Issues in Auditing Practice - Potential Risk Indicators and Risk Analysis - Assignment Example

Question 1 a. If Alice is able to increase the non-audit fees revenue which is collected from Walterhugh Ltd would result in an increase in her reputation within the audit firm. This is primarily due to the fact that Alice will be able to earn more revenues for the audit firm and previous auditors were not able to do the same. According to APES 110.290.154 the decision could lead towards a self-interest threat and would lead towards a situation where Alice would be able to influence people to act in a specific manner. APES 110.290.154 clearly states that the fees which are quoted from the client should eliminate the threats associated with self-interest and the engagement should be carried out in accordance with the specific standards (APES, 2014). In addition to it APES 110. 290. 6, independence of mind states that the expressions carried out should not lead towards an influence which compromises personal judgment which has an impact on the objectivity and integrity of profession. This requires that Alice should be prevented from carrying out such actions as it leads towards influencing people and at the same time creating self-interest threats which will thereby impact her reputation. b. There are many non-audit services which can be provided to the client but some services which auditors are restricted from providing are valuation services, tax calculations, internal audit service, implement services, recruiting services and bookkeeping services. APES 110. 290. 169 states that an audit firm should not provide non-audit services like accounting and book keeping services, including payroll services, or prepare financial statement as personal opinion could lead towards impacting the public entities. The audit firm can thereby provide non-assurance services and no other services if it has an impact on their financial statement (APES, 2014) c. The result would be different for proprietary business concerns as certain non-audit services like preparation of accounting records, tax calculation and IT system services can be provided. APES 110. 290. 168 clearly states that an audit firm can provide services like payroll services, assist private entities in preparation of financial statement, recording of transaction after obtaining the required permission, posting of ledger entries and even carrying out bookkeeping services (APES, 2014). Question 2 The advantages of comparing audit client data with industry data are as It helps to understand the client’s business as comparing with the industry helps to understand the manner in which the organization is performing in comparison to the industry. It gives a sense of direction by ensuring that the performance can be compared with industry averages and important steps can be taken through which improvement in the manner business works can be ascertained (Baird and Thomas, 2000) It gives an indication of the financial position and indicates the likelihood of a financial problem. This thereby helps organization to be better prepared and provides them a guideline where they need to make changes for better results in the future. Comparing with industry helps client data to gauge their performance with the entire industry which thereby helps to understand their position in comparison to the industry. The process determines the manner in which the organization is performing in contrast to the entire industry and brings forward different areas and avenues which needs to be worked on so that better improvement in performance becomes possible (Baird and Thomas, 2000) Industry comparison also provides useful information regarding client’s capital structure and the borrowing capacity. This thereby helps different users to take important business decisions regarding investment and other purposes. Comparing with the industry also provides a framework through which better use of resources can be ensured and the manner in which the client has performed in comparison to the industry can be ascertained (Baird and Thomas, 2000). The disadvantages of comparing audit client data with industry data are as Comparing the clients financial information with the industry might not provide correct results due to the different nature of business and finance which might have been undertaken while determining industry averages will be different. This will make the entire comparison to be untrue and incorrect and will not reflect the correct comparison (Baird and Thomas, 2000) Industry uses broad averages so the comparison won’t me meaningful as it won’t provide correct information for interpretation Different client’s follow different accounting methods so industry is a culmination of all the averages so comparing with the client financial figures will be incorrect and not provide correct information (Baird and Thomas, 2000) Industry averages assumes different organizations and functioning which might be different from the client’s organization thereby resulting in providing data and results which are incorrect b. The details are as Potential Risk Indicator Risk Analysis Effect on Audit Planning Increase in sale which is significant Fictitious sale due to more bonus and compensation for employees and manipulating the financial statement for better market results Verification of the ale voucher, purchase voucher and payments made to supplier to find out the authenticity of the transaction Significant increase in inventory in 2014 as compared to 2013 Wrong value of inventory than actual physical value of inventory by having damaged inventories, wrong entries and classification