Necessary Considerations for Audit Design
In order to design the audit related work due considerations must be given in knowing the risk that could originate from the material misstatement. In the words of DeFond and Lennox (2017), the International Auditing and Assurance Standard Board lay down the guidance in using the expert work in performing the audit of the financial statement. The falls under the obligations of making an appropriate usage of the audit data as the evidence in planning the audit work. The International Auditing and Assurance Standard Board lay down that the auditor should be proficient enough in using the expert work in planning audit. Accordingly, certain criteria need to be fulfilled in using the audit expert work;
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- It is obligatory on the part of auditors to evaluate the instances related to tax and issues related to compliance.
- In performing the work of audit, an obligation arises for auditors in placing emphasis on mandatory requirements of gathering facts so that the audit work can be effective.
- A suitable considerations associated with the agreement of insurance and assistance of employees must be considered.
- At the time of valuation of assets namely the plant and equipment’s the audit work may be impacted (Clinton, Pinello and Skaife 2014). A suitable amount of considerations is required because these assets is required to meet the business requirement.
Appropriate amount of facts is needed in preparation of the audit work. It is worth mentioning that the auditor is ought to be proficient in complying with the business procedures and guidelines. The auditor is required determine the characteristics of the collected data at the time of externally reviewing the books of accounts (Chen et al. 2014). To meet the business goals proper observance should be given in planning the audit work. External influence affecting the business objectives along with the consequences of business expansion must be appropriately considered by the auditor in performing the audit work. Therefore, the below stated issues extracted from the case study of DIPL defines the evidences of using the work of audit expert are as follows;
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Necessary Issue
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Appropriate decision making required in measuring the issues associated with the audit process
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Issues arising of depreciation of Non-current Assets
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On in depth evaluation of the annual financial report it is found that the DIPL follows fixed rate of depreciation (Hayes Wallage and Gortemaker 2014). The administration of the company can look for the work of audit expert in cutting down the depreciation that is levied on the non-current asset to appropriately value the assets in meeting the business goals of business.
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Issues that are associated with the obsolescence of inventory
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On account of the issue related to the matter of inventory obsolescence, the issue is regarded as the top most subject in regard to the earlier year for complying with the falling value of non-current asset. With the objective of ascertaining the value of obsolescence the administration is required to obtain the audit expert service to offer them with required guidelines. To meet the business goals it is mandatory for the DIPL to make use of the expert work in resolving the inventory obsolescence issue.
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The given case of DIPL effectively lay down that business activities that is executed by the company is supportive in the determination of the process engaged in the identification of the five necessary factors that could result in an effect on the materiality of the firm. To be more precise misstatement in the financial statement might result in fair determination of the evidences of materiality (Goh, Krishnan and Li 2013). In respect of the case study of DIPL, the below defined factors showcase the result that may lead to an impact on the materiality;
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2A: Factors
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2B: Discussions
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2C: Influence on Materiality
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Policies of accounting affecting materiality: The situation that has been presented by the DIPL showcase the procedure engaged in the pricing of the raw materials under the average cost is not appropriate since it results in changing prices (Chan 2016). The case of DIPL reflects that valuing of raw materials is done at average cost and as a result of this it creates a huge influence on the inventory because the valuation of inventory is done at lower price.
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The inherent risk creates an impact on the materiality because the DIPL administration has failed to preserve the truthfulness and business objectives. Consequently the materiality is impacted along with the financial position of DIPL. The employees engaged in the fraudulent activity since they were facing greater pressure from the management for the installation of new system. Simultaneously, the fraudulent activity impacts the board and effects the organizational development. The employee’s engagement in fraudulent business practice creates an impact on materiality and financial structure of the company.
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Accounting policy creating an influence on the materiality: The valuation of inventory based on the average cost is not suitable. Defective assumptions and tools that are used in the inventory valuation might create an influence on the accounting process (Pizzini, Lin and Ziegenfuss 2014). As a result of this there will be an influence on the audit process.
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Risk of Fraud: According to (Abbott et al. 2016) risk of fraud is regarded as vital and this will have an impact on the materiality on the financial report of the company. The DIPL case study defines that an individual carrying the functional activities is under pressure from the administration and the IT division established new system of accounting. Subsequently, business is exposed fraud related risk from the changes in the business process because they effect the materiality and the financial report of the firm.
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Errors which is identified during collection of data represents those errors that are generated from the financial report in preparing the financial report. Misrepresenting the factors results in incorrect accounting projections. Fraudulent activities in misrepresentation of materiality influences the opinion of the auditor relating to the internal control.
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Risk of dishonest activity that effects materiality: The management was not satisfied regarding the installation of machine. As understood the employees were under the heavy burden from the admin (Stewart and Shamdasani 2014). The pressure was related to the reconciliation and determination of the installation of new IT effecting the materiality.
