ACCTING3502 Auditing

Question 1

The auditor’s liability mainly intends to represent legal liabilities that is being assumed when an auditor is performing professional duties. In simple terms it could be stated that an auditor is being liable for client accounting misstatements in the financial statements. it should be noted that there is always risk of fraud as well as material misstatements in financial statements. by critically anlayzing given case study it could be stated that Docile and Co is being liable as auditor has not physically verified the stock and not even visited warehouse. The Docile and Co is liable to its client mainly due to breach of contract that stated that auditor has not obtain sufficient appropriate audit evidences that lead to material misstatements. In this case it could be stated that Docile and Co is liability is subjected to civil offence as in this case shareholders of Beta tools could seek remedy for breach of contractual obligations. In simple terms it could be argued that shareholders of Beta tools could seek remedy from auditor as they fail to comply with terms of audit engagement. It is prime responsibility of an auditor to physically verify assets of client as well gather reliable and relevant audit evidences that will help auditor to efficiently value assets that will reflect true and fair view of assets of organization. even as per law of tort an auditor could be sued for negligence if they breach a duty of care towards a third party who intend to suffer some form of loss.

Question 2

It is an evident fact that an audit partner or an auditor is required to takes into account various factors such as ethical factors, legal factors, as well as various other considerations before accepting an audit engagement offer. It should be noted that audit process intends to requires collection of sufficient appropriate audit evidences that will help audit partner to issue an appropriate as well as reliable audit report and audit opinion. As auditor’s report intend to be used by various users such as shareholders as well as other stakeholders of business entity for their decision making process, thus, it is extremely essential that before accepting auditing engagement offer, an auditor should consider various factors that are associated with business internal and external environment. By critically analyzing given case study, it could be stated that Docile and Co should not accept DMC as its client. Even though it is analyzed that there is not such direct evidences that DMC is engaged in some unethical or illegal activities but there is rumours in market that Mr Diffident intend to run a business in some other state and that even failed. Thus, it is advisable that Mr Docile should not accept DMC as its client as audit risk might be too high that could automatically lead to arise of material misstatements in financial report of organization. as from given case study it is examined that Docile and Co could not analyzed exact reason of failure of company that Mr Diffident was running thus, it will be correct to state that there might be high risk if audit engagement offer is accepted and even, Docile and Co will require to formulate more detailed testing regarding implementing an appropriate and robust audit plan for DMC.  

Question 3

Audit engagement letter mainly intend to a document as well as intend to confirms the auditor’s acceptance of the appointment, the objective the scope of audit, the extent of auditor’s responsibilities to client as well as form of any reports. The key headings of the engagement letter are stated below:

The objectives of engagement letter that will includes extent of auditor’s responsibilities as well as intend to minimize possibility of any type of misunderstanding between client and audit partner. The engagement letter should clearly explain statutory as well as professional duties and reporting responsibility of an auditor.

The management responsibilities should point out management statutory responsibilities for maintaining proper accounting financial statements.

Scope of audit should be clearly mentioned that will takes into account auditing standards mainly in regard to relevant international statements of auditing.

Management representation takes into account written representation from management mainly in respect of matters having effect on financial statements.

Irregularities and fraud will state that main purpose of audit is not to discover frauds or defalcations but it is responsibility of management to detect frauds and irregularities arising within organization.

The engagement letter should highlight various other services and even fee’s structure should be clearly mentioned in the engagement letter.

Lastly client’s confirmation should be presented that will reflect requesting management of company that they confirm terms of engagement letter.  

Question 4

By critically analyzing given ratios, it could be stated that current ratio of client is stable that is one, however, industry average ratio is more as compared to DMC current ratio, thus, it is advisable that auditor should try to analyze more about current assets and current liabilities of organization that will help to gain clear and better understanding about liquidity position of DMC in prevailing business industry. However, from given ratios, it is examined that quick ratio of company is low as compared to industry ratio. Even it could be stated that quick ratio of DMC id less than one, thus, it could be stated that company is not having sufficient quick assets that could be used to set off its current short-term obligations. Thus, auditor should try to focus on current assets of company and should gain clear explanation from management of company regarding decline in quick ratio. Even auditor should try to analyze appropriate reason why gross margin of company is less than as compared to its respective industry.

Question 5

Memorandum

The auditor is required to conduct audit opinion based on reliable as well as appropriate auditing standards as well as policies. The auditor is required to adopt generally accepted auditing standards that intend to takes into account set of principles that auditor follows while reviewing financial records of business. adopting GAAPS will help auditor to make sure that accuracy, consistency, as well as verifiability of an auditor actions as well as reports. The audit risk model is a tool that is used by auditors to understand the relationship between various risk that includes inherent risk, control risks, and detection risk that intend to arise from audit engagement enabling auditors to manage overall audit risks. In simple terms it could be stated that audit risk model intends to suggest that overall audit risks of an audit engagement is the product of following three components risks. AR= f (IR x CR x DR))   

Question 6

Mr Docile decision of conducting audit of a company who has been in questions for not efficiently managing the warehouses can be accepted when Docile and co. conduct adequate pre-engagement investigation about the client company so that the audit firm can confirm that there are no threat to the independence of auditor and auditor can use his reasonable assurance before accepting such engagement.

