The Importance of Auditing in Organisations

This assignment discusses the importance of auditing in organisations to ensure accuracy and fairness in financial statements. It highlights various risks associated with auditing, including human error and technology risk, and explains how measures can be taken to mitigate these risks. The assignment concludes that auditing plays a vital role in exhibiting fairness and accuracy in financial statements.

AUDITING

EXECUTIVE SUMMARY
Auditing is being carried out in the report to check the accuracy of financial statements of
the company by the auditor of Alex financial services for Sheridan A V organisation so that
errors and frauds may be easily identified and true and fair information may be exhibited quite
easily.

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
A. Identify the audit risks of company...................................................................................1
B. Risk implications on the validity of financial statements..................................................2
C. Audit response on the approach.........................................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Auditing is the essence to check accuracy of financial statements in the best possible
way. The enclosed report deals with Sheridan A V company which is suspected in the value
obtained in the turnover. Alex financial services have been approached to test the accuracy of
financial statements of the company so that accuracy may be ascertained and errors and frauds
may be easily identified by carrying out audit procedures quite effectively. The audit risks and its
effects on the validity of financial statements are also discussed in the report.
A. Identify the audit risks of company
The audit is required to be done in effective manner to check the accuracy of various
financial statements of organisation. Auditors are required to be appointed by firm so that no
misleading financial statements are drawn and as such, accuracy may be observed with much
ease. Sheridan A V has provided financial statements but it is suspected as it does not match with
the financial condition of the company. Misstatement is being observed in financial statements
and as such, auditing is required to be carried out to check accuracy of it in the best possible
way.
ISA (International Standard on Auditing) has been regulating auditing in the companies
as it is professional body which guides auditors to carry out task by abiding with the provided
principles. ISA 315 requires assessing risk of material misstatement of the organisation so that
misleading statements may be exploited quite effectively. The audit risks of company are
numerous.
B. Risk implications on the validity of financial statements
The various types of risks such as inherent, control and detection risks are discussed
above. The risk implications on financial statements are described quite effectively. The
misstatement in financial statements may be rectified on time by the auditor so that accuracy
may be observed in it. The inherent risk as discussed which cannot be controlled by company is
also reflected on validity of financial statements as this leads to misstatement in the financial
statements and as such needs to be timely rectified by auditor.
The financial statements are misleaded by this risk as derivate instruments and intricate
products are being affected by it which leads to misstatement. Moreover, non-routine
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transactions also lead to inherent risk causing to misstatement in the financial statements.
Furthermore, auditor needs to assess the fair value of estimations which are also difficult to
ascertain by auditor. Thus, it leads to inherent risk (Liu and et.al., 2017).
C. Audit response on the approach
The audit of Sheridan A V is being carried out and is being found out that turnover of the
company is bitten manipulated in financial years 2020 and 2021 threshold accounts. The audit
risks are being ascertained and importance of risk minimisation is also initiated so that company
may not face such risks (Demb and et.al., 2017). There are some susceptible circumstances that
misstatement in the financial statements will occur in future course of the business and as such,
audit is required to assess the misleading financial statements to remove errors and frauds from
it.
Risk implications of Sheridan AV
Audit Risk Implications Audit Response
Inherit Risk- This results
because of complexity of
business transactions. Auditor
need to assess inherent risk as
it is difficult to carry out and
as such, audit procedures need
to be implemented so that
accuracy may be obtained
quite effectively. Moreover,
audit strategy need to be
carried out by auditor. It is
done so that inherent risks may
be rectified in timely manner
and financial statements are
easily checked by him.
In this regard, IAS 2 can be
explained. It states that
inventory to be measured at
low cost and NRV (Net
Realisable Value). For
example, transactions
involving exchange of cash
will have more inherent risk
than settled by cheque.
The auditors has the
responsibility to present
inventory at the stated level
only. The process was
followed and found that
misstatement might be there.
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Bad debts Risk- This risk is
observed when credit sales
money is not recovered by
company.
Sheridan AV has given total
190000 credit to customers
including bad debts. For
example, debtor who has 5000
outstanding may go bankrupt,
thus leads to bad debts.
Proper recording of
transactions relating to cash
inflow and outflow to be
maintained so that credit may
be collected timely.
IT control risk- Excel
spreadsheet is being used by
organisation leading to errors
