1.Based on the doctrines of “International Auditing and Assurance Standard Board”, the guidelines in order to utilise the services of an audit professional is given. In the audit plan procedure, the board has laid forward the vital matters, which is needed to be taken into account on the part of the auditors while detecting material misstatements in financial reports (Badertscher et al. 2017). Another vital element concerning the auditors is to use rightfully the gathered information as evidence while carrying out the audit plan process. For achieving the same, it is required for the auditors to possess three main features taking into account competency, objectivity and capability, if the audit expert’s service is needed. When utilising the service of an audit professional, the consideration of the following aspects needs to be made:
It is the accountability of the audit professionals to obtain considerable evidence of audit along with determining the need for internal audit, while carrying out the audit-related tasks of non-accounting organisations. There needs to be competency, objectivity and capability within the audit professionals, if the organisation needs their services. Therefore, competency is crucial for the external auditors while auditing the books of accounts of the organisations, since it is associated with the nature and degree of expertise of the auditors. At the same time, it is crucial for the audit professionals to possess the capability of realising specific audit issues for the auditing clients. For objectivity, it could be observed that few vital aspects such as favouritism and conflict of interest have adverse effects on the opinions of audit. An auditor’s opinion would not carry any value, if it expresses anything besides the objective related to auditing operations.
Based on the case study of DIPL, the services of an audit professional could be used in the below-stated cases:
After assessing the condition of DIPL, it could be observed that for covering the anticipated decline in inventory value and scarcity, there is presence of inventory and purchase of obsolete inventory in the past year of the organisation. Hence, for ascertaining the anticipated value of obsolete inventory, the services of an audit professional could use to obtain an overview of the overall inventory amount (Chou 2015).
The assessment of the financial reports of DIPL cites that the organisation uses the straight-line method of depreciation on their non-current assets coupled with the value of impairment. Henceforth, in order to calculate the depreciation amount and precise value related to impairment of asset, there is a requirement for the organisation in using the service of audit professionals for depreciation purpose.
2.Materiality denotes some of the primary influential dynamics, which are adjudged as significant barriers during true and fair representation of the financial reports with special adherence to the needed regulations of accounting. Based on the DIPL case study, five main factors are inherent, which have significant impact on the entire materiality of the organisation. It is to be noted that any type of misstatement in the financial reports could have considerable influence on the fair presentation related to financial information. The misstatement creation could be seen from various types of errors and frauds.
The detection, description and impact of the factors on the materiality of the organisation are discussed briefly in the following sections:
a.The main five factors identified behind the determination of preliminary figure on overall materiality of the organisation are discussed briefly as follows:
Risk related to fraud:
Fraud risk has created effects on the materiality of the organisation in DIPL. According to the provided case, the board of DIPL has formed considerable pressure on the business operations of the organisation due to IT segment’s accountability in developing the new system of accounting. Because of this aspect, the likelihood of various risks related to fraud could be viewed in the entire operations of the organisation. Such risk could have considerable influence on the materiality of financial reports of DIPL (Cohen and Simnett 2014).
Based on the provided case of DIPL, it has been observed that the average cost method for raw material valuation could not be adjudged effective for the organisation. The primary reason of this ineffectiveness is the undervaluation of the existing paper cost under the average cost method at the time of inventory recording (Duncan and Whittington 2014). Hence, it could be cited that such specific aspect could have influence on the materiality of the financial statements of DIPL.
When the financial statements of DIPL are prepared, the management of the firm has not recorded various transactions either deliberately or by mistake (Houghton and Campbell 2013). Such specific aspect has influence on the process of planning of DI pertaining to selling activities. Moreover, the management of DIPL did not take into account the impact of both macro-economic and micro-economic factors like political, economic and social factors , which has influence on its overall materiality and process of planning of the organisation.
According to the provided information of DIPL, it has a complex method of appointing CEO. Significant risk is involved in appointing new CEO coupled with transition of last CEO, since the entire process is not conducted based on the requisite scheme. The process of appointing new CEO has been conducted after due date and this method exposes the business activities of the organisation to many risks. Hence, such condition might have considerable effect on the overall materiality of DIPL (Knechel and Salterio 2016).
