Audit Plan for JI Hi-Fi Company - Case Study Example

Running Head: Audit Plan for JI Hi-Fi Company Name: University: Course: Tutor: Date of Submission: Executive summary This aim of this paper is to develop an audit plan for JI Hi-Fi Company using its annual financial reports. The audit plan will provide in detailed an understanding of the underlying concepts related to the overall audit strategy. This audit plan therefore will outline the direction and the scope of entire JI Hi-Fi Company auditing process. The audit plan report will address five major points as follows; Understanding the entity and its environment, Making preliminary judgments about materiality levels, Considering the audit risk, Understanding internal control structure and Developing preliminary audit strategies for significant assertions. The entire audit planning process for JI Hi-Fi company financial reports will be used together with relevant auditing standards such as ASA300 - Planning an Audit of a Financial Report,ASA315 - Understanding the entity and its environment and assessing the risk of material misstatement and ASA 320- Materiality and audit adjustments among other accounting standards. The audit plan in addition will provide an overview of risks that the company is facing as well as the strategy procedures to control them. Furthermore, the audit plan provides an analysis of JI Hi-Fi company corporate governance in relation stipulated corporate governance principles of ASX Introduction A financial audit is described as the financial review of company’s statements or any other legal entity. In normal circumstances financial audits is one of the many assurances to the company provided by accounting and auditing firms. Financial audits therefore exists to add credibility to the organization’s management that financial statements are fairly a representative of organization’s position and performance to the firm’s stakeholders as well as interested parties. The audit is usually designed to increase the possibility of material misstatement detection through the auditing procedures (Trenerry, 2004, pp.23). A misstatement is usually defined as false or missing information normally caused y fraud thus deliberate misstatement or errors. Audits therefore exist to add value through easing the cost of information as well as providing conformity that all the materials and audits are in line with the generally accepted accounting principles. As a way of preparing an audit plan in a timely as well as in an efficient manner, it is very important that a proper strategy be used in developing an audit plan for the financial statements (Rao, 2005,pp.67-70).In order to ensure that correct outcomes are established it is important that many areas be addressed. First and foremost it will be important for the auditing firm to understand thoroughly the environment of JI Hi-Fi Company, its environment and the electronic industry at large. As way of carrying out an effective auditing process, the external auditors will be required to understand the entity and its environment by analyzing the entities internal and external information. To successful carry out a substantial financial l audit for JI Hi-Fi Company, the external auditors will be required to obtain sufficient information through proper understanding of the entity and its environment including JI Hi-Fi company internal control structures. Understanding of JI Hi-Fi company business environment will help the auditors in a variety of ways throughout the audit process including material establishment appropriateness consideration as well as designing audit procedures that can facilitate the growth of HI-FI Company(Charles, 2009,pp.20-30). Developing an audit plan aids the auditors to determine the necessary resources required to perform the engagement. This audit plan will provide a comprehensive description of the nature, timing and extent of the planned risk assessment procedures as well as the material misstatement risks. This audit plan will be used to determine whether the company’s financial statements have been fairly stated in relation to the Australian accounting principles. As way of completing the audit plan, the external auditors will be required to carry out major assessment of financial statements including Income Statement, Balance sheet, Cash flow statement and changes in equity statements.  This audit process will involve obtaining and reviewing financial information about prospective customers, annual reports, interim statement, registration statement and reports to regulatory agencies. In relation to audit engagement communication with the predecessor audit will done to extract information on management’s integrity, disagreements with management about accounting principle, audit procedures, or similar matters; and the reasons for a change or auditors (Gray& Walter,2008,pp.34). Understanding the entity and its environment Obtaining an understanding of HI-FI Company and its environment is an essential aspect of performing an audit in relation ASA315 - Understanding the entity and its environment and assessing the risk of material misstatement. “JB Hi-Fi Limited” company is an Australian public company and one of the largest retail chain groups dealing in home consumer products such as electronics, electrical goods, software including music, games and movies. The company operates in Australia as well as in New Zealand with approximately 