Questions
1: According to the International Auditing and Assurance Standard Board sets out the guidelines in using the work of an expert to audit the financial statements. In planning the audit of the financial statements it sets out the matters that auditor must take into the considerations before the identification of the risk of the material misstatements. One of the important element that is involved in the work of audit experts it is necessary to use the information as the evidence in planning the work of audit (Pitt, 2014). To use the work an auditor expert the auditor is required to be competent, capable and objective if it becomes necessary to use the work of an auditor for audit purpose. Using the work of an audit expert involves paying regards to the subjects that is listed below;
- At the time of planning the audit, the auditor must determine the requirement of expert together with the specialized expertise so that an appropriate audit evidence can be obtained.
- Assessing the matters related to tax and issues of compliance
- Necessity involves in using the work of an auditor in the areas of valuation of business assets such as plant and machinery, antiques and art work that are acquired as assets along with the liabilities during the business operations (Nickell&Roberts, 2014).
- Assessing the liabilities of the firm that is associated with the contracts of insurance or employee benefits.
Alternatively, while conducting the work of audit expert apart from the field of accounting and audit is under the obligation of deriving sufficient amount of appropriate auditing evidence and the assessor is required to determine whether or not the service of an expert must be sought. The audit expert is required to be capable, competent and objective if their services is deemed to be sufficient for audit purpose (Coetzee et al., 2014). As for the external review of books of accounts an auditor’s competency is necessary since it is associated to the nature and degree of expertise of an audit expert. Evidently, using an audit expert requires having extensive recognition of their expertise in the specified discipline. Concerning the objectivity, it states that the probable effects that favouritism, conflict of interest or influence of the others might have in the judgement of the expert. Given that the expert has been entrusted with the interest of expressing anything apart from the objective opinion in relation to the subject matter, then their view point will be useless to the auditor.
As evident from the current situation of DIPL, it lay down the fact theuse of audit expert can be employed in the below stated issue which are as follows;
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Necessary Issue |
Decision required to indulge in audit related to this issue |
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Inventory and purchase of Inventory Obsolescence |
On performing a detailed analysis, it is found that the purchase and purchase of inventory obsolescence was prevalent from the previous year in order to cover the expected fall in the value because of the shortage in the value. To determine the estimated value of the obsolescence the assessor is required to obtain the service of the audit expert with the objective of reckoning the amount of inventory (Nuijten et al., 2015). |
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Depreciation of fixed assets |
On analysing the financial report of the DIPL it is noticed that the depreciation of the fixed assets of the business is stated under the fixed line method. With the objective of measuring the overall depreciation together with the impairment of the assets (Reding et al., 2013). Therefore, the management of the organization can undertake the service of the audit expert. |
2: According to Knechel&Salterio(2016), materiality can be defined as the different factors that are either separate or they are in aggregate considered to be significant in representing a fair presentation of the financial statements in adherence with the necessary standards. On assessing the case study, it is noticed that business of the business can be helpful in determining procedure of identifying the five different factors which can create an influence on the preliminary numerals for the overall materiality. Fundamentally, any form of misstatement in the financial report can create a significant impact on the fair presentation of the materiality facets. Misstatements generally originates from the errors and fraud with error reflecting the fact that the purposefully misstatement might otherwise omit the particular amounts together with the disclosure in the financial reports (William et al., 2016).
A: Identification of the different factors that can create an impact on the preliminary figures for materiality is as follows;
In the words of Arens et al. (2016), fraud risk is viewed as the important element, which undesirably creates an influence on the materiality of the financial report of the DIPL. As evident from the study, it is noticed that the DIPL operations were under immense pressure from the board. Because of this the IT segment of the business concern created a new accounting system. Essentially this type of procedure makes the business of the DIPL expose to numerous fraud risk, which can result in immateriality. The fraud risk can adversely affect the materiality of the DIPL financial statement.
Answers
As evident from the report, it is found that the method of average cost was deployed in determining the varied raw materials, which cannot be considered to be appropriate. On assessing the case study, it can be stated that valuation of inventory of raw materials under the average cost method is not appropriate (Hayes et al., 2014). This is because the present cost of paper is undervalued under average cost of recording the inventory. There is greater influence on the inventory since the inventory is undervalued and an assertion can be bought forward by stating that the mechanism of average cost is not appropriate.
While preparing the financial reports, it is found that the several transactions were either deliberately omitted or error occurred in recording those transactions by the management of DIPL (Cao et al., 2015). This has resulted in inconsistent planning associated to the market process and selling activities. DIPL failed to assess the varying micro and macro factors and the business is required to undertake both the social and political economic factors.The environmental factors creates an influence on the materiality since inconsistent recording of transactions results inconsistent and ineffective accounting planning.
Selecting and appointing the CEO in DIPL is complicated. Especially, the process involved in the appointment of the CEO and transition of the previous CEO together with the activities undertaken by William Jackson involved risk since the process of appointing CEO were not in compliance with the requisite schemes. The procedure involved in appointing the CEO was executed at the later date and inappropriate process of appointment of CEO left the workers to exposed to numerous business risks (Pasko, 2017).Inappropriate appointment of CEO could create an impact on the materiality for the process involved in audit of DIPL.
An important factor that is associated with the materiality is the recording of cash receipts of DIPL. A large part of the expenses is accepted through electronic means (Engel, 2014). Therefore, the accountant could present the process involved in bookkeeping of cash receipts copy following the download of receipts from mail and the process of reconciling the overall batch. The process of reconciliation that is prepared and presented needs consistency of recording the same on frequent basis and the same should be executed at the end of the month. DIPL derives sales revenue through e-book marketing; republishing and printing of textbooks may probably create an influence on the materiality.
