Auditing: Concepts and Procedures

This assignment covers various topics such as explanation of sufficient appropriate audit evidence, assessment of ratios, definition of internal control weaknesses, risk associates with related party, and differences between internal and external auditors.

Auditing

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
a. Explanation of meaning of sufficient appropriate audit evidence...........................................1
b. Explanation of whether sufficient appropriate audit evidence has been obtained for each of
the situations................................................................................................................................1
QUESTION 2...................................................................................................................................2
a. Four possible explanations for the results of various ratios for Nova Ltd and explanation of
their implications for the audit.....................................................................................................2
QUESTION 3...................................................................................................................................3
a. Description of internal control weaknesses in Everyday Supplies internal control for cash
receipts and billing functions.......................................................................................................3
b. Reasons for two of the weaknesses why they are weaknesses................................................3
QUESTION 4...................................................................................................................................4
Determination of whether John has arrived at the appropriate conclusion or not.......................4
QUESTION 5...................................................................................................................................4
Description of the procedures that could be used to audit Sun Construction’s revenues............4
QUESTION 6...................................................................................................................................5
Differences and similarities of the following features of internal and external auditors.............5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Auditing could be defined as the process of verification of the financial statements that
are generated during the year. If the businesses will not be able to conduct audit of final accounts
then it may leave negative impact upon mind set of the stakeholders who analyse the financial
position of business for the purpose of making investment, providing credit or supplying goods.
Present report is based upon assessment of different auditing concepts (Groomer and Murthy,
2018). This assignment covers various topics such as explanation of sufficient appropriate audit
evidence, assessment of ratios, definition of internal control weaknesses, risk associates with
related party etc. Apart from this, assertions of occurrence, completeness and accuracy and notes
regarding differences and similarities of independence, reporting responsibilities etc.
QUESTION 1
a. Explanation of meaning of sufficient appropriate audit evidence
Sufficient appropriate audit evidence could be defined as the aspects that are required to
be focused by the auditors for the purpose of writing conclusion and support for the stakeholders.
There are various aspects that are focused while conducting auditing are relevancy, reliability,
accuracy, transparency etc. The auditors evaluate all the elements that are recorded in the
financial statements so that they can analyse that accurate information is recorded in the books in
context of all the receipts, payments, assets, liabilities, incomes and expenses.
b. Explanation of whether sufficient appropriate audit evidence has been obtained for each of the
situations
By analysing the two different situations it has been analysed that in the first situation
appropriate audit evidences are not been obtained. All the perceptual documents were not
provided by the entity in the case. On the other hand, in the second scenario t has been analysed
that appropriate and sufficient audit evidences were there (Minnis and Shroff, 2017). While
conducting the physical examination it was analysed by the auditor that the lucent has found five
variations between the perceptual records and the real amount which was involved were around
50000 dollars. Apart from this, it was deemed immaterial.
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QUESTION 2
a. Four possible explanations for the results of various ratios for Nova Ltd and explanation of
their implications for the audit
The explanations of ratios along with the implication on the audit is as follows for Nova Ltd:
Current ratio: From the current ratio’s result it has been determined that company’s
ability of paying short term liabilities is increased in current year because the value of actual is
higher than the budgeted one (Current ratio, 2020). Apart from this, in previous year it was very
low. Additionally, the company is also performing better than industry average that demonstrates
effective execution of business. It will impact the audit because it is very high and auditors have
to evaluate that the figures used to calculate it are correct or not.
Quick asset ratio: The actual ratio is same as budgeted and previous year that
demonstrates that the performance of entity is same. It is lower than industry average which
means it is not able to meet industry average. No improvement is being seen in the company’s
ability of paying current liabilities from quick assets. It will affect audit process as it is same as
last year (Moffitt, Rozario and Vasarhelyi, 2018).
Inventory turnover: Actual results are lower than budgeted ones which means the
company has not met its targets. The ratio is also decreased as compare to previous year that
shows its ability to convert goods in sales is decreased. Industry average is also very high as
compare to the actual results which is showing that company is not meeting the standards. It will
affect the audit process as auditors will have to evaluate ratios on different bases.
Net profit margin: Actual results are high which means actual performance is good.
Budgeted results are lower than actual one that shows organisation was not able to estimate it
properly. In previous year it was low which shows improvement in performance. The entity is
performing better than industry average because of high actual results. It will affect auditing
process as the performance is improved in current year as compared to previous year.
Gross margin: The organisation’s actual performance is good as compared to previous
year. Entity is also performing better than industry average. Its budgeted figures are very low as
compared to actual figures that shows weak estimation skills. It will affect auditing process as
the entity is improving the percentage of gross profit on sales (Song and Shmatikov, 2019).
