The Need for Experts in the Audit Process
In the principles of International Auditing and Assurance Standard Board, the guidelines for using the work of an audit expert is provided. In the planning process of auditing, this board has provided the crucial matters that the auditors are required to consider at the time of identifying the material misstatements in the financial statements (Pitt, 2014). In this context, one crucial element for the auditors is to correctly use the acquired information as evidence in the process of audit planning. In order to do so, the auditors are needed to have three major characteristics that are competency, capability and objectivity in case the service of audit expert is required. At the time of using the work of an audit expert, the following aspects are required to consider:
- While doing the audit planning, the auditors need to determine expert’s requirement along with the expertise of the experts in order to obtain required audit evidence.
- The auditors are required to assess the issues related to tax and compliance (Arens, Elder & Mark, 2012).
- It is required to use the work of an audit expert at the time of valuing different business assets like plant, machinery, equipment, antiques, art works and others along with the liabilities at the time of business activities.
- The auditors are required to assess the liabilities of the companies having association with employee benefits and insurance (Arens, Elder & Mark, 2012).
While audit experts conduct the audit operations of any non-accounting firms, they are under the obligation to acquire sufficient audit evidence and they are also required to determine whether there is any needs to use the work of an audit expert. The audit experts must be competent, objective and capable in case their work is required for the company (William Jr, Glover & Prawitt, 2016). Thus, competency is required for the external, auditions at the time of auditing the books of the companies as it is related with the degree and nature of expertise of the auditors. At the same time, the audit experts are required to have the ability to recognize various audit issues for their audit clients. In case of objectivity, it can be seen that some crucial aspects like conflict of interest, favoritism and influence have their negative effects on the audit opinions (Nickell & Roberts, 2014). In case the audit experts express anything apart from the objective of their audit operations, their opinion will be regarded as of no use.
According to the provide case study of DIPL, there is a need to use the work of an audit expert in the following cases:
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Issues |
Required Revision for Audit |
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Inventory and Purchase of Inventory Obsolescence |
After analyzing the situation of DIPL, it can be observed that in order to cover the predicted decline in the value of inventory along with shortage, there is an existence of inventory and purchase of inventory obsolescence in the previous year of the company. Thus, for the determination of estimated value of inventory obsolescence, there is a need to use the work of an audit expert for reckoning the amount of inventory (Knechel & Salterio, 2016). |
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Depreciation of Fixed Assets |
The analysis of the financial statement of DIPL states that the company uses to charge depreciation on their assets based on straight-line method. It is required for the company to calculate their depreciation along with the value of impartment. Thus, for calculating the amount of depreciation along with the exact value of asset impairment, there is a need for the company to use to use the work of an audit expert for depreciation (Mock et al., 2012). |
Materiality refers to some of the major factors that are considered as significant obstacles at the time of fair and true representation of the financial statements complying with the required accounting regulations. From the case study of DIPL, it can be observed that there are three five major factors in the company that has crucial effects on the overall materiality of the company. It needs to be mentioned that any kind of misstatements in the financial statements can significantly affect the fair presentation of financial information. The generation of misstatements can be seen from different kinds of frauds and errors.
The identification, explanation and description of the five major factors of materiality are provided below:
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a. Factors |
b. Explanation |
c. Description |
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Fraud Risk: In DIPL, fraud risk has created influence on the materiality of the company. The case study states that the board of DIPL has created immense pressure on the operations due to the responsibility of IT segment for the creation of new accounting system. Due to this aspect, the possibility of different fraud risks can be seen in the operations of DIPL. This risks can affect the materiality of the financial statement of DIPL (Duncan & Whittington, 2014). |
The occurrence of error can be seen at the time of the completion and process of data from financial statements while preparing the financial reports. In addition, errors also take place while applying different accounting policies related to valuation and classification of financial items while disclosing financial information. Thus, the relation of fraud can be seen with material misstatement (Christensen, Glover & Wood, 2013). Thus, the expert opinion of the audit experts is required in this filed. |
Impact on Materiality: The IT department’s administration function was not content with the installation of the machinery. For this reason, there was immense pressure on the employees from the board of DIPL in order to reconcile and assess the suitability of the new accounting system. This particular aspect has created major impact on the overall materiality of financial stateme4nts of the company (Duncan & Whittington, 2014). |
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Accounting Policies: From the provided case study of DIPL, it can be found that the average cost method of the valuation of raw materials cannot be considered as appropriate for the company. The main reason of this inappropriateness is that there is the undervaluation of present cost of papers under average cost method while recording the inventories (Chambers & Odar, 2015). Thus, it can be said that this particular aspect can affect the overall materiality of DIPL’s financial statements. |
