Contents
ii. Opening
Balance Verification
v. Determination
of Audit Procedures
(a) Audit
Procedures for Foreign Exchange Rate Risk
(b) Audit
Procedures for Valuation of Stock
Executive Summary
The report presents an analysis about M
Ltd, a company which is specialized in the production and selling of wine. The
company has recently been listed on the stock exchange which increases the
responsibility of management to prepare unbiased and transparent financial
statements that satisfies the needs of shareholders. The initial part of the
report focuses on risk assessment strategies and bifurcates it into inherent,
control and detection risk. Further, this part of the report also discusses
that the allocation of resources will depends on the importance and complexity
of business transactions.
The second part of the analysis provides
a detailed knowledge about the audit plan and what strategies could be adopted
by auditor to gather sufficient appropriate audit evidence. This segment also
describes various audit procedures about the valuation and measurement of
foreign currency and inventory valuation. At the end, the report provides a
conclusion about the overall analysis.
Risk Evaluation
In accordance with ASA 315 Identifying and Assessing the Risk of
Material Misstatement through Understanding the Entity and its Environment, it
is the responsibility of the auditor to appropriately address the overall audit
risk through adopting appropriate audit procedures (AUASB, 2015). The Audit
Risk can be bifurcated into inherent risk, control risk and detection risk.
(a) Inherent Risk
Inherent risk is the risk of errors and
omission in financial statements. It arises where there is high level of
management judgment and estimations. One of the major risk in M Ltd is the
valuation of stock; there is a significant stock in warehouse which is rejected
by customers and its payment is still in dispute. The valuation of stock may
require significant management estimation which increases the inherent risk.
Further, the precedent auditor had also some disagreements with finance
director regarding some accounting treatments, so the current auditor must
contact the precedent auditor and obtain knowledge about any discrepancy in
accounting treatment.
(b) Control Risk
Control risk arises due to the failure
of internal controls. It is the responsibility of those charged with governance
to implement sound internal controls that prevent the chances of errors or
fraud and encourage them to present unbiased and transparent financial information
to shareholders. One of the major control risk in M Ltd is there is a lack of
supervision. The managing director is involved in executing the operations
whereas on the other hand, finance director oversees all the financial matters.
In order to effectively implement internal controls, it is very important that
there must be proper supervision and segregation of duties which reduces the
risk of error and omission (IIA, 2008). The internal controls of M Ltd seem to
be weak, so the auditor must focus on substantive procedures to gather sufficient
appropriate audit evidence.
(c) Detection Risk
Detection risk arises where auditor
fails to detect a material misstatement in financial statement. It arises where
the auditor fails to apply appropriate audit procedure and the error or
omission may not be detected in sampling. In order to avoid this risk, auditor
must assure that sufficient competent and capable staff has been assigned to
the client that can conduct an audit in an efficient manner.
Audit Plan
ASA 300 Planning an Audit of Financial Statement requires the auditors to
develop a comprehensive audit plan in order to gather sufficient appropriate
audit evidence. The major purpose of the audit plan is to obtain an
understanding of the entity and its environment so that appropriate audit
procedures could be applied to generate a reasonable opinion on financial
statements (AUASB, 2015). Further, it can also facilitate external auditors to
understand what procedures have been applied by auditor to support the audit conclusion.
i.
Understanding
the Entity
The first step in the audit plan is to
obtain an understanding of the entity and how its operations are executed. It
will help us to analyze the risk associated with entity and enable us to
allocate sufficient resources to collect sufficient appropriate audit evidence
(AUASB, 2015)
M Ltd operates a management incentive
plan which is based on the profit of the company. The finance director is
susceptible to get a bonus on the profit of the company so the auditor shall
made a rebuttable presumption that there is a risk of material misstatement in
financial statement. The auditor shall believe that the financial statements
could be misstated to get finance director eligible for bonus. The auditor
shall also exert strong emphasis on the valuation of inventory and foreign
currency. Further, the auditor shall also consider the disagreement of finance
director over accounting treatment in last year as well.
ii.
