Audit report III part: Apollo Shoes - Essay Example

The audit program will stipulate the fieldwork required to achieve objectives of the audit process. After preliminary review of the items in financial records, the procedures will be carried out in the audit program to test internal controls and the accuracy of transactions. Sampling of transactions is used during the testing. This is because of the time and resource constraints due to the numerous transactions involved. Audit process affects the financial position of the firm to the extent that the management needs to restate or manipulate the financial statements of Apollo Shoes in a manner that will not compromise the materiality of the items in the financial statements (Choi & Jeter, 1992).

An item is considered material if its inclusion or omission in the financial statement is likely to cause a change of opinion by the auditor or a change in the financial position from a profit to a loss or from loss to profit. Materiality plays a crucial role in financial reporting. Financial reporting may be abused and often stem from misuse or misunderstanding of the proper application of the materiality concept. Any misstatements whether material or not are not acceptable. It is therefore unreasonable for accountants to fail to correct mistakes because of directions given to them by senior management under the pretext of managing profits or earnings.

Immaterial misrepresentations often give rise to material misrepresentation. In order to allow for a fair presentation of information, it is imperative that the information be presented as per the accounting principles, which in this case would mean that the inventory be valued at the lower of cost or net realizable value. While carrying out auditing, a number of issues are considered but the most important is the verification techniques used. In determining the balances in the account in order for the audit to conduct his audit in a professional way he must plan to carry out auditing testing and consider audit evidence in carrying out the audit.

The following procedures are in use; Substantive tests: - Substantive procedures are tests to obtain audit evidence to detect material misstatements in the financial statements. The audit team therefore has to carry out tests on a reasonable sample, which is a representative to ascertain the materiality of the included or excluded items. This in turn prohibits the management from financial position to the extreme, which may affect the opinion of the auditor. Auditing acts as a monitoring device that minimizes motivation by management to manipulate reported profits.

Auditors’ opinion whether qualified or unqualified has grave consequences upon the image of the company and the entire management. Thus, materiality should be properly applied to strengthen reporting of financial statements and records to the satisfaction of the auditor. Auditor’s attention and vigilance goes a long way in preventing misstatement of profits (Gray and Manson, 2005). Substantive procedures or tests refer to activities carried out by the auditor to gather verification as to the completeness, accuracy, and validity of account balances and transactions to obtain reasonable assurance of the internal controls on which he relies upon.

Some practices carried out in earnings management erode the public confidence in the financial reports of the firm and hinder the efficient capital flow in the financial markets.