Auditing: Responsibilities, Misconceptions, and Potential Risks in Revenue Recognition

Running head: AUDITING
AUDITING
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction................................................................................................................................3
Responsibility as per ASA/ISA 240...........................................................................................3
Misconception in Role of Auditor..............................................................................................5
Potential Risk in Revenue Recognition......................................................................................6
Cases Having Material Misstatement.........................................................................................8
Conclusion..................................................................................................................................9
Part 2..........................................................................................................................................9
Introduction............................................................................................................................9
Overview of the company....................................................................................................10
Business Risk in the Company.............................................................................................11
Financial Analysis of the company......................................................................................12
Inherent Risk in the Business...............................................................................................13
Conclusion................................................................................................................................17
Reference..................................................................................................................................18
Appendix..................................................................................................................................21

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Introduction
Auditing is the process from the auditor is able to inspect and examine the financial
statement so that it can know that the company is able to meet all the rules and regulation in
the company business activities1. Each company should follow all the accounting standard
while preparing the financial statement so that the user can able to get proper information
about the company activities. It show about the different aspects of the auditor and how the
auditor have to meet up with its responsibility of auditing process.
Responsibility as per ASA/ISA 240
ASA/ISA 240 state about the auditor responsibility and how the company is able to
meet the responsibility of to check all the financial statement so that it can know about the
financial problem easily in the business2. The responsibility of different authority in regards
of fraud is shown below
Responsibility of Management as it should able to communicate the information to
the auditor so that the auditor is able to take proper assertion of company financial statement.
The management should able to give proper amount of management assessment in regards of
the fraud and material misstatement inn the financial statement. Management should disclose
all the process of identification and responding in regards of the fraud and material
1 Baños-Caballero, Sonia, Pedro J. García-Teruel, and Pedro Martínez-Solano. "Working
capital management, corporate performance, and financial constraints." Journal of Business
Research 67.3 (2014): 332-338.
2Auasb.gov.au, Auasb.Gov.Au (Webpage,2019)
https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_A
SA_220.pdf

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misstatement, it should also ascertain the specific risk which is been associated with company
financial statement. It should also able to communicate all the necessary information with the
company management so that the auditor is able to ascertain the risk which is there in the
financial statement.
Those charge with Governance is also have some kind of responsibility with the risk
and fraud in the company financial statement3. It should able to communicate all the process
which they have taken in regards of the risk associated with the financial statement. Auditor
should able to enquire all the related information with those charge with governance and
should able to get proper solution from all the problem in the business. It should identify the
fraud in the company financial statement so that the auditor can get proper opinion about the
company financial statement.
Auditor responsibility is also there as it have to carry different procedure to obtain
evidence about the risk which is associated with the company financial statement, it should
able to make all the process to know about the materiality and misstatement in the company
financial statement4. It should also make proper assumption in the company financial
statement so that the auditor is able to have proper opinion about the company financial
statement. It should also able to analysis of internal control so that the company is not having
any kind of business issue in the company activity so that the company is able to have proper
3 Bromiley, Philip, et al. "Enterprise risk management: Review, critique, and research
directions." Long range planning 48.4 (2015): 265-276.
4 Burtonshaw-Gunn, Simon A. Risk and financial management in construction. Routledge,
2017.

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management in the business as well as it help the auditor to ascertain the amount of risk
which is associated with the company financial statement.
Misconception in Role of Auditor
Each company financial statement is been audited by an auditor as this help the user
to get proper information about the company financial statement. Financial user take in for
granted as the auditor is responsible to company fraud as the company should able to have
proper justification in the business5. Auditor responsibility is to ascertain that the company is
able to manage the business operation with all the ethics and regulation. Company
responsibility is to take proper amount of precaution in regards of fraud in the company
business activities. Auditor is able to have a duty to know that the company is having all the
rules and regulation and able to make proper financial statement in the company business.
Auditor have to carry many procedures which help it to ascertain the financial
performance of the company and also help the user to get proper information about the
company performance6. Auditor always give reasonable assurance about the company
financial statement as this state that in its knowledge the company is not having any kind of
material misstatement in the business, but it may happen that the company is having some
kind of material misstatement in the business.
Auditor should also follow all the auditing standard while carrying different audit
procedure so it can able to get more evidence about the company financial statement, as well
5 Chen, Yunhao, et al. "Information technology capability, internal control effectiveness, and
audit fees and delays." Journal of Information Systems 28.2 (2014): 149-180.
6 Cohen, Lee J., et al. "Bank earnings management and tail risk during the financial
crisis." Journal of Money, Credit and Banking 46.1 (2014): 171-197.

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as it help them to manage its business operation7. Financial user should only take an idea
from the auditor report and should not charge anything more, it should decide upon the
investment only when they are full confidence upon the company financial activities in the
business.
The above points signify that the auditor is only able to check and gives its opinion
upon the financial statement and not able to have any responsibility upon the fraud which is
taking place in the company financial statement. As they should able to carry different
procedure so that the it can know whether the company is having any kind of fraud or no. it
should only give reasonable assurance to the user and not guaranty about the company free
from any kind of fraud or material misstatement.
Potential Risk in Revenue Recognition
Each company have some kind of revenue in the business, as each company should
able to recognise the revenue in different ways so it is the duty of the auditor to ascertain the
company business and able to check out any fraud or material misstatement is there in the
company or not8. Auditor always take into consideration there will some fraud in revenue
recognition and the reason are shown below:
1. Company usually show more amount of revenue recognition as this will help the
company to gain more amount of business in the company9. As the company is having
more amount of revenue so this will show that it is earning more amount of revenue
7 De Simone, Lisa, Matthew S. Ege, and Bridget Stomberg. "Internal control quality: The role
of auditor-provided tax services." The Accounting Review 90.4 (2014): 1469-1496.
8 DeFond, Mark L., and Clive S. Lennox. "Do PCAOB inspections improve the quality of
internal control audits?." Journal of Accounting Research 55.3 (2017): 591-627.