Opening
Balance Verification
The auditor must obtain draft financial
statements of current year and verify the opening balances from the audited
financial statements. If there is any discrepancy in figures then the auditor
must enquire it from management and if the figures are restated then the
auditor shall apply appropriate audit procedure to assure that the restated
figures does not materially misstate the financial statements (AUASB, 2013).
iii.
Test
of Controls
Test of controls is a strategy where
the auditor itself process a transaction to determine whether the company has
sufficient internal controls in place that can reduces the risk of material
misstatement in financial statements. If the controls are week in the
organization then the auditor performs substantive audit procedures to reduce
the risk to an acceptable level. On the other hand, if the controls are strong
in the organization then auditor mainly focus on analytical procedures to form
an audit conclusion (IIA, 2008).
iv.
Balance
Audit Program
Balance audit program is basically a
design of comprehensive audit procedure to gather direct audit evidence on the
basis of various audit assertions. It facilitates the auditors in obtaining
sufficient appropriate audit evidence and helps auditor in reaching reasonable
conclusion. The controls of M Ltd seem weak so the organization shall balance
the substantive and analytical procedures in providing a reasonable conclusion
(AUASB, 2013).
v.
Determination
of Audit Procedures
The extent of the audit procedures will
depend on the complexity of the entity and its environment and the
implementation of internal controls in the organization. Areas which are of
strategic importance will be allocated higher workforce and the areas of least
importance will be allocated reasonable workforce.
(a) Audit Procedures for Foreign Exchange
Rate Risk
Foreign currency business arises due to
the changes in economic and political conditions in different countries. It
increases the risk for auditors due to its subjective nature and raises
difficulty for auditors in developing a suitable audit program that enable them
to gather sufficient appropriate audit procedure (AUASB, 2013).
In order to reduce the foreign exchange
rate risk, it is very important that the auditor shall verify the accuracy of
foreign transaction through accounting records. Further, the auditor shall also
obtain the daily foreign rates and compare it with processed transaction. The
auditor shall also verify that the exchange gain or loss has appropriately been
recognized in income statement in accordance with AASB 121 (AASB, 2015).
(b) Audit Procedures for Valuation of Stock
In manufacturing concern organizations,
stock represents a substantial portion of an organization’s current assets.
Further, it is of strategic importance because it has direct impact on the
profitability of the organization. It is important that the organization shall
appropriately record the stock in financial statement which is free from any
material misstatement and enable shareholders to obtain unbiased and
transparent information (AUASB, 2013).
The basic audit procedure for the stock
valuation is that the auditor shall conduct a physical stock count and verify
it with the stock list provided by the organization. If there is any variation
in available stock and accounting records then enquire it from management and
ensure that there is no material misstatement in financial statement. Further,
the auditor shall also observe the physical condition of stock and assure that
it is in saleable condition (AASB, 2015).
The second audit procedure for stock is
to appropriately value the inventory in accordance with AASB 102.The inventory
must be valued at the lower of cost and net realizable value. For the rejected
bottles of vines by the foreign customer, the auditor must assure that the
inventory has been recorded at the lower of cost and selling price less any
less additional cost to become saleable to customer.
Conclusion
In order to develop an audit program,
the auditor must obtain an understanding of the entity and its environment
which would help them to form a reasonable opinion on the financial statements.
The audit plan is bifurcated into general audit program and specific audit
program. The general audit program shall focuses on industry analysis, test of
controls and opening balance verification where as specific audit program shall
focus on the development of specific audit procedures that helps to verify
different audit assertions.
There is an inherent risk in M Ltd as
the bonuses of finance directors are dependent on the profitability of the
organization. Further, there was also disagreement of accounting treatment with
precedent auditor which requires the application of sufficient resources to
gather sufficient appropriate audit evidence. Additionally, it also requires
the adoption of appropriate audit procedures for the valuation of stock and
foreign currency.
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