Question:
The case study on Double Ink Printers Ltd. (DIPL), and answer the following questions:
1: You are looking into whether an expert will be needed to audit Double Ink Printers Ltd (DIPL) as part of your planning.
Based on the background information in the case, determine if it is necessary to employ the services of an expert for the audit of DIPL.
2: The planning stage of the audit at Double Ink Printers Ltd (DIPL), for the year ending 30 June 2017, has been reached. You have been asked to assist in determining the materiality levels by the auditor manager.
Referring to the background information in the case, identify five factors which would influence your determination for the preliminary figure for overall materiality of the 2017 audit by DIPL.
b.
c. Explain how the factors mentioned in (a) will affect your estimate of overall materiality for the audit planning process.
Answer:
Introduction
Every company should audit its financial statements to ensure that they are accurate and free of any discrepancies.
Most companies have to audit, while some do it optionally. However, they need to prove that their company is transparent and accountable (Zadek Evans and Pruzan 2013, 2013).
The assignment contains two questions that deal with two important areas of auditing.
The first questions deals with ASA 620, which outlines when an audit can render expert services and when the auditor can consider the expert’s opinion creditable.
The second question concerns the materiality of a transaction. This is entirely up to the auditor’s discretion.
This assignment requires that a case study be given about DIPL Company, which is involved in publishing, printing, and advertising work.
Also included is the financial statement with figures for the last three years.
This assignment will analyze the role played by auditors in determining whether expert opinion is necessary. It will also identify five transactions that are important and explain why they are so.
Answer 1
Audit is the independent investigation of books of accounts by a person with the required qualifications to determine if they are true and fair (Bymes, et al.
An auditor is the person responsible for conducting an audit.
An auditor’s main responsibility is to verify that the financial statements are accurate and fair (Haupt & Ismer 2013, 2013).
A common misconception in many companies is that an auditor’s primary responsibility is to detect fraud.
An auditor always has a plan of how he will conduct each step of the audit.
In this case study, an audit will be performed on Double Ink Printers Ltd. (DIPL), for the year 2017.
DIPL is a printing company that produces books, magazines, and advertising materials for the publishing, educational, and advertising industries.
Audit procedures include the verification of assets or liabilities and vouching income and expenses.
The auditor is responsible for verifying or denying that all information has been recorded accurately and pertinently.
Auditors can review all requirements relating to accounting and auditing procedures.
The auditor cannot value certain areas, such as the valuation of fixed assets, which is what the question asks.
The auditor will need to get an expert’s opinion.
It is important to define expert. An expert is someone or an organization that has experience in an area other than accounting and auditing.
This ASA describes situations in which an auditor may call upon an expert to provide sufficient audit evidences.
The auditor in this case study is skeptical about the value of fixed assets. He also questions the financial records.
The auditor believes there could be an overestimation of fixed assets.
The stock value has increased significantly in comparison to 2016.
In 2016, it was $8394750, and by 2017, it had almost doubled to $15572062.
An auditor is not qualified to value fixed assets.
An auditor should call an expert to confirm or deny the valuation of fixed assets.
If the auditor needs the expert’s opinion, the nature, timing, and extent of the procedures will vary (Kuenkaikaew & Vasarhelyi 2013,).
The following are important considerations for auditors in such situations:
The nature of the subject to which expert’s works is related
There are risks of material misstatement when expert opinion is required.
How will the auditor’s report be affected by the import report?
If there were any, the auditors will have access to previous expert’s reports.
If the auditor requires that the experts follow the quality standards set forth by the auditor
An expert in the valuation and management of fixed assets will be appointed by DIPL’s auditor.
The auditor will assess the competence, abilities and objectivity of the expert to accomplish the auditor’s purposes.
An auditor will also ensure that the expert approaches the task independently by asking the expert questions and verifying that he isn’t connected to the company.
ASA 620 states that an auditor must be familiar with the specialist’s field to enable him to make informed decisions.
To establish the scope, nature and objectives of the expert’s work in order to audit the purpose.
To assess the quality of the expert’s work.
This evaluation will consist of:
The auditor will verify the relevance and reasonability of the expert’s findings and compare them with other audit evidence.
Auditors must verify that expert work does not use assumptions or methods.
The auditor must verify the accuracy, completeness, and relevance of source data if expert work involves the use of source data.
According to the case study and the arguments in ASA 620 the auditor should call an expert to value fixed assets and determine if the financial statements are accurate and truthful.
The expert will use his expertise to determine if the financial statements are accurate and fair. After that, the expert will present his report to the auditor.
If all conditions are met, the auditor has the right to accept or rely upon the expert’s report. Alternatively, the auditor can reject the report or rely upon other corroborative audit evidences to form an opinion.
ASA 620 states that the auditor does not have to attach the report of an expert in their auditor’s report unless that is a requirement by law.
Answer 2
The auditor must determine the materiality of audit information according to the case study.