of inventory so that the godown in charge can have personal gains (Clarke and Varma, 2009) Verifying the purchase ledger, merchandise sales of the organization and matching the same with the supplier’s payments and goods dispatched receipt. Also looking into stock table and physical count and verification of goods with what has been highlighted to find discrepancies Increase in debt equity ratio Inability to meet its debt and equity balance will impact the future earning potential as raising money in the future will become difficult Monitoring the manner in which debt is taken and keeping it within control limits so that different taxation benefits can be availed. In addition to it ensuring that the debt is used for the desired purpose for which it has been taken Significant increase in the accounts payable Increase due to fraudulent entries, wrong posting, duplicate payment receipts have been provided, payments made have not been entered and similar other reasons which could lead towards personal gains Verifying the bank and cash statement, matching the different receipts and payments with the vendor and continuous check so that differences can be found out Financial Position Highlights the manner the organization performed in comparison to all other players Needs to evaluate the different risk and ensure proper financial planning to fill the gap Question 3 Control Test of Control Potential Fraud Expanded Substantive Test  a.  Sequential Numbering of all the goods which are received on a continuous basis and recording it as soon as it is received  Not recording the goods which are received in a sequential numbering method could result in using the product for their own gains. The person can either sell the raw materials and collect the money or can look towards having duplicate bill for the same materials which will result in paying for the same goods again and would have an impact on the financial condition  Physical counting and verification of the credit memos with the bill which is billed to the billing department. This will help to find out the gap if it exists in the numbering of bills. In addition to it find out the case which shows errors and look to find reasons for it  b.  Sample testing to ensure that the cashier doesn’t issue credit memo as those are complementary services which the cashier don’t have to undertake  Not recording the goods which are returned by the customer can result in the person in-charge using the same for his own gain. The person can either sell the raw materials and collect the money or can look towards having more funds being collected from the customer which will impact their brand image (Huffman, 2002)  Physically verify all the credit memos and write offs to ensure that the memos are signed and necessary permission has been obtained from the concerned authority c.  Sample testing to ensure that the approvals are obtained  It could lead towards false entries and create commotion as employees who might have not been present will look to ensure that they are present and will put pressure on the management to give them compensation even when they are absent  Having a test where the sample represent the population and helps to find out the real cause of the problem so that it can be reported accordingly  d Having manual exercise and ensuring that the employees don’t work more than the prescribed norms   This could lead towards prohibition of government laws which prohibits person from working above a limited time. This could lead towards legal action and requires that such activities are controlled and not allowed to take place (Holloway, 2009)  Ensure continuous inquiry into the system to ensure that working hours remain within 53 hours and if any change in seen than take appropriate steps to stop such activities  e. Have a process involved in the system to ensure that sales personnel doesn’t have permission to make sale adjustments  The sales person could manipulate the information and increase the same so that the financial gains which is achieved will be used by the person for his own benefit  Verify all the sales return case Question 4 Assertion Substantive Audit Procedure  Existence or Occurrence  a. Verify the balances from the vendors b. Conduct sample testing on the voucher documentation  Rights & Obligations  a. Providing details regarding the accounts payable b. Having all accounts payable being highlights in the financial statement  Disclosure & Presentation  a. Ensuring that accounts payable is shown as short term liability in the financial statement b. Verifying and checking that complete calculation with regard to accounts payable is provided  Completeness  a. Reconciliation of accounts payable with the summation of individual balance and verifying the same b. Check all the transaction in every week to ensure all positing are correct and complete  Valuation or Allocation  a. Using same accounting policies when calculating accounting payables b. Abiding with the different valuation techniques sued for valuing payables References APES. 2014. An Overview of APES 110 Code of Ethics for Professional Accountants. CPA, Australia Baird, I. and Thomas, H. 2000. What is Risk Anyway ? Using and Measuring Risk in Strategic Management, Greenwich, CT : JAI Press Inc. Clarke, J. and Varma, S., 2009. Strategic Risk Management : the New Competitive Edge. Journal of Long Range Planning,, 32 (4), 414 – 424 Huffman, F.E. 2002. Corporate real estate risk management and assessment. Journal of Corporate Real Estate, 5 (1), 31-41 Holloway, C. 2009. Decision Making Under Uncertainty: Models and Choices. Prentice-Hall, Englewood Cliffs, NJ. Read More