123 stores spread across Australia as well as New Zealand. The company has put in place appropriate risk management measures to protect the business operations, the staff and the company assets. To carry out the auditing process more successful, auditors will be required to understand the risk management procedures and their influence on the financial statements of the company. JB Hi-Fi risk management policy considers a balance of risk and reward in order to optimize the returns gained from its business activities as way of meeting the business expectations as well as those of stakeholders. Auditors will need to understand such polices to effectively carry out the auditing process since the policies have a great influence on JI Hi-Fi returns which eventually affects the financial statements. The company corporate governance is well established from the board of directors up to lower level employees. From the reports the company has implemented several corporate governance rules and polices to ensure that the company functions properly in relation to the set organizational objectives and aims. The relationship between the Board and management is based on individual engagement and communication. Good corporate governance has enabled the company to continually succeed in the business as well as achieve the expected growth and profits (Gay & Simnett, 2009, pp.45-50). The company embraces the principle of equity participation which has over the years remained a critical tool in attracting new management, retaining the existing as well as rewording performance. The company through its corporate governance endeavors to make an alignment between the stakeholders’ interests and the interests of the company. JB Hi-Fi monitors and evaluates the performance of its Board, its Board Committees, individual Directors, and key Executives in order to fairly review and actively encourage enhanced Board and management effectiveness. Understanding of HI-FI as Retail Company and the environment surrounding its operations is significant for auditors especially when it comes to establishing a frame of reference. This is important since it helps the auditors to effectively plan the audit as well as exercise professional judgment when assessing risks of material misstatement related to the financial statements as well as responding to those risks throughout the audit. The auditors will be required to use professional judgment in determining the extent of JI Hi-Fi environmental and business operations understanding. In using past financial information on JI Hi-Fi financial performance related to the prior periods, the auditors will be required to determine whether any changes have occurred in the financial statements from previous periods which may affect the relevance of the current audit. The auditors too will be required to assess the previous audit engagements done in the past years related to HI-FI financial statements. This is because audit procedures performed in the previous years ordinarily provide audit evidence about the entity’s organizational structure, business, and controls, as well as information about past misstatements (Gray & Manson, 2007,pp.67-70). In addition, it provides additional information to the auditors on whether the misstatements were corrected on a timely basis or not. This usually assists the auditors in assessing the risks of material misstatement in the current audit hence avoiding the repetition of the same. Since the past information related to JI Hi-Fi Company currently has been rendered irrelevant due to globalization as well as changes in business environment, the auditors will be required to make thorough inquires and to perform other appropriate audit procedures, such as overall financial statements walk-through essentially to determine any changes that have occurred and how they can affect the relevance of the current audit. Understanding of Internal Control In order to effectively understand the organizational internal control structures, the auditors will be required to first of all obtain an understanding of the internal controls through performing various procedures in relation to the ASA300 Planning an Audit of a Financial Report.The auditor’s will be required to understand various aspects of the company as well as the electronic industry in which the business operates. The auditors will be required to obtain a significant understanding of regulatory factors related to Australian electronic industry as well as other external factors which directly or indirectly affects the operations of the company. The factors which the auditors will be required to look at will comprises of industry conditions, competitive environment, supplier and customer relationships, technological development, relevant accounting pronouncements, legal and political environment as well as other external factors such as general economic conditions. The auditors will need to obtain an understanding of JI Hi-Fi Company and its environment. The nature of JI Hi-Fi company environment refers to its operations, its ownership, JI Hi-Fi company structure, financing, governance as well as HI-FI investment types and its future plans. The auditors will need to have a clearly understanding of HI-FI classes of financial transactions, account balances, receipts payments and disclosures to be expected in the financial statements. JI Hi-Fi Company operates in Australia and New Zealand hence