BAO3306 Auditing : Organization Scenario and Environment

Introduction

In order to perform auditing plan in the organization in most effective and sufficient manner, ASA 210 stipulates that an auditor require implementing following rules and regulations which are following;

• Compliance with the ethical needs and effectively maintain independent with customers
• Gaining and understanding the terms as well as conditions of engagement which should be truly stated within the audit engagement letter.

Audit planning procedure contains the main steps of the auditing which establishes the objective, scope, provide effective direction, conduct effective auditing and provide rules and regulations in the development of the audit program (Power, 2013). Audit plan and audit strategy are considered two aspect of the audit planning.  There are the seven steps of conducting audit on the organization financial reports as explained in ASA 300 (auasb, 2017).

• Gaining and understanding the organization scenario and environment
• gaining and understanding the internal controls
• Assessing and evaluating risk associated with the material misstatement
• Developing an effective responses to analyze issues
• Performing tests of controls
• Effectively and coordinately performing substantive process
• review and completion

In order to perform better auditing and determining issues associated with the financial statement Reece Limited organization has been selected and a fee is   $700000 which is clearly mentioned in the engagement latter. The organization Reece limited is the largest supplier of bathroom and plumbing supplies. In presently, more than 4000 employees are working in this organization.

ASA 230 is based on the audit documentiaon and an effective as well as experience auditor should documented all the audit strategy, plan and gathering of the evidence explaining and evaluating how they reach to end or conclusion in well and organized manner. Documentation of the outcomes of the audit plan and procedures provide a basis for audit report.        

Audit plan

Reece Limited organization has effective organization structure and contains the management, board of director, audit and risk committee, nomination committee and remuneration committee that helps the organization to review all the performance and operation effectively.  Along with that share trading policy, corporate governance statement, performance evaluation, share trading and wellbeing and safety are the most effective and major component of the company chart.

In order to perform operation in most effective and vital manner the organization has to accountable to incorporate with regulations and rules and ensure of better standards of products has to meet with the government set of rules and regulations (reecegroup, 2017). The organization is performing its operations in better manner and listed in ASX therefore that it is accountable to incorporate with two effective regulations one is ASIC and other is ASX. In addition to this while creating an effective financial statement the financial management of the company must comply with corporate act 2001 and AASB standards.  If for some reason the management not comply with the regulations would outcomes in delist from the ASX.

Reece Limited organization revenues arise from the selling goods and products such as bathroom and plumbing goods to customers. It has been seen that bathroom and plumbing suppliers in Australia is increasing rapidly.  As per the organization financial report it has been seen that sales revenues ending 31 December 2016 was increased approximately 6.1% respectively.  Net assets of the organization were $1076.5 million up 3.4% as compared to the previous years. In order to gain better outcomes and perform operation in successful manner Reece Limited organization has regularly invested in the development of new goods, IT, people as well as new branch opening within the initial first half of the financial year (reecegroup, 2017).     

In auditing financial statements are compared against pre determined criteria, account policies and conventions. When the accounting statement fails to match the criteris, it is said to be a misstatement. The various types of misstatements are errors (unintentional), failure to comply with established laws and regulations (intentional or unintentional) and fraud (intentional).

Misstatement are said to be material if the omission or misrepresentation in the statement are capable of affecting the financial judgments of the users taken with the help of the facts mentioned in the financial report (CPA, 2017).          

Based on the figures obtained from the comparative financial statements of 2015 and 2016, five accounts have been identified with major variations from the past years. Such variations should be clearly monitored to identify any risk arising from the misstatement.

Decision about what accounts to materiality is taken after due consideration of the external circumstances and also after considering the degree of misstatement found in the statement. The requirements or the general use pattern of information are also considered while determining the items whose misstatement has more severe impact (Stuart, 2012). 

Planning the auditing procedures within the organization is to obtain individually material mistreatment fail to notice in successful manner. Therefore an auditor responsibility while conducting an audit is to offers reasonable assurance that the statements of the financial of the company are fairly presented in accordance to the material. Materiality should be effectively considered by adductors when assigning, planning and analyzing the outcomes of audit  

During the initial state i.e. planning phase, an auditor needs to establish materiality in order to obtain the timing, nature as well as extent of audit process to execute. An auditor mainly represents the quantitative amount of materiality in the initial i.e. planning phase. After completion of the planning phase an auditors allocates planning materiality among several class of traction.                   

  In conducting the audit of the financial statements, the main purpose and objective of auditors are to evaluate and assess the information in most accurate manner. Moreover adductors require determining most reasonable assurance in concern of whether the organization financial statement as a whole is risks free from the material misstatement, whether the statement is fraud free so that enabling the auditors to represent an opinion regarding whether financial statement is made. 

It is the auditor’s professional prerogative wherein he takes a decision about what accounts to materiality and is affected by the auditor’s impressions about what could be the financial information which are more important for the end users and their resultant impact in case of materiality. The materiality decided at the beginning of the audit plays an important role at the level of planning and subsequent conduct of the audit, However the level of materiality can be revisited by the auditor if the unforeseen circumstances during the audit call for so or id required after observing the Aggregate Uncorrected Misstatement.(Gay & Simnett, 2000). 

Aggregate Uncorrected Misstatement refers to the sum of auditor’s identification of misstatement, the potential or actual misstatement which has failed to be noticed and the impact which the misstatements of the previous year will have on this year’s final accounts of the concern (Basu, 2016). ASA 320 explains the materiality concepts as misstated in the data or information and possibility of impact the client’s decision most effective and successful manner. At the initial steps of the auditing procedures, auditors decided to evaluate risks of materiality in the largest movement or irregularities in the organization financial statement, just effectively quantified required judgment based on the professional’s manner.

