Question no 1
With the increased regulations and compliance requirements, audit has been an inevitable part of company’s post facto check of the accounting. There are various aspects and methods of auditing. The books of accounts cannot be taken into consideration and cannot be assumed to give reasonable assurance unless it has been checked and the auditor has stated opinion on the same. With the increased compliance requirements mandated by ACCA and IFRS, audit is no longer assumed to be the activity only concerned with checking of the books of accounts in search of frauds and errors or to express an opinion on it. It also asks whether the reporting has been done in the prescribed format, whether the internal controls in the company are adequate, whether the independence of directors is existing, whether the company is aware and complaint of its corporate social responsibility.Along with whether the accounts prepared are relevant to the internal and external stakeholders like creditors, loan financing companies, shareholders, customers, government, etc. Audit also focuses to bring about the changes in the procedures and processes being followed currently by the company, an example of which is the use of estimates in taking the provisions, etc (Knechel & Salterio 2016). Auditors generally focuses on two crucial audit procedures starting with substantive audit procedures, which include checking of all the incomes and expenditures, recorded in the books with the relevant supporting and evidences such that wrong recording or false recording to misstate the financial statements can be avoided and brought to the notice of the management. This also has a bearing on the control perspective as the flow of the activities should be from department to department and person to person and not all the critical tasks can be given to a single person like invoicing and collection, etc., as it increases the risk of frauds (Grenier 2017).
When the substantive audit procedures are not enough to express an opinion, the auditor has to go for analytical procedures which includes trend analysis over the past period using the ratio analysis, budgetary analysis and forecasting, variance analysis and several other audit techniques which help them to determine whether further audit procedures need to applied or not. The main factor here is how good the internal financial control being established in the entity, in case the same is strong, less of audit procedures would be required, however, in case it is weak, it reflects more of the risks and more audit procedures needs to be applied. Besides all this, the auditor also has to comment upon the materiality level considered, whether the entity has been consistent in its approach and whether or not, it is a going concern. It needs to highlight the risk areas to the management and get a proper justification of the same as to how the same will be mitigated. All these factors affect the audit planning (Jones 2017).
Stewart, the client mentioned here in the question, is auditing DIPL, and Kathy for the first time since its taking over from the last auditors named ‘Jay and Associates’. In addition, there have been system changes and the policy changes in DIPL as compared to the last year and hence, the same needs to be considered before audit planning besides considering the results of the ratio analysis done below for the last 3 years (Raiborn, Butler & Martin 2016).
Below table summarizes the critical ratios like liquidity ratios, profitability ratios, debt management ratios and asset management ratios, following are the major observation:
From the above ratios, it is clear that the DIPL is firmly placed in terms of current and liquid ratio with both of them falling within the industry trend of 2 and 1 respectively. The profits have been stagnant at around 6% and the company has been finding it difficult to increase the margins. However, the collections have been on the weaker side and the debtors receivable days have increased from 26 to 42 days. The company should undertake possible options to make sure that the ratios are in favour of the company.
Solution 2
There are various types of risk that are associated with an audit some are in the hands of the management and some are not. Those risks that occur even though management has taken proper precaution from their side and have installed proper control facilities are known as inherent risk. Inherent risks are the most dangerous because they are neither in the hands of the management nor in the auditor. The other type of risks is control risk and detection risk. Control risks occur when the management does not apply proper internal control in the system, because of which there may be material misstatement. Detection risks occur when the auditor fails to detect some errors in the system. These are the most common type of risk it is because of lack of professional scepticism on part of the auditor. In case of DIPL, the company faces few inherent risks and they auditor must take proper steps to mitigate the same (Fay & Negangard 2017). The two areas where there might be risk of material misstatement are-
The company has started to adopt new methods and policies without proper expertise in the same. The management is opting for non-routine transaction, which is a major factor of risk. The company is asserting changing the methods of depreciation and to calculate the same by considering the life of asset to be thirty years whereas in normal procedure the life is considered twenty years. The company is also thinking of changing the method of calculation of inventory valuation. All this may lead to major changes in the overall accounting assumptions and principles. There is a risk of material misstatement because the change in methods might affect the overall functionality of the business and can lead to overvaluation or undervaluation of the financial statements. All that might affect the overall profitability of the company (Sonu, Ahn & Choi 2017). Thus in the end, in case the management is considering change of methods, proper control must be established and also care should be taken to make sure that these changes are implemented after expert advice and not just on mere judgement. The other case where there might be chances of inherent risk is in the adoption of the new It system, the company is doing the same without any sort of research and reconciliation. This may cause a lot of damage to the company by affecting its overall operations and functionality. It is thus important that when the management is considering new methods, expert advice must be done and all the judgement should be based on the same. The auditor needs to access all the risks properly and then make a statement on the same. It is important that the management must provide all the necessary help and support to the auditor to mitigate the risk (Fay & Negangard 2017).