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QUESTION 3
a. Description of internal control weaknesses in Everyday Supplies internal control for cash
receipts and billing functions
By analysing the case of Everyday Supplies different weaknesses are identified for the
organisation. All of them could be understood with the help of following discussion:
 Formulation of account receivable subsidiary ledger without a reconciliation: The
account receivable supervisor is not reconciling the account receivable subsidiary ledger
which is a weakness for the organisation. Due to this, the accuracy level of the
receivables may get affected and it will also leave negative impact upon the funding
which is used by the entity to fund operations.
 Cashier not having access to the journals and ledgers: By analysing whole case of
Everyday Supplies it has been determined that the cashier of the organisation is not
having access to the journals and ledgers. It is one of the main weakness because due to
this, cashier will not able to analyse that the amount recorded in journal and ledger
accounts is accurate or not. It will also affect the accuracy and transparency of cash book
which is one of the main books used for the analysation of business performance
(Vanstraelen and Schelleman, 2017).
 Large duration of credit to the contractors: The case of Everyday Supplies is
demonstrating that the duration which is provided by the organisation to the contractors is
very long and due to this the possibility of bad debts is very high. If this much time will
be provided to them then it may result in lack of funding for the organisation and will
also leave negative impact upon functionality of business.
 Inappropriate management procedure: The management process of cashier,
bookkeeper and account receivable supervisor is inappropriate. They have to follow
unnecessary processes for recording the information in the books. Due to this, the time
required for formulation of reports is very high and it is affecting the effective execution
of the organisation (Libert, 2018).
b. Reasons for two of the weaknesses why they are weaknesses
Two of the main weaknesses of the organisation are as follows and these are described
with the reasons due to which these are treated as the weaknesses:
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 Formulation of account receivable subsidiary ledger without a reconciliation: The
main reasons for considering it a weakness is that if the account receivable supervisor
will not focus towards reconciliation with the ledger then it will result in inaccurate
transactions in the books. Due to this, whole process of credit receiving may get impacted
because if the records will not eb reconciled then it will be very difficult to estimate that
the actual amount is received or not.
 Cashier not having access to the journals and ledgers: Cashier of the organisation is
not having access of ledgers and journals due to which it will be very difficult to analyse
that actual cash is recorded in the cash book according to organisation’s receipts or not. If
the entity will not be able to deal with this weakness then it may leave negative impact
upon functionality of operations in long run (William Jr, Glover and Prawitt, 2016).
QUESTION 4
Determination of whether John has arrived at the appropriate conclusion or not
John Smith who is new junior employee in the auditing firm concluded that as all the
internal control of Taxon Ltd were working so the auditing team can use the analytical processes
alone for audit payments that are made to the related parties. BY analysing the whole situation, it
has been evaluated that John has not arrived at right conclusion because all the payments that are
made by the entity should have CFO’s signature of approval. Six out of ten payments were
having the written approval but four of them were not having it which may result in issues for the
organisation in long run. It may create the risk associated with the related party transaction
because if there will be no signature of CFO on the receipt then the receivers may raise issue and
it will create difficulties in maintenance of the transactions. Apart from this, it may also result in
the reliability of the controls within the organisation because if all the payments will not be
signed by CFO then it will affect the reliability. Due to this the payments receivers may have
issues that the receipt which is received by them is not approved by the chief finance officer of
the company (Yu and Wang, 2017).
QUESTION 5
Description of the procedures that could be used to audit Sun Construction’s revenues
The processes which could be used to audit the revenues of Sun Construction are as follows:
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Occurrence: In order to work on this assertion, the auditors can analyse all the
transactions that are made by Magi during the year as it will help to evaluate the actual occurred
transactions.
Completeness: Under this type assertion the auditor can analyse that all the receipts and
payments are mentioned in the accounting books or not so that accurate records could be
generated.
Accuracy: It is last assertion and the process which could be undertaken by the auditor
for the organisation is checking the records and the bills that are provided by Magi to the clients
as it will help to analyse the accuracy of all the transactions.
By paying attention towards above described processes appropriate audit for all the final
accounts of Sun Construction could eb conducted and the revenues could be audited in
systematic manner (Zhang, Wang and Xu, 2019).
QUESTION 6
Differences and similarities of the following features of internal and external auditors
Internal auditors: A trained professional who is tasked with making independent and
accurate evaluation of the entity’ operational and financial performance. Main role of them is to
make sure that the company is following correct procedures to formulate the financial
statements. They are responsible for providing independent assurance of that the business is able
to conduct all the procedures of risk management, governance etc. in systematic manner or not.
These are the individuals who are member of board, trustees, accounting officers and the whole
audit committee of the organisation.
External auditors: The person who is a public accountant who is responsible to conduct
audit of all the final accounts, review the position of company and work for all the clients.
