Discuss about the Issues in Auditing Practice.
The general ledger accounts reflect the existing balances of Bob’s Bikes that would have an impact on the financial condition of the business entity. Therefore, the concept of materiality in the case of would analyze accounts that are overstated.
According to Arens (2012), “The depreciation as well as the cost of sales in the business entity can be considered for evaluation irrespective of their quantitative materiality”. The cost of sales would reflect the total amount of expenditure that would be necessary for the manufacturing as well as the distribution of goods (Arens et al. 2012).
The trial balance of the business organization presents the detail of each of the financial transactions that is happening within the business entity (Biggs et al. 2012). If the trial balance of the business organizations is, considered business items like Cash at bank, inventory as well as accounts receivable as well as wages superannuation as well as the owner’s equity of a business entity.
The five accounts that are to be considered are Inventory, Sales, Owner’s equity as well as the wages. Rationale- It is very necessary to analyze the reasons behind the selection of the five accounts for passing on judgment of materiality. The following accounts are evaluated in an in-depth manner.
Cash at Bank- The cash at bank represent the financial position of the business enterprise.
Sales – The sales account would reflect the amount of revenue that is available to the business organization in a quarterly or annual basis. Therefore, the sales account of the business organization shall reveal the market growth achieved by the business organization in terms of revenue.
Owner’s equity – The owner’s equity would state the necessary amount of investments made by the owner in the business (Budescu et al. 2012). As such, the owner’s equity is one of the essential components that are stated in the balance sheet of the business organization. Therefore, the owner’s equity is a substantial portion of the total assets of a business
Wages –The concept of materiality would have to be judged from the point of view of the amount of wages paid to the workers on a monthly basis (Boritz and Huo 2013). The payment of monthly wages is a necessary part of the operational expenditures of a business entity. The auditing measures must consider the wages paid, so that no financial data is manipulated deliberately.
The systematic method of sampling has been used in selecting the sales transactions in a particular accounting period. The systematic method of sampling entails dividing the number of sampling units by the population size within a business unit (Chandler and Edwards 2015).
The revenue account selected is the sales account. The systematic sampling technique has been selecting the financial transactions based on their value as well as their relevance to a business enterprise (Contessotto and Moroney 2014). The sampling technique has been choosing the financial transactions based on their monetary value as well as their impact on the financial statements of a business entity.
The following are the advantages of systematic sampling method
Cost effective- The systematic random sampling method is cost –effective and provides a number of options to employer. As such, the management of a business enterprise would not have to incur considerable expense in running the audit procedure. The systematic sampling method is cheaper than the other modes of sampling techniques (Evetts 2014).
Simplistic- The systematic random sampling method is simplistic yet effective. Therefore, this would enable the business enterprise in the systematic implementation of the audit procedure, which would help the organization in facilitating transparency as well as authenticity of the financial statements of an entity.
Relevance- The systematic random sampling method has acquired considerable relevance for the audit procedures implemented in the audit procedure. As such, the systematic random sampling method can be applicable to any sector for the purpose of audit. (Furnha and Gunter 2015).
The haphazard technique is executed without considering any specific structure. In addition, the haphazard technique can require extra time when compared to the systematic sampling method (Griffith et al. 2012). The haphazard technique can bring biasness to the auditing process in a business entity. Thus, this would have a considerable adverse influence on the auditing process that is being implemented.
The random sampling method also has several limitations and it is not as effective as the systematic sampling method of collecting financial transactions. The random sampling method can be only used in gathering of physical evidence for the research procedure (Hayes et al., 2014).
The random sampling method is also rigid and is not adaptable to the changing circumstances. As such, the random sampling method cannot be used when there is adequate complexity in the financial operations of a business entity. Therefore, the random sampling method would not be suitable for Bob’s Bikes
A substantive audit approach shall allow the auditor to gather the intrinsic details about each financial transaction. Thus, the auditor’s team would verify each vouchers of the financial transaction taken within the organization. This process of audit would enable the auditor to find out the discrepancies in the operational strategies and take the necessary measures to prevent any kind of financial losses (Johnstone et al. 2013).
The audit assertion of “occurrence” would be the most appropriate factor that has to be considered in the development of the operational strategies of the business enterprise. (Tabor 2013). The occurrence would state the event at that point of which the financial transactions have been a part of the organization. Besides this, each of the aspects of the financial transactions would have to be analyzed to ensure there is no manipulation of data.
Vouching would be a more appropriate form of audit than testing. As such, this would entail selecting a group of accounting journals and ledgers from the books of accounts that can be expected to have a maximum impact on the operational procedures and the financial condition of the business entity. In addition, noted that vouching would provide the opportunity to the auditing team to take the necessary measures for the development of the organizational policies for the business enterprise (Srivastava and Shafer 2012).
The purpose of vouching would be established if the physical evidence of each financial transaction is matched with the amount that is established in the books of accounts for the organization (Kumar and Sharma 2015). Tracing would be more appropriate if the scale of operations for the organization is low. As such, vouching would be more appropriate than tracing and would assist the business entity to find out the discrepancies in the books of accounts of the organization.
