Need of an Expert
Planning plays a very important role in each and every process. Without planning, none of the function can be executed and in case if it is executed then the results will be in total haphazard manner. In the process of auditing, planning plays key role in the overall results. If the plan of the audit will be ineffective, then the observations of the audit team will purely be ineffective and inefficient. In turn the results delivered to the company will be of least importance. The audit plan shall define each activity in a very clear and precise manner so that each member of the audit team shall be conversant with the steps. In this report, the financial statements of the company – Double Ink Printers Limited has been analysed. At first it has been detailed whether the auditor of the company requires the help of the expert or his opinion on the planning of an audit of the Double Ink Printers Limited. In the second section, the materiality levels ascertained and observed in the financial statements through the help of the financial ratios have been analysed and detailed. These materiality levels have been detailed with factors which have been observed from the background information of the company as given in the case study. Thereafter, the adequate conclusion and recommendation has been given.
As per the auditing standard number six hundred and twenty issued by the auditing standards board, the auditor can take the opinion of the expert on any matter in which the auditor faces any difficulty or in case the auditor requires to justify his opinion.
Clause number six of the auditing standard number 620 defines the expert as an individual or an organization which possesses an expertise in the field of the subject which is different from the accounting and auditing and his or her work is used by the auditor of the company in forming an opinion of the financial statements of the company. It is because the results of the expert will be the audit evidence for the auditors to issue their opinion on the financial health of the company (ACCA, 2016).
As per the given case study of Double Ink Printers Limited, the need of having the services of an expert has arisen due to the following instances that has been observed from the background information of the company as well as the financial statements of the company –
- Inventory Obsolescence– The inventory obsolescence is referred to as the situation where the inventory has become obsolete and meaningless. As per the background information of the company read with the financial statements of the company, the company maintains the allowance for the obsolescence of the inventory which usually happens during the course of business. But as per the basic premise of the functioning of the company, there shall be no obsolete inventory with the company. It is because the company follows the print on demand model of business. In this model, the company prints the books as and when the company receives the order and hence the question of having the inventory does not arise (Cooper, 2015). Therefore, to check the correctness of the provision so made the auditor shall take the report of an expert having the requisite knowledge and the experience in the relevant field so as to form an opinion.
- New IT System –The Company has installed the new system of Information Technology which will integrate the whole of the business operations at the single place and thus helps in bringing together all the function towards the achievement of the goals and objectives. From the background information of the company it has been observed that the staff of the employees has undergone the excess pressure for the installation of the system. Also the reports generated by the system does not relates to the correct period and rather relates to the subsequent period which in turn will affect the reporting figures in the financial statements and thus will distort the true picture of the financial health of the company (Anastasia, 2015). By referring to an expert in this field, the auditor can have the audit evidence whether the system so installed is in actual very complex and cumbersome.
Thus, in this manner, the auditor will be requiring the help of an expert.
Materiality is defined as the weight age of the particular item that it will have while forming the opining on the financial statements of the company. If the particular item is so significant that it can affect the reporting of the auditor of the company, then it will be regarded as the material item and in case it is not so significant that it can affect the reporting of the auditor of the company, then it will not be regarded as the material item. Thus, in other words, materiality of any item depends upon the effect that such item will have on the financial statements of the company (Capital Markets Advisory Committee Meeting, 2013). If it adversely affects then the materiality level is said to be high and in case it will be affecting in least manner then the materiality level is said to be low.
From the background information of the company, following are the important five factors which will influence the overall materiality:
- Current Ratio – As per the information available, the current ratio of the company for the last three years are 1.42, 1.47 and 1.50 respectively for the year ending 2017, 2016 and 2015 respectively (Gary, 2017).
- Debt Equity Ratio – The debt equity ratio for the last three years are 0.41, 0.47 and 1.13 respectively for the year ending 2017, 2016 and 2015 respectively.
- New IT System – The system has generated the wrong reports as the transactions that should have been reported for the current year has been wrongly reported in the future periods which entails that the financial health of the company will be in the manipulated mode.
- Inventory Valuation – The inventory has been valued at Average basis rather than First in First out basis.
- Depreciating – The printing press has been depreciated for 20 years instead of 30 years which is the prevalent practice in the industry.
The all of the above factors are relevant for conducting the preliminary estimation of the overall materiality.
- Current ratio and debt equity ratio is relevant for the consideration because of the stipulation that has been provided by the BDO Finance.
- New IT system is relevant because through the system generated reports, the audit will be done and if it is wrong then the opinion will be wrong.
- Inventory valuation is relevant as it affects the profitability of the company.
- Depreciation is the essential part as it erodes the value of an asset early if the useful life is taken as shorter.
All the factors so listed above have the greater influence on the materiality of the items. It is because the first two factors will affect the loan facility of the company and the last three factors will affect the true picture of the financial statements of the company (Weiss, 2014).
Conclusion
The company – DIPL is in the printing business and has been printing various books, articles and magazines since its inception. The report has mainly focused on the audit planning of the company and has detailed two major areas. First whether the audit planning requires the need of an expert and secondly the materiality levels that has been observed from the background information of the company. Along with the materiality levels, the preliminary figure has been analysed and detailed. In order to conclude the report, the audit planning stage of the audit process has been detailed with respect to the financial statements of the company and its importance has been closely cited.
The recommendation for the company is only to put sound system in the company in order to decrease the audit materiality levels and proper functioning of the company.
References
ACCA, (2016), “Analytical Procedures”, available on https://www.accaglobal.com/vn/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/analytical-procedures.html accessed on 12-12-2017.
Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 12-12-2017.
Capital Markets Advisory Committee Meeting, (2013), “Conceptual Framework” available on https://www.ifrs.org/Meetings/MeetingDocs/Other%20Meeting/2013/March/AP%203%20conceptual%20framework.pdf accessed on 12-12-2017.
Cooper S, (2015), “A Tale of Prudence”, available on https://www.ifrs.org/Investor-resources/Investor-perspectives-2/Documents/Prudence_Investor-Perspective_Conceptual-FW.PDF accessed on 12-12-2017.
Gary S., (2017), “The Importance of Inherent Risk Factors: Auditor’s Perceptions”, Australian Accounting Review, Vol 3, Pp 38-44.
Weiss D, (2014), “Faithful Representation” available on https://bschool.huji.ac.il/.upload/Seminars/Faithful%20Representation%20October%202014.pdf accessed on 12-12-2017.
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