Methods of Auditing Company Accounts: Materiality Identification

According to the assignment content, company accounts can be audited by an auditor using materiality as a method to identify any discrepancies or irregularities in the financial statements. This approach enables auditors to conduct their audits more effectively and efficiently. The provided references include various academic journals, books, and online sources that discuss auditing techniques, including the concept of materiality, and its relevance to conducting effective audits.

FINANCIAL SYSTEM AND
AUDITING

TABLE OF CONTENTS
INTRODUCTION.......................................................................................................................................3
TASK 1.......................................................................................................................................................3
(a)............................................................................................................................................................3
(b)............................................................................................................................................................4
©..............................................................................................................................................................5
TASK 2.......................................................................................................................................................5
(a)............................................................................................................................................................5
(b)............................................................................................................................................................6
(c)............................................................................................................................................................7
TASK 3.......................................................................................................................................................7
(a)............................................................................................................................................................7
(b)............................................................................................................................................................8
© Audit process for Minty Cola..............................................................................................................9
TASK 4.....................................................................................................................................................10
(a)..........................................................................................................................................................10
(b)..........................................................................................................................................................10
CONCLUSION.........................................................................................................................................11
REFERENCE............................................................................................................................................12

INTRODUCTION
Ever firm irrespective of its size prepare company accounts. There is a very high
probability that company accounts may be manipulated. Audit is conducted in order to ensure
that all accounts are prepared in the systematic way. In the current report different type of
accounting records are discussed in detail. Along with this, different components of the business
risk are also discussed in detail in the report. In middle section of research study, audit process is
discussed in detail. Apart from this, different things like scope, materiality and risk are discussed
briefly. At end of the report, recommendations are given in respect to materiality of accounts.
TASK 1
(a)
Following are the purpose and use of different accounting records for the Minty Cola
Company such as-
 Ledger- It is considered as the book or account of recording financial information. It
records the information related to liabilities, revenues, owners equity and expenses. It is
prepared by individual person and thus each and every journal entries are recorded into
ledge of particular item. It is prepared in order to construct trial balance which helps in
carrying out annual reports. Main purpose of preparing Ledge in Minty Cola is to assess
the accounting errors that are prevailed within the journal (Barrington and Ho, 2014).
 Trail balance- Further, it is another summarized statement prepared by involving all the
ledgers and is prepared by following any total or balance methods. With the help of total
method, it helps in summing up the both debit and credit sides. While, in the balance
method, companies are focused upon reporting ledger balances only. Here, the main aim
of Minty Cola is to make sure that arithmetical accuracy is maintained while preparing
final accounts (Liu, Ranjan and Chen, 2015).
 Subsidiary books- It involves purchase book which reports all the entries regarding
credit purchases, return outward report, all the purchase return, disclosing all the
information within sales book related to sales while return inward records all the
transactions related to sales return.

 Income statement- It helps in preparing the operational revenue, expenses and other
costs in order to measure the net yield whether the business has carried out profitability
within the normal course of functions (Knechel, 2016). Main purpose of Minty Cola
Company is to evaluate its profit level comparing from previous years.
 Balance sheet- It involves fixed assets, current assets, short term liabilities and owners
equity etc. Main purpose of such statement within Minty Cola Company is to measure
financial strength and also examine creditworthiness of firm so that best decision can be
attained (Mak, Sidman and Sommer, 2013).
(b)
Following is the importance of different accounting concepts witin Minty Cola Company such as-
 Accrual concept- In such accounting concept it helps firm to record all the revenue and
expenses occurred within the same year. However, it is not essential that income receives
in cash within the same year and it is also implemented the same within the case of
expenses. Thus, accrual concept assists Minty Cola Company in providing reliable
picture of its financial statement so that income and expenses that are related to the
financial year are recorded (Liu, Huang and Xian, 2015).
 Going concern concept- Within this accounting concept, it helps cited firm to continue
its business operations for unlimited time period and thus success and failure aspect can
be evaluated effectively within Minty Cola through comparing cost and output.
 Business entity- It assesses that enterprise and business owner are separate. Here, both
the enterprise owner and personnel of Minty Cola possess equal rights to make
transaction on behalf of the firm. All the transactions done are recorded in the books and
thus helps in keeping away private affairs from the business transactions (Chandler and
Edwards, 2014).
 Historical concept- Here, Minty Cola aims to record the products upon actual value of
cost rather than market value within the books of accounts. While, market price of the
assets varies as the time passes.
 Consistency concept- In this, business aims to follow similar accounting policies in
order to record business transactions. Thus, such concept helps in maintaining the
accountability within the financial statements so that business is able to assess its