In addition to this, Docile and co. has appointed me as audit manager and wanted internal control to be done by me. Internal control processes are required to be done for assessing the audit risk.

There is high inherent risk which suggests that there are events and processes of the business which causes error and the errors are not due to internal control. These risk can be ascertained by adequate enquiries with the management and knowing more about the company. As per audit risk model,

Inherent risk +control risk +detection risk = audit risk

Question 7

As from given case study it is examined that DMC company has provided a manual report of internal control of organization and Docile and Co has decided to use such internal control reports for carrying out audit procedures. However, it could be stated that this strategy is suitable but auditor should try to gather more reliable audit evidences both from internal as well as external business environment associated with DMC business. relying on internal control manual of company is a reliable strategy but to provide appropriate audit opinion and report, an auditor should gain as much as possible audit evidences that will help users of auditor’s report to gain true and fair view of company’s financial health and position.

Question 8

There are different assertions which are analysed for analysing the risk to the balances of ledger or accounting records. The management assertions are checked for their validity in terms of their application to different assets and liabilities. If the assets and liabilities are not properly recorded following adequate principles and accounting judgements, there are risk of material misstatements in the records. The assertions in relation to completeness of records or entries, accuracy of the figures, occurrences of events relating to the assets and liabilities, presentation and reporting of different items relating to assets and liabilities are some of the assertions which are needed to be reviewed with the management assertions. If assertions in relations to assets and liabilities are identified at risk, then adequate internal control test and proper audit investigation process will be conducted to find out the actual risk relating to audit.

Question 9

Further testing is required in the warehouse but this time, investigation must be conducted without informing the staffs and Mr. Diffident. In the provided case, when auditor visits the warehouse to inspect those high value containers, the staff told that keys are with Mr Diffident and this create suspicion that there are some aspects relating to the such containers which needs to be investigated as the excuses or reasons by staffs provided much time to the Mr Diffident to manipulate audit evidences and inventories contained in the containers. Uninformed audit inspection process must be conducted so that appropriate sufficient audit evidences can be collected. The auditor cannot stop audit process or audit investigation until he achieves adequate reasonable assurances.

Question 10

The process of physical inventory cunt must be done. Random sample methods for selecting the containers must be used for conducting audit procedures. The physical count of inventory can provide assurance about the accuracy of the inventory records. The inventory count must be reconciled with the ledger accounts for collecting audit evidences concerning the inventory valuation.  The high value items which are contained in the locked containers must be examined for the quality as well as quality as they are material to the business process. If there are items which are not of high value or are mixed with such lots, there can be fraud concerning the quality of inventory. Proper enquiries and investigation with the existing staff needs to be conducted to ascertain whether company is engaged in selling other products or inventories illegally which it does not want to show and therefore it the high valued inventory containers are locked. Proper enquiries and sudden visits at the warehouse can be very helpful in obtaining audit evidences for further audit process and for assessing whether there are any material risk of misstatements in the inventory records or material misrepresentation conducted by the warehouse operations.

Question 11

In the provided case, on 20^th July, one of DMC’s containers is stolen which was already in suspicion in the above case scenarios. The management of DMC has the responsibility to investigate the matter. They must check whether they have taken proper insurance of the inventory. Background checks needs to be done by the management that why the inventory theft has occurred. Proper explanations must be provided by the management to the auditor and the management must support the auditor to collect proper evidences which are sufficient to detect any risk of material fraud within the company. The management has the responsibility to prepare the financial statement and maintain the financial reporting true and faithful to the users of accounts. Therefore, in the provided case study, it can be said that the management has the responsibility to support the audit investigation process and auditor in investigating the inventory theft. They can also expect a modified report if sufficient audit evidences are not collected by auditors and they fail to support adequately the audit process.

Question 12

Introductory paragraph

We have audited the company DMC, and financial statements of the company for the year ended 30 July 201x.

Scope paragraph

We conducted the audit in accordance with the applicable accounting and auditing standards. Proper planning of audit process has been done to achieve reasonable assurances.

Opinion paragraph

In our opinion, there are identified limitations to the audit evidences as adequate support could not be achieved. The inventory control processes are weak and audit evidences shows that there are risk of material misstatements in the inventory which needs further investigation. Therefore, our opinion is modified in relation to the quality of financial statements.

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