Audit risks-Practical
Q1a. Understanding and application of Audit risk in business.
When carrying out an audit, it would be a tall order for the auditor to go through all the company’s transactions as recorded in the statement of comprehensive income and the statement of financial position. Therefore, they must consider utilizing the risk-based approach which ensures a more efficient audit process by considering the level of audit risk. Audit risk denotes the event that the auditor will present the wrong opinion due to a misstatement in the company’s financial misstatements (Demartini & Trucco, 2016, p. 329). This is accelerated when there are business risks that the auditor is not adequately aware of and, thus, fails to include it in their audit assessment. Business risks include lowered profitability, loss of customers, increased production cost, the rise in competition levels and fraud and theft among others. Considering the business risks, therefore, ensures that the auditor is aware of factors that can lead to possible financial statement misstatement. In order to minimize audit risk, the auditor needs to start by deeply understanding the organization, the environment it operates in and the business risks it faces in order to determine how such risks bring about audit risk. This would then inform how he approaches the audit process, and it is advisable to consider the most significant risks which present the highest probability of financial misstatement caused by errors from balances and transactions (Demartini & Trucco, 2016, p. 330).
Q1b. Evaluate the Analytical procedure and Tests of control (Details) process
Analytical procedures are diagnostic financial processes in auditing that enable the auditor to detect potential risks and problems that may be congruent with the client’s financial statements (Onome Imoniana, Thereza P. Antunes, Martins Mattos, & Maciel, 2012, p. 285). These procedures check whether various relevant financial and historical information indicate consistent relationships all the way to the current period which is under review. Inconsistencies in such relationships indicate fraudulent reporting or incorrectness of the financial statements. Analytical procedures can take place in many ways such as reviews of the current ratio which examines the current assets and current liabilities with the inclusion of inventory, accounts payable and accounts receivable. The payroll can be examined by checking the ending balances that reflect in the compensation expense so that any signs that the amounts do not rise with inflation over time, then the auditor knows there have been fake payments made to fake employees.
Tests of controls help the auditor to make a judgment on whether the client’s controls are reliable in terms of preventing errors in recording balances and transactions in their books of accounts. Through tests of controls, the auditor puts the client’s mechanisms of control to the test in order to determine their effectiveness of such controls prevention and detection of misstatements (Onome Imoniana, Thereza P. Antunes, Martins Mattos, & Maciel, 2012, p. 285). If the test results prove the client’s controls are dependable, then the auditor can use the controls during their auditing processes and apply substantive tests if the results show weaknesses. There are different ways to carry out tests of control including observation, inspection and re-performance (Onome Imoniana, Thereza P. Antunes, Martins Mattos, & Maciel, 2012, p. 286). Observation is where the auditor watches the elements of the control process as a business process takes place while inspection sees the auditor inspect the documents for signs of approval such as stamps or signatures indicating that the control procedure was authorized. In re-performance, the auditor performs a transaction to see how controls work in real-time and their effectiveness.
Q2a. Differentiate between Management assertions and Audit objectives.
Management assertions refer to the management claims on various business operation aspects of a business and these assertions or claims are important to the auditing process while audit objectives are the goals of an auditing process which culminates in the expression of an opinion regarding the state of the financial statements (Turner & Weickgenannt, 2016, p. 218). The first obvious difference is that management assertions reflect what the management think about the health of their company’s financial statements while audit objectives originate from the auditor’s perspective on the same after tests and consideration of every aspect of such statements as well as the management assertions. Another difference is in the valuation and allocation methods that are used between the management and auditor so that the auditor has to examine the turnover rates of the inventory to determine claims of the management (Turner & Weickgenannt, 2016, p. 218).
Q2b. Describe the procedure to be followed for the Verification and Valuation of Account Receivables and Long-term loans
When a company is being audited, one of the most important aspects of the account books to check is usually the accounts receivables given that it is the largest asset that most companies have. The verification and valuation of accounts receivables and long term loans are conducted through following some universally accepted procedures. The auditor can request a list of company debtors and compare it against the database of individual accounts, inspect debtors’ documents like invoices, check date of balance sheet to reaffirm the debts are reliable as confirmed by debtors and examine debts written off as well as provision of bad debts with a comparison to the past (Hall, 2015, p. 447). The aforementioned verification methods have been proven as reliable and used all over the world and can thus be applied to the Sultanate of Oman context. Conducting these procedures ensures that the auditor is able to detect and address audit risks like non-existent accounts receivables, inaccuracies in the recorded receivables, revenue not being recognized, sales transactions having been recorded in the wrong periods and the impossibility of collection of the recorded account receivables (Hall, 2015, p. 449).
Conclusively, the auditing process is very important in business because it ensures that credibility and transparency are maintained. The reputation of the company is important, and one way to boost it is to ensure that fraud is prevented. The pursuit of comprehensive auditing can be derailed by the misstatement of financial reports and thus risk-based auditing is considered essential to dealing with such potential risks because it involves identification of business risks that may increase the odds of misstatements and thus enabling the auditor to take that into account.
References
Demartini, C, & Trucco, S 2016, ‘Audit risk and corporate governance: Italian auditors’ perception after the global financial crisis’, African Journal of Business Management, vol. 10, no. 13, pp. 328-339.
Hall, JA 2015, Accounting Information Systems, Cengage Learning, Boston, MA.
Onome Imoniana, J, Thereza P. Antunes, M, Martins Mattos, S, & Maciel, E 2012, ‘The analytical review procedures in audit: an exploratory study’, Advances in Scientific and Applied Accounting, vol. 5, no. 2, pp. 282-303.
Turner, L, & Weickgenannt, AB 2016, Accounting Information Systems: The Processes and Controls, John Wiley & Sons: Hoboken, NJ.