PACC6002 Auditing and Assurance Services - Free Samples to Students
2. For EACH of the two asset accounts identified above:
a. Provide a brief explanation as to why the asset account is at risk;
b. List the key assertion (as per ASA315) where the audit effort should be concentrated; and
c. Describe one substantive test of detail you would perform to gather sufficient appropriate evidence in relation to the assertion identified in b. above.
3. Identify one Statement of Comprehensive Income (Income Statement) expense account at risk, which is unrelated to the asset accounts identified in 1 above. Provide a brief explanation of why it is at risk and list the key assertion.
Answer:
Introduction
A company that operates in a society and is publicly traded is required to get its accounts scrutinised periodically from time to time as required by the owners. For this purpose, an auditor is appointed by the owners, i.e. shareholders, to audit and report on the working of the company and tells about the true and fair state of affairs of financial position and financial performance. Auditing is the process of independent examination and evaluation of books of accounts, vouchers, entity’s control environment etc by an unbiased person with a view to give an opinion over its truthfulness and fairness. In the ongoing report, the company chosen is Woolworths Group. The company is a retail business giant and carries on business throughout Australia and New Zealand. Their mission is to deliver the best experience and quality to its customers. They have served successful business partners to thousands of manufacturers and farmers.
ASA 315: Understanding The Entity And Its Environment And Assessing The Risk Of Material Misstatement
As per this auditing standard the auditor, before commencing any audit, is required to und
erstand the entity’s internal environment, which enables him to asses the level of risk of material misstatement existent in entity (Woolworths Group Limited 2018). The main responsibilities of the auditor apart from assessing the environment includes, discussing with engagement team the susceptibility of material misstatement in entity’s financial reports, understanding entity’s internal control components, identifying areas where substantive procedures alone won’t be sufficient, communicating with those charged with governance the observed weaknesses in internal control and outlining the documentation requirements (Vîls?noiua, and Buzenche (Matei), 2014).
Key assertions are another name given to audit assertions. These are basically the implied or unambiguous claims and depictions that are being made by the management, who are in case of every entity responsible for preparation and presentation of financial statements. Through these claims, management tries to convince readers with the appropriateness of different financial transactions, assets, liabilities and equity balances. The assertions can be regarding presentations and disclosures also (Woolworths Group 2016).
Substantive test of detail: the case of applying substantive procedure arises when the auditor doubts the internal control environment of an entity. These are done in order to eliminate the risk that auditor suspects about certain assets or transactions or other areas. They may involve analytical procedures and test of details. Analytical procedures involve forming relationships and comparisons among different kind of financial and/or non-financial information of the same and/or different entities. Whereas, the test of details includes performing tasks full of efforts to gather audit evidence like, observation, reperformance, inspection, external confirmations (The Institute of Chartered Accountants in England and Wales 2013).
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1. Asset Account |
2(a). Explanation of why the account is at risk |
2(b). Key Assertion |
2(c). Substantive test of detail |
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1. INVENTORIES: AUD 4080.4 million |
The inventory is said to be valued at lower of cost and net realisable value. There is a risk as to whether the same process had been followed or not. There are chances that the value of inventory may not match with the physical count of inventory. There may lie overvaluation or undervaluation. There may be risk related to the control environment of entity, i.e. theft or stealing of inventory may have taken place and there is no awareness in the entity’s control environment regarding that. Risk may be associated with the accounts related to inventory. The inventory subledgers might not match with general ledgers (Woolworths Limited 2015). |
VALUATION: This key assertion deals with the value of assets, liabilities and equity balances. By value, it refers to the appropriateness of the valuation done. E.g. in this case the inventory is valued at cost, being lower of cost and net realisable value. This valuation is as per the Australian accounting standard AASB 102, “INVENTORIES”. |
OBSERVATION: this tool involves, direct approach of an auditor, wherein he himself witnesses the physical count of inventory being made. Therein he perceives the kind of documentation done by the concern’s employees of the count made by them and matches it with the records maintained by the entity in its books of account. By this he is able to sustain the inventory ledgers also. Other technique could be inspection, i.e. vouching and verifying the bills of purchase and supply of inventory. The inward and outward bills can be vouched. Their posting into ledgers could also be verified. |
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2. PROPERTY, PLANT AND EQUIPMENT: AUD 8,437.5 million |
There is a risk that the assets that have been recorded in the statement of financial position do not even exist with the entity (Kristensen, 2015). Chances of charging wrong depreciation amount are high. Even all the assets that are possessed by the entity might not have been reflected in the books of accounts. Some assets might have been recorded in the books, whose rights are not lying with the company. The valuation done by Woolworths may be done wrongly. There are high risks of undervaluation and overvaluation. |
EXISTENCE: the key point lies in checking whether the assets which have been shown by the entity in this statement of financial position are in the possession of entity as at period end. This amounts for looking for the existence of physical property of the assets (Woolworths Limited 2015). |
PHYSICAL VERIFICATION AND INSPECTION: to eliminate the risk of the assets being non-existent on the period end, the auditor must resort to physical verification of property, plant and equipment. Under this, the auditor needs to physically examine the property present in the company’s premises to verify whether they are the same as mentioned in the records of the company. Questions should be asked regarding any discrepancies noticed and same should be documented for future references (Woolworths Limited 2015). The auditor must call for written confirmations from external parties to confirm the assets kept as a security, if that is so the case. |
This above table reflects that company has been facing high in its business which could be measured by using the Assertion test (Khorwatt, 2015).