Below 5 per cent= immaterial

Above 10%= material

8% professional judgment

Significant enough for the organization or auditors to build effective decision

Some of the methods determining materiality are

Single Rule Method:

• 5% of EBIT
• 5% of the sum of noncurrent and current assets
• 1% of the total equity
• 5% of the total revenue

Another method suggests that

• 5% of the total sales (with commission)
• 1% to 2% of the sum of current and noncurrent assets
• 5% to 10% of Earnings after tax
• 2% to 5% of Shareholder’s fund

In the given audit assignment 2.5% of the total revenue has been considered as the materiality. Therefore 2.5% of the current revenue is $ 572939.

(d) Audit Risk Assessment for the Identified Account

Audit Risk refers to the risk of having an unfavorable opinion from the auditor on the risk of material misstatement being identified. The three main aspects of audit risk are control risk, inherent risk and detection risk.

Control risk refers to the risk arising from the ineffectiveness and faulty implementation of the internal control by the management. Such risks often affect the company’s mission to achieve their goals and objectives and are often results through transactions of unusual nature and manipulations which are done by the management. (Bansal, 2012).

Inherent risk refers to the risk arising from the nature of certain balance of accounts and transactions to be prone to misstatement. This risk generally arises at management’s level and takes place with balance of accounts, transactions and the financial statement in entirety

Detection Risk refers to a situation where the steps and procedures undertaken by the auditor won’t be useful in detecting the misstatement in the accounting system. This is only risk which comes from the side of the auditor and is indirectly related to the sum total of the control and inherent risk. (Ainapure & Ainapure, 2009)

 In order to achieve better performance and outcomes auditors use the audit risks models . It is the effective procedures in audit that aids the organization to assess the area of the financial statement in most appropriate manner.

The formula of audit model is represented below;

Audit=inherent risks*detection risks*Control risks

AR=IR*DR*CR

As per the above equations, it has been said that if the risks percentage values can be analyzed for both control as well as inherent risks then for particular level of satisfactory risks, a stipulated level of the audit risks is to be established.   

Revenue from Other Sources

An analysis of the extra ordinary increase in the income from other sources indicate  a high inflow from the profit arising through the sale of assets, The sale of assets have always been a matter of high attention for the auditor since often assets are often replaced by the company official to gain from the transactions taking place. Revenue from profit arising from sale of asset therefore involves high inherent risk over other risks.

An increase in long term provision of noncurrent nature has taken place due to provision for employment benefits. The organization should provide necessary internal controls to determine that the employee benefits are passed to the recipient and hence leads to rise of control risk.

The increase of around 38% in reserve has been caused by the increase in foreign translation reserve. Difference in amount which occurs when the financial statements are converted from functional to presentational currency at the current foreign exchange rate is transferred to foreign translation reserve account. There is high inherent risk and auditor should judge whether proper rules are followed in the translation process.

This segment of account has seen high outflow because of purchase of plants and machinery and payment to suppliers. Cash and cash equivalent is subject to high inherent risk where in the auditor should keep a check on the transaction regarding the formalities followed in case of purchases and payments to suppliers.

Other Liabilities have arisen this year due to amount relating to a contract. Control risk remains high here where appropriate internal control needs to be exercised to see if the work for which payment is due has actually taken place or not. Inherent Risk in terms of contract refers to the various transactions which have taken place in the execution of the contract.

Conclusion 

As per the above analysis and findings it has been concluded that an auditor require to perform its operation independently and ethically, maintain effective customer relationship as well as management problems does not interface an auditor engagement. From the analysis and findings it has been seen that auditor requires considering distinguish factors such as client management, staffing, time schedule and auditing location in audit engagement.  From the findings it has been seen that the main roles and reponsiblteis of an auditor to document plan and procedures in most effective and successful manner.

References

Ainapure, V., & Ainapure, M. (2009). Auditing and assurance. PHI Learning Pvt. Ltd..

Arens, A. A., Best, P., Shailer, G., Fiedler, B., Elder, R. J., & Beasley, M. (2007). Auditing and assurance services in Australia: an integrated approach. Pearson Education Australia.

auasb. (2017). auasb. [online] Available at: https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_300.pdf [Accessed 28 Apr. 2017].

CPA (2017). Overview of audits and reviews of financial statements. [online] CPA Australia. Available at: https://www.cpaaustralia.com.au/documents/seam-audits-reviews-financial-statements.pdf [Accessed 27 Apr. 2017].

Bansal, S. (2012). Auditing and Assurance. 10th ed. New Delhi: Bestword Publishers.

Basu, S. K. (2016). Auditing & Assurance. Pearson Education India.

Gay, G.E. & Simnett, R., (2000). Auditing and assurance services in Australia. Sydney: Mcgraw-hill.

Power, M. (2013). The audit society. 1st ed. Oxford: Oxford University Press.

reecegroup. (2017). reecegroup. [online] Available at: https://www.reecegroup.com.au/assets/Uploads/Half-Year-Results-Ending-December-2016.pdf [Accessed 28 Apr. 2017].

Stuart, I. (2012). Auditing and assurance services: an applied approach. New York, NY: McGraw-Hill/Irwin.

William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic approach. McGraw-Hill Education.