Auditing and Assurance Services - Example

Scenario one Audit Gap An audit expectation gap is the real as well as anticipated performance of an auditor. The expectation gap might be defined also as the difference between what the public as well as financial statement users believe practitioners are accountable for as well as what auditors believe their accountabilities are. The views of the audit partner An audit is assumed to provide audit test beyond reasonable doubt and as well as conclude that the books of accounts are free from material misstatement and thus accounts are reliable since they portray a true and fair view. it is on this basis that the users of the financial statement will employ an audit to audit the company books of accounts with an expectation that an audit will disclose all errors as well as provide an assurance as to the going concern assumption of the company which might turn out to be what they were expecting after an audit issues an audited books of accounts that is beyond their expectation. In this regards, the users of the financial statement must be aware that an auditor is an independent practitioner employed in the business to work independently with no under influence and as well as to provide audit report that is free from undue influence as well as seem to provide a true and fair view of the company’s financial positing (Griffiths 2012). It there implies that an audit shall not be held accountable for the difference in real and anticipated audit result and opinion as long as the audit report provide a true and fair view of the company financial position of the company and as long as the auditors independence is not at risk. An expectation gap cannot just be narrowed down merely with an increase in audit fees but instead, expectation gap depends on the company compliance with the general accepted accounting principles as well as international auditing standing in preparation its books of account which might in turn reduces chances of errors occurring in books of accounts as well as provide an assurance as to completeness test on the company financial statement (Get Through Guides 2007). Adherence of the accounting standards will therefore minimize the audit expectation gap since, the company books of accounts will be having smalls errors which in turns implies that what auditors will report and what users of the audited financial statement expect is low and thus the audit expectation gap will be narrowed down. Scenario two The professional and ethical issues faced by Eric Independence It can be observed that audit independence is at risk since, Eric has realized some audit risk in the inventory department but prior to issuing audit report about the risk of internal control over inventory, and the report is changed by the partners to portray true and fair view (Cascarino 2007). To avoid the risk of audit independence, an audit must communicate to the audit staff and the company about the importance of independence of an audit in providing audit evidence. In this regards, an audit will only accept audit service where he is satisfied of the audit independence that he be provided at the time of providing audit evidence. Undue influence An auditor is at risk of facing under influence from the partners since; Eric has issued qualified audit opinion about weakness in the inerternal control system in inventory but the partners when ahead to issue a qualified audit report. This is under influence on the side of Eric since; he is forced by the partners to accept the false information about the company’s internal control system over inventory (Rittenberg 2009). In this regards, Eric should explain to John the professional code of conduct that an auditor must experience at the time of providing audit evidence, john should therefore comply with Eric’s audit report as well as ensure that weakness in the inventory is clearly explained and dealt with as per the audit report since, as an audit practitioner, they are require to observe due diligence and with no external pressure to provide false information about the company’s performance. Truthfulness Eric is facing the ethical practice of being threat. He faces pressure from his partner in providing false and misleading information to users of the financial statement that the books of account is true and fair view but in reality the company is having weakness in inventory which might be a chance of perpetrating frauds by disgruntle employees (Rittenberg 2009). Providing misleading information is unethical under the code of conduct in audit profession and consequently, Eric should inform John on the need of observing ethical standards at the time of audit work and providing audit report which might not be misleading to the users of the audited financial statement. Scenario Three: Preliminary audit plan assessing internal control risk Audit Objectives Proposed audit procedures to be executed Obtaining the files as well as overview of the file 1. Calculate a control total for Work-in-Progress (WIP) worth to guarantee that the auditor poses the complete data file. 2. Employ field statistics to acquire a “feel” for the data in key fields. Testing for mechanical correctness and correctness of data entry 1. Re-computing the worth of inventory 2. Confirming the computation approach employed for work in progress balances 3. Testing for redundancy in job numbers 4. Testing for redundancy in part numbers Testing for categorization of Work in progress. 1. Use the percentage of completion approach to identify work in progress as follows 2. {% complete = 100%) 3. Which is work in progress that hasn’t been transferred to finished goods? 