financial health and performance as compared to past year (Jans, Alles and Vasarhelyi,
2014).
 Prudence concept- In such accounting concept, business is required to avoid the aspects
of overestimation and underestimation of revenue and expenses. It is also follows at the
time of recording assets and liabilities (Alzeban and Gwilliam, 2014). Thus, Minty Cola
aims to present the fair view of financial aspects of firm.
 Materiality concept- Further, here business is allowed to violate another principle of
accounting if the amount is small in numbers. Thus, it helps firm to provide users with
appropriate records in the financial statements (Rasheed, 2014).
©
Following are the different factors that possess effective influence upon the natire and
structure of accounting system of Minty Cola Company such as-
 Minty Cola’s nature and structure of accounting system gets affected from the extent
to which it possess competent and experiences workforce. Also, if the accountant
possess effective knowledge and experience regarding accounting principles,
convention and GAAP so that they can record the transactions effectively. However, if
the personnel does not have the knowledge then they are not able to record the
financial information in a proper way (e Costa, Carnero and Oliveira, 2012).
 Furthermore, structure of the accounting system also gets influences from the length
and size of business. Therefore, in the case of small businesses, they are focused upon
preparing the income statement with the purpose of evaluating the profit generated by
them over expenses. In regard to this, size or length of business of Minty Cola is large
and thus in order to obtain in depth information regarding the profitability, liquidity
and solvency ratio (Smith-Lacroix, Durocher and Gendron, 2012). Firm is able to
prepare all the relevant financial statements such as income, balance sheet and cash
flow statement.
TASK 2
(a)
Through evaluating the present case of Minty Cola it can be assessed that taste and
preference of customers are getting change with high pact. Thus, there are several factors that
closely influence the profit level of firm and involves sales, competition, economic climate,

government regulations etc. However, all these factors assesses that there is possibility that
Minty Cola might experience loss rather than attaining profit margin as always (Neu, Everett and
Rahaman, 2013). Following are the main components of business risk that affects the business
operations such as-
 Strategic risk- As per the case of Minty Cola it provide cola, lemonade and other soft
drinks therefore, it is essential for firm to assess the taste and preference of consumers as
it is changing quickly (Barrington and Ho, 2014). Thus, if business unit fails to assess the
market condition in the right manner then it will result into inappropriate strategic and
policy framework. Also, it is essential for firm to prepare strategies through making
proper analysis of competitors. However, if business unit fails to assess the competition
level than it may results in losses. Here, Minty Cola fails to assess social media
marketing strategy is employed by its competitors then it would result into loss of
customer base (Liu, Ranjan and Chen, 2015).
 Financial risk- Now, Minty Cola aims to improve its profit margin they are required to
invest money in different types of projects so that risk level could be diversified.
However, if the finance manager fails to select appropriate project for investment then it
would result into loss of profitability in firm (Knechel, 2016).
(b)
It is essential for firm to control the fraudulent activities regarding cash, inventory and
other aspects firm requires to adopt the strategy of corporate governance. Thus, with the help of
such aspect, Minty Cola Company requires to follow the auditors specific rules and processes in
order to direct the control activities within the firm. In regard to this, cited firm aims to formulate
specific policies that need to be followed by internal auditors and make assessment of the final
accounts (Mak, Sidman and Sommer, 2013). With the help of this, firm is required to become
able to balance the interest of different stakeholders such as management, customers, suppliers
and government. Also, by appointing external auditor, Minty Cola could also restrict the
fraudulent activities up to a large extent. Also, business, shareholders and government possess
the right to appoint external auditors. Here, auditor is liable to make verification of each and
every transaction regarding the voucher, invoices etc (Liu, Huang and Xian, 2015). Thus, it helps
Minty Cola to undertake appropriate control system so that fraudulent activities can be stopped.

