It is very important to plan an audit before initiating the audit procedure of the company. Before conducting audit procedure it is necessary to plan the procedures which need to be followed which includes deep study about the procedures which are followed by the company. As an auditor it is required to apply analytical procedures the nature time and extent to be applied during the process of audit. Analytical procedures are required in order to obtain the evidence for the authenticity of the transactions in the organization. The help of analytical procedures, ration ship between financial and non financial data can be ascertained. Some of the procedures comprises of comparison between different elements of data from the past years, unusual transaction which are not related to the company are checked, fluctuations in the figures from the past years, change in accounting policies.
Application of analytical procedures is necessary for the auditor to ascertain the fraud and error in the financial statements so that proper formal report can be made for the company. Therefore it is very necessary to plan the audit procedures to get the actual result from the financial statement prepared by the company. Plan which will be prepared as an auditor will be based on the results obtained through analytical procedures applied on the company. After applying the procedure if any which statement or error is noticed then that area need to be focused and is need to be deeply studied so that actual picture can be obtained from the figures. Only after the application of analytical procedures the auditor will be able to plan the areas which are more important in order to give true and fair view on the financial statements all the company. (Christensen, et.al., 2012)
In the present scenario as an auditor of the company it is required to apply analytical procedure so that any misstatement or error can be noticed on the financial statement. 3 years financial statements have been provided to the auditor and a full detailed plan need to be made so that the direction to conduct the procedure can be obtained. The plan will be focused on the areas where the error or fraud can be made by the company so that true and fair view can be obtained by the auditor.
EBook Storage Fees: From the income statement of the company eBook storage fees has been substantially increased from 2013 to 2015. In order to check the authenticity of eBook storage fees, of the storage should be checked manually by the auditor to check if there has been any miss statement made by the company.
Bad Debts: Since the bad debts have also been substantially increased, this can be checked why certain documents of debtors are made by the company. Auditor need to be check about the period from which the financial statements are made by the company. Reason for increase in bad debts need to be checked and the reason for increase in debtors over the past 3 years is also a matter of concern which should be checked by the auditor. He should ask from the management about the reason for delay in receiving the amount from debtors.
Stock: Stock balance in the balance sheet has also been substantially increased from 2014 to 2015. In order to check the authenticity of increase in stock manual check can be made in factory or warehouse. Also it can be checked from the inward and outward slip at the factory gate. The slips obtained from the factory should be confirmed by the stock lying in the warehouse by the company.
Cash: To check the actual balance of cash possessed by the company it is required by the auditor to compare cash balance possessed by the cashier and the balance shown in the financial statement by the company. Sudden decrease in cash balance would be ascertained by checking the balance of actual cash maintained by the company as well as from the receipts and payments lips and the counterfoil and the bank statement.
Employees Payments: Employees for the leave encashment can be checked from the policy is formulated by the company for the payment. If fixed amount is paid to the Employees then it need not be checked but if the amount is paid on the basis of receipt received by the company from the employees then it need to be checked carefully so that more payment is not made which is outside the area made by the company.
These are the items which can be verified by applying the analytical procedures which will assist the auditor when forming conclusion on the financial statements. The result obtained through this procedure will help in making plan before conducting the audit procedure. Investigation into the books of accounts and financial statement is also a part of analytical procedure which can be applied while conducting audit. The type of detailed analysis which is made specifically in the auditor is of the view that the financial statements have chances of fraud and error.
Revenue and Receipts: To check revenue and receivables auditor should adopt sampling method. By planning appropriate method in sampling should be taken by applying the procedure as per the results of the company and to check whether details have been attached with the revenue.
EBook revenue: The revenue generated to eBooks can be checked by making comparison between the manual receipts. The orders taken through online system can be checked by the receipt of actual delivery to the customer. This procedure will help the auditor in taking the result about the authenticity of the receipts and revenue of the company. EBooks revenue is a major source of revenue for the company so it is to be checked in detail manner so that any sort of error can be rectified then time.
After the application of analytical procedure the auditor will be able to understand the areas where detailed verification will be needed. This procedure is only applied so as to know the areas where a company has made error or fraud. In any organization fraud and error are committed by those employees who are internally connected with the company. There are fewer chances to detect the error committed by them as these are intelligently made. Therefore with the application of this procedure auditor can certain the areas where the management may have committed any sort of fraud. Conducting study of internal control system is also a part of analytical procedure applied by the auditor. This will help the auditor in determining the level of vouching and verification needed. If the internal control system of the organization is satisfactory less detailed verification will be needed but if it is found that the company has weak internal control system than the auditor need to check the items of financial statement in detailed manner.( Jans, et.al.,2014)
From the above discussion it is proved that planning of auditor is fully dependent on the analytical procedures and its results. Steps which should be formulated by the auditor in conducting audit a fully based on the results and application of the procedure supplied by him. So as an auditor he needs to analysis about the best procedure which should be applied towards the items of financial statement so that plan prepared fully cover the financial statement of company. Therefore the details of the company and the financial statement provided can be verified by applying the analytical procedure by the auditor and making plan for conducting audit and providing true and fair view on the financial statement.( Messier Jr, 2010)
Inherent risk is the response by the company which cannot be avoided and are inherent while preparing the financial statement. It is the error or omission made by the personal engaged in preparation of financial statements and it is occurred other than failure of control. Inherent risk can be occurred in any type of company and it is dependent on the type of work and the level of prevention taken by the employees in the company.
