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Auditing - Essay Example

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Summary
Auditing is the act of detecting errors and frauds in accounting statement, auditing utilizes some sample techniques to detect frauds and errors, Errors are much more likely to be discovered during an audit than fraud. A company is advised to have their accounts audited due the following reasons:
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Auditing Essay
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Download file to see previous pages The employee had been steeling for years and covering her tracks by dividing the amount into very small amounts in the various accounts.
Risks are more prevalent at the end of the year when there is a incase of an unusual transactions, when the companies performance is declining for no apparent reason, frequent change in business councillors and auditors, where there is a complex corporate structure and inadequate balancing of financial accounts.
Audit risks include inherent risks, control risks and analytical procedure risks. Inherent risk is associated with auditor's assessment of material misstatement, it is associated with wrong information given on financial status of the various accounts. Accounts with low inherent risks include fixed assets accounts which are easy to observe and securities traded in the stock market whose price level is easily observed.
Control risks are the risk that which misstatement is not easily observed and cannot be prevented or detected. The internal control system cannot detect these frauds. The assessment of control risks detects the effectiveness of the internal control to prevent and detect such misstatement.
Analytical procedure risks is the risk associated with the auditor, it is a measure of the willingness of an auditor to accept the misstatement of financial statements. This risk will cause unqualified opinions on the current status of a company. The auditor can lower these risks by making sure that financial statements are not materially misstated. Both the inherent and the control risks are referred to as the risk of material misstatement.
(http://www.aicpa.org/pubs/jofa/sep2000/prac_aud.htm)
The analysis of Railway PLC Financial statements.
According to the audited financial statements of Railway PLC the risks can be analyzed as follows:
The profit and loss account for Railway PLC has two parts, the Railway and the River financial statements. This combination is not appropriate and the two sectors should be analyzed separately. In my previous discussion on the possible of the occurrence of frauds and errors, when an organization has a complex corporate structure then the risks of fraud are high. Therefore the two should be analyzed separately to reduce the occurrence of frauds and to determine their individual contribution to profits.
The direct costs, depreciation and other expenses in the profit and loss account should be split into individual expenses so as to enable proper auditing in detection of any frauds. These accounts individual accounts should also be audited. Direct costs should contain fuel expenses and other accounts associated with cost of providing services. Depreciation should also be analyzed according to individual assets and this accounts forwarded for auditing.
Another risk factor is the indication of revenues and expenses in thousand pounds. Each single cent should be accounted for and this is evident in the above case where an employee committed frauds through the division of a large sum of money ...Download file to see next pagesRead More
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