The auditing assertion of accuracy is one of the factors that would have an impact on the authenticity of the financial statements prepared at the end of a year. As such, “accuracy” would help the auditing team to determine the level of accuracy currently existing within the financial statements prepared at the end of a year and the necessary measures that can be adopted. Furthermore, the auditing assertion of accuracy would help the business enterprise in ascertaining that the payment of wages as well as the salaries has been calculated in an appropriate manner (Rust et al. 2011).
The audit assertion of accuracy is a significant part of the auditing procedures implemented in a business enterprise (Lenz and Sarens 2012). The annual expenses consisting of the fixed as well as the variable cost of the organization would have to be thoroughly analyzed to prevent any kind of financial manipulation on the part of the organization.
A misstatement of $20000 cannot be considered acceptable since this would have an adverse impact on the financial position. Besides this, a misstatement of $200000 would result in inaccuracies in the financial statements prepared at the end of a year. Therefore, misstatement of $20000 cannot be deemed acceptable.
The magnitude of misstatement would not be relevant if tests of control were applicable instead of the substantive testing method. Therefore, the tests of control in an auditing procedure would refer to testing the benefits or effectiveness of the control procedures implemented in an entity to detect any manipulation or the misappropriation of funds of an entity.
The tests of control shall have to be used in the facilitation of authenticity of the books of accounts for the business enterprise (Messier Jr 2016). The tests of control could be classified into three categories like re-performance, observation as well as inspection. Thus, any misstatement of $20000 would not be easily detected by the internal control method adopted in the audit procedure.
The following information can be considered necessary before the publication of the auditing results:
Financial Policies – Data shall have to be gathered regarding the kind of financial policies that is adopted in a business organization for the execution of the business functionalities in an organization.
External Financing – Auditors need to acquire the necessary information regarding the external financing strategies that are being adopted in case there is a shortage of funds.
If the financial condition of business entity de-stabilizes due to misappropriation of funds or there is wastage of financial resources for the business enterprise a part –year trial balance can be used for substantive testing of the auditing procedures (Peters 2012). In addition, it would offer the necessary guidelines that can be taken to implement the corrective measures. In the case of Bob’s Bikes, there would be increased financial complexities since the business entity has been operating in a large scale.
List of References
Arens, A.A., Elder, R.J. and Beasley, M.S., 2012. Auditing and assurance services: an integrated approach. Prentice Hall
Biggs, S.F., Mock, T.J. and Watkins, P.R., 2012. Auditor’s use of analytical review in audit program design. Accounting Review, pp.148-161.
Boritz, J.E. and Huo, K., 2013. Business Models and Audit Risk Assessment: An Investigation of Alternative Information Presentation Techniques. In CAAA Annual Conference.
Budescu, D.V., Peecher, M.E. and Solomon, I., 2012. The joint influence of the extent and nature of audit evidence, materiality thresholds, and misstatement type on achieved audit risk. Auditing: A Journal of Practice & Theory, 31(2), pp.19-41.
Chandler, R.A. and Edwards, J.R., 2014. Recurring Issues in Auditing (RLE Accounting): Professional Debate 1875-1900. Routledge.
Contessotto, C. and Moroney, R., 2014. The association between audit committee effectiveness and audit risk. Accounting & Finance, 54(2), pp.393-418.
Evetts, J., 2014. The concept of professionalism: Professional work, professional practice and learning. In International Handbook of Research in Professional and Practice-based Learning (pp. 29-56). Springer Netherlands.
Furnham, A. and Gunter, B., 2015. Corporate Assessment (Routledge Revivals): Auditing a Company’s Personality. Routledge.
Griffith, E.E., Hammersley, J.S. and Kadous, K., 2012. Auditing complex estimates: Understanding the process used and problems encountered. W orking paper, University of Georgia.
Hayes, R., Wallage, P. and Gortemaker, H., 2014. Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.
Johnstone, K., Gramling, A. and Rittenberg, L.E., 2013. Auditing: A Risk-Based Approach to Conducting a Quality Audit. Cengage Learning.
Kumar, R. and Sharma, V., 2015. Auditing: Principles and Practice. PHI Learning Pvt. Ltd..
Lenz, R. and Sarens, G., 2012. Reflections on the internal auditing profession: what might have gone wrong?. Managerial Auditing Journal, 27(6), pp.532-549.
Messier Jr, W., 2016. Auditing & assurance services: A systematic approach. McGraw-Hill Higher Education.
Peters, J.M., 2012. A knowledge-based model of inherent audit risk assessment.
Rust, M., Barrows, F., Hardy, R., Lazur, A., Naughten, K., & Silverstein, J. 2011. The Future of Aquafeeds, NOAA/USDA Alternative Feeds Initiative, NOAA Technical Memorandum NMFS F/SPO-124.
Srivastava, R.P. and Shafer, G.R., 2012. Belief-function formulas for audit risk. Accounting Review, pp.249-283.
Tabor, R.H., 2013. Internal control evaluations and audit program revisions: some additional evidence. Journal of Accounting Research, pp.348-354.
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