necessary for the auditors to understand the complex structure of the company. Companies with locations in other countries usually have problems related to financial statements consolidation as well as good will allocation resulting to risks of material misstatement. The auditors will be required to have a clear understanding of JI Hi-Fi company ownership, management and other personnel relations between key stakeholders and the company operations. In such cases the auditors will be required to identify all the party related financial transactions and whether the financial transactions have been accounted for more appropriately. Assessing the risks of material misstatement The electronic industry in which JI Hi-Fi Company operates is subject to various risks of material misstatement arising from the nature of the business, degree of governmental regulation and other external forces. JI Hi-Fi company long-term financial contracts show significant estimates of revenues and costs giving arise to risks of material misstatement of the financial statements. Since the electronic industry of Australia has specific regulations on certain financial reporting requirements for the industry, auditors will be required to have sufficient knowledge and experience on the accounting reporting standards (Rao,2005,pp.67-70). The auditors will be required to assess any risks related to the company which might in one way or the other influence it’s the reporting as well as application of substantive procedures. Moreover, the auditor will be required to take preliminary judgments about the materiality levels through an analysis of company’s financial controls. In order to carry out effective auditing process, various organizational risks will be assessed and these risks will comprises of business risks which can be defined as the risk which can affect an organization’s ability to achieve its objectives. Business risks are normally caused by significant economic conditions, events, circumstances, actions, or interactions which at a greater extend could have an adverse effect on the company’s ability to achieve its objectives and strategies. Just as the external environment often changes, the conduct of the business too is dynamic hence affecting the implementation of strategies as well as objectives over time. . Business risk is broader than the risk of material misstatement of the financial statements. Most business risks have financial consequence that eventually affects the financial statements. Though, not all business risks result to material misstatement business risks has immediate consequences on the company financial statements .Audit risk is described as the risk in which the auditor gives an inappropriate audit opinion when the financial statements are materially misstated. Audit risk can be divided into various other risks comprising of; Inherent risk which actually reflects the auditor’s opinion on the possibility of material misstatement on financial statement. Control risk is the risk that internal control policies and procedures failed to detected or prevented (Russell, 2005, pp.34-45). Detection risk is defined as the likelihood that a material misstatement relating to an assertion will not be detected by the auditor's substantive testing. The auditor will be required to look at each area of the company areas as way of detecting material misstatement and lastly fraud risk which can be described as the misappropriation of assets and absence of controls Developing responses to assessed risks The auditors will be required to consider all the identified risks in relation to individual JI Hi-Fi company account balances, classes of transactions, disclosures as well as relevant assertions on the overall level of financial statements. In order to effectively respond to the identified risks it’s necessary that the auditors implement certain responses. The responses which will be implemented will include emphasizing to the audit team the need to maintain professional skepticism especially when gathering and evaluating audit evidence. The other response will involve employing experienced auditors with special skills as far as the electronic industry is concerned. Provision of effective supervision is another response methods as well as incorporating additional elements of unpredictability. Implementing proper audit procedures is another response and proper understanding of the control environment by the auditors. This is because an effective control environment helps the auditors to gain more confidence especially in the internal controls. The nature, timing and the extend of risk assessment procedures related to the company’s business operations will be performed depending on the engagement circumstances thus the size of JI Hi-Fi company in the electronic industry and the complexity of the business as well as the auditor’s experience with the electronic industry in which JI Hi-Fi company operates. The auditors will be required to identify significant changes related to the above mentioned aspects from JI Hi-Fi company financial reports and other reports from prior periods mainly to gain a sufficient understanding of the company(Russell, 2005, pp.34-45). In order to understand the design as well as the internal controls related to the JI Hi-Fi financial statements both inherent risk and control risk will be evaluated and assessed inversely with their detection. The auditors will