The cash receipt recording is a significant factor having association with the overall materiality of DIPL. The organisation spends huge amount of money as expenses through electronic medium. The use of electronic medium is made for the accounts to integrate the entire process in accounting through download of the receipts from mails. Hence, an improvement is required in the overall process for conducting it frequently and the execution could be made by month end. Along with this, DIPL’s procedure of obtaining revenue from e-book marketing coupled with printing and republishing might have severe influence on the entire DIPL materiality.
b.The above factors identified are relevant to the calculation of materiality in the following ways:
Risk related to fraud:
The error incidence could be observed during completion and data processing from the financial reports at the time of preparing the same. Moreover, there is incidence of error at the time of application of various policies related to accounting. These are associated with categorisation and valuation of the financial items when financial information is disclosed. Hence, there is direct association between fraud and material misstatement (Peters and Romi 2014). This necessitates the need of expert opinions in this field.
The inherent risks could have considerable effect on the overall materiality of the organisation. There is lack of objectivity and integrity in the work of management of the organisation. Such specific aspect could have influence on the financial position of the organisation by providing the users with falsified financial information.
The activities of fraud from the staffs could be viewed due to excessive pressure from the board of DIPL, since the incorporation of new accounting system has affected the financial information of the organisation. Because of this, this matter could have negative effect on the materiality of the organisation (Pitt 2014).
It could be viewed that the complicated procedure of appointing the new CEO jeopardises the organisational lucidity, which has considerable impact on its decision-making procedure. Hence, this total aspect has major impact on the entire materiality of DIPL.
The adopted procedure of accounting in relation to raw materials has considerable impact on the materiality of the organisation. Therefore, it is to be cited that the incorporation of correct procedures of accounting allows the users to ascertain the fair and true financial condition of DIPL (William Jr, Glover and Prawitt 2016). Hence, it could be stated that the ineffective process of recording the receipts of cash could have influence on the materiality of DIPL.
c.Impact of risk related to fraud on materiality:
The administrative functions associated with the department of IT were not in line with the implementation of machinery. Due to this reason, the staffs face considerable pressure from the DIPL board to evaluate and reconcile the effectiveness of the implemented system of accounting. This specific aspect has formed significant aspect on the entire materiality of the financial reports of the organisation.
It is to be mentioned that the average cost method adopted for valuation of inventory on the part of the organisation is not considered as a suitable method because of the undervaluation of the current papers. The DIPL accounting policy could be influenced mainly by wrong mechanism related to valuation of inventory and the entire accounting policy has association with the materiality factor (Wong and Millington 2014). Such wrong adoption of mechanism has significant effect on the materiality of financial statements of the organisation.
The inability of the management could be seen from the adoption of wrong financial information in the organisation, as it has failed to take into account micro as well as macro-environmental factors. Because of this reason, the users of the financial reports could not obtain a fair picture of the overall financial position of the organisation. Moreover, it has not recorded few transactions in accounting, which could have major impact on the entire materiality of DIPL.
The method of appointing CEO is a complicated procedure developing influence on the materiality of DIPL. In this procedure, the services of audit professionals are needed to select the CEO with utmost care.
The electronic medium used to pay for expenses could have impact on the procedure of maintaining financial transactions of DIPL. Hence, the management of DIPL is not able in recording receipts for cash transactions, which could lead to the decline of the entire accounting system of the organisation.
References:
Badertscher, B.A., Kim, J., Kinney, W. and Owens, E.L., 2017. Audit Procedures and Financial Statement Quality: The Positive Effects of Negative Assurance.
Birkey, R.N., Michelon, G., Patten, D.M. and Sankara, J., 2016, September. Does assurance on CSR reporting enhance environmental reputation? An examination in the US context. In Accounting Forum (Vol. 40, No. 3, pp. 143-152). Elsevier.
Carson, E., Simnett, R., Trompeter, G. and Vanstraelen, A., 2014. The Impact of Group Audit Arrangements on Audit Quality and Pricing.
Chou, D.C., 2015. Cloud computing risk and audit issues. Computer Standards & Interfaces, 42, pp.137-142.
Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A Journal of Practice & Theory, 34(1), pp.59-74.
Duncan, B. and 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.
Houghton, K. and Campbell, T., 2013. Ethics and auditing (p. 354). ANU Press.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Peters, G.F. and Romi, A.M., 2014. The association between sustainability governance characteristics and the assurance of corporate sustainability reports. Auditing: A Journal of Practice & Theory, 34(1), pp.163-198.
Pitt, S.A., 2014. Internal audit quality: Developing a quality assurance and improvement program. John Wiley & Sons.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic approach. McGraw-Hill Education.
Wong, R. and Millington, A., 2014. Corporate social disclosures: a user perspective on assurance. Accounting, Auditing & Accountability Journal, 27(5), pp.863-887.
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