As stated by Moroney & Trotman (2016), error occurs in collection and procession of data that is acquired from the financial information at the time of preparing report. Irrational accounting projections originate from miss-representation of different factors. Additionally, error takes place during the process of applying specific accounting policies related to the valuation, classification, methods involved in reflection and disclosure of accounting information. Fraud is considered as the wide concept, which is associated to fraudulent activities resulting in misstatement of financial information. The viewpoint of auditor relating to the internal control of an organization may increase or ease the business from the threat of material misstatement.
Identification of different factors that can influence materiality
Inherent risk is considered to be an important element that have impacted on the materiality. Particularly the management of the DIPL fails to act with integrity and objectivity. Because of this, the financial position of the organization could be reasonably impacted by the materiality and might provide the user with misleading information (Toy & Hay, 2014).
Fraud activities of the employees because of the growing pressure of board and process involved in execution of new system of accounting might create an influence on the financial information. Fraudulent activities might create an impact on the financial reports and it is appropriate in respect of materiality.
Furthermore, cumbersome appointment of CEO for DIPL significantly jeopardizes the transparency that ultimate effects the decision makers. Therefore, this results an impact on the materiality of the DIPL.
In the words of Andon et al. (2015), bookkeeping procedure adopted by DIPL for raw materials could be viewed as the relevant factor affecting the materiality. Similarly, the accounting procedure assists in determining the valuation of raw materials, which helps the users in comprehending the true and fair view of the books of accounts. The management inabilities in integrating the environmental factors could be viewed as important factors affecting the materiality. Because of this, such environmental factors converses the effect on the financial outcomes and viewpoint involved in audit.
The administration functions of the IT division were not considered to be content with the process of installation of the machinery of the organization. It was noticed that immense pressure was imposed on the employees for reconciling and assessing the fittings of the new system.
Inventory valuation of raw materials under the method of average cost is not regarded as an appropriate method. Inappropriate assumptions or valuation mechanism may create an influence on the overall accounting process (Moroney& Trotman 2016). This would probably create an impact on the overall substantiation of the assessor along with the audit procedure.
The management incapability of identifying the micro and macro environmental factors along with the omission of the specific financial transaction shows that incorrect method of financial accounting have been adopted. Particularly, the users of the financial information might fail to get the true and fair view of the books of accounts that can create an impact on the overall on the audit planning and assessing the influence of misstatement in the financial reports (Engel, 2014). The users of the financial information should be provided with the fair view of the books of accounts that can simultaneously create an influence on the audit plan, assessing the impact on the identified misstatement.
The appointment of the CEO at DIPL is a cumbersome procedure and as a result, this creates an influence on the materiality. There should be a careful and transparent procedure of appointing CEO.
Payment of expenses through the electronic means creates an influence on the process of maintaining the accounting transactions of DIPL receipts and presentation of the reconciliation statements (Hayes et al., 2014). The organizations inability of recording the transactions of cash receipts and reconciliation statement could directly contribute to the downfall of the management for the variances arising from the business transactions. Simultaneously, this can create an impact on the overall presentation of the financial reports. The auditor might fail to express the required viewpoint of the financial position of the organization for the different size of materials.
Reference List:
Andon, P., Baxter, J., & Chua, W. F. (2015). Accounting for stakeholders and making accounting useful. Journal of Management Studies, 52(7), 986-1002.
Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2016). Auditing and assurance services. Pearson.
Cao, M., Chychyla, R., & Stewart, T. (2015). Big Data analytics in financial statement audits. Accounting Horizons, 29(2), 423-429.
Coetzee, G. P., Du Bruyn, R., Fourie, H., & Plant, K. (2014). Internal auditing: an introduction. LexisNexis.
Engel, C. J. (2014). A Primer on the Condition of the Accounting and Auditing Profession. International Journal, 2(2), 129-133.
Hayes, R., Wallage, P., &Gortemaker, H. (2014). Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.
Knechel, W. R., &Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.
Moroney, R., & Trotman, K. T. (2016). Differences in Auditors’ Materiality Assessments When Auditing Financial Statements and Sustainability Reports. Contemporary Accounting Research, 33(2), 551-575.
Nickell, E. B., & Roberts, R. W. (2014). Organizational legitimacy, conflict, and hypocrisy: An alternative view of the role of internal auditing. Critical Perspectives on Accounting, 25(3), 217-221.
Nuijten, A., Twist, M., & Steen, M. (2015). Auditing interactive complexity: Challenges for the internal audit profession. International Journal of Auditing, 19(3), 195-205.
Pasko, O. (2017). Perception of Accounting and Auditing Standards by Users in Context of Formation of Institutional Openness in Regulation. Accounting and Finance, (1), 68-75.
Pitt, S. A. (2014). International standards for the professional practice of internal auditing.
Pitt, S. A. (2014). International standards for the professional practice of internal auditing.
Reding, K. F., Sobel, P. J., Anderson, U. L., Head, M. J., Ramamoorti, S., Salamasick, M., & Riddle, C. (2013). Internal auditing: Assurance & advisory services. IIA Research Foundation.
Toy, A., & Hay, D. C. (2014). Privacy auditing standards. Auditing: A Journal of Practice & Theory, 34(3), 181-199.
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic approach. McGraw-Hill Education.
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