The ultimate and most superior motive of any business concern is to make profit. However, profit making involves earning of income and deducting expenses out of the earnings. This makes the expense accounts a high risk generating area. This is so because window dressing profits is a common practice nowadays and that can happen both ways, either by altering incomes high and expenses low or by altering incomes low and expenses high. It all depends on what the organisation wants to picturize.
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1.ADMINISTRATION EXPENSES: AUD 3175.7 million |
Being a major expense area, this account is exposed to various risks. It might happen that this transaction is recorded with an intention of fraud and the expense recorded is not even related to the entity. Some vague cash theft is recorded with the name of administration expense (Hay, Stewart, and Redmayne, 2017). In order to minimise the profits with a view to eliminate taxes, there are chances of not recording all the payments done for administration expenses. A few transactions might have been eliminated. Some human error is also bound to have taken place, as its impossible to protect. High possibilities exist of recording inaccurate amounts, i.e. the transactions might have been recorded completely, but the amount might not be accurate (Deloitte, 2018). There might exist the case of overlapping financial years and due to which some transactions relating to administration expense might have been exposed to the risk of being recognised in a period other than the accounting period of its accrual (Auditing and Assurance Standards Board 2015). |
COMPLETENESS: This expense accounts in value a figure that nearly matches with the inventory held by Woolworths. The management might have made a claim regarding the completeness of this transaction. But its necessary to ensure that whether are the transaction that involve expenditure on account of administration expense have been properly accounted for in the books of accounts of Woolworths and the tax effect have also been considered for the same (Grant Thornton 2017). One thing that is required to be kept in mind is keeping the awareness while checking for this claim that the transaction recorded does relate to Woolworths only and is a valid transaction. There is no forgery in same (Financial Times 2017). |
References
Auditing and Assurance Standards Board 2015. Auditing Standard ASA 570 Going Concern [ONLINE] retrieved from https://www.auasb.gov.au/admin/file/content102/c3/ASA_570_2015.pdf [
Deloitte 2018. Deloitte Touche Tohmatsu LLC [ONLINE] retrieved from https://www2.deloitte.com/jp/en/pages/about-deloitte/articles/audit/audit.html
Financial Times 2017. Equities [ONLINE] retrieved from https://markets.ft.com/data/equities/tearsheet/forecasts?s=WOW:ASX
Grant Thornton 2017. IFRS Viewpoint. [ONLINE] retrieved from https://www.grantthornton.global/globalassets/1.-member-firms/global/insights/article-pdfs/2017/IFRS-Viewpoint-7-going-concern.pdf
Hay, D. Stewart, J. and Redmayne, N, B. (2017). The Role of Auditing in Corporate Governance in Australia and New Zealand: A Research Synthesis. Australian Accounting Review. 27(4).
Khorwatt, E., (2015) .Assessment of Business Risk and Control Risk in the Libyan Context. Open Journal of Accounting.4.
Kristensen, R. H. (2015). Judgment in an auditor’s materiality assessments. Danish Journal of Management & Business. 2.
The Institute of Chartered Accountants in England and Wales 2013. Audit and Assurance Advanced Stage Technical Integration Level. [ONLINE] Available from https://www.icaew.com/~/media/corporate/files/qualifications%20and%20programmes/learning%20partners/learning%20materials/ti%20audit%20assurance%2020142015%20inspection%20copy.ashx
Vîls?noiua, & Buzenche (Matei),S. (2014). Determining Audit Materiality in the banking industry- a knowledge based approach. Procedia Economics and Finance.15.
Woolworths Group (2016). Financial Report 2016. [ONLINE] Available from https://wow2016ar.qreports.com.au/xresources/pdf/wow16ar-financial-report.pdf /
Woolworths Group Limited 2018 Portfolio Businesses [ONLINE] Available from https://www.woolworthsgroup.com.au/page/about-us/our-brands/portfolio-businesses/ [Accessed 22nd May, 2018].
Woolworths Limited (2015). Annual Report 2015. [ONLINE] retrieved from https://www.woolworthsgroup.com.au/icms_docs/182381_Annual_Report_2015.pdf
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