Audit Risk and Substantive Audit Procedures - Essay Example

Audit Risk Contents Audit Risk Contents 2 0 Audit Risk Audit Risk refers to the risk that an auditor may express an unqualified opinion on the financial statements that does not reflect the actual value of the financial statements provided in relation to the financial position of the organization under audit. In this case, an auditor may issue an opinion that is not correct about the financial statements of a company. For the case of the financial statements provided, an audit risk may be experienced in a situation where an auditor decides to give an opinion that is qualified instead of an unqualified opinion. This usually come due to the independence of the auditor being compromised by the management of the organization and other factors. Similarly, giving unqualified opinion where qualified opinion is recommended and justified is also a risk in auditing. , moreover, an auditor may deliberately fail to cite a material matter in the financial statement that may have a substantial influence on the overall financial position of the company (Rittenberg,n Johnstone & Gramling, 2012). Any limitation on the scope of an audit ,may also pose an audit risk thus forcing an auditor to give an opinion to that are not reasonable to financial statements the overall audit risk in an auditing exercise involves three categories, the inherent risk, the detection risk and the control risks. To some extent, an audit risk is considered as a product of all factors that may hinder the normal delivery of a professional audit opinion. A measure must be taken to keep audit risk at a low level for a professional audit opinion to be reached. This will only be achieved by assessing the level of audit risk l\related to each audit (Puncel & Luis, 2007). Three Areas of Heightened Audit Risk Relating To the Audit of the Company 1.1 Revenue The three risk area include the risk of inherent material misstatement in the final financial statements. This risk associated with revenue arises as a result of omission and errors in the financial statement. As well, the omission and error are regarded as out of control of the auditor or the person involved in preparing the financial statement. This area is riskier in an audit exercise since the more the degree of estimation and judgment, the most complicated calculation of transactions become thus resulting in wrong calculations. The financial statements of this company, for instance, will experience risk associated with revenue due to the new ventures and nature of business it is operating in as compared to an older company that has already been established. For instance, the company should report the exact revenue as 89590 for the year 2013 and 93462 for the year 2012 since this bear material nature to the company representing -3.10% of the company’s performance (Whittington & Delaney, 2012). 1.2 Cost of Goods Sold. The next risk associated with this company during the audit is the risk associated with the cost of goods sold. The cost of goods sold for Havelock Europa PLC company stand at 78406 for the year 2013 and 82112 for the year 2012. This show a -4.33 material nature to the company. The company must thus take care since this is a risky audit spot that if nit thoroughly audited may be misstated in the financial statement, thus resulting into a wrong opinion being given. This risk may be caused by failure of the management to initiate proper controls into the company. Lack of adequate internal control in this company has posed the risk of control procedure raising a significant threat to the overall audit process in the company. Moreover, this company lacks adequate internal controls and thus it is impossible for the organization to discover any potential fraud or malpractice by the staff and management. In addition, its small size will mean that the company does not delegate duties to its employs properly thus the probability of the unqualified staff preparing the financial statements is very high (Einolf & Menghini, 1999) 1.3 Administration Expenses. The final aspect of audit risk is the element of risk associated with administration expense in the financial statements of the company. These risk may prevent the auditor from identifying the material misstatement in and financial statement. However, it is the sole responsibility of an auditor to detect any misstatement in the financial statements of this company that has a material nature. This mean that failure to do this due to this due to the omission of audit procedure or misapplication of the professions auditing standard will lead a high risk in auditing. This will lead to the auditor being limited to the kind of material misstatement that he may detect during the auditing process. In case of such a company like the one given, them the limited number of audit sample may contribute towards increased risk of detection in the auditing. Havelock Europa PLC company has registered 10,665 in terms of administration expense for the year 2013 and 10,107 for the year 2012. This show a -0.42 % material significance and thus must be proper recorded and looked at by the auditors in the prices of auditing. (Sadler, Hamel, Staden & Smit, 1998). 2.0 Five Substantive Audit Procedures The audit procedure is another precarious area that require a lot of increased care and measure when conducting an audit risk. This area is a heightened audit area because the procedures followed if not well planned will lead to an improper audit being conducted. The result of an audit exercise depends on a well-planned and coordinated procedure to ensure that all aspects of the audit objective are taken into consideration. In addition, if wrong procedures are followed, then the audit exercise will end up with a wrong audit opinion. There exists several pieces of evidence achievable only with proper planning and conduct of an audit. Ascertaining the materiality of amateur and 0othere relevant documents needed for a successful audit activity all depend on a carefully planned and managed audit procedure. Havelock Europa PLC will apply substantive audit procedures that try to prevent the risk of misstating revenue, cost of goods sold and the administrative expenses. (Dauber, 2009). 