The Process of Auditing - Essay Example

? AUDITING and Introduction The process of auditing requires an evaluation of the specified items to ensure that the report is aligned with the reality. This essay will attempt to do an audit of rent stock, liabilities and the receivables of Wentworth Brewster limited. The company manufactures sports equipment. Their main customers are private gyms as well as specified retailers. The information regarding the four items is retrieved from the trial balance that is dated March 31st 2011. The essay will address the four items listed identifying the extent to which they have been audited in order to review any audit problems. The paper will also indicate any recommendation on furthering the audit in case of an audit problem. Finally the paper will outline the actions following the further work done on the audit. Analysis of the Four Items Debtors During interim audit preparation, a list of who owes the company and the total amount they owe is drafted. According to the trial balance dated 31st March 2011, the amount expected from the debtors amounts to 950,000 pounds. During auditing, the expectation is that the schedule of debtors or the accounts receivables should always agree with the figures in the financial statements (Loughran 2010). Audit problems normally arise as a result of not taking into considerations the risks involved when dealing with accounts receivables. The accounts receivables that have been listed may be inaccurate. It is also possible that the receivables may not be existing or may not be collectible. The audit should consider the write offs of the bad debts. The sales transaction should always be processed at the right period to avoid recording of sales due the next period. In this case for instance, Multi gym which is a private company, may be defaulting from paying 95,000 pounds, the reason being the machines they purchased from Wentworth Brewster limited could be used for reasons related to jamming (Montgomery 2009). This therefore, has to be indicated in the bad debts and deducted from the accounts receivables. There debtors have balances at the end of the year that range from 5000 to 20000 pounds. The specific amount of the balances is not specified. This could lead to assumptions that may trigger false figures in the income statements. The schedule for the accounts receivables hold be reviewed so to match with those in the financial statement. Claim for Damages During audit preparation, a schedule should be done relating to the creditors of the firm or those individuals or business that have a claim. The totals in the formulated list should always be equal with the figures in the financial statement. According to the trial balance dated 31st March 2011, the total amount of money claimed for damages is 25000 pounds. This amount should be included in the schedule as amount payable to the individual claiming. However, the draft has not included provision for claims from other customers (Loughran 2010). For instance, the three customers have placed claims against retailers for suffering injuries as a result of vague instructions. For there to be a correct indication of the reality on the grounds, the draft should make a provision for such claims then they will be directed to the company. Stock The trial balance indicated stock amounting to 1.6 million pounds. According to the laid down accounting principles, it is required stock for the previous period to be reported in that period. This therefore presents an audit problem. In order to determine stock for the period, the amount of stock currently being held is subtracted from sales of that period. This resulting figure indicates the stock that has been sold. This is therefore added to the beginning inventory to determine the total stock available for dale. This is where the audit discovers that 0.5 million stock was included in the previously concluded period. Rent Rent when considered as an income should be recorded in the period, it is received and not reported. According to the trial balance, income generated from renting the extra facility of the firm amounts to 120000 pounds. In auditing, the receipts should be reflected against the payments to ensure no details are missing and to hold account for any tenanting case of rent clearance. Part of the stages of auditing is the audit test. This normally comes after collection of the evidence. Evidence collection involves acquiring actual evidence regarding the figures reported. Audit test introduces list that records further auditing work. This introduces new tests to be performed to ensure the accuracy. The test is based on assessing the risks involved, the scope of the previously audit and the standards of the industry as recorded in the guidelines governing the industry (Gramling 2011). . Debtors The only way to ascertain the accuracy of the figures relating to the accounts receivables is through carrying out a further audit of the sales. This includes proving that all orders received for the period are executed accurately. All invoices for the products dispatched should be produced and receipts produced (Montgomery 2009). They should be recorded in the ledger accurately. The private gym is threatening on boycotting payment of equipments worth 95,000 pounds. This should be dealt with either as bad debt or customer returns. All the cash received should be recorded in the ledger reflecting the receivable cleared. The need for this further test is to ensure the accounting systems, that is the ledger maintenance and other internal controls are accurate. The internal controls should always be present to ensure the production of reliable and accurate records. Compliance tests will also be carried out to prove that the systems used to record are compliant with the set international accounting standards. Given the above case scenario, five of the thirty debtors did not respond to the confirmation letters sent to them. It is therefore recommended that remainders be sent to the five debtors. If this does not work at all, the auditor has the option of performing additional testing to ensure accuracy of the balances carried forward. The testing done will involve coming to an agreement regarding the balances of the debtor relative to the cash the debtor has paid so far. Agreement should also be reached on the details regarding the balance of the customer relative to the advised customer remittance (Montgomery 2009). The balance should be analyzed keenly to ensure all the transactions are identified and confirmed. Finally a summary of the final results should be formulated and a final conclusion done. The auditor is also required to satisfy that the figures reported in the balance sheet under the trade debtors will be inclusive of all the recipients. Provision should also