Auditing and Assurance Standards Board-Free-Samples for Students

Questions: 1.Explain how your results Influence your planning decisions for the audit for the year ending 30 June 2015 2.Explain why it is a risk and how it may affect the risk of Material Misstatement in the Financial Report . 3.Explain two key fraud risk factors relating to Misstatements arising from Fraudulent Financial reporting to which DIPL may be susceptible. Answers: 1.Analytical procedures are procedures those help the auditor in making auditor plan and plan how to conduct an audit, which areas of the companys financial report needs a greater number of procedures etc (Glover et al., 2000). Analytical procedures can be performed in two steps in first step auditor makes understanding regarding entity, business environment surrounded by entity, internal controls applied by entity in its daily operating procedures, this step is known as preliminary analytical procedure study (Auditing and Assurance Standards Board, 2009) and in second step auditor calculates ratios from financial information as well as apply some statistical tools and this step is known as substantive analytical procedure (HIRST KOONCE, 1996). Preliminary analytical procedures on the company Double ink printers limited results that company is a public company, working in the service sector business enviournemnt. Copamys major service is to provide print on demand i.e. company prints various paper print materials for the clients for theire exact order requirment. The secondry way of earning revenue for the company is to provide e-books with titles of publishers, for providing this service company change commission as well as fees. Companys internal conrol from the view point of preliminary procedures seems good except for the non-application of seggeregation of duties. Application of substantive analytical procedures on the company will impact audit plans and audit procedures on the following way, 2013 2014 2015 Gross Profit 6004500 6079500 6604500 Revenue from Operations 34212000 37699500 43459500 Gross profit 17.55% 16.13% 15.20% Net profit 2359190 2291362 2972183 Revenue from Operations 34212000 37699500 43459500 Net profit ratio 6.90% 6.08% 6.84% Net profit ratios show profitability percentage of the company for total profit and gross profit ratio shows profitability percentage for profit from direct activities of the company. In the present case, net profit ratio is increased in 2015 even after a decrease in the gross profit ratio for the same year. This is unusual assertion hence this will impact audit procedures by an increase in a number of procedures for all assertions present in income statement especially those assertions which can be changed by an organization with own discretion like accousting estimates, valuation methods etc. Net profit 2359190 2291362 2972183 Total Assets 12930000 15903900 26147991 Return on asset 18.25% 14.41% 11.37% Net profit 2359190 2291362 2972183 Total Equity 9150000 10783650 12250491 Return on equity 25.78% 21.25% 24.26% Return on asset shows the profitability of company for total asset invested in the company and return on equity shows the profitability of company for total equity invested in the company. In the present case, return on equity is increased in 2015 and return on asset ratio decreased for the same year. Return on asset ratio decline due to higher investment in the assets of the company. This will impact audit procedures by an increase in a number of procedures for all transactions related to assets especially for the transactions related to assets purchase and method of asset valuation. Total Liabilities 3780000 5120250 13897500 Total Equity 9150000 10783650 12250491 Debt/ equity 41.31% 47.48% 113.44% EBIT 3454650 3357037 3867337 Interest expense 84379 83663 808038 Time interest 40.94 40.13 4.79 In the year 2015, companys debt increased with a very higher amount hence debt financing is also increased and entity becomes more leveraged. A Higher level of leverage increase risk because non-payment of debt related obligation may result in companys liquidation. Due to this debt-equity ratio increased and times interest ratio decreased during the year. This will impact audit procedures by an increase in a number of procedures for making understanding regarding the need for new debt capital. Accounts Receivables 2482500 4320000 5073309 * Days 365 365 365 Revenue from Operations 34212000 37699500 43459500 Days sales outstanding 26.49 41.83 42.61 Revenue from Operations 34212000 37699500 43459500 Accounts Receivables 2482500 4320000 5073309 Accounts receivable turnover ratio 13.78 8.73 8.57 Accounts receivable turnover ratio shows frequency of collecting debts by the company its receivables. Days sales outstanding in how many days company can convert its debts into cash. In the present case Accounts receivable turnover declined and days sales outstanding decline due to increase in accounts receivable. It indicates that company starts to give longer credit period which may increase bad debts. Hence auditor must make procedures regarding accounts receivable outstanding and check whether is there are any fake accounts receivable Revenue from Operations 34212000 37699500 43459500 Total Assets 12930000 15903900 26147991 Asset turnover ratio 2.65 2.37 1.66 Asset turnover ratio shows revenue earned by the company for per dollar investment in assets of the company. Higher the ratio better will be for the company. In the present case in 2015 this ratio declining due to huge investments in assets of the company. This will impact audit procedures by an increase in a number of procedures for all transactions related to assets especially for the transactions related to assets purchase and method of asset valuation. Current Assets 5385938 7509150 9600929 Current Liabilities 3780000 5120250 6397500 Current ratio 1.42 1.47 1.50 Quick Assets 3129750 4837788 5420429 Current Liabilities 3780000 5120250 6397500 Quick ratio 0.83 0.94 0.85 These both ratios show that how efficiently a company uses its short term assets for paying current obligations. Current ratio increased but quick ratio decreased it means current ratio increased due to increase in inventory. This will impact audit procedures by an increase in a number of procedures for all transactions related to inventory especially for the transactions related to inventory valuations and estimates related to the assertion of inventory like inventory obsolesce provision. Analytical procedures are procedures those help the auditor in making auditor plan and plan how to conduct an audit, which areas of the companys financial report needs a greater number of procedures etc. Results from these procedures will increase the procedures for the above mentioned assertions and transactions. 