Audit Fees and Risk Factors: An Analysis

This assignment involves an in-depth analysis of factors affecting audit fees and risks, drawing insights from eight scholarly articles. Key aspects include the impact of parent-subsidiary investment layers (Gul et al., 2017), information technology investments (Han et al., 2015), healthcare delivery quality (Holla et al., 2015), CEO narcissism (Judd et al., 2016), and risk models for surgeries (Kurita et al., 2015; Watanabe et al., 2014). Additionally, consider the contextual nature of managerial ability's association with audit fees (Li et al., 2017) and the effect of human resource investment in internal control on audit reporting lag (Shin et al., 2017). Furthermore, evaluate Strecker et al.'s (2015) domain-specific modeling language for internal controls. Analyze data from these papers to draw conclusions and recommendations.

Auditing Major
Assignment

Table of Contents
Question 1........................................................................................................................................3
Questions 2.......................................................................................................................................5

Question 1
Identification of risk of material statement
Audit risk is a risk which a auditor may fail to change their opinion on misstatement in
the financial statements. The beverage industry is the fastest growing industry which have upto 7
billion potential consumers around all over the world. In the present report audit risk analysis is
conducted of the coca cola company. In respect to develop overall audit plan the auditor is
required to evaluated the risk inherent in the financial statement level. Further, for developing a
risk program it is important for the auditor to relate the same evaluation of material that can be
different classless of transaction and account balance at the different level. Inherent risk in audit
is known as the risk which is posed by an omission and error in a financial statement because of
factors accept than a failure of control (Judd, Olsen and Stekelberg, 2016). Therefore, the
process which apply for measuring the audit risk there is required to determine the entity
business risk. It can be done through evaluating the different aspects that is external factor,
nature of entity governance measurement and performance etc. Here given below are few
inherent risk which is considered that are as follows:
 Sample which is selected for auditing at the time of planning the audit do not reflect the
true sample of the transaction which can be stated as one of the biggest risk of the Coca
cola company.
 Second one is weak internal control system: It is identified that internal control of Coca
cola company is fine but it is not much effective in order to find out the miss happening,
risk or any type of fraud.
 Further, representation of the financial statements, as it can be mis presented due of lack
in understanding in the accounting staff members or because of the complexity in the
transactions (Gul, Hsu and Liu, 2017).

 At last the adverse commodity price movement enhanced the financial inherent risk. In a
market there is high competition which make easy for customer to switch which is
attached with inherent risk.
 Further error is identified at the time of estimating that is the inherent risk which is
identified in auditing.
Therefore, it is important for auditor to update his knowledge related to laws and regulation and
business critical area. The first concern show that information which is reflected in the financial
statement is relied by the investor and managers. Here it can be stated that information provided
in it not provide whole image of firm. On the other side second concern is can be because
difference in fiscal year (Brown, Pott and Wömpener, 2014). While the last concern could be
because of problem while looking at financial statement that as one cannot understand the exact
condition of the firm . At the time of selecting the audit procedure it is important for the firm to
consider all the facts which are based on the risk of material contain errors. The risk of material
misstatements refer to the risk which a in financial statement can materially misstate.
Procedure which can be followed by Coca cola company for checking the inventory
statements in its operating cycle and draw management attention. It assists in taking proper step
for disposing off or sell the stock which is slow and non moving. Through extending the
procedure of audit and substantive checking it makes easy for the cited firm to check the
financial inherent risk (Deng, Simunic and Ye, 2014). Further this procedure for Coca cola firm
can be the impact of the economic scenario on the business which can be measured and provided
in the audit report. Along with this any foreseeing event which can hamper the going concern
concept of the firm because of exaggerated competitors then it is required to mention in the
report. However, fluctuation of currency is manifest so it important to provide proper evidence
and documentation need to be maintained.
In Coca cola company there is increase in revenue from the operations but in 2016 there
is decrease in earning before interest and tax and deprecation. In financial statement net profit
after tax is reflected but it is considered as a progressive sign because this profit is earned from
the discontinued operations (Aad, Abbott and Abreu, 2015). Due to this reason the operations
are closed and its capital expenditure get lowered which show that firm is reached to its
saturation point. The procedure which is undertaken is substantive checking of all the

