Expert Services And Materiality Levels In The Audit Of Double Ink Printers Ltd (DIPL)

Background Information

1.Circumstances where the service of an expert is required

An expert except the accountant or the auditor is the person who has expertise knowledge in the field of –

• Calculation of liabilities as actuary with regard to the employee’s benefit plans or insurance contracts
• Evaluation of the general tax or the complicated issues associated with the compliance
• Valuation of the oil reserves or the gas service (Anugerah, Sari and Frostiana 2014)
• Analysis of complex financial statement and various items included there such as plant and property, liabilities and assets generated in the course of business combination, intangible assets, assets that are impaired, art works and antiques.
• Estimation of environmental liabilities and the costs associated the sites clean ups.

In the course of audit, the auditor shall gather required information regarding the work of the expert so that they can analyze the work sufficiency to carry out the audit and determine the objectivity, nature and scope of the work procedure of the expert for the audit purpose. While there is a requirement of the expert other than the accountant or the auditor at the initial stage the auditor must evaluate whether to what extent the service of the expert is required (Arens, Elder and Beasley 2014). In requirement of the external audit the auditor shall also evaluate the relationship with the client firm to assess the fact that there may involve the threat to the audit. The auditor shall also determine the capability, objectivity and competency of the expert required for the particular audit.

In the given circumstances of DIPL, it is analyzed that the company use straight line method of depreciation for the fixed assets. The fixed asset along with depreciation must be checked periodically if there is any indication of impairment. It may not be possible for the auditor to measure the impairment or evaluate the indication of impairment with regard to the fixed assets. Thus, for calculating the depreciation and appropriateness of the depreciation rate and identifying the indication of impairment and measuring the amount of impairment, the auditors require the service of an expert (Eilifsen, Hamilton and Messier 2017). Further, regarding the purchase and the existing inventory it has been identified that the obsolescence was already in existence from previous year to cover up the estimated decline in the value of the inventory arising from the storage hazards. Thus for determining the obsolescence value the auditor must avail the services of an expert as he may not be able to assess the value.

2.a.Identifying 5 factors that may have an influence on the preliminary figures with regard to overall materiality

The nature that is quality as well as the amount that is quantity for misstatement is significant for deciding the material fact. The objective behind audit of financial statement is enabling the auditor for expressing the opinion regarding whether all the material aspects have been taken into consideration while preparing the financial statement and whether the statements have been prepared with respect to all the required framework of the financial reporting. With regard to the auditing, the term materiality represents not only the quantified amount but also the impact that the amount will have on various contexts. During the procedure of audit planning the auditor determines at what level of the materiality the entire financial statements shall be audited. The term materiality is associated with the contents as well as type and level of the testing that is required (Lakis and Masiulevi?ius 2017).  The decision is taken on the basis of the specific circumstances, nature and size of the misstatement that may have an impact on the users of financial statements. Factors affecting the materiality are as follows –

1. Accounting policies – the raw material valuation procedure based on the average cost was not suitable as the valuation process of inventory for the raw materials is not appropriate. The reason behind this is the paper cost has been significantly went up that was required to be taken into consideration (Rkaur, Rani and Garg 2016).
2. Fraud risk – fraud is the important factor that may have an adverse impact on the materiality. In case of DIPL, it was found that the IT division was failed to install an appropriate accounting system and managed somehow to apply an accounting system (Tanyi and Smith 2014). Therefore, it exposed the company to the risks of fraud which in turn leads to materiality.
3. Registration of the new accounting system – Maintaining the cash receipts records by the cashier is not appropriate and may have an effect on the materiality. Generally, DIPL disburse the amount through the electronic system of payment (William Jr, Glover and Prawitt 2016). The registering and maintaining systems for receipt copy after downloading it from mail and reconciling the same is carried out by the assistant accountant. These procedures as well as the system of text book reprinting system may have adverse impact on the materiality.
4. Appointment procedure of CEO – the procedure for appointing the CEO, transition process of the previous CEO Ms Rebecca Styles and the commencement of work by Mr. William Jackson included various risks as these were not as per the required procedures (Knechel and Salterio 2016). However, the company did not start the procedure on time and the engagement of the CEO was not appropriate. Further, the leaving procedures of the staff members also exposed DIPL to different risks which in turn may lead to materiality (Acito, Hogan and Imdieke 2015).
5. Financial and environmental factors – DIPL did not considered various factors while prepared the financial statements which may lead to the inconsistencies with regard to the sales and marketing procedure (Kanatov, Atymtayeva and Yagaliyeva 2014). The company failed to achieve the target profit level as compared to sales. The reason behind this was that the administration of the company failed to recognize the specific items and the required procedures. Further, it failed to evaluate the macro and micro objectives that led to failure of recognizing the economic and socio-political factors.

