The Key Audit Risks to the Audit for Little Diggers - Case Study Example

?AUDIT REPORT FOR LITTLE DIGGERS Ltd I) The key audit risks to the audit for Little Diggers Ltd  It is d that all audit work entail some risk; this may be because of a set of company accounts having been misstated due to a mistake or fraud, or when an auditor unsuccessfully detects errors or fraud in accounts. Audit risk is the risk that the auditors may unintentionally fail to adjust their analysis on financial accounts that are greatly misstated. The following are the risks that Little Diggers Ltd is subject to. Inherent risk This is the likelihood of material misstatement of a claim before taking into consideration the client’s internal control. Factors that influence this arise from the nature of the consumers and its environment, or from the accounts nature. The auditor should consider whether to acknowledge the commitment since inherent risk increases the generally risk of the audit. It is often beneficial to set aside transactions into three types- routine, non-routine, and evaluation when valuing inherent risk.  Little Digger’s auditors may not use the system that gives the precise outcome to them, the result is mainly inherited by the risk factors as this system is applied to just a small section of the population as opposed to the whole population. This is prone to the misstatement that is said to be the inherent risk. The term inherent risk is applied in auditing and accounting, if there is higher likelihood of material misstatement within the financial statement, the inherent risk is considered high .It is also used for the misstatement of the business that is there in the financial statement. If the auditors will not lookout at these inherent perils, there would be more inaccuracies in the financial statement, which certainly will lead the organization to the incorrect direction, and consequently the financial statement will not be presenting accurate and just outlook. The auditors had to come up with ways of making an error free or inherent risk free financial statement in order to make their company move in the precise direction by formulating correct assessments .As per the auditor’s opinion, inherent risk improves the auditor's peril as the inherent risk is an element of it. It is therefore essential to minimize the inherent risk in order to diminish the auditor’s risk. Because of this, the auditors can make improper decisions because the proof to back such view will be false.  Detection risk Detection risk is essentially the risk that the measures applied by the auditors will fail to identify material misstatements in the financial accounts. Auditors in Little Diggers Ltd have to ensure accuracy and efficiency in the business with regard to the asset management, transactions, and their documentation in the monetary accounts. Besides this, the auditors look for various methods that aid them in measuring future risks that may affect their business. Auditors use a variety of methods to measure the risk, mainly the risk due to material misstatement Detection risk is allied to other relations i.e. the trade risk, material misstatement risk and its two major elements, which are the control risk and the inherent risk in general. If the material misstatement risk rises, it will lower the detection risk hence the auditors risk increases. The material risk increases when its essentials; control risk and inherent risk increase. The correlation of the risks will assist the administration and the auditors to try such diverse useful ways that will help reduce on risk levels. Control risk Control risk is the likelihood that a material misstatement exists in an allegation since either that misstatement was not barred from entering entity’s economic statements or it was not identified and approved by the internal control system of the unit. It is the duty of the organization and those responsible with authority to execute internal control system and uphold it properly. However if internal control system is discovering and correcting misstatements then inherent harms will creep in the entity’s system and thus the risk of material misstatement increases. Keeping in mind the task of the management or where appropriate those with the responsibility of governance to deal with inherent and control risks. They are also called client side risks because an auditor is not held responsible for managing internal control system i.e. gives his view on internal control system of the entity unless he is obliged under other relevant set of laws and rules. If control risk is high then the risk of material misstatement will increase eventually increasing the chances that the auditor may end up giving improper estimations. In response to increased audit risk, he is obliged to identify material misstatements by putting in place suitable audit measures. Provisional materiality levels for the year end Using the single rule method, the auditor will select one of the following materiality levels. Balance sheet ‘000 Income statement ‘000 Assets 134,480 total revenue 560,550 Liabilities 43,070 cost of sales (475,230) Owner’s equity 91,410 gross profit 85,320 Operating expenses (49,750) Operating profit 35,570 Finance costs (1,800) Net income before tax 33,770 Income tax (6,750) Net income after tax 27,020 Using the single rule method, the auditor will select one of the following materiality levels Single rule computation materiality amount/level 5% of pre-tax income 5% x 33,770 1688.50 ?% of total assets ?% x 134480 672.40 1% of equity 1% x 91,410 914.10 ?% of total revenues ?% x 560,550 2,802.75 II) Non-substantive planning analytics How the material movements may be suggestive of additional risks on some specific financial statement During the course of planning or auditing year-end financial accounts, economic administration or the registrant's independent auditor becomes sensitive of misstatements in a registrant's financial reports. Each declaration of fiscal Accounting Standards approved by the Financial Accounting Standards Board states, the requirements of this report need not be useful to immaterial things. In the staff's opinion, the auditor of its monetary statements suppose the immateriality of items that are less than a percentage threshold laid down by management or the auditors to establish whether quantities and items are material to the economic testimonial? The staff being aware that certain registrants, eventually, have developed quantitative thresholds as set of laws of thumb to assist in the research of their financial accounts, and that auditors also have used these thresholds in their valuation of whether substances might be considered material to users of a registrant's financial proclamations. But putting it in percentage terms, the extent of a misstatement is only the commencement of an investigation of materiality; it cannot properly be used as an alternate for a full analysis of all appropriate considerations. Materiality concerns the importance of an item to clients of a registrant's financial statements. A matter is material if there is a considerable possibility that a sensible person would regard it