Also, by adopting corrective action it helps Minty Cola Company to attain best results in specific
time frame.
(c)
Following is the risk of fraud within Minty Cola Company such as-
As per the stated case of Minty Cola, business possess certain individual who have stolen
cash and inventory that directly impacts upon the profitability of firm. In accordance to this, in
regard to earn extra income, personnel working in firm provide unfair vouchers or invoices of the
expenses. Thus, such situation occurs due to the unavailability of particular accounting personnel
of Minty Cola is not in the condition to maintain proper and appropriate record of cash aspect.
Also, at certain times, manager of cited business maintains false record of the inventory as
compared to the actual level (Chandler and Edwards, 2014). Thus, accountant is not able to
present the true and reliable picture of financial statement and thus risk of fraud is there.
Underneath discussed is the method to detect fraud-
 Through conducting internal audit on regular basis it helps firm to overcome fraudulent
activities that occurs within firm. Thus, through carrying out proper auditing, accountant
makes the evaluation of each and every transaction in against of the vouchers and thus
assesses the deficiencies so that it could be overcome to maintain proper financial
statements (Jans, Alles and Vasarhelyi, 2014).
 Moreover, risk of fraud could also be detected within Minty Cola Company through
carrying out strategic framework and introducing strict rules and regulations so that
business can control such activities and thus best results can be attained (Alzeban and
Gwilliam, 2014). All such strict rules and regulations are carried out by the firm in order
to detect the fraud and overcome them within firm.
TASK 3
(a)
Audit is a very complicated process and in this one needs to consider number of factors in
order to ensure that he is doing an audit in the right direction and in right way. Scope is the one
of the main word on which an auditor always focused before conduct an audit. Scope refers to
the tasks and activities that an auditor can perform to do auditing of the company accounts.
Relevant tasks must come under this company scope of authority. In case of the Mint Cola if any

top manager wants to ensure that all accounts are prepared in the right by following all rules and
regulations then he will conduct audit. In such kind of case scope of audit increased and become
wider. Apart from the scope materiality is another word that is more commonly used in respect
to audit (Duncan, Razvi and Mulhern, 2011). Materiality refers to the any error or omission that
exists in the financial statement that is prepared by the firm Chartered accountant. Errors or
omissions may remain in the company major books of accounts. Hence, it becomes very
important to identify those errors and omissions. In the audit due importance is given to the
materiality of the financial statements. This is done in order to ensure that financial statements
are revealing true financial position of the firm. If anything will be missed from the financial
statements there is a probability that same may depict false profitability and financial position of
the firm. Hence, in audit auditor give due importance to identifying materiality in the financial
statements. Apart from the materiality risk is another factor on which most of auditors give due
importance. Risk refers to the situation in which management does not give assistance to the
auditor of the auditing firm. It must be noted that in order to do audit of the company accounts
one needs different type of documents. Many times management does not cooperate with the
auditors and does not provide required information to them. Hence, risk is another factor that
greatly influence audit in the business firm.
(b)
Audit test refers to the procedure that is followed by an auditor in order to ensure that
financial statements are prepared in systematic way. By using audit test materiality of the
financial statements is measured by the firm (Reichelt, and Wang, 2010). it is the audit test by
using which an auditor ensured that there is no materiality in the financial statements and they
are revealing the true profitability and financial position of the firm. It can be said that auditor by
using relevant test can ascertain that financial statements are prepared in proper way by the
Charted accountant of the Minty Cola Co. In order to do auditor needs some specific sort of
documents which may any paper that is related to the business firm. In order to identify the
fraud in the company an auditor needs to use specific type of test. There are mainly two type of
audit tests namely risk assessment process and test of control as well as analytical process
(Paterson and Valencia, 2011). Out of these tests any one can be used by the auditors to identify
fraud in the company accounts. Auditor of Minty Cola Co. employs substantive and analytical

