Audit Planning of Forest Limited

Running head: AUDITING
Auditing
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Introduction and scope:....................................................................................................................2
Risk assessment:..............................................................................................................................2
Audit approach:...............................................................................................................................4
References:......................................................................................................................................6

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MEMO
Ref:
To: Audit Manager
From: Audit Senior
Date: 14/05/2018
Subject: Forest Limited
Introduction and scope:
This memorandum is prepared after the completion of a preliminary assessment, which is
a portion of the audit planning phase of Forest Limited. The first section would aim to identify
the major accounts at risk for Forest Limited with the help of criteria represented in ASA 315.
ASA 315 is concerned with identifying and analysing the material misstatement risks by
obtaining a fair overview of the organisation and its environment. The suitable audit approach
that could be undertaken would be recommended depending on the criteria laid down in ASA
300, which is to plan audit of a financial report.
Risk assessment:
Based on the provided information, the three major accounts that are subject to increase
in audit risk constitute of the following:
Accounts payable:

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It has been identified that Forest Limited has upgraded its system of accounts payable to
a wholly integrated system, which updates the general ledger automatically at the time of making
credit entries. The errors that have taken place at the time of recording the transactions have
drastic impact on the credibility of accounts payable, as few of them have been extremely severe.
This might be the interchange to record currency between AUD and USD. Since the balances of
the creditors are reset to zero at the start of the month automatically, entries are made manually
and significant accounting staffs are engaged in the exercise, manual intervention has occurred
significantly despite the presence of the automation procedure (assertion - occurrence/existence)
(Auasb.Gov.Au 2018).
Internal audit:
It has been observed from the provided case study that there is absence of internal audit
department in Forest Limited. As a result, various accounting lapses could be observed within
the organisation (Griffiths 2016). In addition, the organisation is planning to diversify its
business operations in the global countries as well. This would increase the overall operations of
Forest Limited and complexities would be increased in its accounting system (assertion -
valuation and allocation).
Checks related to credit limit:
There is absence of effective checks related to credit limit for the customers and it has
declared bonuses for the salespersons at a raised percentage of the gross sales mad. This
percentage exceeds the monthly targets of the salespersons. This could lead to a risky situation,
since sales above the credit limit could be made to the customers, which raise the possibility of
non-recovery (William Jr, Glover and Prawitt 2016). The account that would be influenced due

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to this measure would be accounts receivable and there is greater chance that the payment of
bonuses would be made against sales to the defaulting customers as well (assertions -
presentation and disclosure). According to “Paragraph A54 of ASA 315”, credit checks could be
edited in a software program, which are designed for identifying and reporting transactions
exceeding the specified credit limits. As a result, there is high possibility that such checks might
be disabled or overridden.
Audit approach:
In order to mitigate the risks identified in the three major accounts, Forest Limited needs
to adopt an effective audit approach. As a part of the audit plan, it is necessary for the
organisation to design extensive audit plan in relation to accounts payable. This particular plan
needs to cover checks associated with the beginning balance of the creditors. In addition, sample
is required to be checked for the currency entered (Graham, Bedard and Dutta 2018). The main
issue lying in the systems of accounts payable needs to be identified and measures need to be
adopted for mitigating the same.
Moreover, it is necessary for Forest Limited to develop internal audit department, which
could be proved effective in contrast to accounting and system errors. The formulation of such a
department would help in saving additional revenues for the organisation (Contessotto and
Moroney 2014). For dealing with the issue of checks related to credit limit, the organisation
needs to pay adequate attention. More precisely, it is necessary to check the outstanding balances
and credit limits of the customers based on samples. The outcome obtained is required to be
evaluated for formulating a series of steps so that the pending amounts from the customers could
be recovered.

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Hence, it is necessary for the auditor to communicate with the higher-level management
of Forest Limited for mitigating the above-stated problems. The auditor might conduct
investigations associated with fraud in accordance with ASA 240. The auditor is required to lay
emphasis on selling prices along with performing detailed testing on the significant daily
accounts like sales revenue. The verification of accounts receivable could be made with the help
of confirmation requests in accordance with ASA 505. Furthermore, the representation letter
from the management is required to be obtained by documenting the view of the management on
the expected performance of Forest Limited in the near future.
Moreover, it is necessary for the auditor to obtain a fair overview of the financial health
of Forest Limited. This is because such understanding would help the auditor in evaluating the
motivation of the management in misstating the financial statements. The auditor could identify
the additional areas that are probable to be misstated and the other accounts having unusual book
balances. Finally, the quality of internal control procedures needs to be analysed for designing
the audit plan in an effective manner.

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References:
Auasb.Gov.Au., 2018.
http://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_
300.pdf.
Auasb.Gov.Au., 2018.
http://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_
315.pdf.
Contessotto, Christine, and Robyn Moroney. "The association between audit committee
effectiveness and audit risk." Accounting & Finance 54, no. 2 (2014): 393-418.
Graham, Lynford, Jean C. Bedard, and Saurav Dutta. "Managing group audit risk in a
multicomponent audit setting." International Journal of Auditing 22, no. 1 (2018): 40-54.
Griffiths, Phil. Risk-based auditing. Routledge, 2016.
William Jr, Messier, Steven Glover, and Douglas Prawitt. Auditing and assurance services: A
systematic approach. McGraw-Hill Education, 2016.