Question 1
The requirement of an expert in auditing of the financial statement of organization is provided by the guidelines of International Auditing and Assurance Standard Board. Matters than must be considered by auditors before examination of material misstatement is provided while planning the audit. Information available to users should be used as an evidence in audit planning that forms an important part of expert work. Professionals and experts should have sufficient knowledge to perform, review and guide the work and they should be capable, competent and objective (Arens et al. 2016).
Some of the requirements of proficient expert is related to the matters listed below-
- When there is a need to value complicated financial tools, acquired assets, plant and equipment and any other things that has been acquired during normal course of business. In event when an organization is require to value complex financial statements, impairment of assets and liabilities assumed and acquired assets in business combination.
- The actuarial liabilities calculation associated with employee benefits plan and insurance contracts.
- Analysing unusual and complex issues of tax compliance.
- Interpretation of regulations, laws and contracts.
- In event of site clean-up costs and environmental liabilities valuation (Eilifsen et al.2013).
- Estimating gas and oil reserves.
Expertise in field other than accounting and auditing in the process of audit requires to obtain appropriate and sufficient evidence on part of audit. It needs to be assessed by firm whether they require specialist or experts’ service. Nonetheless, it is required by company to assess whether the expert or specialist is competent, capabilities and objectivity of carrying out audit. Expert might be required for providing auditor with assistance in obtaining an understanding of environment in which entity operates, assessment and identification of risk of material misstatement. Requirement of expert in need of evaluating the efficiency and appropriateness of evidence of audit while forming opinion of financial statements (Glover et al. 2016).
Allowance for obsolescence of inventory is one of the accounting issue as depicted in the case study for which auditing requires service of experts. Furthermore, it is reflected by analysis of pecuniary report that the computation of depreciation of fixed assets of DIPL business is done by using straight line method. By analysing the case and situation of DIPL, employing the service of an expert can be done in the following issues:
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Issues faced by DIPL |
Expert requirement while carrying out auditing |
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Inventory obsolescence |
The existing of allowance inventory obsolescence existed for covering an estimated decline in value due to effects of storage hazards. It is revealed by analysing the case study of DIPL that there is a prevalence of inventory allowance for obsolescence. This has been because of storage vulnerability influence and so that anticipated decrease in value are covered. Payment of inventory is done at relevant currency of country. It was discussed at the board that allowance for inventory obsolescence should be written back. Thus, the auditor of DIPL requires the expert service for approximating value of obsolescence. It is because the value of the obsolescence of inventory is reckoned. |
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Fixed assets depreciation |
The method of using straight line mechanism was mainly for the allocation of cost over their estimated useful lives of assets (Kunz et al. 2014). In this regard, for the measurement of impairment of assets along with depreciation, service of an expert of specialist can be used by DIPL while carrying out auditing. |
Materiality is considered as an important facts concerning financial statement faithful representation that are in compliance with accounting standard. While assessing the case study on the given functionalities of business of DIPL, the preliminary materiality figures can be influenced by five factors. The identification of five factors and their influence on determination of preliminary figures on the overall materiality of audit of DIPL are listed in the table below.