The two types of inherent risk which can be occurring in an organization are:
This inherent risk can occur in any organization even when proper care in recording the transaction is taken. It is called an inherent risk because it occurs due to weakness in internal control system of the organization. If the internal control system of an organization is strong the chances of occurrence of statement will be less as there will be proper recording of transaction without committing error. But is the internal control system of the organization is week they will be more chance of error and therefore the risk will be increased and will lead to the chances of inherent risk.
This organization has different aspects in which inherent risk can occur. The auditor needs to check the internal control system of the company to ascertain the level of inherent risk which can be rectified by conducting the audit procedure. The organization has different expenses in which the risk can be occurred while recording so the auditor need to all the expenses have duly been correctly recorded. An example of misstatement is that the inherent risk and also be occurred while recording salaries of the employees so that payment of salary should be checked with the paying slip possessed by the company. (Bame-Aldred, et. al., 2012).
The knowledge possessed by the person charged with governance can be checked by verifying the internal control system of the company. A company possessing a good internal control system will have less chances of inherent risk and also if there are any type of risk it can be easily verified and rectified. Auditor should take the knowledge about the authorities who will assist him in conducting the audit procedure and their past records to set the level at which he has to conduct his engagement with the company and the level of procedure to be applied why him to provide report on the financial statement. He can only provide true and fair view on the financial statement if he is satisfied with the reply received from the person charged with governance on the queries made by him.( Lou, & Wang, 2011)
The organization has to take care about them if statement in recording the transactions. Purchase and inventory of the organization is divided between different countries from Australia as well as from Asian countries. Recording of this needs to be taken care by the organization or the person who is charged with the responsibility. Are the chances of fraud can easily take place and miss statement can occur. The warehouse is closed by the organization from 28 to 30th June so the sales are invoiced in the system by close of business on 27th June. This should be correctly recorded in the system and should be checked by the auditor that no transaction has been recorded between 28 to 13th June.
As most of the transaction are systems generated so the order should check whether there have been any changes in the system so that undue benefit can be taken by the person handling the system. The system should be regularly updated and any chances of error which have been occurred before should be rectified by the developer of the system on regular basis. This will help in reducing the chances for committing fraud and risk will be reduced. The higher authority should review the working of the system and the work of the personal who is handling the system on regular basis and should prepare a report and provide it to the developer so that he can provide for any update to the system.( Hammersley, et.al., 2011)
So it is very important that the firm should assist the auditor in conducting the audit and to provide necessary evidence and documents which will be helpful to him in preparing the report and in providing true and fair view on the financial statement. If the auditor is satisfied on the authenticity of the financial statement and books of accounts he will be able to prepare clean report.
References
Christensen, B. E., Glover, S. M., & Wood, D. A. (2012). Extreme estimation uncertainty in fair value estimates: Implications for audit assurance. Auditing: A Journal of Practice & Theory, 31(1), 127-146.
Jans, M., Alles, M. G., & Vasarhelyi, M. A. (2014). A field study on the use of process mining of event logs as an analytical procedure in auditing. The Accounting Review, 89(5), 1751-1773.
Messier Jr, W. F. (2010). Opportunities for Task?Level Research within the Audit Process. International Journal of Auditing, 14(3), 320-328.
Hammersley, J. S., Johnstone, K. M., & Kadous, K. (2011). How do audit seniors respond to heightened fraud risk?. Auditing: A Journal of Practice & Theory, 30(3), 81-101.
Norman, C. S., Rose, A. M., & Rose, J. M. (2010). Internal audit reporting lines, fraud risk decomposition, and assessments of fraud risk. Accounting, Organizations and Society, 35(5), 546-557.
Lou, Y. I., & Wang, M. L. (2011). Fraud risk factor of the fraud triangle assessing the likelihood of fraudulent financial reporting. Journal of Business & Economics Research (JBER), 7(2).
Budescu, D. V., Peecher, M. E., & 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), 19-41.
Bame-Aldred, C. W., Brandon, D. M., Messier Jr, W. F., Rittenberg, L. E., & Stefaniak, C. M. (2012). A summary of research on external auditor reliance on the internal audit function. Auditing: A Journal of Practice & Theory, 32(sp1), 251-286.
Black, J., & Baldwin, R. (2012). When risk?based regulation aims low: Approaches and challenges. Regulation & Governance, 6(1), 2-22.
Hammersley, J. S., Bamber, E. M., & Carpenter, T. D. (2010). The influence of documentation specificity and priming on auditors’ fraud risk assessments and evidence evaluation decisions. The Accounting Review, 85(2), 547-571.
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