be made for all debts. The auditor should therefore carry out an age analysis for the year ended of the debtor and carry out the testing for the selected set of balances. The auditor should also analyze the provision for poor debts or those being poor. The auditor should also scrutinize the analysis to enable them to identify debts which are debatable (Louwers 2005). This analysis should be done on the private gym that is claiming to default paying for the machines that are unusable. Since these debts were not included in the provision for the bad debts, the auditor should also seek advice from the management regarding the same. After the agreement the auditor will; be required to carry out further testing to eliminate any disputes. A final conclusion should then be drawn regarding the accuracy of the bad debts provisions. Stock The auditor has to satisfy that the cut off is accurate. A cut off eliminates any doubts that the sales could be overstated. Cut off test should therefore be conducted. This will include performing tests for the invoices that are previously issued for the last period. The invoices should also be included in the category of debtors (Loughran 2010). The invoices should be for the goods that have been dispatched should not be included in the figures stating the stock accumulation, the cut off test should also be carried out for the goods that have been dispatched and have been included in the debtor’s category but were recorded in the year end prior to the current year end. Cut off test allows for no goods to be dispatched once the year has ended and the invoiced goods have been included in the debtor category. Claim for Damages The claim for damages should be treated as payables hence should be reported under the payables category in the balance sheet. The trial balance figures are not inclusive of the provisions relating to the claims for damages. The auditor should retrieve details or information relating to the invoices of the accounts payable. The claims for damages are unpredictable sand therefore should be reported as a provision (Loughran 2010). The retailers’ should make a well detailed report relating to the damages payables including the items that were defaulted. The firm should ensure that the amount they are paying for is detailed or reflected in the balance sheet. Rent Rental income should be confirmed to ensure no income is lost and no fraud is committed. The interim report showed that the receipts for the rental payments were reflected in the system and compatible to the rent payments (Pickett 2004). However it is supposed to be done in order to reflect the payable receipts. Balances that have not been cleared should be formulated and deducted from the renal income. This will ensure that income not received is not reported in the balance sheet as income. Actions Recommended Altering the accounts As an auditor, I would recommend different actions to be undertaken, based on the different situations, for instance in the area of debtors, provision off bad debts was not included in the accounts. This calls for alteration of the accounts. The figure relating to the accounts receivables will be altered (Pickett 2004). This will include deducting the doubtful debts amounts from the debtors and including it in the provision for serious debts accounts. In the case of the rental income, the balances that have accrued should be deducted from the rental income and added to the rent payable account. Qualifying the Audit Report Claims for damages should be treated as a payable in these cases since the company will have to compensate the amount to the retailers who have already incurred the expense following a court order (Kumar 2010). Since the court order has already been finalized, it allowed for the amount to be included in the payables account. It is advisable that the amount should be disclosed on a receipt. This is because; the party could manipulate the figures and account for more damages than those that were initially ordered by the court (Gramling 2011). A receipt eliminates any doubt for the uncertainty that comes with recognition of that amount as payable. A note has to be specified detailing the addition of the t payable and should be attached to the auditing report. The report will qualify the audit report and term it as accurate and reliable. Notes relating to the amount paid against the amount payable should also be attached to the audit report. If any balances were found, they should be deducted in the rental income and added to the rent payable account. In order to qualify the audit report, the notes have to specify the amounts to be included and to be deducted (Kumar 2010). Obtaining Management Assurance Provision for adverse debts, management is required to give letters of representation that admit or agree with the amount that will be defaulted to the customer as a result of the unusable equipments. The letters will allow the auditors to include the account relating to the provision for adverse debts in the statement of financial position (Gramling 2011). Conclusion The work of an audit manager is to majorly review the work that has been done regarding the interim audit report. This paper has analyzed for items in the balance sheet that the audit manager reviewed. These include the stock, the debtors, rent and the claims for damages. The paper has addressed the extent to which the audit problem has escalated. The paper has also mentioned the recommendations that should be taken regarding the problems that have been identified. This includes the steps that should be undertaken when solving these problems. Finally the report has mentioned recommendations relating to the actions that should be taken on the further work done. The report has analyzed three actions that include altering the accounts, obtaining management assurance in the letters of representation and qualifying the interim audit report. According to the analysis, an auditing report should be reviewed before finalizing on all the figures. It should also be qualified through attachment of notes that specify the changes that have taken place. Bibliography Audrey. A. Gramling, 2011. Internal Audit Standards. London: Cengage Learning. Basau Sanjib Kumar, 2010. Fundamentals of Auditing. India: Dorling Kindersley Publishing. Kamal Gupta, 2004. Contemporary Auditing. New York: McGraw-Hill. K H. Spencer Pickett, 2004. The Internal Auditor at Work: A Practical Guide to Everyday Challenges. New York: McGraw-Hill. Maire Loughran, 2010. Auditing for Dummies. Canada: Prentice Hall. Robert Hester Montgomery, 2009. Auditing, Theory and Practice. New York: McGraw-Hill. Ravider Kumar, 2008. Auditing Practice and Guide. Canada: Wiley Publishing. Timothy J. Louwers, 2005. Auditing and Assurance Services. New York: McGraw-Hill. Read More