vital. Assessing materiality Under the prevailing principles, an evaluation of materiality necessitate that one views the facts in the situation of the surrounding conditions, as the accounting prose puts it. In the perspective of a misstatement of a financial report item, it includes the factual context in which the user of financial account would scrutiny the monetary statement item. The prime view is that materiality decision can appropriately be made by those who have all the specifics. The Board's present situation is that no common values of materiality could be formulated to take into relation all the concerns that enter into an experienced human finding. Amongst other factors, the verified instability of the price of a registrant's securities in reaction to other types of revelations provides regulation as to whether investors view quantitatively little misstatements as material. While the aim of management does not turn into a misstatement material, it may offer important evidence of materiality. The facts may be compelling where management has by design misstated items in the financial statements to control reported earnings. BACKGROUND Founded by Bamthorpe Family, Little diggers Ltd is a small manufacturer of farming equipment. It has diversified its products range across construction, demolition, and agriculture, where it has renowned a reputation for high quality durable products. This is an audit report for Little Diggers Ltd foe the period ended 30th Sep 2012. SCOPE The scope of the audit includes: Cash handling processes in the company Transactions for the period ended September 30, 2012 OBJECTIVES The audit was aimed at ensuring that the financial statements for the Little Diggers Ltd have been accurately, efficiently and effectively recorded in order to ascertain the financial position for the company and reduce the possible risks. Specific objectives of the audit were to assess the level of adequacy of the management, and the framework for financial statements control. The audit assessed whether the accounting policies employed in the company follow the applicable accounting regulations, policies and standards. A risk analysis was conducted during the initial planning of the audit in order to identify, evaluate, and assess the risks associated with the management of the financial statements. An examination of accounting regulations, policies, and standards was carried out to govern the management of the financial statements. The audit evaluated the adequacy of controls and processes to achieve key business objectives as it related to cashiers receiving payments. Following are the business objectives and related control assessment (Satisfactory, Needs Improvement, and Unsatisfactory) and a summary of good and weak controls noted in the audit. OBSERVATIONS AND ACTION PLAN From the accompanying statements of financial position of the Little diggers Ltd, as of 30th Sep 2012, and the related statements of activities, functional express and cash flows for the years ended. These financial statements are responsibility of the Little Digger’s management. My responsibility is to express my opinion on the audited financial statements foe the Little Diggers Ltd. RISKS ANALYSIS A risk analysis was carried out to identify, evaluate and assess the possible risks that associated with the management of the financial statements for the company. The risk analysis was important to determine whether the company followed the stated accounting policies and standards that govern the preparation of final accounts. Various risks were identified and evaluated in terms of the probability of their reality and their impact on the company’s operations. III). Further enquiries of management regarding the debtors balance and the recommended audit procedures The reconciliation setting in the nominal ledger Opening balance 219,210 Receipts and payments 237, 50 Closing balance (152,173) Net change 90,787 The financial statements of the Little Diggers Ltd have prepared on the accrual basis of accounting. The significant accounting policies followed are described below. Financial statement presentation: the company’s financial statements are presented in accordance with the provisions of Financial Accounting Standards Board (FASB). Inventory: inventory comprises of construction, demolition, and agriculture equipment. The inventory is purchased at the lower of cost or market price. Recommended Audit steps for Little Diggers Ltd 1. The auditors should verify that the outgoing cheques are signed properly and posted to the correct accounts 2. The company should ensure the incoming funds were correctly deposited to the accounts and the correct ledgers. These are the accounts receivables, and they should be classified into specific variables depending on the policies of the organization. 3. All the financial statements should be reviewed to ensure that all transactions are properly recorded and taken into account. If there are any unusual deposits or withdrawals, they must be noted to show that they were properly accounted for. This ensures that all the accounts are reconciled. 4. All the treasurer’s reports should be read, and ensure that what was reported was recorded and the totals from report to books match accurately. 5. All the financial review worksheet should be completed as a summary of all the activities for the period. This includes the cash balances at the beginning of the period, all the receipts during that time, and the cash at the end of the period. 6. Submit your signed documents (statement) that you have completed the audit and you have found either that the ledgers are accurate or that there are issues. In order to avoid auditing risks, the Assistant Deputy Minister, Finance and Corporate Branch, should: Take the necessary actions to recover or write off the amounts over 365 days past due; and Works Cited 1. Rittenberg, Larry E., Karla M. Johnstone, and Audrey A. Gramling. Auditing a business risk approach. Melbourne, Vic: Southwestern Cengage Learning, 2012. Print 2. Vona, Leonard W. Fraud risk assessment building a fraud audit program. Hoboken, NJ: J. Wiley & Sons, 2008. Print 3. Vona, Leonard W. Fraud risk assessment building a fraud audit program. Hoboken, NJ: J. Wiley & Sons, 2008. Print. 4. Pickett and Jennifer M. Pickett. Auditing for managers the ultimate risk management tool. Chichester, West Sussex, England Hoboken, NJ: John Wiley & Sons, 2005. Print. 5. Pickett. Audit planning a risk-based approach. Hoboken, N.J: Wiley, 2006. Print. 6. Vallabhaneni, S R. Wiley CIA exam review. Hoboken, N.J: Wiley, 2005. Print. 7. Vona, Leonard W. The fraud audit responding to the risk of fraud in core business systems. Hoboken, N.J: Wiley, 2011. Print. 8. Wiley CPA Exam Review 2013, Auditing and Attestation. City: John Wiley & Sons Inc, 2012. Print 9. Puttick, George, S. D. Esch, and S. P. Kana. The principles and practice of auditing. Lansdowne South Africa: Juta, 2007. Print. 10. Gupta, Kamal. Contemporary auditing. New Delhi: Tata McGraw-Hill, 2005. Print. 11. Gray, Iain, and Stuart Manson. The audit process: principles practice and cases. London Australia: Thomson, 2008. Print. Read More