There is major impact of inherent risks on the materiality of companies. There was not any integrity and objectivity in the work of the management of DIPL. This particular aspect can affect the financial position of the company by providing the users with misleading financial information. |
Impact on Materiality: It needs to be mentioned that the adopted average cost method of inventory valuation by DIPL is not regarded as an appropriate method due to the undervaluation of the present of papers. Overall accounting policy of DIPL can be majorly affected by wrong mechanism for inventory valuation and the overall accounting policy of DIPL has connection with the factor of materiality (Ojala et al., 2014). The adopted wrong mechanism can have major impact on the overall materiality of the financial statements of DIPL. |
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Environmental Factors: At the time of preparing the financial statement of DIPL, the management of the company missed to record several transactions either by mistake or on a deliberate way (Kuenkaikaew & Vasarhelyi, 2013). This particular aspect affects the planning process of DIPL related to selling activities. In addition, the management of DIPL failed to take into consideration the effects of various macro as well as micro economic factors like social, political and economic factors on their business. This aspect affects the materiality and planning process of DIPL. |
Fraud activities from the employees can be seen as a result of excessive pressure from the board of DIPL due to the implementation of new accounting system and this aspect has the ability to affect financial information of DIPL. For this reason, this whole matter can create negative impact on the materiality of the company (Toy & Hay, 2014). |
Impact on Materiality: The adoption of incorrect financial accounting in DIPL can be seen from the management’s inability to consider the major macro and micro economic factors. Due to this, the users of financial information fail to get the true and fair picture of the company’s financial position. In addition, not recording some of the financial transactions can also create major effects on the overall materiality of DIPL. |
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Appointment of CEO: The provided case study states that DIPL has a complicated process of appointing CEO. There is major risk involved in the process of appointing the new CEO along with the transition of previous CEO as the whole process has not been done according to requisite scheme. The process to appoint the new CEO has been done after the due date and this process exposes the business activities of DIPL to numerous risks. Thus, this situation creates impact on the materiality of DIPL (Nuijten, Twist & Steen, 2015). |
It can be seen that the heavy or complex process of appointing the CEO jeopardize the transparency of the organizations and this aspect affects the decision-making process of the company. Thus, this total aspect creates major effect on overall materiality of DIPL. |
Impact on Materiality: The process to appoint and transit the CEOs is a complex process that creates influence on the materiality of DIPL. In this process, there is a need for the work of audit experts for careful procedure of selecting the CEO (Nickell & Roberts, 2014). |
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Record of Cash Receipts and Expenses: The recording of the cash receipts is a major factors having relation with the materiality of DIPL. The company accepts a large portion of their expenses with the help of electronic means. Electronic means are used so that the accountants can involve the whole process in bookkeeping by downloading the receipts from the mails. Thus, there is a need for improvement in this whole process so that it can be done on frequent basis and can be executed at the end of the month. In addition, the process to derive revenue by DIPL from e-book marketing along with republishing and printing may have large impact on the overall materiality of DIPL (Knechel & Salterio, 2016). |
In case of DIPL, the adopted bookkeeping procedure for raw materials has major effect on the materiality of the company. In this aspect, it needs to be mentioned that the adoption of correct accounting procedures helps the users in determining the true and fair financial position of DIPL (Knechel & Salterio, 2016). Thus, it can be seen that the inappropriate process of recoding the cash receipts by DIPL can affect the overall materiality of the company. |
Impact on Materiality: The use of electronic means to make payment for expenses can create effect on the process of maintaining financial transactions of DIPL. Thus, the inability of DIPL’s management to record the receipts for cash transactions ca become a major cause of the downfall of the company’s whole accounting system. For this reason, this aspect can create negative impact on the overall materiality of DIPL (Knechel & Salterio, 2016). |
References
Arens, A. A., Elder, R. J., & Mark, B. (2012). Auditing and assurance services: an integrated approach. Boston: Prentice Hall.
Chambers, A. D., & Odar, M. (2015). A new vision for internal audit. Managerial Auditing Journal, 30(1), 34-55.
Christensen, B. E., Glover, S. M., & Wood, D. A. (2013). Extreme estimation uncertainty and audit assurance. Current Issues in Auditing, 7(1), P36-P42.
Duncan, B., & Whittington, M. (2014, September). Compliance with standards, assurance and audit: Does this equal security?. In Proceedings of the 7th International Conference on Security of Information and Networks (p. 77). ACM.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.
Kuenkaikaew, S., & Vasarhelyi, M. A. (2013). The predictive audit framework.
Mock, T. J., Bédard, J., Coram, P. J., Davis, S. M., Espahbodi, R., & Warne, R. C. (2012). The audit reporting model: Current research synthesis and implications. Auditing: A Journal of Practice & Theory, 32(sp1), 323-351.
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.
Ojala, H., Niskanen, M., Collis, J., & Pajunen, K. (2014). Audit quality and decision-making in small companies. Managerial Auditing Journal, 29(9), 800-817.
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.
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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