Auditing for Gourmet Pty Ltd - a Food Manufacturing Company - Case Study Example

Name : xxxxxx Tutor : xxxxxx Title : Auditing Course : xxxxxx Institution : xxxxxx @ 2010 Introduction  Auditing for Gourmet pty ltd a food manufacturing company Analytical procedures are a major part of auditing which involves financial data evaluations to determine the relationship between non-financial and financial data. They range from simple to complex comparisons involving high amounts of data. It provides the auditor with financial information overall view, assists the auditor to time and plan for the auditing and also helps him or her to acquire audit evidence   The following are some of the procedures of preliminary analytical review I as the auditor can use: I should compare financial balances of the two periods for Gourmet pty ltd manufacturers Year                                      Type of balance                        Amount 2009                                      Net profit                                             56,240,000                                               Shareholders equity                              141,300,000                                               Goodwill at cost                                   70,296,000 2010                                      Net profit                                             63,562,000                                               Shareholders equity                              204.862,000                                               Goodwill at cost                                   95,150,000 This will enable the auditor to determine any inflated account since the financial accounts of a current year are calculated beginning with closing accounts of the previous year. This also enables him or her to discover trends in debt and equity structure which can indicate risks of insolvency The auditor should compare the financial ratios of this company to determine its performance. Level of performance of a company is directly related to its financial statement data.        Current ratio=          total current assets   total current liabilities            For the year 2009 =62394/512700 = 0.12            For the year 2010 =102230/634104 =0.16 Client and auditor determined results should also be used as they enable the auditor to write a report. A regression investigation of the expected results of the current year for the balances of the financial balances should be compared with the actual ones which gives the auditor to understand the financial trends of the company                        Inherent risks are the assessment done by auditor which gives the occurrence of a material misstatement in the financial statement. Audit risk on the other hand occurs when an auditor gives a inappropriate opinion due to financial statement misstatement. Management and directors integrity, experience of the management, pressures put to the management, industry condition and nature of business are some of the factor affecting inherent risk assessment. When management and directors integrity is compromised, it can lead to a high audit risk. Management integrity can be compromised when the managers manipulate the financial accountants to give a wrong financial report. When auditing this report in Gourmet pty ltd, I will detect errors and frauds or material misstatement in the financial statement and then give an inappropriate opinion hence high audit risk. An audit procedure involves the collection of evidence to determine the reliability of the financial records. Compromised management integrity will affect my audit procedures negatively as the information I will collect from banks or fixed assets account will give me enough evidence of the unreliability of the Gourmet pty ltd financial report. Managers who are inexperienced like the finance manager who is recently employed in Gourmet pty ltd is inexperienced in accounting may fail to make essential provisions or fail to do essential calculations on leases, depreciation or contracts and this result to accounting errors which increases chances of audit risk leading to inappropriate opinion. Similarly, this has a negative impact on audit procedures as any collected data will show the unreliability of the financial accounts. When there is need to produce a financial statement within a given shorter period or to beat a deadline, people tend to work under pressure resulting to mistakes in the preparation increasing audit risk. During my auditing the accounts of Gourmet pty ltd then, I should put this factor into consideration but only when it is necessary and especially during inherent risk assessment but errors in a financial statement lead to an inappropriate opinion by the auditor. Data obtained to determine the reliability of this will totally differ with what is got in the financial statement hence audit procedures will be negatively affected. As an auditor I should understand some businesses like Gourmet pty ltd may have a high incidence of irregularities in financial statement. This may arise due to geographical and technological change and complex contractual relationship with its customers or suppliers. Financial irregularities results to high audit risks which affect audit procedures positively due to the relevant information that I will collect to ascertain the reliability and validity of the financial statements. Simply, when there are financial irregularities then the financial statements will be unreliable. Major turmoil within the industry like demutualization of insurance companies may lead to increase in audit risk which in turn affects audit procedures negatively A financial statement is said to be material if the omission or elimination of an item of financial statement can influence a reasonable person relying on this financial statement to make a wrong judgment. There is an inverse relationship between the materiality level and audit risk. If the materiality level of Gourmet pty ltd was reduced from $55,000,000 to$32,000,000 then the obtained evidences will increase the audit risks. To determine the original materiality level, I as the auditor will have to obtain additional evidences to determine the misstatements that occurred for the change in the materiality level to occur. Therefore, reduction in materiality level increase audit risk which in turn lead to increased levels of audit procedures to obtain additional evidence. There are several audit objectives which include: Auditing is done to confirm whether proper procedures were followed in preparing the financial statements. This is usually achieved by the auditor going through the books of assets, liabilities, provisions and even depreciation to determine their existence and see whether each necessary account has been considered in financial reporting. Auditing also