4. b. (% complete = 0%) which is inventory that has been transferred to work in progress to early which shouldn’t have been. Performing numerous assessment test 1. Carry out Numerous computations to establish if net realizable worth is below the cost. Such as the margin ratio, sales prices less than cost, real cost less than quoted price confirming for obsolesce by checking the due dates for working in progress against the date of production. Choosing a sample entailing both numerical as well as non-numerical criterion. 3. Select all high value items plus a statistical sample of items for pricing tests. Examining disclosure of economic autonomy. 2. Recapitulate work in progress to recognize if any undisclosed important attentiveness exists. Scenario three: Preliminary judgment for detection risk Detection risk is the risk that the approach employed in the audit process will not discover risk or material error in accounts of the company and consequently practitioners employ their opinion in determining levels of suitable inherent risks well as control risk, particularly the practitioner’s input hardly employ the suitable detection risk acceptable (Pickett 2006). In reality, practitioners manage the entire risk in the audit process. This is made possible by developing the extent of audit and assessment to be executed during the audit process. Audit risk equals the risk on detection and risk and the risk on control. It therefore is observed that the percentage of audit risk is appraised for the inherent risk and control risk and thus this sort of audit risk is considered significant for the audit process in order to minimize the materiality of the audit risk and its impact on audit final report. The risk on detection depicts a comparative link concerning the risk on financial statement. In this regards, where an audit detect a high financial risk, it will call for comprehensive detection risk and also where there is low completeness audit test, it must be realized as well that the detection risk is set which will make an auditor to employ audit manual table as guidebook to right sample to be tested in the audit process. It can also be concluded that prior to setting the key audit risk based methodology, a practitioner must assume the audit planning and recording where the risk based auditing is assumed in the audit process. The practitioner assumes the risk based audit approach should be accentuated on the risk that may impact the financial statement of the company and also guarantee an audit opinion is precise and reliable to the users of the financial statement. The risk based methodology is deem risky since it uses a detailed audit methodology and also employing substantive audit test so as to guarantee that there is no material errors in the books of account, in this regards, the audit approach commands a comprehensive audit to avoid audit liability (Harrer, 2008). The practitioner employing the risk based auditing will be required to uses this type of auditing because the audit approach requires the employment of audit risk mathematics that deem the detection risk, control risk as well as the inherent risk. An analysis from the three types of risk is deem significant before making an audit opinion which as a result requires the employment of audit risk approach that is detailed like comprehending these risks. Deficiencies in MTI’S general IT control environment The company IT has a backup which is a strong implication of effective internal control over Systems. Also the password is weak since it is become controlled by one person who is the similar person that does the data entry work. To advance the efficiency of the backup system, the business must guarantee that it data is stored in a back up file dissimilar and far from the business premises so as to make sure that data integrity is guaranteed (Pickett 2006). The dearth of the password can be eradicated by guarantee that the person who controls the password doesn’t have the right to enter the data and the password should be case sensitivity with one time verification. This will guarantee that the password efficiency is enhanced as well as provide a guarantee as to the integrity and secrecy of the data files by those having the right of password enter in the company files and systems. Automated input application control To be certain of the right input control data being entered into the system, I will ensure that the worth of input control provide a confirmation response as to worth of the work in progress and other data entry inputted into the system that is deem vital to the bsui9nes and susceptible to fraud every time they are being entered into the system (Larry Rittenberg 2009). The automated input response will act as caution by way of inputted data so at make certain that data entry is clearly comprehend the precise value to be entered into the system as well to be specific of the value in order to reduce the data error which may over or under estimate the accuracy of the financial statement .T o ensure that the automated date of acquisition is entered in the right format, I will ensure that the system is installed with the correct format of date in order to ensure that the data entry just follow the data for amount provided by the system. Tests the effectiveness of the control. In order to ensure that the automated response on the correct of depreciation is working well, I will perform the surprise check in the system performance by testing with the wrong rates of deprecation to confirm where the system actually detects the errors. This test