expenditure as this show that no usual expenses are shown. It is important for auditor to report in
its audit report that firm is going concern or not. The auditor of Coca cola company have formed
an unmodified opinion in their independent auditors reports and they also stated that they have
gathered enough information from audit evidence in order to form their audit opinion. Further all
the corporation regulation is complying in the financial statement (Holla, Das and Muralidharan,
2015). For understanding the auditing and assurance the accounting standard provide fair
statement.
To asses the risk of material statement
Risk assessment procedure include inquiries of management, observation and enquiry and and
analytical procedure. One of the essential part of identifying the risk or marital statement is risk
which is find out should be prioritised. It is so due to International Standard on Auditing (ISA)
315 ascertained that risk which is find out should be prioritised first in Coca cola company.
Therefore, after determining the risk the auditor need to plan the way it can predict with the audit
which help in reducing the amount of audit risk (Strecker, Heise and Frank, 2015). The audit risk
model can be applied at the account balance or class of transaction level. There are few steps
which can be followed for applying the model that consider setting a planned level of audit risk,
determining inherent risk and resolving the risk equation for determining the appropriate level of
detection risk. An accounting standard is a principal which guides and standardized accounting
practices to the Coca cola firm.
Questions 2
Audit evidence is all the information which is used by the auditor at the time of arriving
the conclusion in the basis of which audit opinion is based and cover all the information which
are contained in the accounting records underlying the financial statement and other information.
Further, audit evidence cannot be stated as reliable if any source is not knowledgable (Clinton,
Pinello and Skaife, 2014). The main purpose of the audit test and audit procedure that it allow
the auditor to collect information which appropriate audit evidence to be able to conclude with
reasonable assurance that financial statement are free of material misstatement.
There are some point which generalize the reliability of audit evidence are useful:
 Audit evidence is stated as reliable at the time when it is obtained from source which is
knowledgable and independent outside the entity.

 Reliability of audit evidence can be reflected when it takes place in the documentary
form. For instance it can be electronic, paper or other form.
 Further, it audits evidence is provided in original document then it can be more reliable as
compare to provided in form of photocopies (Kurita, Miyata. and Mori, 2015).
 Here management team of Coca cola company is responsible for the fair presentation of
the financial statement which show the nature and operations of the entity.
There are five type of audit test which can be implemented in order to get audit evidence that are
as follows:
Risk assessment procedure: It is collective procedure which is performed to obtained the
understanding of the environment, its internal control. Further the major part of risk assessment
procedure is taken into consideration to find out the risk of material misstatement reflected in the
financial statement (Han, Rezaee and Zhang, 2015). Further it also helps in developing an
understanding related to the internal control.
 Test of control: In test of internal control auditor basically used to measure control risk of
for the audit objective which is related to transaction. Here inherent risk which is
identified in the Coca cola company there are two type of evidence of available for test of
controls that is examining the report, document and records and inquiries of appropriate
client personnel (Kurita, Miyata and Mori, 2015). This help in finding out material
misrepresentation which taken place in the balance sheet and accounting statements.
Therefore, it is a strong evidence for the risk audit which is carried out in the Coca cola
company.
 Substantive test of transaction: In substantive test of transaction is known as procedure
which is designed for testing the dollar misstatement which direly impact the correctness
of financial statement balance (Watanabe, Miyata and Mori, 2014). Further two type of
evidence for substantive test of transaction that is to ensure that all the sales are recorded
and its transaction in fair manner. On the other hand to verify the records of cash
transaction in order to avoid misrepresentation.
 Analytical procedures: At the time of completing the audit it is required the recorded
amount to expectation which is developed by the auditor as it can be done. There are two
main aim of analytical procedure that in the audit that is to indicate the misstatement in