2.1 Occurrence The first substantive procedure to be used in preventing the audit risk is ensuring that all transaction relevant to the revenue, cost of goods sold and the administrative expenses of the companys financial statements are included in the financial reports. In this regard, the auditor must ascertain that the financial statements show record that occurred and not fixing entries. For the case of receivables, the financial statements must show that the records occurred and were accurately recorded. For payables, there must be evidenced to prove that such payable occurred. It is also important to ascertain the occurrence of the movement of assets and liabilities in the company as they progress in the company (Jones, 1999). 2.2 Completeness Completeness is a substantive procedure that helps an auditor ascertain that the financial records as they appear in the financial statements are complex and free of any error. This mean that a there should be no omission in either recording or fraud in the process of recording the auditor must ascertain that all the transaction that occurred during the trading period are completely recorded without omitting any that may be of material nature tit e financial position of the company. This way, the auditor should apply this substantive procedures that prevents any material misstatement of complete record relating to revenue, cost of goods sold and the administrative expenses of the company. 2.3 Accuracy Accuracy is the key aim of conducting an audit. Usually, an auditor expresses an opinion on whether the financial statement provided by the managements are accurate and present the exact nature of the company. Therefore, it is important to conduct a substantive procedure to ensure that all the record in the financial statement of the company is recorded accurately, and no fraud is committed in the process of recording such financial statements. In this case, the auditor will look at the accuracy with which the revenue, cost of goods sold and the administrative expenses of the company are recorded in the financial statements. (Pickett, 2006). 2.4 Cut-off The cut-off records should be able to list the last GRN/last despatch, the movement of all receipts and invoices, a list of checks received and signed out. Moreover, it is good to ascertain the payables and receivables with correct dates. In this company. It will be important to ascertain that all payables and receivable are correctly included and classified appropriately. Moreover, the period of entry must also be recorded properly for receivables, it will be important to ascertain that proper classification of all payable are recorded according to the period they are incurred. The payroll of this company should contain records that are correctly and accurately recorded and classified. The substantive procedure should be able to apply completeness tests, accuracy test, occurrence test and cut-off tests this means that proper sample must be obtained to ascertain authorization and proper calculation of time, commission, bonuses and others facts relevant to the payroll. In addition, it is important to determine proper classification and complete recording of all the transactions. All deduction. Arithmetic and net pay must be correctly entered. The receivables must be casted, control accounts checked and visible items and omissions reviewed to ascertain accuracy and cut-offs. Similarly, the auditor will focus on ensuring that all invoices, receipts and, movements relating to the revenue, cost of goods sold and the administrative expenses of the company are properly documented according to the dates of their occurrences. (Kagermann, 2008). 2.5 Classification The last substantive procedure to be conducted by an auditor in case of preventing audit risk is to ensure that all the financial record are correctly classified to avoid double recording or omission in times of recording. In addition, it is important to ensure that the transaction are properly conducted, and proper measure put in place to ascertain the exact mechanism of realizing any audit risk in the financial statements. In order to reduce the audit risk listed above, it will be proper to employ audit procedures that aim at ensuring all loophole in the audit process are sealed and no room is left for any audit risk to occur (Gray, 2007). To begin with, the audit procedures to be employed in auditing the company’s revenue, cost of goods sold and the administrative expenses as stated in the financial statements are complete. This man that the auditor will keenly look at the revenue, cost of goods sold and the administrative expenses of the company and ascertain their completeness and observance of all the accounting standards. Moreover, it important to ascertain that the administration expenses were rightfully paid to those who were owed by the company. During the auditing process, it is essential that the auditor checks the list of payables in the control accounts, it is also important to cast the list of the payables and conduct a review of any omission that might exist in the administrative expenses.(Jones, 1999) Bibliography Jones, P. C. (1999). Statistical sampling and risk analysis in auditing. Hampshire, Gower. Gray, I. (2007). The audit process: principles, practice and cases. London, Thomson Learning Kagermann, H. (2008). Internal audit handbook management with the SAP-Audit Roadmap. Berlin, Springer. http://public.eblib.com/choice/publicfullrecord.aspx?p=372077. Pickett, K. H. S. (2006). Audit Planning a Risk-Based Approach. Hoboken, John Wiley & Sons. http://www.123library.org/book_details/?id=5953 Puncel, Luis. (2007). Audit Procedures 2008. Cch Inc. Rittenberg, L. E., Johnstone, K. M., & Gramling, A. A. (2012). Auditing: a business risk approach. [Melbourne, Vic.], South-Western Cengage Learning. Whittington, R., & Delaney, P. R. (2012). Wiley CPA exam review 2012. Hoboken, N.J., John Wiley & Sons. Sadler, E., Hamel, A., Staden, M. V., & Smit, R. (1998). Auditing: a final approach. Kenwyn, Juta. Gupta, K. (2005). Contemporary auditing. New Delhi, Tata McGraw-Hill. Rittenberg, L. E., Johnstone, K. M., & Gramling, A. A. (2012). Auditing: a business risk approach. [Melbourne, Vic.], South-Western Cengage Learning. Whittington, R., & Delaney, P. R. (2012). Wiley CPA exam review 2012. Hoboken, N.J., John Wiley & Sons. Jones, P. C. (1999). Statistical sampling and risk analysis in auditing. Hampshire, Gower Einolf, D. M., & Menghini, L. K. (1999). Process safety management, risk management planning auditing handbook: a checklist approach. Washington, Government Institutes. Dauber, N. A. (2009). The complete guide to auditing standards, and other professional standards for accountants, 2009. Somerset, N.J., Wiley. Appendix : financial statements ROCE = Capital Employed / Gross Profit = 78,406/15,000 5.2227 =82112/14580 5.6318 Revenue 89590/ 92462 showing apercentage chage of -3.1% Read More