obtain an understanding of JI Hi-Fi company objectives and financial strategies as well as business risks which may result in material misstatement of the financial statements. Since JI Hi-Fi Company operates in a context of industry, regulatory as well as other internal and external factors, the company has put in place strategic plans to deal with risks. The auditors will be required to apply analytical procedures in planning the audit of JI Hi-Fi company financial statements. Use of analytical procedures will help the auditors to effectively understand the business operations of JI Hi-Fi company its environment as well as identifying areas which may represent specific risks relevant to the audit. Analytical procedures will be used at length during the auditing process by the auditors primarily as a tool helpful in the identification of unusual transactions, events, amounts, ratios, and trends that might indicate matters which have financial statement and audit implications on the company. When performing analytical procedures in relation to the risk assessment procedures, the auditors will be required to develop expectations about plausible relationships in the financial statements which are reasonably expected to exist. Comparison of the expectations in relation to the recorded amounts of ratios will be developed from the recorded yields .The auditors will be required to use the results in identifying risks of material misstatement( Russell,2005,pp.34-45). Analytical procedures will help the auditors along with other information to identify risks of material misstatement. The auditors will be required to specifically assess the risks of material misstatements of financial statements due to fraud..In relation to this the auditors will be required to consider as well as design various audit procedures. In making the assessment, the auditors will be required to consider fraud risks factors which relate directly or indirectly to the material misstatements resulting from fraudulent financial reporting. The auditors will be required to evaluate management‘s characteristics and its influence over the environment control factors. In addition, the auditors will be required to assess the industry conditions and its operating characteristics as well as financial stability. Fraud risk relates to the misappropriation of assets and absence of controls. The auditor’s response to fraud risk assessment is normally influenced by the nature and significance of the risks factors so far identified hence it will be necessary for the auditors to modify the audit procedures according to the identified fraud factors(Russell, 2005, pp.34-45). Depending on the circumstances the auditors will need to critically evaluate fraud risk material misstatement and the response required. The auditors will be required to assess whether the fraud calls require an overall response or a specific one to a particular account balance, class of transactions, or disclosures at the relevant assertion level, or both. Since fraud risk factors necessarily do not indicate the existence of fraud in the results of risk material misstatement rather they only provide a broad initial indication about material misstatement, the auditors should consider the results of the assessment to evidently conclude on the existence of fraud risk which can be described as the misappropriation of assets and absence of controls (Arte, Cianfrani & West ,2003,pp.34-45). This risk is evident from the financial reports of JI Hi-Fi Company causing misstatements in the valuation of accounts receivables. Similarly, a business risk may have an immediate consequence for the risk. The auditors will be required to obtain a clearly understanding of JI Hi-Fi company financial performance as well as the financial measurement. Performance measures and their review are important in an auditing process since they indicate to the auditor various aspects of the company. Performance measures therefore whether external or internal usually create pressures on the entity eventually motivating management to take action as well as improve the overall business performance in relation to financial misstatement Conclusion In conclusion this audit plan will aid the external auditors to effectively carry out the auditing process of the financial statements of JI Hi-Fi- company. The auditors will be required to determine overall responses that effectively address the risks of material misstatement identified in the financial statements. Appendix JI Hi-FI annual reports References Arter, D., R., Cianfrani, C & West , J (2003). How to audit the process-based.Publisher:ASQ Quality Press,pp.34-45 Charles, M (2009). Australian Government Auditing Standards. Sydney:DIANE Publishing Company,pp.20-30 Gay, G & Simnett, R (2009). Auditing and Assurance Services in Australia.4th ed. Australia: McGraw-Hill Australia,pp.45-50 Gray, I & Manson, S (2007).The Audit Process: Principles, Practice and Cases.4th ed. Chicago: Cengage Learning EMEA,pp.67-70 Gray, R & Walter, D (2008). Australian reporting standards. Publisher: Markus Wiener Publishers, pp.34 Rao, S (2005).Internal audit activity's role in governance, risk, and control, Volume 1.3ed. New York: Wiley and Sons, pp.67-70 Russell, J.,P (2005). Auditing handbook: principles, implementation and use.3rd ed. Brisbane: ASQ Quality Press,pp.34-45 Trenerry, A (2004).Principles of Internal Audit. London: UNSW Press, pp.23 . Read More