Stages of Planning the Audit - Essay Example

?Requirement: Describe the key stages involved in planning the Audit for Audit Planning always required smooth and successful transition schedule and it must be carefully analysed and structured (Nicholls and Gardner, 1999). We will complete this audit in several simple stages; buy using these stages our aim will be to better monitor the audit process and provide recommendations for its improvement. Our key steps will be: 1. Establishing priority areas: Here we will identify the critical business processes that need to be audited, such as; bad debts, issue of pre paid expenses and payments owes by other businesses, and expenses that are occurred due to cancelling the balance of invoices not received in previous years. Here we will collect all the data required for audit and the costs involved doing this audit in such areas. Here our objective is to find how we can better control the costs and minimize the debts. 2. Monitoring and Continuous Audit Rules Here we will consider all the accounting and internal rules adapted by the company and how these rules applied to each area and are company following these rules and making sure none of them are being violated. Like which ISA is applied to the auditing area. 3. Configuring Audit Parameters Here auditor will consider several parameters like the cost benefits of error detection and these parameters can be audit and management follow-up activities, etc. Here auditors can perform stratification of audited data and divide them into sub-groups; this will allow them to monitor the activity far better. 4. Following Up Follow up is another parameter but its more focused it will allow us to look into errors and risks more deeply and will set the alarms and the data which is purely educational where no other source present than it will benefit the auditor to establish grounds and there is no source available for evaluation. 5. Communicating Results Now, it is time to discuss the results and outcomes with the concern persons or person. Make sure you present your data in easy to understand and friendly manner, support it with pictures and charts. Like in our scenario we will present the data to senior auditor and help them in the whole process. Requirement: Determine both areas of risk and areas of control (justify and explain. Identify weakness and potential risks) In modern world risks and weaknesses study is very essential for businesses and in almost every area of business. (Weiss, 2010) The one of the major weakness is that company has not owned any place they are working at a place which is taken from council and they are on lease. This can be a great threat as well if council asked them to release the place on short notice. Company’s expenses are very high and increased significantly as compare to last year. One other weakness is that company balance is very high and company work on credit and their bad debts are very high. Many receivables are cancelled too. The one of the major issues are that health department fines are also high. One of the major threats is that council can cancel the lease since high amounts of lease are not paid and due, health department fines are very high and mat be one reason council can cancel their permit. Requirement: Apply analytical procedures in order to compare accounts with most significant variations between periods (justify and explain why you consider having potential inherent risk) Analytical technique is always needed when auditor is measuring significant variations (Rittenberg, Johnstone and Gramling, 2009). In the year 2009 the balance for current assets were 6,819,248.36 where this were reduced to 6,135,435.45 almost the variance of -683,812.91 or almost decreased to -10.03. The assets decreased almost 10% which is very risky for the4 production and output of the company may affect, if it will continue in future too. In current assets similarly the raw material’s balance as compare to last year reduced and most affected area was receivables which is most risky because it will directly affect the liquidity and increase debts over company. Financial assets also decreased significantly. The alarming threat for company is 14% decline of the sales and gross profit declines by 10% and the issue of extra ordinary results are major threats since they are increased by almost 400%. Requirement: Explain the concept of Materiality In the preparation of the accounts high degree of judgement is involved and as we know the standards and policies of international accounting, are based on judgements as well and where ever high level of judgement is involved, the concept of materiality recommend that; we can call it issue in condition where the judgement is "significant" or "material" to a user of the accounts. For auditors it’s an important convention and it’s an important issue. The materiality is important because it may affect the statement if it’s judged wrong and it can be measured through its inherent nature, impact value, use value, and the situation in which it happen. (Puncel, 2007) Requirement: Determine the standard