the processing of orders are made. Patients who are insured by insurance company are provided credit for treatment as the amount will be recoverable from insurance company. In this case also there is no shipping of goods as the business provides services in the Medical center itself. The bills are generated on the basis of the medical services which are taken by the patients and same is recorded in the registrar. The cash is received in advance for general patients and for patients covered by Insurance company credits are provided. There is no case of sales return or bad debts. Uncollectible amount can occur when the business has to collect money from the insurance companies.
5. The business of Buku.com is an online website which provides all kinds of products to its customers and the business specializes in selling of books and used books. The order is processed when customer orders a product in the website. The business provides a credit in the form of 30 days period from receiving the order. As it is global brand therefore certain products which have to be shipped in or out depending on the location of the customers. Such transport cost forms a part of the cost of the product. The customers are billed and the customers have the option of make immediate online payments or cash on delivery as preferred. In case of any defective goods or if the customers are not satisfied goods are returned and replacement of the same is made. Uncollected amounts and bad debts are rare but it occurs which is written off by the company.
6. The eight sales and collection cycle functions will be different for different cases of business. For example, in a manufacturing concern, all the eight functions will be applicable and the business might also have bad debts(Lidstone & MacLennan, 2017). Similarly, in case of a business which provides services, all the sales and collection function might not be applicable.  

Reference

Badara, M. A. S., & Saidin, S. Z. (2013). Impact of the effective internal control system on the internal audit effectiveness at local government level. Journal of Social and Development Sciences, 4(1), 16-23.

Glover, S. M., Prawitt, D. F., & Drake, M. S. (2014). Between a rock and a hard place: A path forward for using substantive analytical procedures in auditing large P&L accounts: Commentary and analysis. Auditing: A Journal of Practice & Theory, 34(3), 161-179.

Griffiths, P. (2016). Risk-based auditing. Routledge.

Jali, M. N., Abas, Z., & Ariffin, A. S. (2017). Auditing and Internal Control. In SHS Web of Conferences (Vol. 34). EDP Sciences.

Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.

Lidstone, J., & MacLennan, J. (2017). Marketing planning for the pharmaceutical industry. Routledge.

Messier, W. F., Glover, S. M., & Prawitt, D. F. (2015). Auditing & Assurance Services: A Systematic Approach. Qing hua da xue chu ban she.

Osadchy, E. A., & Akhmetshin, E. M. (2015). Development of the financial control system in the company in crisis. Mediterranean Journal of Social Sciences, 6(5), 390.

Pizzini, M., Lin, S., & Ziegenfuss, D. E. (2014). The impact of internal audit function quality and contribution on audit delay. Auditing: A Journal of Practice & Theory, 34(1), 25-58.

Whitehouse, T. (2014). Auditing in the era of big data. Compliance Week, 11(126), 28.

William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic approach. McGraw-Hill Education.

Yang, K., & Jia, X. (2013). An efficient and secure dynamic auditing protocol for data storage in cloud computing. IEEE transactions on parallel and distributed systems, 24(9), 1717-1726.