Solution 3
Fraud occurs when the management or the employees indulges in certain activities that might leads to risk of material misstatement in the books of account, for their own benefits. It is one of the major risks that the auditor faces because it is very hard to detect these frauds as they are conceal very smartly. The auditor must apply all kinds of substantive and analytical procedures to might these frauds. In case of DIPL, there are few areas where there might be chances of fraud occurring and that might affect the functioning of the company. First in case of the company, there is no proper segregation of duties (DeZoort & Harrison 2016). It is important that important duties must be properly segregated and proper control and authority must be established. In case of DIPL, the accounts receivable is checked and reconciled by the same person. He prepares the bill, makes the pricing, verifies the bill s, authorises the payment and then make the reconciliation with the accounts. The cash collection department is also handled by on person, from downloading the e receipts to verifying the payment to ascertaining the debts; one person does the work. Therefore, when there is no control to keep check on their work, these people can easily defalcate the money and the management will not be able to understand also. It is therefore important that while taking such important decision the management should see that proper segregation of work is there and proper control is established. Timely checks must be done, surprise analysis can also be undertaken to catch them offgaurd. The auditor can mitigate the risk of fraud in these few ways. One more area is, where the management is installing the new It system. It is done in allot of haste so there are chances that some personal motive of the management might be involved in it. It is therefore important that the management before taking this important step make sure that proper reconciliation is done or not. The auditor should ask for all the necessary details that might be needed in conducting the audit effectively. The auditor should also take expert advice to make sure that the verification of the asset is done properly and the valuation is as per the market standards so that there is no over or under valuation. The changes should be such that it is of value to the business and not the management. The management should try its best to avoid chances of any fr4aud and it should not indulge in such activities. These are the few areas where there might be chances of fraud in the given company (Bae 2017).
References
Bae, SH 2017, ‘The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From Korea’, Journal of Applied Business Research, vol 33, no. 1, pp. 153-172.
DeZoort, FT & Harrison, PD 2016, ‘Understanding Auditors sense of Responsibility for detecting fraud within organization’, Journal of Business Ethics, pp. 1-18.
Fay, R & Negangard, EM 2017, ‘Manual journal entry testing : Data analytics and the risk of fraud’, Journal of Accounting Education, vol 38, pp. 37-49.
Grenier, J 2017, ‘Encouraging Professional Skepticism in the Industry Specialization Era’, Journal of Business Ethics, vol 142, no. 2, pp. 241-256.
Jones, P 2017, Statistical Sampling and Risk Analysis in Auditing, Routledge, NY.
Knechel, WB & Salterio, SE 2016, Auditing:Assurance and Risk, 4th edn, Routledge, New York.
Raiborn, C, Butler, JB & Martin, K 2016, ‘The internal audit function: A prerequisite for Good Governance’, Journal of Corporate Accounting and Finance, vol 28, no. 2, pp. 10-21.
Sonu, CH, Ahn, H & Choi, A 2017, ‘Audit fee pressure and audit risk: evidence from the financial crisis of 2008’, Asia-Pacific Journal of Accounting & Economics , vol 24, no. 1-2, pp. 127-144
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