while recording accounting
transactions
The spreadsheets need to be
updated constantly to minimise
errors. For example, using
outdated software lead to
wrong results.
For ensuring proper record
keeping, certain software like
SAGE, SAP could be used.
Weak control Environment
Risk- The environment within
which company operates
should be sound enough.
David is pretty much sure that
company is earning good
revenue. For instance, weak
control may be not effective
for organisations' growth.
For this, internal control and
well-structured policies need
to be implemented.
Undervalued Employees Risk-
Staff is not appreciated and are
feeling undervalued.
The conversation with Blake,
management is weak enough.
Employees should have access
to software.
Potential Fraud Risk-
Discrepancies are found in the
financial statements as
management is not fulfilling
duties.
Weak control is prevailing and
thus, leads to errors and
software is outdated as well.
For example, posting
manipulated entries by
knowingly increasing debtors'
money outstanding so that less
taxes may be paid,
Proper control should be there
and software should be
updated to minimise risk.
Advertising Risk- Professional
footballers should be hired by
The costs should be controlled
else will lead to more
Poor advertising may damage
reputation of company. It
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effective advertising. expenses. For example,
posting promotional message
which might be edited by
rivals to damage reputation of
firm.
should be effective enough.
Stock exchange Risk- The
assets and liabilities are not
error free as manipulation is
present and this will affect
securities listed on stock
market
Financial records are
misleading.
Strong focus should be
maintained and risks being
minimised.
Expanding to Europe economy
Risk- The currency is not
stable and should not expand.
Financial statements are not
proper and this step should not
be taken.
Financial records need to be
revised and decisions based on
this should be taken.
Legal claim Risk- The incident
was happened with women
and is asking for legal claim
but David is refusing to accept.
David should not ignore claim
of the lady. Otherwise, he has
to face legal action. For
example, government may
issue legal notice to provide
services to employees.
ISA 501 states that if any
claim is material, it should be
reflected in financial
statements else, it will be
misleading.
Control risk- Control risk is
affected on the validity of
financial statements by cost
benefit constraints which
misleads financial statements
and as such, conclusions
cannot be ascertain quite
effectively.
Internal control needs to be
strengthen so that
misstatement in financial
statements may be avoided up
to great extent. For example, it
may be higher as separation of
duties is not well-defined.
There is a requirement that
internal control may be
maintained so that misleading
financial statements may not
occur.
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Detection risk- Detection risk
is a basically termed as a risk
which the auditor of the
company has failed to carry
out and as such, misstatement
in the financial statements
continues to exist and which
misguides users of accounting
information.
Sheridan A V needs to have
efficient auditors which can
easily detect such errors and
mistakes so that financial
statements may be prepared
with much ease. Detection risk
has effect on validity of
financial statements such as
business transactions which
are recorded wrong and as a
result, these are taken to
prepare financial statements of
the company and as such,
misstatement continues in
balance sheet and other
financial statements. For
example, human errors such as
posting in ledger may incur
wrong results.
Detection is required so that
auditors may easily identify
misstatement.
Technology risk- This is
required to be attained so that
misstatement in the financial
statements may be carried out
effectively which auditor may
fail
Appropriate measures to be
taken so that accounting
software may be implemented
which may detect misleading
financial statements. For
example, using ourdated
software will provide
inaccurate results.
It needs to be strengthen by
Sheridan AV so that risk may
be minimised.
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CONCLUSION
Hereby it can be concluded that auditing is required in every organisation so that
financial statements may be rectified to check accuracy of it by the auditor appointed by firm.
Sometimes, auditor is statutory appointed by government to check accuracy of misleading
financial statements of the company. It is helpful to exhibit various errors and frauds that are
done in financials of the company so that true and fair financial information may be obtained.
Thus, auditing plays vital role in exhibiting fairness of financial statements of the company.
REFERENCES
Books and Journals
Adler, P. and et.al, 2018. Auditing black-box models for indirect influence. Knowledge and
Information Systems. 54(1). pp.95-122.
Boone, J.P. and et.al, 2017. Auditing: A Journal of Practice & Theory A Publication of the
Auditing Section of the American Accounting Association.
Demb, J. and et.al, 2017. Optimizing radiation doses for computed tomography across
institutions: dose auditing and best practices. JAMA Internal Medicine, 177(6),
pp.810-817.
Liu, X. and et.al, 2017, May. One-tag checker: Message-locked integrity auditing on encrypted
cloud deduplication storage. In INFOCOM 2017-IEEE Conference on Computer
Communications, IEEE (pp. 1-9). IEEE.
Simunic, D.A., Ye, M. and Zhang, P., 2017. The joint effects of multiple legal system
characteristics on auditing standards and auditor behavior. Contemporary Accounting
Research. 34(1). pp.7-38.
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