applied (justify and explain) International Standard on Auditing 500 and 530, Audit Sampling is some of the standards that applied to this case study (IFAC, 2008). ISA 500 deals with the responsibility of the auditor for designing the statements and report based on appropriate audit evidence which make viable opinion. Its guide the auditor to select right samples on which testing of the areas can give closest results (IFAC, 2008). ISA 300 is also involved because it’s related to the auditing planning (IFAC, 2006). In this establishing the overall auditing strategy and assist the auditor to establish over all framework of planning is involved. This can be done through small team and whole audit can be done through small entity. Requirement: Determine the method of sampling per accounts-areas (justify and explain) Value-Weighted Selection sample technique: Population is made by individual monetary units and when we are testing details than its better to take sampling unit as individual monetary units which almost covers the whole population. By selecting these units within the population like the accounts receivable balance now only need is to judge the particular heads that made those monetary units. This approach allows auditors to pick those values which are larger values and in this technique chances of selection for such larger values are very high, this will be done through smaller sample size; which is the great benefit of this approach. When selection is random this technique is very viable and based on systematic method of sample selection. (IFAC, 2008) We can also use Stratification sampling technique as well but since our data is more systematic and values are larger that is why we are using Value-Weighted Selection sample technique. Requirement: Identify and justify which factors in this Case could change the size of the samples chosen (if you consider none, justify the reasons) These are the some factors which may change the sample size and what changes can be expected if sample size will change. This will also determine the needs of sample size and where which size is required. FACTOR EFFECT ON SAMPLE SIZE DESCRIPTION       A raise in the level to which the auditor’s risk measurement takes into account related controls. Increase The auditor is required to perform tests of controls. More assurance of operating effectiveness of controls the less the risk of material misstatement and at same time larger the sample size will be required.       An increase in the tolerable rate of deviation Decrease The larger sample size required if tolerable rate of deviation is lower.       An increase in the expected rate of deviation of the population to be tested Increase Very large sample size is required if the expected rate of deviation is high and auditors will be in a good position to make judgments about rate of deviations.       An increase in the number of sampling units in the population Negligible effect For small population auditing sampling is not much effective. Requirement: Which adjustments (entries) would you recommend to MeatsB prior to give the brief report to the Senior Auditor (justify and explain) The balance related to short-term linked companies (DD) for -580,426.32 euros are operations between SpanishMeats and MeatsB. The cheques paid by the SpanishMeats’s customers are collected by MeatsB and transfer to its own banks. The accounting entry is MeatsB’s banks (debit), Affiliated Companies (credit). The sales from MeatsB to SpanishMeats are never paid; MeatsB compensates the trade receivables of SpanishMeats with the cheques that prior to the sales, MeatsB has deposited into its banks. At the end of the period MeatsB compensates both balances and an invoice is issued by the company that owns the reminder of the balance. These above transactions will required adjustment entries; above statement clearly shows that the company sales are never paid in-fact they were compensated against the receivables. References: Rittenberg, L.E., Johnstone, K. and Gramling, A.A. (2009), Auditing: A Business Risk Approach, Cengage Learning, p. 574 Nicholls, G. and Gardner, J., (1999), Pupils in transition: moving between key stages, Routledge,p. 73 Weiss, M. D. (2010), The Ultimate Depression Survival Guide: Protect Your Savings, Boost Your Income, and Grow Wealthy Even in the Worst of Times, John Wiley and Sons Puncel, L. (2007), Audit Procedures 2008, CCH, p. 4-16 International Federation of Accountants, (2008), International Standard on Auditing 530 Audit Sampling, accessed on 7 April 2011, from: http://web.ifac.org/download/a027-2010-iaasb-handbook-isa-530.pdf International Federation of Accountants, (2008), ISA 500, Audit Evidence, accessed on 7 April 2011, from: http://web.ifac.org/clarity-center/isa-500 International Federation of Accountants, (2008), ISA 530, Audit Sampling, accessed on 7 April 2011, from: http://web.ifac.org/clarity-center/isa-530 International Federation of Accountants, (2008), ISA 300, Planning an Audit of Financial Statements, accessed on 7 April 2011, from: http://web.ifac.org/clarity-center/isa-300 Read More