With the objective of conducting the work of the audit a sufficient amount of regard is required to be paid in understanding the risk of misstatement. According to the International Auditing and Assurance Standard Board, a guideline has been provided for making the use of the work of the expert relating to the audit of the financial statement. To plan the work of audit considerations should be paid related to the location of risk that is associated with the material misstatement (Arens, Elder and Beasley 2014). To the carry the work of audit, the audit expert is required to make use of information as evidence during audit. The auditor must be competent to use the work of experts in planning the work of audit. The below stated criterion must be fulfilled for using the work of an audit expert;
The auditor is required to collect sufficient evidences in planning the work of audit. The auditor must be capable in meeting the business rules and regulations. To externally review the books of accounts, the auditor should determine the nature of data collected. In planning the work of audit, sufficient considerations and adherence must be followed to meet the business objectives (Flood 2013). The auditor is required to state the consequences that could effect the business development and must be independent of the subject matter together with the external influence concerning the audit. In accordance with the present case study of DIPL, the below stated fact lay down the use of audit expert for the listed issues which are as follows;
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Necessary Issue |
Necessary decision making needed to measure the issues related to the auditing procedure |
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Issues of inventory and inventory obsolescence |
As per the analysis, subject of inventory obsolescence is the main priority in respect to the previous year for meeting the declining value. To determine the value of obsolescence the management needs the service of audit expert to provide them with necessary guidance (Kearney 2013). To meet the business objectives and development of the organization it is necessary for DIPL to use the work of audit expert in issues related to inventory obsolescence. |
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Depreciation of Fixed Assets |
While assessing the DIPL financial statement it is understood that, the company follows the depreciation of fixed asset under the straight-line method. The management can seek the expertise of the auditor in reducing the depreciation charged to the asset in order to correctly value the assets for meeting the organizational growth objectives (Kemp 2013). |
Materiality can be regarded as the element that is separate and generally treated as the necessary element in fair presentation of the financial report of an organization in compliance with the necessary standards. The case study of DIPL highlights that the business activities performed by the company is helpful in determining the procedure involved for identifying the five factors which could create an impact on the materiality of the organization. More precisely any form of misstatement in the financial report could contribute in fair depiction of the materiality facts. Misstatement generally takes place in the form of error and fraud. Thus, error usually assist in showcasing the evidences that decisive misstatement may eventually remove the figure from being stated in the financial report. The below stated factors could lead to an impact on the materiality which are as follows;
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A: Factors |
B: Discussions |
C: Influence on Materiality |
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Risk that are associated with fraud: In the words of Louwers et al. (2015), any form of risk that is associated with the fraudulent activities should be viewed as vital because it results in direct impact on the materiality of the organizations financial report. As evident from the study of DIPL, it states that person that performs the operating activities have to shoulder growing pressure arising from the management. Consequently, the Information technology department created a new accounting system. Because of this, alterations in the business procedure might make the business expose to risk of fraudulent activities that may create an impact on materiality, which significantly effects the financial statement of the company. |
As it has been stated by Moeller (2014), errors that are located at the time of data collection and processing are those that are derived from the financial information during the preparation of the financial report. Misrepresentation of the factors generally give rise to the inappropriate accounting forecast. Furthermore, errors that takes place at the time of implementing the particular accounting policies such as classification and validation of transactions are usually accompanied with the disclosure and reflects the accounting information. Fraudulent activities generally give rise to the material misstatement of the accounting information. In the present situation of DIPL the auditor’s viewpoint in respect to the internal control of the organization may help in increasing the business development from the influence created by the material misstatement. |
Risk originating from fraudulent activities influencing materiality: The administrative functions of the Information Technology was not content with the installation of machine in the firm. It is noticed that the employees were facing immense pressure from the management in order to reconcile and determine the fixtures associated with the installation of the new IT system. |
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Accounting policies creating impact on materiality: The scenario presented in the case of DIPL reflects that the method undertaken in pricing the raw materials is based on the average cost, which leads to varying prices. Consequently, this could not be viewed as correct method (Montgomery 2013). The situation defines that the valuation of raw materials is not appropriate because the current cost of paper is generally valued at less price under the process of average cost. Because of this, there is a heavy influence on inventory since the inventory is valued at lowered price and the process adopted for inventory valuation is not appropriate. |
One of the most important element that effects the materiality is the inherent risk. The management of DIPL has not been successful in upholding the truthfulness and objectivity. Because of this reason, the financial position of DIPL and its materiality is adversely effected. Fraudulent activities of the employees have increasingly created a mounting pressure on the new accounting system that is internally used by the business and this results an influence on the financial information affecting the accounting policies. It also impacts the board since the organizational procedure is impacted by the fraudulent activities hampering the development of the organization (Nair and Shah 2016). The fraudulent activities effects of the employees significantly impacts the financial statement and as a result of this there is a significant impact on the materiality of the organizations financial infrastructure. |