2.Risk assessment procedures are performed by organizations for examining the risk present in the financial reports which may misstate financial reports of the company significantly (Auditing and Assurance Standards Board, 2011), due to which decisions of users of financial statements will effect considerably. This process is a relevant process for conduct of the audit. Under this process auditor of the organization obtain assurance that risk falsehood in the financial report is at the level which can be accepted by the auditor. Risk of significant falsehood in the financial statements can arise due to three reason i.e. due to nature of transactions, due to the absence of appropriate controls or due to non-detection significant falsehood by auditor because of the lower number of audit procedures. Risk arises because of first, second and third reasons termed as inherent risk, control risk, and detection risk respectively (Houston et al., 1999). In the present case in Double ink printers limited, following are inherent risk factors, Change in inventory valuation method In the present case Double ink printers limited change its method for estimating the carring amount of inventory. Previously company used average cost method where the average cost of all puchases applied to closing inventory, but in 2015 company stoped using average cost method and starts using first in fist out method, where inventory valuation made on the basis of the purchase price of units purchased just before the end of the period. Due to inflation first in first out method always provide higher inventory value. Incerease in carring amount of closing inventory incerease the amount of profit earned by copany during the year in the income statement. Incerease in the amount of profit earned by copany during the year in the income statement surely impacts the decisions of person useine financial repors for making decisions. Application of new IT system During the year company set new system for accounting processes. This system will be fully automated and will also integrate general ledger system of the company. This system imposed by the board of a company with pressure without having appropriate staff and after receiving complaints form IT department of the company after application of the system. Application of this system results in many problems like interfacing between the previous and new system, non-allocation of year end entries to the appropriate accounting year. Due to this transaction in the year, there may be a higher number of inappropriate allocations of significant transaction year end entries that can influence decisions of person useine financial repors for making decisions. 3.Fraud is an illegal activity which performed for enjoying unjust benefits. Fraud is an intentional act and cannot be interchanged with the error because the error is an unintentional act. Fraud is performed with the intention hence person making fraud use ways to cover that fraud. Fraud is covered by fraudster hence there is a higher chance of non-detection of fraud in comparison of a chance of non-detection of error (Auditing and Assurance Standards Board, 2013). Fraud risk arises when any person comes under the pressure of showing the better position of the financial report in comparison of the actual position of financial report or it can arise when any person having a higher level of privileges (Knapp Knapp, 2001). Fraud can be initiated at any level of the organizations management, staff or employee. In the present case following are the fraud risk factors arise, Fraud risk factor Company changes its method for estimating the carring amount of inventory. Previously company used average cost method but in 2015 company stoped using average cost method and starts using first in fist out method, Due to inflation first in first out method always provide higher inventory value. In addition to this company stopped making inventory absolance reserve. The company took a loan during the year 2015 for BDO finance company which includes a condition that loan can be recalled by financing company due to the non maintenance of current ratio at least one. In previous year company made an investment in the net assets of Nuclear Publishing limited company. A company by stating the reason that this companys book data is worthy and useful for increasing revenue from e-books. Identification of fraud risk factor Connecting both transactions with each other emerge the doubt of the presence of fraud risk factor because the company needs to increase current ratio for meeting financial companys condition. Current ratio can be increased by an increase in inventory value. Incerease in carring amount of closing inventory incerease a number of current assets. Incerease in the current assets incerease current ratio and results in satisfaction of loan condition. In current year a journal article reveals that book data of Nuclear Publishing limited can be loose its value due to the implication of new theory. This article emerges as fraud risk factor due to arise of doubt of misappropriating of companys resources for taking unjust benefits. Impact on audit This Identification of fraud risk factor will increase the audit procedures for the inventory valuation and professional skepticism of auditor. This Identification of fraud risk factor will increase the audit procedures for having knowledge regarding the reliability of journal article. Auditor will also make the procedure to know whether person initiated the purchase of net assets of Nuclear Publishing limited company was aware regarding new theory or not. References Auditing and Assurance Standards Board, 2009. ASA 520 Analytical Procedures. [Online] Available at: www.auasb.gov.au/admin/file/content102/c3/ASA_520_27-10-09.pdf [Accessed August 23 2017]. Auditing and Assurance Standards Board, 2009. Auditing Standard ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards. [Online] Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_200_27-10-09.pdf [Accessed 23 august 2017]. Auditing and Assurance Standards Board, 2011. Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. [Online] Available at: file:///F:/GS%20Solution%20(60%20paise)/Aug/16/risk%20assement%20procedure.pdf [Accessed 23 august 2017]. Auditing and Assurance Standards Board, 2013. Auditing Standard ASA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of a Financial Report. [Online] Available at: https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_240.pdf [Accessed 2017 August 23]. Glover, S.M., Jiambalvo, J. Kennedy, J., 2000. Analytical Procedures and Audit?Planning Decisions. AUDITING: A Journal of Practice Theory, pp.27-45. HIRST, D.E. KOONCE, L., 1996. Audit Analytical Procedures: A Field Investigation. Contemporary Accounting Research, 13(2), pp.457-86. Houston, R.W., Peters, M.F. Pratt, J.H., 1999. The Audit Risk Model, Business Risk, and Audit?Planning Decisions. The Accounting Review, 74(3), pp.281-98. Knapp, C.A. Knapp, M.C., 2001. The effects of experience and explicit fraud risk assessment in detecting fraud with analytical procedures. Accounting, Organizations and Society, 26(1), pp.25-37.