Its experience in Beer manufacturing company audits is quite limited, but has some experience with drinks manufacturers which can be relevant. Apart from evaluating experience, there is a need to check all the factors, which are in essence the objectives of Auditing. The core objective of an Audit is to provide an independent opinion the financial report, to see whether there is no material misstatement and it is prepared in accordance with financial reporting framework.
Also, before accepting an audit contract, it is critically important to assess the client on ethical s well as legal considerations. The overall findings and on paper evidence suggests that the potential client in past has been good and barring few disagreements with the auditors; there were no major causes of concern. ABLE seems to embrace the independence of its auditors and has got a spate audit committee as well as internal monitoring committee. EX. had duty to assess the background and consult past auditors, their reason for discontinuation of audit.
When consulted past auditors, this doubt was also cleared and the reason for past auditors to leave was not related to auditor Independence. The control environment was also satisfactory, as the board of ABLE had appointed audit committee with 3 members. The board itself has 11 members, which might add on to the integrity and corporate governing standards of the company. Moreover there was also an internal auditing unit, which was directly reporting to the chairman. It is of utmost importance to check if any of the Audit Partners or their families has any shareholding in ABLE.
If yes, then it would be a case of clear conflict of interest and would influence the independence and integrity of audit recess. But in this case no partners in EX. or their families have holding in ABLE, a manager in EX. has disclosed holding in ABLE. EX. should ensure that he is not involved in servicing this client and complete confidentiality is maintained. The financial statements and the cash flow statements seems fair, there are few evidences of material misstatement which have been identified.
They should be worked upon to make sure there is maximum amount of transparency and no material misstatements. Looking at these points the client should be accepted, UT material misstatement should be worked upon soon with greater efficiency. PART B There are mainly 3 types of risks associated with accepting the audit, which are Audit Risk, Firm’s Business Risk, and Business Risk of Auditor. Business risk of Auditor The auditor has full knowledge about the financial condition of the company, which keeps the company in risk of going into liquidation.
A company will provide all the details about its activity to the auditors and thus auditors keep on changing (Audit Risk Model, 2013). Inherent Risk The company might sometimes have errors in the statements like errors in cording material stock in the past or just omissions while recording, which might risk the company and can be a major concern. This occurs when there are complicated transactions and where recording is done on intuition. Firms Business Risk The most important risk is organizational risk. That is the case where the board is adamant and rigid in applying standards that are required.
Control Risk Control Risk occurs when there is no supervision or control over the recording of statements, which exposes the company to higher risk of material misstatement. Detection risk The auditors might sometimes miss the misstatements in the financial reports and thus they go undetected. This risk is generally associated to mistake and is not done by the auditors on purpose. Analyzing and testing data further can minimize this risk to a great extent. (Vanderbilt et al 2008). Major transaction and accounts that warrant increase the audit effort.
In case of ABLE omission of average collection 10% in 2011 from 33. 56 to 40. 32. When average collection period increases it means that company is taking extra time in collection debts from debtors increased period. Considering the increase in average collection period the doubtful debts should have increased as if the information is not taken seriously it may lead to bad debts that affects the profits of the company. Though, the management confirmed that necessary steps have already been taken for fast debt recovery. Other threshold of materiality is qualitative in nature.
These include trends in profitability, misstatement that changes a loss into income, effect of statement on segment information, existence of statutory reporting requirements, implications of misstatement involving frauds possible legal acts, misclassification in operating and non-operating income. PART C Following guidelines have been used in assessing misstatement. 1. Obtaining an understanding of the company and its environment is extremely important. The material misstatement can be found via evidences on cash flow statements and financial statements.
Comparing them with market evidence and trend of past events like debt collection period and current market price of inventory. (Linked Corporation 2014) (Fraser 2011) According to us the company would be a viable option as per the information gathered from financial statements, ash flows and market factors. 2. Obtaining an understanding of internal control over financial reporting The process of internal control have to be followed in more depth and with greater efforts on the payable as well as sales side, the misstatement in accounts receivable and over statement of inventory are evident. . While taking into consideration the client evaluation and past engagement, Bulb’s relation was not always smooth. There were material level disagreements in past with the Auditors. Hence further investigation about this was needed. 4. Doing analytical procedures Having tested the financial figures that are provided, it is evident that the account payable days are lower for ABLE when compared to the industry average. This can possibly be a risk of internal control in present times.
Debt-equity ratio is also way less when compared o industry standard. Both the facts raise concern over possibility of a material misstatement in present. Considering the above facts we can identify there is a high risk of material misstatement. PART D Appropriate audit strategy auditor should take into account the reporting objectives of the engagement and the nature of communications required, he factors that are significant.
Knowledge of companies internal control over financial reporting, economic conditions, laws and regulations, technological changes, operational characteristics, capital structure preliminary judgments about materiality, preliminary judgments about effectiveness of internal control over financial reporting, control deficiencies previously communicated to audit committee, the relative complexity of companies operations help in determining the appropriate audit strategy. They play a vital role in deciding right audit strategy.
The two approaches for audit strategy are substantive- where there is high control risk and lower assessed level of control risk-where low control risk exists. When the control risk is deemed to be low more extensive undertaking and documentation of controls is performed. Whereas when the control risk is low more focus is on performing detailed substantive procedures on balances and transactions is considered and less extensive understanding and documentation of control is performed.
When the entity’s internal control system is not considered to be effective the preliminary assessment is determined to be gig and once it is high it is not necessary for further audit testing of controls. Since the ABLE Company’s internal controls are questionable auditor should determine the company’s control risk level and based on that assessment one can use both substantive procedures and test of control.