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Selection of CEO impacting materiality: Evidences derived from the DIPL case it was noticed that appointment of CEO is not an easy process since the method that is undertaken is not appropriate (Boone et al. 2017). Consequently, the method undertaken in CEO recruitment involves risk and the firm has been unsuccessful in adhering with the needed rules and regulations. There arises the risk of occupation for the workers and result in problems of materiality.
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Taking into the considerations the complexity engaged in the appointment of CEO, it is understood that DIPL exposure to the transparency risk impacts the decision making procedure. Hence, in correct selection of CEO might create an impact on the materiality of DIPL.
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Difficult procedure of recruitment of CEO affecting the materiality: The case study of DIPL lay down that the method engaged in the selection of CEO is not easy and leads to effect on the materiality. The managers of the DIPL should be very cautious and must indulge in the procedure of appointing CEO appropriately.
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Factors associated with receipt of revenue and expenses: Certain kinds of factors involved in the receipt of revenue in the form of cash and expense by the company since they are form an effect on the materiality (Bik et al. 2017). Majority of the expenses is accepted through electronic means and individuals that are assigned with the responsibility of maintaining accounts might be provided the procedure of keeping the records of cash received. The company generally generates revenue by marketing e-book, re-publishing and printing which would result an influence on the materiality.
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DIPL case study brings forward that keeping records of accounts is vital factor and might result in an influence on the materiality. Therefore, accounting methods helps in valuation of raw materials along with the determination of business position unaffected by any bias opinion.
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Influences on accounting transactions in new system: Reimbursement of business expenditure with the help of electronic platform would ultimately create an impact on the accounting records for the revenue received and would provide a mechanism for reconciliation (William, Glover and Prawitt 2016). DIPL has been unsuccessful in reconciling the cash receipts and this has primarily been generated from the commercial transactions. This introduces influence on the monetary presentation of report. Under such kinds of situations the auditors would fail to define the viewpoint in understanding the financial position of the firm.
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Environmental influence on materiality: Considering the environmental influence on materiality DIPL has been unsuccessful in locating the macro and micro factors of business. Such elements impact materiality because of the incorrect accounting transactions and would eventually result in inconsistency in audit plan.
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The management liabilities is associated with the incorporation of the environmental elements which is considered as vital impacting the materiality of DIPL. The environmental elements could adversely impact the DIPL position together with the opinion of audit process.
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Environmental factors influence on materiality: On the part of the managers their incapacity in recognizing environmental factors such as macro and micro business environmental and DIPL’s omission of financial records has resulted in faulty adoption of maintaining accounting policies. The stakeholders would not be able get the true view of the company and this would effect the materiality.
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Reference List:
Abbott, L.J., Daugherty, B., Parker, S. and Peters, G.F., 2016. Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research, 54(1), pp.3-40.
Bik, O., Hooghiemstra, R., Bishop, C.C., DeZoort, F.T., Hermanson, D.R., Officers’Judgments, F., Cheng, M.M., Tan, H.T., Trotman, K.T., Tse, A. and Glover, S.M., 2017. Auditing: A Journal of Practice & Theory A Publication of the Auditing Section of the American Accounting Association.
Boone, J.P., Khurana, I.K., Raman, K.K., Chen, L.H., Chung, H.H.S., Peters, G.F., Wynn, J.P.J., Chen, Y., Knechel, W.R., Marisetty, V.B. and Truong, C., 2017. Auditing: A Journal of Practice & Theory A Publication of the Auditing Section of the American Accounting Association.
Chan, D.K.W., 2016. The effects of internal control reporting regulation on Control Quality, Compensation and Audit Quality. In Workshop on Accounting and Economics, EIASM 2016.
Chen, Y., Smith, A.L., Cao, J. and Xia, W., 2014. Information technology capability, internal control effectiveness, and audit fees and delays. Journal of Information Systems, 28(2), pp.149-180.
Clinton, S.B., Pinello, A.S. and Skaife, H.A., 2014. The implications of ineffective internal control and SOX 404 reporting for financial analysts. Journal of Accounting and Public Policy, 33(4), pp.303-327.
DeFond, M.L. and Lennox, C.S., 2017. Do PCAOB Inspections Improve the Quality of Internal Control Audits?. Journal of Accounting Research, 55(3), pp.591-627.
Goh, B.W., Krishnan, J. and Li, D., 2013. Auditor reporting under Section 404: The association between the internal control and going concern audit opinions. Contemporary Accounting Research, 30(3), pp.970-995.
Hayes, R., Wallage, P. and Gortemaker, H., 2014. Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.
Pizzini, M., Lin, S. and Ziegenfuss, D.E., 2014. The impact of internal audit function quality and contribution on audit delay. Auditing: A Journal of Practice & Theory, 34(1), pp.25-58.
Stewart, D.W. and Shamdasani, P.N., 2014. Focus groups: Theory and practice (Vol. 20). Sage publications.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic approach. McGraw-Hill Education.
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