The engagement partner has requested a meeting tomorrow to discuss audit plan for MTI She has requested several documents for that meeting.
1. A preliminary audit plan assessing internal control risk and providing preliminary judgment for detection risk.
2. A description of specific substantive procedures that could be conducted for the WIP inventory.
You are required to justify the audit plan by referring to theoretical grounds learnt from this unit.
Internal control is basically the processes well designed, implemented and maintained by those charged with governance, management and other personnel. The main objective of the internal control is provide reasonable assurance about the achievement of the entity objective with regard to reliability of financial reporting.
It is the responsibility of the auditor to plan the audit of the financial audit. As per ASA 300 “Planning an Audit of Financial report”, the partner and other the team member of the engagement team shall be involved in planning the audit. (Board A. a., 2011)
As per ASA 300, the auditor shall establish an overall audit strategy that set the timing, direction and scope of the audit and that guides the development of the audit plan. In the given case also Engagement partner of Dalen & jay want to hold a meeting to discuss the audit plan of MTI.
Before making any audit plan the Engagement partner must identify the characteristics and scope of their Engagement in the audit of the organization. As per ASA 315 (Board, 2013) “Assessing and Identifying the risk of Material Misstatement through understanding the entity and its environment” the auditor should identify the risk of material misstatement in the organization, whether due to fraud or error, at the financial statement and assertion levels. Thomas Smith also needs to understand the MTI and its environment including the internal control before starting any Audit plan. This will help Mr. Smith to reduce the risk of material misstatement at an acceptable low level.
Business Risk is a risk which is resulting from significant event, condition, action, circumstances or inaction that could adversely affect an entity ability to achieve the objective of the entity.
MTI is basically engaged in production of environmental friendly product such as recycle containers. However, the company also deals with variety of metal as well as plastics.
Audit Plan Assessing risk and Judgment in detection risk for different department of MTI is as follows:
It has also been observed from the past working paper that due to lack of control one of the suppliers unfortunately sent the program which was infected with virus as a result of which entire system need to be clean by Tiffany with the antivirus. To avoid this time of situation Mr. Thomas smith would ask the management to prepare a report regarding service organization system, control objective, related control which has been designed and implemented during the period. Mr. Thomas Smith can also asked for the report of the service auditor with the objective of conveying reasonable assurance that include the service auditor opinion on the description of the service organization system and control objective.
Further, MTI should first install all the Software purchase from the vendor in one standalone computer and after its successful installation it has been installed to another computer to reduce the risk of virus spreading in the entire network. Further, MTI must make an agreement with the supplier in case of any infected software supplied by them, they make to make good the amount of loss caused to the company due to installation of the infected software in the system.
Answer to Question No :2
Substantive test of procedure or transaction helps to reduce the level of detection risk so that the audit objective can be fulfilled. (James, 2011) . This test helps the auditor to detect the material misstatement in the financial statement. Substantive procedure include test of details of transaction details and analytical procedure of disclosures and account balance. (Not for Profit Orgnisation, 2009).
As per ASA 501 on “Existence and valuation of Inventory” the auditor shall obtain appropriate audit evidence regarding the existence and valuation of inventory material in the financial statement. (Board A. a., April 2006). The auditor should must use the following assertion:
The following Steps to be followed by Mr. Thomas for conducting WIP Audit
Board, A. a. (2011). Auditing Standard ASA 300. Planning an Audit of Financial Statement , 35.
Board, A. a. (2013). Auditing Standard ASA 315. Idntifying and Assessing the risk of Material Misstatement , 48.
Board, A. a. (April 2006). Auditing Standard ASA 501. Existenance and valuation of Invntory , 13.
Board, A. a. (2011). Guidance Statement 007. Audit Implication of the use of Service organoztion , 45.
James. (2011). Test of Control and Test of Details. 12.
Not for Profit Orgnisation. (2009). SA , 10.
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