Accounting policies affecting materiality: It is noteworthy to denote that the method adopted for valuing the inventory under the method of average cost cannot be regarded as the correct method (Pickett 2013). Faulty assumption and tools involved in valuation of inventory would lead to an influence on the overall accounting method. Consequently, this would lead to an impact on the audit procedure. |
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Environmental influence on materiality: While preparing the financial statement an evidence suggested that several business transactions were not posted in the books of accounts correctly (Porter, Simon and Hatherly 2015). Because of this, the inconsistent scheduling associated with the marketing and selling process resulted in discrepancy. An assertion can be bought forward by stating that the organization miserably failed to locate both the micro and macro aspects of business as it was obligatory for the business to undertake the political and social elements of business. These environmental factors affects the materiality due to improper accounting of transactions and ultimately give rise to inconsistent and insufficient audit planning. |
The liabilities of the management that is engaged in the integration of the environmental factors is viewed as the significant factor that might affect the materiality of the firm. Consequently, these kind of environmental factors can lead to an adverse effect on the financial position of the firm along with the opinion that are associated with the auditing procedure. |
Environmental elements creating an influence on materiality: The inability of the managers in identifying the aspects of both the micro and the micro factors of the business environment together with the exclusion of the financial transactions highlights that the organization has adopted the faulty means of maintaining the books of accounts (Reding 2013). An assertion can be bought forward in this regard is that the shareholders and the stakeholders of the company would be deprived from the understanding of the fair position of firm. This might result an influence on the audit plan and may create an impact on the misstatement of the financial statement. Person using the fiscal statement should be provided with appropriate financial report to understand the audit planning and entire effect on the identified misstatement. |
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CEO selection effecting the materiality: In the case study of DIPL it is found that selection of CEO is considered to be difficult process. This is because the process adopted in selection of CEO together with the change of earlier CEO involved risk and the company failed to comply with the required set of rules (Taylor and Osborne 2014). The method involved in the recruitment of CEO was considered in the later part of the year and inappropriate method of selecting CEO resulted in occupational risk for the workers. This resulted in problems of materiality at the time of audit. |
In view of the complexity involved in the selection of the CEO, it can be stated that DIPL is exposed to the transparency risk effecting the decision making process in context of the organization. Therefore, it can be said that inappropriate selection of CEO may effect the materiality of DIPL. |
Cumbersome process of recruitment of CEO influencing the materiality: As evident from the case study of DIPL, the method involved in the recruitment of CEO is regarded as the cumbersome and creates an influence on the materiality (Thomas 2015). The administrations must be careful in this regard and should engage appropriate process to recruit CEO. |
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Factors involved in receipt of cash and expenditure: There are factors that is associated with the receipt of cash and expenses by DIPL as this directly creates an impact on the materiality (Vallabhaneni 2013). A large part of the expenditure is accepted through the help of electronic machines and the person in charge with maintaining the books of accounts may provide the process of keeping the track of the cash receipts by downloading those receipts through the mail and settling the entire batch. The process that is engaged in reconciliation needs reliability of keeping track of the business transaction constantly at the end of every month. DIPL usually derived its sales revenue from the marketing of e-book, re-publication and printing that may result an influence on the materiality. |
As evident from the case study of DIPL it can be said that the process of bookkeeping undertake for raw materials is important factor that can have an influence on the materiality. The procedure of accounting helps in recognizing the raw materials value that assist the users in determining the fair position of the business without having any unbiased opinion of accounting transactions (Nair and Shah 2016). |
Factors that are related in accounting of transaction in new system: Paying business expenses through electronic medium influences the accounting transactions for the receipts of revenue generated by the company and offers the mechanism of reconciliation (Taylor and Osborne 2014). The organizations inability in reconciling cash receipts statement contributes to the falling administration because of the differences that has originated from the business transactions. Because of this, it leads to an influence on the financial report presentation. The auditor in such circumstances would not be able to state their viewpoint related to the fiscal position of the company because of the numerous size of materials. |
Reference List:
Arens, A., Elder, R. and Beasley, M. (n.d.). 2014 Auditing and assurance services.
Chuprunov, M. 2013. Auditing and GRC automation in SAP. Berlin: Springer.
Flood, J. 2013. Wiley practitioner’s guide to GAAS 2013. Hoboken, N.J.: Wiley.
Ghandar, A. and Tsahuridu, E. 2013. Auditing, assurance and ethics handbook 2013. Frenchs Forest, N.S.W.: Pearson Australia.
Kearney, E. 2013. Wiley federal government auditing. Hoboken, N.J.: John Wiley & Sons.
Kemp, S. 2013. Auditing, assurance and ethics handbook 2013. Milton, Qld: Wiley.
Louwers, T., Ramsay, R., Sinason, D., Strawser, J. and Thibodeau, J. (n.d.). 2015 Auditing & assurance services.
Moeller, R. (n.d.). 2014 Executive’s guide to COSO internal controls.
Montgomery, R. 2013. Auditing theory and practice volume 1. [Place of publication not identified]: Theclassics Us.
Nair, C. and Shah, M. (n.d.). 2016 External quality audit.
Pickett, K. 2013. The internal auditing handbook. Hoboken, N.J.: Wiley.
Porter, B., Simon, J. and Hatherly, D. 2015. Principles of external auditing. Chichester: Wiley.
Reding, K. 2013. Internal auditing. Altomonte Springs, Fla.
Taylor, J. and Osborne, J. (n.d.). 2014 Auditing.
Thomas, S. (n.d.). 2015 Compensating your employees fairly.
Vallabhaneni, S. 2013. Wiley CIA Exam Review 2013, Internal Audit Knowledge Elements. New York: Wiley.
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