The necessary guidelines to use the work of an expert in audit for the financial statements are provided in the standards of International Auditing and Assurance Standard Board. In the audit planning process of financial statements, it has mentioned about the matters that the auditors are required to take into consideration while identifying the risk of material misstatements (Louwers et al. 2015). In this case, one important factor is to use the acquired financial information as the evidence of the audit planning process. For the purpose of using the work of an audit expert, it is necessary for the auditors to have three major professional traits; they are competence, capability and objectivity. One should consider the following factors for using the work of an audit expert:
While examining the work of audit expert in the domain of finance, there is a need for sufficient information for the determination of the fact that whether there is any need for audit expert or not. In this context, it is required for the auditors to be competent, capable and objective in case the service of an expert is deemed to be sufficient. In addition, for the purpose of external audit, it is necessary to have the competence of the auditors ass it has association with the degree and nature of expertise in audit program. It is required to have extensive recognition of the expertise of audit expert in the audit fields at the time of using the expertise of the auditors (Causholli and Knechel 2012). In case of objectivity, it implies that interest conflicts, favoritism and others aspects have their negative impacts on the audit judgments. The viewpoint of an expert in audit will be of no use in case the auditor is entrusted to express his/her views on non-objective matters.
In case of the matter of DIPL, the use of an audit expert can be employed in the following situations:
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Issues |
Audit decision required in the issues |
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Inventory and Purchase of Inventory Obsolescence |
After the analysis of the information of DIPL, it can be seen that the purchase of inventory and inventory obsolescence is prevalent from the last year account in order to cover the downfall and shortage in inventory. For the determination of inventory obsolescence, it is the duty of the assessor to obtain the service of an audit expert so that the objective of reckoning the whole inventory amount can be achieved (Lenz and Sarens 2012). |
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Depreciation of Fixed Assets |
After the analysis of the case study of DIPL, it is evident that DIPL adopts straight line method for depreciating their fixed assets. For this reason, it is required for the assessor of DIPL to obtain the expertise of an audit expert in order to calculate the exact amount of depreciation along with impairment of those assets. For this reason, it is required for the management of the company to obtain the expertise of an audit expert (Lenz and Sarens 2012). |
Materiality is considered as an important factor that greatly influence the faithful representation of financial reports of companies in accordance with the principles and standards of accounting . After assessing the case of DIPL, it can be ascertained that there are five major factors in the company that have significant negative effect on the financial statements of the company. For this reason, it is utmost necessary for the management of DIPL to identify these five factors. On a fundamental basis, any kind of misstatement in the financial reports of the company has major impact on the fair presentation of materiality factors. Errors and frauds are considered as the origins of material misstatements and this fact reflects that the whole amount is omitted from the financial statements of DIPL with the disclosure of financial reports.
The following discussions show the identification of five factors having impact on the materiality of DIPL:
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a. Factors |
b. Explanations |
c. Influence on Materiality |
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Fraud Risk: Fraud risk refers to an important element that undesirably creates major negative effects on the overall materiality of the financial statements of DIPL (Ballwieser et al. 2012). The information of DIPL case study indicates that the board of DIPL created extreme pressure on the employees for implementing new accounting system with the assistance of IT department. This implementation of new accounting system has exposed the business operations of DIPL to various risk factors that can impact the materiality of the company. Hence, this risk has major impact on the overall materiality of DIPL. |
The occurrence of errors can be seen in the process of collecting and processing financial information while preparing the financial report of DIPL. The origination of irrational accounting projections can be seen from misinterpretation of accounting factors. In addition, the occurrence of errors can be seen while applying specific accounting policies having association with valuation, classification, methods of reflection and disclosure of accounting information (Hope, Langli and Thomas 2012). Thus, the wide concept of fraud can has association with various fraudulent actions for misstating the financial information. Hence, in order to save the company from the threat of material misstatement, it is essential to have the viewpoint of an auditor. |
The function of the administration team related to the IT division of DIPL is not synchronized with the installation process of the new accounting system. The board of DIPL crated extreme pressure on their employees for the installation of new accounting system. |
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Accounting Policies: The provided information of DIPL informs that DIPL follows average cost method to make valuation of raw materials that is not an appropriate method. Thus, the case study states that the determination of raw materials under average cost method is no right. The undervaluation of the present cost of paper can be considered as the reason of this. This particular aspect has great influence on the inventory of DIPL and for this reason, an audit assessment can be invited stating the inappropriateness of average cost method. |
Inherent risk is considered as a crucial element having major impact on the materiality of DIPL. In addition, lack of integrity and objectivity can be noticed in the management of DIPL. All these aspects together can create impact on the financial position as well as materiality of the company and can also provide the users with misleading information. |
