Audit Risk and Materiality Guidelines †Free Samples to Samples

Question: Discuss about the Audit Risk and Materiality Guidelines. Answer: Introduction: The Auditing standard ASA 520 has provided the guidelines in relation to analytical procedure and the way it can be implied to business (Sanderson, 2014). The standard deal with the auditor use of the analytical procedure and the way it is applied at the year end to draw anoverall conclusion over the financial report. The auditor before applying the process need to determine the suitability of the procedure taking into account the risk of the material misstatement and check the detail for this assertion. The auditor also needs to take into account the source, nature, therelevance of the information and control over the preparation at the time of using ratio (Jans, et. al., 2014). The auditor at the time of audit planning needs to determine the area which is to be examined in detail. The auditor needs to comply with the guidelines provided in ASA 200 at the time of identifying the risk in relation to the audit of the DIPL. The inherent risk occurs due to amaterial misstatement in the financial statement which may be due to error or omission and thereason behind the same is other than the internal control system (Clikeman Diaz, 2014). The inherent risk is said to be high when there is thepossibility of misstatement in the financial statement and occur due to complexity in recording the transaction. The auditor at the time of reporting should focus on error free and inherent free risk reporting at the time of reporting to make anaccurate decision. Inherent risk Reasons for inherent risk Impact on material misstatement 1. Inventory The DIPL acquire resources from two different Australia and Asian countries which create complexity at the time recording the transaction and may lead to misstatement due to thedifference in theexchange rate over the period of time. Also, the company for the purpose of stock taking closes its books of accounts on 27th June which may lead to many of the time unrecorded thus leading to theinappropriate recording of the inventory. The material misstatement may lead to thewrong valuation of the inventory as the company may failto track the inventory which in transit which may lead to undervaluation and overvaluation of the inventory thus affecting the reporting of the financial statement (HematfarHemmati, 2013). 2. E-book revenue The other area where there is the possibility of inherent risk is in recognizing the revenue from E-book. There may be thepossibility of inherent risk as the storage fees are recognized in the month when fees are invoiced instead of the fact that the fee is charged 12 months in advance (Yoon, et. al., 2015). The misstatement in the E-book revenue will lead to improper allocation of the fee over the period as the company recognizes the fee during the period when payment is made to the publisher. The auditor needs to work over the audit risk before starting the audit process to report the true and fair position of the financial statement of the entity. Fraud risk Identification of fraud risk Audit impact 1. Cash receipt There is arisk in the receipt of the payment from mails as the cashier record the transaction in the inward remittance register and then reports the transaction to the Gay Chan for posting in account receivable register. The Judy bones also record the receipt from the online banking and then reconcile the account receivable for the amount banked for the day (Zamboni Litschig, 2013). There may be apossibility that the Judy Bones may commit fraud as she has complete control over the bank transaction. The auditor needs to make effort to obtain sufficient evidence and examine the internal control over the cash receipt. As the receipt of the cash is the most probable area where fraud can occur. 2. New IT system The company has also invested in new IT system which will computerize the current accounting process. There may be thepossibility of the error as the employee was unaware of the new system and the excess pressure was implemented over the staff to install the new system. Due to the change in the accounting system, the transaction was not reported to the proper period which may create impact over the reporting over the true and fair position of the financial statement. The auditor needs to examine the new IT system and the transaction which occurred during the period as there may be thepossibility of fraud (Baldauf, et. al., 2015). References Baldauf, J., Steller, M., Steckel, R. (2015). The Influence of Audit Risk and Materiality Guidelines on Auditors Planning Materiality Assessment. Accounting and Finance Research, 4(4), 97. Clikeman, P. M., Diaz, J. (2014). ABC Electronics: An Instructional Case Illustrating Auditors' Use of Preliminary Analytical Procedures. Current Issues in Auditing, 8(1), I1-I10. Hematfar, M., Hemmati, M. (2013). A Comparison of Risk-Based and Traditional Auditing and their Effect on the Quality of Audit Reports. Jans, M., Alles, M. G., Vasarhelyi, M. A. (2014). A field study on the use of process mining of event logs as an analytical procedure in auditing. The Accounting Review, 89(5), 1751-1773. Sanderson, J. (2014). Audit issues. SMSF Guide: Current Issues and Strategies for the Self-Managed Superannuation Funds Adviser, 377. Yoon, K., Hoogduin, L., Zhang, L. (2015). Big data as complementary audit evidence. Accounting Horizons, 29(2), 431-438. Zamboni, Y., Litschig, S. (2013). Audit risk and rent extraction: Evidence from a randomized evaluation in Brazil. UniversitatPompeuFabra.