First, it is important to understand the concept of materiality.
Materiality in audit refers to the importance of particular data in a financial record (Williams, Glover, and Prawitt 2016,).
It is determined by the auditor’s judgment as to whether the misstatement is material.
The relevance and impact of the financial information on the report and the user’s decisions will determine the auditor’s decision about the materiality.
According to professional standards, auditors or firms should establish a policy or set of criteria that will allow them to make a materiality judgment.
Auditors are required to establish materiality judgment for clients in similar business situations.
To make a preliminary judgment about materiality, auditors must follow three steps.
These steps are listed below:
An auditor must make a preliminary judgment by selecting a base multiplied with curtained percentage factors (Clikeman & Diaz 2014).
These results will serve as the basis for deciding whether materiality is important.
The auditor’s judgment will determine the factor percentage.
These factors can vary depending on the quality of the factors as well as on their relevance.
Next, the auditor will allocate the selected transactions and calculate the factor percentages based on which a judgment on materiality should be made.
The scope of the audit must be planned by the auditor for all remaining transactions.
Next, the auditor will estimate the misstatements and compare the totals in order to arrive at a preliminary judgment about materiality.
The auditor can conclude that financial records are fair if the likelihood of material misstatement in the future is low.
The auditor can conclude that financial statements do not portray a fair and accurate view if the material error is significant.
Because these factors are more stable, and change less from year to year, it is better to use total assets or total revenue as the base for determining materiality.
When the company isn’t earning profits, net income or any variants of it can cause problems.
The base year for the case study is 2016.
According to the auditor, the five factors that will influence the preliminary judgment on materiality are Cash, Account Receivables (CA), Inventories and Inventories as well as Property, Plants, and Equipment and Profit After Tax (PAT).
These sources are identified by the following reason:
Cash is essential for any company.
The case study shows that Judy Bones, the cashier, recorded many cheques through the inwards-remittance register. These are then recorded in the accounts receivable ledger.
Regular updates are made to Cash and Account receivable accounts.
A bank reconciliation statement is prepared at the end of each month. This indicates that the information recorded is reliable.
The cash value in 2017 was $347120, which is lower than the cash that was $517788 in 2017.
This shows that the cash is material in nature to the auditor.
Account receivables are the second most important consideration. (Eilifsen & Messier Jr 2014).
According to financial records, 2017’s amount is $5073309, compared with last year’s $4320000.
This indicator indicates that credit sales in the current year are higher than last year.
It is evident that the amount sold is much higher in monetary terms, so it is significant.
These transactions are possible to manipulate in the auditor’s mind.
Inventory: A business’s stock that is used to manufacture its final product.
The inventories are the stocks of inks and paper, as well as binding materials, in the current case study (Griffin 2014).
Every business auditor checks inventory and their purchases to ensure there are no discrepancies.
The figure in the financial statements is also significantly higher than the $4180500 last year.
This figure is significant in monetary terms, and therefore it is important.
Property, Plant, and Equipment: The auditor suspects that the fixed asset valuation and the amount of depreciation being charged are significant (Eilifsen & Messier Jr 2014).
The auditor must confirm that the depreciation method is correct.
As explained above, an expert’s opinion is needed to confirm the valuation criteria.
The auditor will confirm the expert’s opinion and then proceed to verification. This will allow the auditor to assess the accuracy of financial statements (Cao. Chychyla. Stewart 2015).
It can therefore be concluded that transactions of fixed assets are material.
It is also a significant part of Non Current assets so it is obvious that it is a substantial area.
Profit after Tax (PAT), is a key indicator for business growth.
A good PAT can indicate that the company is moving in the right direction, even if there are stakeholder.
It is also the percentage of profit that is divided and which is reinvested as retained income.
This is obvious and will be considered a material figure by auditors.
These factors can have a significant impact on the auditor’s report as well as stakeholder’s decisions.
Cash: This is the amount of cash that shows the company’s turnover cycle.
The cash flow statements are a part financial records that only shows cash outflows and inflows.
These statements can be used to determine if a business is operating properly.
These statements should be reviewed by an auditor to verify their accuracy.
Account Receivables: Credit accounts account for the majority of businesses. The maximum percentage of sales occurs in credit.
This factor can influence the auditor’s statement.
Inventory: An auditor will often consider a stock of business stocks.
It is important to keep a detailed record of all stocks, as well as losses and abnormal losses.
Fixed assets: A verification process must be performed on them and their accuracy must be verified.
This item is the most vulnerable to manipulation.
PAT: This refers to the final result of a business. Sometimes, profits are cooked to make the financial statements look better.
These figures require the auditor to be cautious.
Conclusion
Once the assignment is completed, the auditor may seek the assistance of an Expert to determine if the valuations are correct.
The auditor’s opinion on the material transactions is the second thing that is identified.
It also explains why these transactions are important and how they influence the auditor’s opinion.
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