aims at detecting errors and frauds in order to determine the level of audit risk involved. This can be done by a thorough investigation of fraudulent and dishonest activities by the management in which the management may have inflated the financial accounts. Auditing also aims at writing a final report which declares the financial position of the firm by giving either a disclaimer opinion, except for opinion or disclaimer opinion depending on the misstatements in the firms’ financial accounts. Auditing also identifies and defines types of control which can be internal or external and gives a report on management’s responsibility on the controls. Here the auditor assesses the firm’s compliance with laws, policies, regulations and procedures  External and internal auditors should share the following information which is beneficial to their client: They should discuss on their extent of their work and audit coverage to reduce redundancies, provide working papers and reduce risk. Reduction of risks therefore leads to a good opinion by the auditor and hence a benefit to the client, I can not rely on Gourmet pty ltd set of objectives to audit for the trade creditors because using them can not help me get enough audit evidence. This is because so many items of the trade creditors have not been considered. Therefore, I would consider the following- Do a thorough analysis of the trade creditor’s turnover and review the invoices to determine the cash payments. I would also check the trade creditors and payments alongside budgeting and look for explanation on any ambiguous data. As an auditor I would also look for vouchers or goods received note to ensure that the correct procedures were followed in recording the consignment. Checking the movement of creditors in a month alongside the payments done on that month can provide enough audit evidence. The following objectives concerning IAG trade creditors work plan are relevant to an external auditor: Examining the year end trade creditor’s material balance because this will be used as account payable during the preparation of the end of year accounts. That is I as the auditor will be able to determine the account payable by the end of the year. Examining payments done throughout the year in line with the guidelines of the accounting manual account manual. This will ensure that all relevant recording is done in the correct accounting book. There are several errors which the internal auditor may have encountered while auditing the financial accounts of Gourmet pty ltd. Clerical errors were experienced. They include errors of omission and errors of commission. Errors of omission occur when a transaction is fully or partially omitted from the accounts. For example there was some payment to approved suppliers that was not paid meaning that it had been fully omitted from the books of accounting. Also there are payments that did not bear evidence that computation of suppliers invoice had been checked which means that received invoice had not been entered in the books of accounts. Using this data then leads to an inaccurate trial balance. Errors of commission are errors that occur when there is a wrong addition or posting of entries. This results to debiting entries which are supposed to be credited. For example in the accounts of Gourmet pty ltd payments were not matched with the approved supplier meaning that payments were matched to a wrong supplier. This has an implication has it results to an inaccurate trial balance. Due to the occurrence of above errors the internal auditor will be forced to do extra work which will include collection of evidence. For example he should send letters to the suppliers requesting them to reply if and only if they disagree with what is contained in the letters. This is called circularization of creditors and will help the internal auditor to compare the replies from the suppliers with the performed work to determine the validity of creditors. The internal auditor should also use sampling methods to obtain evidence. He can sample out invoices and suppliers. The invoices checking will enable him to determine whether the invoice checks had been carried out while supplier sampling will help to each supplier is valid and authentically authorized The following financial reporting assertions bear a great risk of material misstatement of Gourmet pty ltds accounts payable Existence is used to confirm whether the there given accounts payable are present at that given date and whether recorded ones truly happened. If they are not, then this causes a material misstatement leading to high audit risks. Therefore there should be enough evidence on there existence. To provide audit evidence for the existence then I as the auditor should identify any bank account that was used in processing the accounts payable, look for the suitable documentation which can support the transaction and also get to review previous reports to evaluate whether counteractive measures were put in place for any deficiency. Audit evidence can also be got from the creditor thro circularization. Valuation is used to confirm if the account payable is put into the accounting books in its right proportion contrary to which there is a material misstatement. Audit evidence procedures can be used to get the value of accounts payable through looking for the suitable documentation which can support the transaction and identifying any bank account that was used in processing the accounts payable. This is done through the help of Generally Accepted Accounting Principles (GAAPS) Completeness is used to check whether the accounts payable included in the financial statement is rightfully included. This should be supported with external documents like bank statements and unpaid invoices. Substantive audit test in auditing of inventory balance involves going to the site by the auditor to get the physical count on the inventory together with running the reports of the quantity of inventory in store. Working papers in auditing are used to show that auditing was properly planed with the auditor going through all stages of planning. They also show that enough evidence was collected for audit opinion. Tolerable errors are the optimal errors found in a population sample that despite of their occurrence, the auditor concludes that the audit objectives have been achieved. The assistant auditor in Gourmet pty ltd concluded that the audit objectives were met since he found that the errors found were of a small percentage that is 4% and 5% hence tolerable. As the auditor therefore, I would conclude that the work done by the assistant auditor was acceptable and use that work for writing of the report.     Reference Grant Gay and Roger Simnett. 2010. 4th ed. Auditing &Assurance services in Australia. McGraw-Hill Australia Read More