The process to valuate inventory under average cost method is inappropriate as well as inconsistent. In the valuation mechanism, inappropriate assumptions can affect the overall accounting process of DIPL (Xie and Gamble 2012). All these aspects can together create effects on the overall assessment and audit procedures of the company. |
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Environmental Factors: At the time of preparing the financial statements of DIPL, it can be found that many transactions were omitted deliberately or there were occurrence of error from the management. This aspect contributed to inconsistent planning of market process and selling activities (Nicolaou, Nicolaou and Nicolaou 2012). Apart from this, DIPL’s team of management could not ascertain the impacts of micro and macro environmental factors on the business activities. All these environmental factors have influence on the company’s materiality as inconsistent transaction recordings leads to ineffective and inappropriate accounting planning. |
There were many fraud activities from the employees due to the growing pressure from the board. In addition, the involved process in the implementation of new accounting system might negatively influence the accounting information of the company. Thus, the impact of fraudulent activities can be seen on the financial reports of DIPL along with overall materiality (Kamau and Kariuki 2012). |
The disability of the management to assess the effects of environmental factors along with the omission of several accounting transactions shows that DIPL has adopted incorrect methods for financial accenting. For this reason, the users of financial information cannot get the true and fair view of the financial position of the company and this aspect can create major effect on the overall planning and assessment process of auditing. It is desired that thee users of financial information get true and fair view of the company’s financial position that can create positive effects in audit planning and assessment process. |
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Selection of CEO: According to the case study, DIPL has complex process to appoint CEO. The procedure to select the CEO and the transition process of previous CEO has not done based on requisite scheme; and this, it involves high risk (Laing 2012). The execution of the process of selecting CEO has done after the due date and this particular aspect has exposed the employees of DIPL with several risks. Most importantly, the inappropriate selection of CEO can affect the overall materiality of DIPL. |
The complex process of appointing CEO of DIPL has major effects on the transparency of business activities and the decision-making process of DIPL gets affected. Thus, all these aspects together affect the materiality of the company. |
The process of appointing the CEO of is an ineffective and inappropriate process having major effects on the materiality of the company. For this reason, there is a need for transparent procedures for the selection of CEO that will comply with the requisite schemes (Trotman, Bauer and Humphreys 2015). |
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Recording the Cash Receipts and Expenses: The procedure to maintain the organization’s cash receipts is related with overall materiality. DIPL uses electronic system for accepting majority portion of their expenses. Thus, the accountant is involved in the process of book keeping the cash receipts by downloading them and to reconcile them (Byrnes et al. 2015). Thus, high consistency is essential for recording the transactions frequently so that their execution can be done at the month end. It can be seen that the company creates revenue from the sales of e-book, marketing, publishing and printing; and all these aspects together can create influence on the overall materiality of DIPL. |
The procedure to record raw materials of the organization has influence in the materiality of DIPL. The similar aspect can be seen in case of the accounting process that helps the users getting accurate information about the company. In addition, the inability of the management to integrate environmental factors can affect the materiality as these environment factors can affect the opinion of the auditors (Zadek, Evans and Pruzan 2013). |
The payment process of DIPL with the assistance of electronic means can affect the process of accounting in the company. It also affects the presentation of reconciliation statement of DIPL. Thus, the inability of the organization to properly record the cash transactions receipts and reconciliation can lead to the collapse of the whole accounting system of the company. For this reason, the auditor can fail in delivering accurate audit opinion. |
References
Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated approach. Boston: Prentice Hall.
Ballwieser, W., Bamberg, G., Beckmann, M.J., Bester, H., Blickle, M., Ewert, R., Feichtinger, G., Firchau, V., Fricke, F., Funke, H. and Gaynor, M., 2012. Agency theory, information, and incentives. Springer Science & Business Media.
Byrnes, P.E., Al-Awadhi, C.A., Gullvist, B., Brown-Liburd, H., Teeter, C.R., Warren Jr, J.D. and Vasarhelyi, M., 2015. Evolution of auditing: from the traditional approach to the future audit. Audit Analytics, 71.
Causholli, M. and Knechel, W.R., 2012. An examination of the credence attributes of an audit. Accounting Horizons, 26(4), pp.631-656.
Fung, S., 2014. Hong Kong Auditing: Economic Theory & Practice. City University of HK Press.
Hope, O.K., Langli, J.C. and Thomas, W.B., 2012. Agency conflicts and auditing in private firms. Accounting, Organizations and Society, 37(7), pp.500-517.
Kamau, G.C. and Kariuki, S.N., 2012. Factors influencing sample size for internal audit evidence collection in the public sector in Kenya.
Laing, G.K., 2012. Service learning: An auditing project study. International Education Studies, 6(1), p.174.
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.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.
Nicolaou, C.A., Nicolaou, A.I. and Nicolaou, G.D., 2012. Auditing in the cloud: Challenges and opportunities. The CPA Journal, 82(1), p.66.
Power, M.K. and Gendron, Y., 2015. Qualitative research in auditing: A methodological roadmap. Auditing: A Journal of Practice & Theory, 34(2), pp.147-165.
Trotman, K.T., Bauer, T.D. and Humphreys, K.A., 2015. Group judgment and decision making in auditing: Past and future research. Accounting, Organizations and Society, 47, pp.56-72.
Xie, R. and Gamble, R., 2012, June. A tiered strategy for auditing in the cloud. In Cloud Computing (CLOUD), 2012 IEEE 5th International Conference on (pp. 945-946). IEEE.
Zadek, S., Evans, R. and Pruzan, P., 2013. Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.
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