Question 1: Necessity of expert in DIPL audit
1. International Auditing and Assurance Standard Board is the principal body that sets out the rules and guidelines for establishing the financial statements. When it comes to planning audit of a financial statement, then it points out the elements and key points that an auditor must take into consideration earlier than the identification of the risk that may arise due to material misstatements. Pitt (2014) has argued that one of the key elements that are concerned with the work of an audit expert is information that he or she can use as the evidence in case of planning the wok of audit. In order to perform the auditing, an auditor must be capable and competent and if it seems necessary to use objective for auditing, then the person has to be an expert in his domain. The duty of an audit expert involves paying patronage towards the subject that is mentioned below:
During the audit, and auditor need to determine his requirements with the requirement of the expert that will help to produce appropriate audit evidence.
One of the main importances that the auditors need to provide attention is to assess the matter related to issues and taxes of compliance.
According to the Nickell and Roberts (2014), when it comes to necessity, then it requires asset valuation of business, for instance machinery, plant, artwork, antiques that are occupied as the assets along with liabilities during the operations of business
Besides this, when conducting the audit, the audit experts are required to provide sufficient and appropriate amount of auditing evidence and the assessot need to determine, whether service of the expert must be sought or not. The Audit expert must be capable, objective and competent with his service if his work urges it from him (Coetzee et al. 2014). When it comes to external review of account books, then competency is required from the auditor because is it associated with the degree and nature of the expertise of the auditor. Moreover, auditing requires extensive recognition of their subject in order perform the task smoothly and appropriately. Objectivity of the auditing states that the favouritism and conflict of influence of the other identity may have in the conclusion of the expert.
Considering the present situation of the DIPL, an audit expert would be required for the issues mentioned below:
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Necessary issue |
Required decision indulged in the auditing of this issue |
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Obsolescence of inventory and purchase of the inventory |
Detailed analysis of the DIPL financial performance has been performed and it has been found that the buying of inventory obsolescence was widespread compared to previous year. In order to access the value of the obsolescence service of an audit expert is necessary. It will not only help the DIPL to understand its inventory but also guide them reckoning the objective of inventory (Sabato, Sarwate and Srebro 2013) . |
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Depreciation in the case of fixed assets |
According to the DIPL financial report, it has been noticed that depreciation in the fixed asset of the firm is mentioned under the fixed line method along with the main objective of calculating the aggregate depreciation and the impairment of the asset. Thus, the management of the business house can go for the recruitment of an audit expert. |
2.
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Factors |
Explanations |
Influence on the preliminary materiality |
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Risk of Fraud: Fraud risk is acknowledged as the key element creates an influence on the DIPL financial report (Hematfar and Hemmati 2013). As the study suggest that operation of the DIPL were under pressure due to the new accounting system introduced by the IT department of the business. When it comes to new accounting system from the IT department, then there are various risks, that DIPL may face and especially the numbers of fraud case can gets aggravated due to the action of the IT team. This fraud risk can affect the materiality of the DIPL. |
Moroney and Trotman (2016) has argued that errors take place during the acquiring of financial data collection and preparing the report. Irrational accounting sets in from the wrong interpretation of various factors. Moreover, errors can take place while using the accounting policies connected with the classification, valuation, reflection, and accounting information disclosure. Fraud is one of the wide concepts, which is correlated with the fraudulent activities leading to misstatement of the financial information (Hamilton 2016). |
Impact of Fraud risk on the materiality: After studying the case of DIPL, it can be found that IT division was not content with the installation process of the new system in the organization. It has been observed that management has provided huge amount of pressure on the It department to fit the new system in the production house. |
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Materiality influenced by the accounting policies: In order to find the raw material usage of the firm, average cost method has been utilized in the new accounting method, however it is not appropriate in this scenario. Owing to the fact that average cost for recording the inventory undervalued and it has negatively affected the materiality of the DIPL. |
DIPL management has failed to act with objectivity and integrity. Thus, the financial performance of the organization can be impacted. |
Accounting policies that can influence the materiality: Raw material valuation of the DIPL inventory has inappropriate assumptions that has influenced the accounting process. |