External auditor is an independent person who works independently for all the clients and remain
impartial to evaluate the financial statements which are formulated for evaluation of actual
performance of the entity. These are appointed by the shareholders of the company and if they do
not appoint them then directors appoint them (Simeunović, Grubor and Ristić, 2016).
Difference between external and internal auditors: There are various differences
between internal and external auditors of the company. All of them could be understood on the
basis of following discussion:
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Basis Internal auditor External auditor
Independence These are independent when
they are rendering the
unbiased and impartial
judgement while getting
engaged in the assessment
process of final accounts.
These are independent from
parties which are having
interest in the results that are
reflected in the final accounts
of the company. It is
characterised by integrity and
an approach which is based
upon objectives of the auditing
process (Kwok, Juergens and
McLaws, 2016).
The work carried out on
systems of internal control and
operations
Internal auditors work for
evaluating the internal control
and find ways to make
improvements in the same so
that performance of the
company could be improved.
External auditor conducts an
accurate and unbiased auditing
for the financial statements
that are generated by the entity
so that the accuracy level of
them could be determined.
Reporting responsibilities The main responsibility of
objectively assessing the
business processes. They are
also responsible for making
sure that all the laws,
regulations and principles are
followed by the entity while
generating the financial
statements (Carey, Liu and
Qu, 2017).
An external auditor is
responsible for inspecting all
the final accounts generated by
the company so that all the
frauds, errors and
misstatements could be
caught. Apart from this,
external auditors are
responsible for performing
audit on systems, operations
and accounts.
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Similarities between external and internal auditors: There are various similarities
between internal and external auditors. All of them could be understood with the help of
following discussion:
 Independence: Both type of auditors has independence of providing accurate opinion on
the actual position of the company so that engagement of stakeholders could be
maintained.
 Work carried out on systems of internal control and operations: Internal as well as
external auditors work for assurance of compliance of accurate rules for auditing
(Zhaokai and Moffitt, 2019).
 Reporting responsibilities: Internal and external auditors have main responsibility of
making sure that company’s records are audited properly as it is required for providing
detailed information of business to the stakeholders.
CONCLUSION
From the above project report it has been concluded that auditing is the process of
analysing accuracy of level of information which is recorded in the final accounts. It is very
important for the auditors to have appropriate audit evidences as it can help to analyse that
accurate information is recorded in the books or not. There are two different types auditors which
are internal and external and all of them have different characteristics. These are independence,
reporting responsibility and the work carried out on the systems.
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REFERENCES
Books and Journals:
Carey, P., Liu, L. and Qu, W., 2017. Voluntary corporate social responsibility reporting and
financial statement auditing in China. Journal of Contemporary Accounting &
Economics. 13(3). pp.244-262.
Groomer, S. M. and Murthy, U. S., 2018. Continuous Auditing of Database Applications: An
Embedded Audit Module Approach1. In Continuous auditing. Emerald Publishing
Limited.
Kwok, Y. L. A., Juergens, C. P. and McLaws, M. L., 2016. Automated hand hygiene auditing
with and without an intervention. American journal of infection control. 44(12).
pp.1475-1480.
Libert, T., 2018, April. An automated approach to auditing disclosure of third-party data
collection in website privacy policies. In Proceedings of the 2018 World Wide Web
Conference (pp. 207-216).
Minnis, M. and Shroff, N., 2017. Why regulate private firm disclosure and auditing?. Accounting
and Business Research. 47(5). pp.473-502.
Moffitt, K. C., Rozario, A. M. and Vasarhelyi, M. A., 2018. Robotic process automation for
auditing. Journal of Emerging Technologies in Accounting. 15(1). pp.1-10.
Simeunović, N., Grubor, G. and Ristić, N., 2016. Forensic accounting in the fraud auditing
case. The European Journal of Applied Economics. 13(2). pp.45-56.
Song, C. and Shmatikov, V., 2019, July. Auditing data provenance in text-generation models.
In Proceedings of the 25th ACM SIGKDD International Conference on Knowledge
Discovery & Data Mining (pp. 196-206).
Vanstraelen, A. and Schelleman, C., 2017. Auditing private companies: what do we
know?. Accounting and Business Research. 47(5). pp.565-584.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic
approach. McGraw-Hill Education.
Yu, J. and Wang, H., 2017. Strong key-exposure resilient auditing for secure cloud storage. IEEE
Transactions on Information Forensics and Security. 12(8). pp.1931-1940.
Zhang, X., Wang, H. and Xu, C., 2019. Identity-based key-exposure resilient cloud storage
public auditing scheme from lattices. Information Sciences. 472. pp.223-234.
Zhaokai, Y. and Moffitt, K. C., 2019. Contract analytics in auditing. Accounting Horizons. 33(3).
pp.111-126.
Online
Current ratio. 2020. [Online]. Available through:
<https://www.readyratios.com/reference/liquidity/current_ratio.html>
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