The guidelines for utilising the work of an audit professional are provided under the principles of “International Auditing and Assurance Standard Board”. In the audit planning procedure, this board has depicted the important matters, which the auditors need to consider when they are engaged in identifying material misstatements in the financial reports (Arnold et al. 2014). In this regard, another significant element for the auditors is to make rightful utilisation of the accumulated information in the form of evidence in audit planning process. For conducting this, the auditors need to possess three main features that include capability, competency and objectivity, if the service of audit expert is needed. When the work of an audit expert is used, the consideration of the following aspects is necessary:
It is the obligation of the audit professionals to gather adequate audit evidence along with determining whether any need is there for using the work of an audit expert, while conducting the audit operations of non-accounting organisations. The audit professionals need to be competent, capable and objective, if their work is needed for the organisation (Fu, Carson and Simnett 2015). Therefore, competency is needed for the external auditors when they would audit the books of the organisations, since the relation is with the nature and extent of expertise of the auditors. Along with this, the audit professionals are needed to have the ability of realising different audit issues for the audit clients. For objectivity, it could be observed that few significant aspects like favouritism, conflict of interest and influence have their adverse repercussions on the audit opinion. If the audit professionals express anything other than the objective of their auditing tasks, their opinion would carry no value.
Based on the provided case of DIPL, the work of an audit expert needs to be used in the below-stated cases:
|
Issues |
Needed revision for audit |
|
Stock and purchase of obsolescent stock |
After the situation of DIPL is evaluated, it could be seen that for covering the estimated downfall in the inventory value coupled with shortage, there is existence of stock and purchase of obsolescent stock in the past year of the organisation. Hence, for ascertaining the anticipated value of obsolescent stock, the work of an audit expert needs to be used in order to reckon the overall stock amount (Hay, Stewart and Botica Redmayne 2016). |
|
Depreciation of fixed assets |
The evaluation of the financial statements of DIPL depicts that the organisation is involved in charging depreciation on their assets based on the straight-line method. The organisation needs to compute its depreciation along with the impairment value. Hence, in order to compute the overall depreciation amount and the precise value of impairment of asset, the organisation is needed to use the work of an audit professional for depreciation (Heenetigala et al. 2016). |
Materiality denotes some of the main influential dynamics, which are adjudged as important impediments when the financial statements are represented at fair as well as true value in conformance to the needed regulations of accounting. Based on the case study of DIPL, it could be observed that there are five main factors in the organisation having crucial impact on the entire materiality of the organisation. It is to be borne in mind that any type of misstatements in the financial reports could influence the fair depiction of financial information significantly. The formation of the misstatements could be viewed from the various types of errors and frauds.
The identification, explanation and influence of the five main factors of materiality are discussed in the below-stated sections:
The five factors, which would affect the ascertainment of the preliminary figure for the total materiality for the 2017 audit of DIPL, are described briefly as follows:
There is influence of fraud risk on the materiality of DIPL. According to the DIPL case study, the board of the organisation has put considerable pressure on the business operations because of the responsibility of the IT department in order to create new accounting system. Due to such aspect, the probability of various fraud risks could be viewed in the overall DIPL operations. Thus, fraud risk could have an adverse impact on the materiality of the DIPL financial statements.
Based on the case study of DIPL, it could be observed that the average method of cost of valuing raw materials could not be adjudged suitable for the organisation. The primary reason of this unsuitability is the undervaluation of the current paper cost under the average cost method at the time of recording inventories (Knechel and Salterio 2016). Hence, it could be stated that this specific aspect could influence the overall materiality of the financial reports of DIPL.
When the financial statements of DIPL are prepared, the management of the organisation omitted to record various transactions either due to mistake or deliberately. Such specific aspect influences the DIPL planning process associated with selling activities. Moreover, the management of DIPL does not take into account the impact of both macro and micro-economic factors, which include political, social and economic factors. Such aspect has impact on the process of planning and materiality of DIPL.
According to the provided case, DIPL has a complex process of appointing CEO. However, there is major risk associated with the method of appointing new CEO along with the transition of the last CEO, since the entire process has not been conducted in accordance with the scheme of requisition. The process of appointing the new CEO has been carried out after the due date and this procedure exposes the business operations of the organisation to various risks. Hence, such situation forms influence on the overall materiality of DIPL (Nicoll 2016).
The record of cash receipts is a significant factor, which is associated with the materiality of DIPL. The organisation is engaged in accepting bigger portion of its expenses through electronic medium. The use of electronic medium is made for the ease of the accountants to engage the entire process in bookkeeping by downloading the receipts from mails. Hence, an improvement is required in the overall process for conducting the same frequently and it could be executed by the end of the month. Along with this, the method of obtaining revenue in the context of DIPL from e-book marketing along with printing and republishing might have severe influence on the entire materiality of DIPL (Shah and Jarzabkowski 2013).
The incidence of error could be viewed during completion and the process of data from te financial statements while preparing the necessary reports. Moreover, errors take place at the time of application of various policies of accounting associated with categorisation and valuation of financial items at the time of disclosure of financial information. Hence, the fraud association could be viewed with material misstatement. This necessitates the need of the opinions of audit professionals.