account balance and provide reliable evidence (Li, Li and Luo, 2017). Further two type
of evidence for the analytical procedure in completing and planning phase to calculate
the gross margin and to predict the ending balance. Along with this for evidence recorded
balance can be compared for the prediction.
 Test of detail of balance: In test of detail balance it focuses on ending general ledger
balance of both the income statement accounts and balance sheet (Shin, Lee and Son,
2017). This is effective as it helps in testing the monetary so that it become easy to
understand transactions.
 For testing the detail of balance there are 2 type of evidence which are presented that is to
take into consideration the physical examination of inventory and to confirm the
customer balance for accounts receivable.
There are few risks which is identified the auditor can judge but it cannot be possible to obtain
sufficient to collect right audit evidence. Coca coal company face this type of risk as it may
occur due to inaccurate and incomplete recording of the daily transaction (Judd, Olsen, and
Stekelberg, 2016). Here risk is assessed so that error and fraud which had done in financial
statement can be covered in ISA. There are many information which is obtained from through
the inquires conducted by auditor and from management who are responsible for such kind of
inherent risk. In balance sheet of coca cola company there are reflected different trends on the
other side some of the items show opposite to it. Due to many reason Coca cola company suffer
from debt in 2013 which is reflected in the balance sheet.
Therefore, form the above result it is understood that problem inherent risk in the financial
statement take place due to misrepresentation of transaction in the balance sheet and income
statement (Gul, Hsu, and Liu, 2017.). This type of risk are identified at the time of conducting
internal audit. Further it is important to provide strong evidence such as written proof and
original document is required of the conducted audit and misstatement which is identified in the
accounting statement so that action can be take in order to avoid such kind of inherent risk.

References
Books and Journals
Aad, G., Abbott, B., and Abreu, H., 2015. Evidence for the Higgs-boson Yukawa coupling to tau
leptons with the ATLAS detector. Journal of high energy physics, 2015(4), p.117.
Brown, N.C., Pott, C. and Wömpener, A., 2014. The effect of internal control and risk
management regulation on earnings quality: Evidence from Germany. Journal of
Accounting and Public Policy, 33(1), pp.1-31.
Clinton, S.B., Pinello, A.S. and Skaife, H.A., 2014. The implications of ineffective internal
control and SOX 404 reporting for financial analysts. Journal of Accounting and Public
Policy, 33(4), pp.303-327.
Deng, M., Lu, T., Simunic, D.A. and Ye, M., 2014. Do joint audits improve or impair audit
quality?. Journal of Accounting Research, 52(5), pp.1029-1060.
Gul, F.A., Hsu, A.W.H. and Liu, S.H.T., 2017. Parent-Subsidiary Investment Layers and Audit
Fees. Journal of Accounting, Auditing & Finance, p.0148558X17696763.
Gul, F.A., Hsu, A.W.H. and Liu, S.H.T., 2017. Parent-Subsidiary Investment Layers and Audit
Fees. Journal of Accounting, Auditing & Finance, p.0148558X17696763.
Han, S., Rezaee, Z., Xue, L. and Zhang, J.H., 2015. The association between information
technology investments and audit risk. Journal of Information Systems, 30(1), pp.93-116.
Holla, A., Das, J., Mohpal, A. and Muralidharan, K., 2015. Quality and Accountability in
Healthcare Delivery: Audit Evidence from Primary Care Providers in India (No. id: 7219).
Judd, J.S., Olsen, K.J. and Stekelberg, J., 2016. How do Auditors Respond to CEO Narcissism?
Evidence from External Audit Fees. Accounting Horizons.
Kurita, N., Miyata, H., Gotoh, M., Shimada, M., Imura, S., Kimura, W., Tomita, N., Baba, H.,
Kitagawa, Y., Sugihara, K. and Mori, M., 2015. Risk model for distal gastrectomy when
treating gastric cancer on the basis of data from 33,917 Japanese patients collected using a
nationwide web-based data entry system. Annals of surgery, 262(2), pp.295-303.
Li, Y., Li, Y., Luo, Y. and Luo, Y., 2017. The contextual nature of the association between
managerial ability and audit fees. Review of Accounting and Finance, 16(1), pp.2-20.

Shin, I.H., Lee, H.Y., Lee, H.A. and Son, M., 2017. How does human resource investment in
internal control affect audit reporting lag?. Asia-Pacific Journal of Accounting &
Economics, 24(1-2), pp.195-215.
Strecker, S., Heise, D. and Frank, U., 2015. Prolegomena of a modelling method in support of
audit risk assessment-Outline of a domain-specific modelling language for internal controls
and internal control systems. Enterprise Modelling and Information Systems
Architectures, 6(3), pp.5-24.
Watanabe, M., Miyata, H., Gotoh, M., Baba, H., Kimura, W., Tomita, N., Nakagoe, T., Shimada,
M., Kitagawa, Y., Sugihara, K. and Mori, M., 2014. Total gastrectomy risk model: data
from 20,011 Japanese patients in a nationwide internet-based database. Annals of
surgery, 260(6), pp.1034-1039.