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Environmental factors that can affect the materiality: Analyzing the financial report of the DIPL it has been found that there were the accountant of the firm omitted various transactions. This has lead to the failure in assessing the macro and micro factors of the business. One of the key instrument that has been omitted by the accountant is the environmental factors. It has affected the materiality of the result (Epstein and Buhovac 2014). |
Owing to the high pressure from the board, the employees of the firm has indulged themselves into the fraud activities. For instance, new system of accounting can omit the environmental factors in the accounting and it can negatively affect the financial report of the firm. |
Environmental factors that are influencing the materiality: Management of the DIPL were unable to address the macro and micro environmental factors along with the omission of the environmental factors. This incorrect method of accounting the financial performance of the brand has influenced the materiality of the firm. In order to correct this error in accounting, book accounts that simultaneously provide influence on the plan of the audit for DIPL. |
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Materiality caused but he influence of CEO selection: It is always complex issue to chose the CEO for an organisation. Same thing has happened with the DIPL too. The process involves appointment of the new CEO and transition of the previous CEO of the firm. The procedure involved in selection of the CEO has exposed the various business risks. Improper appointment of the CEO in the DIPL can create on the materiality of the firm and influence the auditing process on behalf of the firm (Alexander and Sherif 2015). |
The appointment of the DIPL CEO has been appointed in a cumbersome manner that has jeopardized the transparency of the firm and has affected the decision-making. Thus, this has affected the materiality of the firm. |
Materiality influenced by the appointment of CEO: Materiality is influenced by the appointment of the CEO and the same thing has happened with the DIPL. Its cumbersome appointment of CEO has affected the materiality of the firm and thus in future there should be a well-structured procedure of recruiting the CEO. |
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Factors connected with the recording of cash expenses and receipts: A vital factor that is related with the materiality is the chronicle of money receipts of DIPL. A vast piece of the costs is acknowledged through electronic means. In this manner, the bookkeeper could show the procedure engaged with accounting of money receipts duplicate after the download of receipts from mail and the way toward accommodating the general group. The procedure of compromise that is arranged and exhibited needs consistency of recording the same on visit premise and the same ought to be executed toward the finish of the month. DIPL infers deals income through digital book advertising; republishing and printing of course readings may likely make an impact on the materiality. |
In the expressions of Andon et al. (2015), accounting technique embraced by DIPL for crude materials could be seen as the important factor influencing the materiality. Additionally, the bookkeeping system help with deciding the valuation of crude materials, which helps the clients in appreciating the genuine and reasonable perspective of the books of records. The administration failures in incorporating the natural components could be seen as vital variables influencing the materiality. Along these lines, such natural elements talks the impact on the money related results and perspective associated with review. |
Factors concerned with the recording of the transaction according to the new system: Instalment of costs through the electronic means makes an effect on the way toward keeping up the bookkeeping exchanges of DIPL receipts and introduction of the compromise articulations (Locke 2013). The associations powerlessness of recording the exchanges of money receipts and compromise explanation could straightforwardly add to the defeat of the administration for the changes emerging from the business exchanges. At the same time, this can make an effect on the general introduction of the monetary reports. The examiner may neglect to express the required perspective of the money related position of the association for the diverse size of materials. |
Reference:
Alexander, S. and Sherif, M., 2015. CEO Compensation and UK Firm Performance: Does Financial Crisis Matter?
Andon, P., Baxter, J., & Chua, W. F. (2015). Accounting for stakeholders and making accounting useful. Journal of Management Studies, 52(7), 986-1002.
Coetzee, G. P., Du Bruyn, R., Fourie, H., & Plant, K. (2014). Internal auditing: an introduction. LexisNexis.
Hamilton, E.L., 2016. Evaluating the intentionality of identified misstatements: How perspective can help auditors in distinguishing errors from fraud. Auditing: A Journal of Practice & Theory, 35(4), pp.57-78.
Hematfar, M. and Hemmati, M., 2013. A Comparison of Risk-Based and Traditional Auditing and their Effect on the Quality of Audit Reports.
Locke, R.R., 2013. Reassessing the basis of corporate business performance: Modern financial economics’ profit control versus integrated people-and process-improvement. Real-World Economics Review, 64, pp.110-124.
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.
Pitt, S. A. (2014). International standards for the professional practice of internal auditing.
Sabato, S., Sarwate, A.D. and Srebro, N., 2013. Auditing: Active learning with outcome-dependent query costs. In Advances in Neural Information Processing Systems (pp. 512-520).
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