The impact of inherent risk is significant on the materiality of DIPL. There has been absence of objectivity and integrity in the management work of DIPL. Such particular aspect could influence the financial position of the organisation, since it would provide misleading financial information to the users.
The fraud activities from the staffs could be viewed due to the excessive pressure from the DIPL board as a result of the implementation of new accounting system and such aspect possesses the capability of affecting the financial information of DIPL. Because of this reason, the entire matter could create negative effect on the materiality of the organisation (Sheedy, E.A., Zhang and Tam 2017).
It could be observed that the complicated or huge procedure of appointing the CEO jeopardises the organisational transparency and such aspect has severe influence on the decision-making process of the organisation. Hence, this overall aspect forms major impact on the entire materiality of DIPL.
For DIPL, the adopted procedure of bookkeeping in relation to raw materials has severe impact on the materiality of the organisation. In this context, it is noteworthy that the adoption of accurate accounting process enables the users to ascertain the fair and true financial condition of DIPL (Soh and Martinov-Bennie 2015). Hence, it could be viewed that the ineffective procedure of recording cash receipts on the part of DIPL could have severe influence on the total materiality of the organisation.
The above-stated factors would have considerable influence on the preliminary figure for overall materiality in the process of audit planning and these are depicted briefly as follows:
The administrative function of the IT department has not been content with the machinery installation. Due to this reason, adequate pressure has been exerted on the staffs from the DIPL board for reconciling and assessing the appropriateness of the new system of accounting. Such specific aspect has formed severe effect on the entire materiality of the financial statements of DIPL.
It is to be borne in mind that the adopted average method of cost related to valuation of inventory on the part of DIPL could not be adjudged as an effective method because of the undervaluation of the current papers. The overall policy related to DIPL could be affected mainly by incorrect mechanism for valuation of inventory and the entire accounting policy of DIPL has association with the materiality factor (Velte and Stawinoga 2017). Such wrongly adopted mechanism could have severe effect on the materiality of the financial statements of DIPL.
The incorporation of wrong financial accounting system in the organisation could be viewed from the inability of the management in considering the micro and macro-environmental factors. Because of this, the users of the financial reports could not obtain the fair and true overview of the financial condition of the organisation. Moreover, failing to record some of the financial transactions could have serious repercussions on the entire materiality of DIPL.
The process of appointing and transitioning the CEO is a complicated procedure, which creates effect on the overall materiality of DIPL. Under this method, the organisation requires the work of the audit professionals for careful process of selecting the CEO.
The utilisation of electronic medium for making payment for expenditures could develop impact on the method of maintaining the financial transactions of DIPL. Hence, the incapability of the management of DIPL in recording the receipts pertaining to cash transactions could be a main reason of the decline of the entire accounting system of the organisation. Due to this reason, such aspect could develop adverse effect on the overall DIPL materiality.
Hence, based on the above discussion, it could be inferred that the average method of cost of valuing raw materials could not be adjudged suitable in the context of the organisation. The primary reason of this unsuitability is the undervaluation of the current paper cost under the average cost method at the time of recording inventories. Adequate pressure has been exerted on the staffs from the DIPL board for reconciling and assessing the appropriateness of the new system of accounting. Such specific aspect has formed severe effect on the entire materiality of the financial statements of DIPL.
References:
Arnold, B.R., Bateman, H., Ferguson, A. and Raftery, A., 2014. Understanding assurance in the Australian self-managed superannuation fund industry.
Christopher, J., 2015. Internal audit: Does it enhance governance in the Australian public university sector?. Educational Management Administration & Leadership, 43(6), pp.954-971.
Eccleston, D., Horrigan, M., Rafter, T., Holt, G., Worthley, S.G., Sage, P., Whelan, A., Reid, C., Thompson, P.L. and GCOR Investigators, 2017. Improving Guideline Compliance in Australia With a National Percutaneous Coronary Intervention Outcomes Registry. Heart, Lung and Circulation.
Fu, Y., Carson, E. and Simnett, R., 2015. Transparency report disclosure by Australian audit firms and opportunities for research. Managerial Auditing Journal, 30(8/9), pp.870-910.
Hay, D., Stewart, J. and Botica Redmayne, N., 2016. The Role of Auditing in Corporate Governance in Australia and New Zealand: A Research Synthesis.
Heenetigala, K., De Silva Lokuwaduge, C., Armstrong, A. and Ediriweera, A., 2016. Investigation of criteria used for assurance practices of sustainability reporting in Australian listed companies. Victoria University.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Nicoll, P., 2016. Audit in a democracy: the Australian model of public sector audit and its application to emerging markets. Routledge.
Shah, M. and Jarzabkowski, L., 2013. The Australian higher education quality assurance framework: From improvement-led to compliance-driven. Perspectives: Policy and Practice in Higher Education, 17(3), pp.96-106.
Sheedy, E.A., Zhang, L. and Tam, K.C.H., 2017. Incentives and Culture in Risk Compliance.
Soh, D.S. and Martinov-Bennie, N., 2015. Internal auditors’ perceptions of their role in environmental, social and governance assurance and consulting. Managerial Auditing Journal, 30(1), pp.80-111.
Velte, P. and Stawinoga, M., 2017. Integrated reporting: the current state of empirical research, limitations and future research implications. Journal of Management Control, 28(3), pp.275-320.
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