Expert Services in the Audit of DIPL

b.Relevance of the identified factors for overall materiality

The inherent risk associated with the internal control system and the preparation of the financial statement has great impact on the materiality.  The management of the company failed to comply with the overall requirement of objectivity and integrity (Hayes, Wallage and Gortemaker 2014). Apart from this, the misrepresentation of the financial items also expose the company to the inherent risks as these misrepresentations will have an impact on various users of the financial statements like creditors, debtors, shareholders and potential investors.

The process of accounting used by DIPL management for the raw material valuation will have an impact on the materiality. The reason behind this is that the accounting process assists the raw material evaluation which in turn assists the users understanding the actual position of the financial items. Likewise the failure in incorporation of the environmental and financial factors by the management is considered to be an important factor that will affect materiality. Further, the appointment procedure of CEO will also affect the transparency system and will have an impact on the policies of the decision makers (DeFond and Zhang 2014). Moreover, the misstatements with regard to growth status of business of the company will have adverse affect on the materiality which in turn will mislead the users of the financial statements. The excessive pressure on the employees for the implementation of the new accounting system will have an impact on the overall materiality of the financial statements. Therefore, the identified factors are relevant for assessing the overall materiality.

c.Influence of the identified factors for overall materiality for the process of audit planning

1. Accounting policies – as the inventory valuation of raw material based on average cost was not appropriate, it can influence the substantive procedure with regard to the methods of the accounting. It may have an impact on the audit planning procedure and various strategic decisions.  
2. Fraud risk – as the manager from IT department was not satisfied with the installation procedure of the machine and the staff members were significantly pressurized for examining and reconciling the system, it may influence the audit planning process (Coetzee and Lubbe 2014). The reason behind this was that chances were there that various business transactions were not carried out properly.
3. Registration of the new accounting system – DIPL failed to register cash receipts and reconcile it which in turn may misstate the particular item in the financial statement (Chou 2015). Owing to this the auditor may not be able to express their opinion regarding those items and it may have an influence on the planning process of audit.
4. Appointment procedure of CEO – the CEO’s appointment by DIPL was not found in order and transition process of the previous CEO Ms Rebecca Styles and the commencement of work by Mr. William Jackson included various risks as these were not as per the required procedures (Baldauf, Steller and Steckel 2015). These were required to be through official process after proper authorization that should have been transparent and as per requirement.
5. Financial and environmental factors – the company failed to take into consideration various macro as well as micro environmental factors and various financial metric for carrying out the business. It will have an impact in the true and fair representation of the financial statement which in turn will influence the process of audit planning (Barndt, Fuller and Flynn 2016).

References

Acito, A., Hogan, C. and Imdieke, A., 2015. Integrated Auditing Standards and Financial Reporting Quality. Working paper, Michigan State University.

Anugerah, R., Sari, R.N. and Frostiana, R.M., 2014. The relationship between ethics, expertise, audit experience, fraud risk assessment and audit situational factors on auditor professional scepticism.

Arens, A., Elder, R. and Beasley, M., 2014. Auditing and assurance services-An integrated approach; includes coverage of international standards and global auditing issues, in addition to coverage of. Boston: Aufl.

Baldauf, J., Steller, M. and Steckel, R., 2015. The Influence of Audit Risk and Materiality Guidelines on Auditors’ Planning Materiality Assessment. Accounting and Finance Research, 4(4), p.97.

Barndt, R.J., Fuller, L.R. and Flynn, K.E., 2016. Teaching Inherent Risk and Tolerable Misstatement in Auditing: A Modified Delphi Method as a Teaching Tool. In Advances in Accounting Education: Teaching and Curriculum Innovations(pp. 125-140). Emerald Group Publishing Limited.

Chou, D.C., 2015. Cloud computing risk and audit issues. Computer Standards & Interfaces, 42, pp.137-142.

Coetzee, P. and Lubbe, D., 2014. Improving the Efficiency and Effectiveness of Risk?Based Internal Audit Engagements. International Journal of Auditing, 18(2), pp.115-125.