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Factors |
Reasons behind relevance of identified factors in calculating preliminary figures on overall materiality |
How the factors influence the preliminary figures for materiality in the planning process of audit |
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Materiality impacted by fraud risk The overall materiality of financial assertions of DIPL can be negatively influenced by considering one of the crucial factors such as fraud risk. It is mentioned in the case study concerning DIPL’s operations that extreme pressure exists from board to provide the information technology department of organization with a new accounting system. In the absence of enough staffs to perform proper testing and reconciliation exposes the implementation procedures to risk of fraud (Martinov et al. 2014). This has highly fair chance to have preparation of immaterial statements. |
It is certainly possible that while preparation of financial report of DIPL, processing and collecting of data might come with errors. Misrepresentation of various factors might lead to some accounting projections that are irrational (Louwers et al. 2015). While application of specific accounting policies concerning classification and valuation might involve errors disclosure of accounting information. |
The procedures of implementing machines within the corporation did not satisfy information technology manager. Moreover, staffs of DIPL were pressurized immensely to install the system and for the examination and reconciliation. It was detected in preliminary testing that some transactions were not allocated in correct time. |
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Environmental aspects influencing materiality It is ascertained from the case study that several transactions were not considered while financial statement preparation either due to mistake or human errors or due to some deliberations by employees of DIPL. In this regard, some effective planning pertaining to sales and marketing activities of business were inconsistent. Furthermore, diverse macro and micro intentions were not successfully evaluated by corporation. |
The transparency of DIPL financial statement can be impacted by complexities in the procedures of appointing CEO of corporation. If the decision maker is not clear about the various factors influencing business, then materiality of financial statements can be impacted by this factor. |
Analysis of case study depicts that DIPL has not adopted a proper method of financial accounting as identified by macro and micro environmental factors and omission of some figures (Soyemi 2014). Financial report of DIPL can be influenced due to high level of materiality and thereby creating an impact on overall planning of audit. |
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Accounting policies impacting materiality It is found by analysing the case study that valuation process of different types of raw materials and input used in the business was based on mechanism of average cost and this was not appropriate measure to be used in the business. The reason attributable to the fact of inappropriate use of valuation method because currently implemented average cost mechanism significantly increase the current cost. |
One of the current factors impacting materiality is prevalence of inherent risk in business. Particularly, DIPL administration does not have any objectivity long with integrity. As a consequence of this, it is certain that produced results is likely to be material and would influence decision. Presentation of financial information has the potentially be materially altered due to occurrence of fraudulent activities driven by extreme pressure on employees (Reding et al. 2013). |
The valuation of inventory procedure of raw material was not suitable. Overall functional process of accounting was influenced by unsuitable and impractical assumptions and mechanism valuations. The overall confirmation of corporation will be probably affected by this particular factor. |
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Factors related with new process of accounts registration The materiality of financial information of DIPL is impacted by the process of maintaining recorders of cash receipt by cashier of corporation.in general, the electronic system of payment helps in recording of majority of expenditures that are borne by corporation (Chandler 2014). It is required by accountant to reconcile and prepare the accounts more frequently and at the ending period. Moreover, materiality has the possibility of getting influenced in terms of revenue generation by way marketing, re publishing and printing. |
The considerable factor influencing materiality is process of accounting that are used by DIPL administration for estimating and recording raw materials. Analysing raw materials receives assistance from accounting process and this helps in comprehending suitable use. |
Overall process of maintain and recording details is influenced considerably by the electronic system of making transactions. However, due to improper recording of data and incapability of reconciling statements van lead to down fall of business. This will influence the overall financial statement preparation due to existence of materiality of statement in light of several issues. Hence, it is quite possible that assessor would fail to present their views considering several material sides. |
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Challenging CEO selection procedure From the analysis of given case, it can be inferred that appointment and selection of chief executive officer of corporation is quite complicated. There are considerable amount of risks that is associated with appointment procedures of firms, transition process of chief executive officer and commencement of several activities that undertaken by William Jackson. Corporation would be exposed to several risks due to leaving of workers and improper appointment of CEO. |
The transparency of the financial information and various other facets of corporation would be impacted by this complicated appointment of CEO. This would in turn impacts the decision maker negatively. Therefore, materiality of statements would be affected. |
Complicated process of hiring and appointing CEO within corporation has the likelihood of considerably impacting materiality. In this regard, it is required by organization to employ transparent and fileted approach to appoint CEO. |
References list:
Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2016). Auditing and assurance services. Pearson.
Chandler, R. (2014). Auditing and assurance. London School of Economics. London.
Eilifsen, A., Messier, W. F., Glover, S. M., & Prawitt, D. F. (2013). Auditing and assurance services. McGraw-Hill.
Glover, S. M., Prawitt, D. F., & Messier, W. F. (2016). Auditing and Assurance Services: A Systematic Approach 10th.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.
Kunz, R., Josset, D., Scholtz, H., Motholo, V., O’Reilly, G., Penning, G., & Rudman, R. (2014). Auditing & Assurance: Principles & Practice. OUP Catalogue.
Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing & assurance services. McGraw-Hill Education.
Martinov-Bennie, N., Roebuck, P., & Soh, D. (2014). Auditing and assurance: a case studies approach.
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.
Simnett, R., Carson, E., & Vanstraelen, A. (2016). International Archival Auditing and Assurance Research: Trends, Methodological Issues, and Opportunities. Auditing: A Journal of Practice & Theory, 35(3), 1-32.
Soyemi, K. A. (2014). Auditing and Assurance services.
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic approach. McGraw-Hill Education.
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