Auditing Practice For Regulations And Auditing Standards

Impact of Purchasing and Selling through Internet on Business Operation

Discuss about the Auditing Practice for Regulations and Auditing Standards.

In today’s modern era, there exist a number of regulations and auditing standards which create complications in the role of auditor. Additionally, adoption of technology by businesses has aggravated these complications. Companies in Australia have been confronted with a number of issues while conducting selling and purchasing transactions through online platforms. These often lead to malpractices and manipulation, on the part of companies, in representing the financial data. As a result, identification such misstatements by auditors becomes a challenging and tedious task.

 This essay provides a brief understanding of various challenges that an auditor faces while auditing an entity. It discusses the impact of online purchasing and selling of goods on business operations. The essay also highlights various business risks regarding online transactions in Australia which leads to material misstatement in the financial statements of business entities. Finally, it concludes with discussion on auditor’s responsibility to detect these frauds and misstatements.

Nowadays, technology leads to dilemma for businesses to purchase and sell the goods through internet. Most of the businesses have adopted the internet based procurement and sales options which have impacted their operation by both perspectives, positive and negative. A business organization operating through the internet based buying and selling is able to explore the business criteria at national as well as international level through capturing the new economic market. Through technology small organizations can expand their business which directly increases the revenue for the business. However, operating through online domain poses many risks for the organisations causing auditors to pay increased attention to the risks and financial misstatements undertaken by organisations as a result of their online operations. This further increases the work load for auditors (Tysiac, 2016).

Supply of goods through internet reduces the cost for business that results into more profit for organization. At the same time customer base is also increased because of the convenience and reliable service through internet based buying and selling (Barnes and Hunt, 2013). Internet purchasing and buying also impacts the operation of the business legally as shipping the goods to areas where the sales tax is required leads to violation the local laws thereby leading to legal implications. Computers integrate the communication technology and allow easier access to information throughout the globe. Supply chain management procedures can also be improved by using internet to deliver the product at the right time.

Business Risks due to Online Transactions

Furthermore, technology can have a mixed impact on the business operations. On one hand, it can lead to loss of confidential information of business through cyber crime or malfunction of system due to virus thereby reducing the overall work efficiency. On the other hand, through the use of technology, a secure environment can be created for the protection of consumer information and maintaining business operation efficiently. Initially, installation of required equipments for online operations may lead to greater costs for the organisation. However, these costs can be easily covered over the long run through generation of higher profits while operating the business on the virtual domain (Pirouz, 2012). 

Taking an auditor’s perspective, technology enables them to improve their skills and the quality of their work that too in less time as compared to the manual handling of the audit work. Moreover, the auditors can make audit strategy by the use of technology which leads to the better account handling process for business.  But, with changing technology, it is also difficult for auditors to develop the required skills to handle technology based data base and systems. Most of the auditors struggle in understanding and developing the skills and systems required for efficient and effective auditing of the business (Audit and Risk, 2016).

As businesses in Australia are embracing the new mode of transactions, they are exposed to higher number of risks as a result of use of new technology. These risks include legal risks, risk of charge backs, laundering of sales, cyber security, information security and many more (Audit and Risk, 2016).

Risk of legality can be considered as major risk in online business and arises as a result of selling goods and services in some areas where it is considered illegal.  Therefore, shipping of products to these areas creates liability for business as it is violating the local laws of that area. Moreover, there is requirement in some areas for collection of sales tax on internet sales. If the business is not able to collect state sales taxes even if it sells products to individuals in these areas, it creates problem for business with state revenue department.  Fluctuation in foreign currency is also an important risk in online business, as business is done internationally and due to sale and purchase of products, there is exchange of currencies of different countries. Therefore, fluctuations in the value of currencies occur, which can impact the profitability of the business (Madura, 2014). Additionally, transaction risk also occurs due to change in exchange rate between the date when price is agreed and date when actual payment is made by the customer.

Financial Statement Manipulations

Another risk that can be included in online business relates to data recording and security and may involve incorrect recording and presentation of transaction that has not been incurred. This means that recording of that transaction in financial statement of business which is not actually incurred. The merchant in online business also faces the risk of charge backs. Charge back is defined as mandatory refund of money to customer (cardholder) by the business. A chargeback is occurred due to problem raised by the person (cardholder) making transaction with the business. The problem may relate to not delivering of good as per expectations of the customer (Westpac Banking Corporations, 2014). Another reason may be that cardholder claims that they did not authorize the purchase as whether the person making transaction is actually the owner of that card or not. In addition to this, goods that are received by customer may be faulty of defective.

Laundering of sales in online business includes chance of fraudulent transactions being processed. Laundering in online business is occurred when a merchant involved in business with as appropriate merchant facility accepts responsibility or recording transaction on behalf of another business. This may lead to improper or unauthorized recording of transactions (Westpac Banking Corporations, 2014). It may also lead to recording amount of revenue generated from sales in account of person recording the transaction instead of recording the transaction in business involving actual sales. Thus, these risks pose threats to the proper working and smooth operations of business.