will provide an assurance as to effectiveness of the system performance in ensuring that the internal control is effective and reliable (ICAA 2014). To check k on the effectiveness of the date format in the system, will perform the test of detail by examination the date format entered in the system as well as perform the test so as to provide an assertion as to the consistency of the system in generating the correct date format. Specific substantive procedures that could be conducted for the WIP inventory Performing Analytical review process I will check on the opening balances for the last three months of work in progress in order to substantiate the actual figures recorded as well as those confirmed in the audit process and concluded on the reliability of the work in progress balances (Griffiths 2012). The procedure is made possible by performing analytical reviews procedure in order to check on the accuracy of the closing balance value with the opening balance and corroborating the value confirmed with the actual figure in the books of accounts. The procedure will thus provide an assurance as to reliability of the WIP balances or identification of errors in the books of accounts that might requires substantive audit test to be certain of the materiality of errors and its impact on books of accounts. Physical verification I will visit the company premises and perform physical verification of value of work in progress in the factory in order get first hand information on the actual opening and closing balance (Get Through Guides 2007). The net benefit of physical inspection is that as an auditor, the information gathered will be cross checked with those values actual recorded in the books of accounts and checks on any variance is vital since t will provide the extent to which the error in balance can be material or immaterial to books of account and its impact on the audited annual report in terms of providing a true and fair view of the company financial situation as far as work in progress is concern. Inspection of supporting document I will check on the relevant supporting document such as the work in progress inventory value in order to track on the value of inventory as well as identify in discrepancies in amount recorded as total value of work in progress and a compressive details of each work in progress. This essence of obtaining the inspection supporting document is that it will provide and up to date report which is considered vital form audit purpose (Cascarino 2007). As an auditor, the information gathered will be sued in ascertain the degree to which accounts are an agreement with books of accounts as well as check on areas that require more attention in order to ensure that all material misstatement and errors are clearly identified in the audit process Cut off test I will perform cut off test by checking on the closing value of work in progress each month with opening balance in order to ensure that the closing value corroborate with the actual opening value of work in progress (Alvin Arens 2013). Cut off test is an important audit procedure since, it provides audit evidence substantial to checking on the accuracy of the data recorded in the, journal entries and books of accounts as well as it point areas with material errors that needs further test of detail in order to disclosure fraudulent entries or material misstatement to be included in the audit report for further consideration. Using CAAT to appraise the value of the Work In progress The CAAT is employed in valuing work in progress as well as appraising the inventory turnover and transfers of work in progress closing balance to finished goods. This is important since CAAT identifies areas of undervaluation of Work in [progress. The audit software is used to create an aged inventory appraisal to check on slow moving goods to finished goods which any require the write downs or provisions (Alvin A Arens 2013). This is achieved by casting the listing of work in progress to corroborate the completeness as well as adequacy of the work in progress. Audit software is used to establish a representative sample of WIP for testing to corroborate net realizable worth or cost. It can be significant inn re-comuptung the cost and also the net realizable value. CAAT may be used to confirm the cut off balance by checking if the date of the last GRN and GDN recorded recount the last financial year end and also if there is any date from the opening date that has been included from the work in progress and inventory records and substantiate if the adjustment noted while the count have been correctly updated in Work in progress records and inventory records as well. Reference list Alvin A Arens, PBGSBF 2013, Auditing, Assurance Services and Ethics in Australia, Pearson Higher Education AU, Sydney. Alvin Arens, PBS 2013, Auditing , Assurance Service and Ethics in Australia, John Wileys and Sons, New york. Cascarino, RE 2007, Auditor's Guide to Information Systems Auditing, John Wiley & Sons.. Get Through Guides 2007, F8 Audit & Assurance(Intl) - Study Text, Get Through Guides. Gray, IAMS 2008, The Audit Process: Principles, Practice and Cases, Cengage Learning EMEA, London. Griffiths, MP 2012, Risk-Based Auditing, Gower Publishing, New york. ICAA 2014, Auditing, Assurance and Ethics Handbook, John Wiley & Sons. Larry Rittenberg, KJAG 2009, Auditing: A Business Risk Approach, Cengage Learning, New york. Pickett, KHS 2006, Audit Planning: A Risk-Based Approach, John Wiley & Sons, New york. Rittenberg, LE,JK,GAAASB 2009, Auditing: A Business Risk Approach, 7th ed., Cengage Learning, London. Read More