testy process to assess the errors of financial statements. By using analytical test or substantive
test auditor can make comparison of actual with the expected figures. The areas where there is a
high gap between actual and estimated figures auditor can do audit and can verify relevant things
in order to ensure that company financial statements are depicting true financial position and
profitability. By applying these tests in the above mentioned ways auditor check materiality of
the financial statements. It can be said that there is great importance of the audit test in entire
audit.
©
Audit process for the Minty Cola is given below. Communicating information about required documents: This is the first stage of audit
under which auditor demands some specific type of documents from the company
(Christensen, Glover and Wolfe, 2014). Documents may be last year that was prepared by
the auditors, vouchers and books of accounts. Developing an audit plan: This is one of the most important stages because in this phase
an audit plan is developed that will be followed to do audit of the company accounts. It
can be said that this is the one of the most important stage of audit. Organizing open meeting with the managers: This is another important phase of the
audit. Under this auditor carry out detail discussion with the managers of the Minty Cola
Co. and try to understand the business model of the firm. Field work: After completion of the meeting auditors conduct audit of the company
accounts and they follow already prepared plan step by step in order to complete audit.
This is the main stage of the entire audit process. Preparing auditor report: After doing an audit of the company accounts auditors prepare
an audit report which revealed the discrepancies that were identified in the company
books of accounts (Audit process, 2007). In the audit report auditors communicate the
steps that must be taken in order to ensure that such kind of discrepancies will not come
in existence in future.
 Final meeting between auditors and managers: This is the final stage of the entire audit
process and in this stage meeting held between auditor and managers. In meeting detail
discussion is carried out between auditors and managers of the firm. In this stage an
auditor give response to all queries of the managers and give them useful suggestions that

they can implement in the firm accounting system.
TASK 4
(a)
Internal Audit Report for the Financial Year 2016
To
Board of Directors of Minty Cola Co
Date: 22nd November 2016
From audit that was carried out it was find out that there was difference between the actual and
figures presented in respect to cash and inventory in the financial statements of the firm. Such
kind of incident comes in existence due to mistake of the accounting personnel. Information
about incidence is provided to the top managers. Materiality was identified in the cash and
inventory. In order to ensure that these things will never repeat again some suggestions are given
to the managers. As part of suggestion it is recommended to the managers that Chartered
accountant must evaluate figures that are provided by the accountant before using same to
prepare final accounts. Apart from this everything is good in respect to the company accounts.
(b)
Management Letter for the Accounting Period of 2016
To
Board of Directors of Minty Cola Co
Date: 22nd November 2016
It is recommended that there must strict rules and regulations in respect to recording of the
transactions in the books of accounts. Accountants must record all transactions time to time.
Moreover, Chartered accountant must check company accounts time to time in order to ensure
that all transactions are recorded at appropriate value. Strong penalty system must be prepared by
the firm. In case if it is identified that specific employee was involved in manipulating company
accounts then against relevant employee strict action must be taken by the firm. By doing so it
can be ensured that all transactions will be recorded properly and accounts will not be
manipulated.

CONCLUSION
On the basis of entire discussion it is concluded that audit must be performed by strictly
following audit procedure that is determined before conducting an audit. It is also concluded that
relevant audit test must be used to identify the specific direction in which auditor especially
needs to work. By using analytic test in better way company accounts can be audited by the
auditor. By using this method materiality in the company accounts can be easily identified by the
auditor. In this way audit can be conducted in better way.

REFERENCE
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Online
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[Accessed on 22rd November 2016].