The above identified risks can lead to fraud practices or misstatement in financial statement on the part of businesses to cover financial distress or wrong doings of the business (Gay and Simnett, 2015). These financial misstatements can be undertaken in different manners. For example, as per specified requirements in some areas regarding collection of sales tax on internet sales, if the products are sold by business in that areas the businesses are required to collect tax on their sales. Therefore, failure to collect sales tax from the customers leads to tax evasion by the business (Khanin and Mahto, 2012). It affects the financial statements of the business as it leads to understatement of liabilities in order to show profitable picture of its financial position.

Fluctuation in foreign currencies creates manipulation in financial statement because fluctuation increases or decreases the value of money. This leads to difference in the value of product that is already recorded in financial statement and the value that is change due to fluctuation in currency. Moreover, recording of some transactions in financial statement that has not been actually incurred creates misstatement/ manipulation in financial because it affects the overall revenue of the company. This leads to increase in revenue of the company through falsified act.

Fraud and Misstatements Identification by Auditors

The risk of charge backs may lead to manipulation of revenue in the financial statement because before at the time of making transaction with the customer, the amount at which product is sold to customer is recorded in the financial statement. But after providing charge back from customer, the transaction is required to be rectified in the financial statement. This required change is not made by business which leads to unnecessary increase in revenue which ultimately leads to misstatement of transaction.  Laundering of sales may effectively lead to misstatement in financial statement of business because, even if a sale is done but the amount of sale is not recorded in financial statement or vice versa. This leads to misrepresentation of actual revenues generated by the business.

Auditors are the external examiner of the business account to find out the fraud and misrepresentations of the financial statements. They can easily find out the whether the procedure adopted for creating financial statements is as per the rules and regulations of accounting system or not (Pcaobus, 2015). Auditors can assess whether the financial statements that are appropriate or not and can identify the fraud and misstatements in final accounts.

Auditor can detect the fraud in revenue representations through various methods like they can adopt a systematic procedure to check the portion of sales tax that is fully collected from the customer. At the same time auditor can also identify the accounting process by the revenue recognition method that enable the auditor to identify the fraud with the financial statements. Many people are involved in the preparation of financial statement, so auditors can assess the misstatement by the inquiries of individual who entitled for journal entry and other adjustments (Moorthy et al., 2011). Furthermore, the auditors can scan internal networks for any data manipulation or system malfunction. In addition to this, use of computer can also be helpful for the auditor to assess the financial statement by updating the accounting system in computer. Computer data processing can help in assessing the auditors to evaluate the internal control and analytical review of account.

Automated process of transferring the information through using IT can evaluate the fraud and misstatement in the financial accounting procedures. At the same time auditors can adopt the ERP system to identify the risk in financial statement of the business (Hall, 2015). Laundering of sales may result into the manipulation of data, when the transaction is not recorded therefore auditors can find out the fraud to check the gap between the transaction times. The electronic data processing changed the way to analyze the process of internal audit and information system audit and control association also provide the new standard guidance for the auditor.

Conclusion

On the basis of above discussion it can be concluded that auditors face many risk such as legality risk, misstatement of transaction, laundering of sales, fraudulent risk, fluctuation in currency rate, manipulation of financial statement and charge back, due to use of the modern technology.  Additionally, management of organization can play crucial role in these instances of fraud and misstatement of financial statements. These risks can be identified by the review of internal audit, testing of internal networks and by adopting the ERP system. At the same time audit if IT infrastructure to access any manipulation in data recording can also be helpful in identifying the risk of misrepresentation of transaction.

References

Audit and Risk (2016) Technology risk are beyond most firms’ IT audit capabilities. Available at: https://auditandrisk.org.uk/news/technology-risks-are-beyond-most-firms-it-audit-capabilities (Accessed: 17 September, 2016)

Barnes, S. and Hunt, B. (2013) E-Commerce and V-Business. Melbourne: Taylor & Francis.

Gay, G. and Simnett, R. (2015) Auditing and Assurance Services in Australia, 6^th ed. Australia: McGraw-Hill Education.

Hall, J.A. (2015) Information Technology Auditing. USA: Cengage Learning.      

https://www.businessreviewaustralia.com/technology/1115/The-Impact-of-Technology-in-Business (Accessed: 17 September, 2016)

Khanin, D. and Mahto, R.V. (2012) ‘’Regulatory risk, borderline legality, fraud and financial restatement’. International Journal of Accounting & Information Management, 20(4), pp.377-394.

Madura, J. (2014) International Financial Management. Australia: Cengage Learning.

Moorthy, M.K., Seetharaman, A., Mohamed, Z., Gopalan, M and San L.H. (2011) The impact of information technology on internal auditing, African Journal of Business Management, 5(9), pp. 3523-3539.

Pcaobus (2015) AS: 2401 Consideration of Fraud in a Financial Statement Audit Available at: https://pcaobus.org/Standards/Auditing/Pages/AS2401.aspx (Accessed: 17 September, 2016)

 Pirouz, A. (2012) The Impact of Technology in Business, Australia Business Review. [Online].  Available at:

Tysiac, K. (2016) How internal audit can help manage 10 top technology risks, Journal of Accountancy. [Online]. Available at: https://www.journalofaccountancy.com/news/2015/aug/internal-audit-technology-risks-201512911.html (Accessed: 17 September, 2016)

Westpac Banking Corporation (2014) Merchant business solutions. [Online]. Available at: https://www.westpac.com.au/docs/pdf/bb/Merchant_Fraud_Brochure.pdf (Accessed: 17 September, 2016).