Auditing: Identifying and Assessing Risks of Material Misstatements

This memo highlights the account balances exposed to audit risks owing to the ongoing business practices of Steel Limited. It outlines the key assertions involved with the identified accounts and recommends an audit plan as per the requirement of ASA 300.

Running head: AUDITING
Auditing
Name of the student
Name of the university
Student ID
Author note

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Ref:
To: Audit manager
From: Audit Senior
Date: 30th June 2018
Subject: Audit for Steel Limited
Introduction
As the audit manager of XYZ Limited, I have completed the preliminary assessment of Steel
Limited for planning the audit of the company. Main objective of this memo is to highlight
the account balances exposed to audit risks owing to the ongoing business practices of the
company as outlined under ASA 315 – Identifying and Assessing the Risks of Material
Misstatements through Understanding the Entity and its Environment’. The memo will further
outline the key assertions involved with the identified accounts (Knechel and Salterio 2016).
Finally, based on the misstatement audit plan will be recommended as per the requirement of
ASA 300 – Planning an Audit of a Financial Report.
Accounts involved with risks and key assertion
Delayed shipments due to tight checks by the custom officials from Australia will definitely
have an adverse impact on sales and the associated account that is accounts receivables.
Sales revenue as well as the accounts receivable will also be impacted as Indian customers
are intimidated to deduct 20% of payments due as a penalty against time lost in production
(Louwers et al. 2015). Further, the inventories will also be at risk as one of the customers of
Steel limited, Construction Limited claimed that the latest batch of the steel delivered by the
company contains high level of the cheap additives like boron. This in turn will turn down the
customer to purchase further steel from the company and will leave negative impact in the
market that will result into lower level of sales and excess level of inventories. Further due to
mismatch in payment system that is split of the payments in $AUD amounts and $US
amounts the accounts payable will also be at risk (Contessotto and Moroney 2014).
As the company is not able to make the delivery on time due to time lost in checking by
Australian custom officials, it is expected to lose significant amount in sales that will
eventually have an impact on the amount of account receivables. However, if the company

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want to report same level of profit as previous years it will definitely misstate its sales
revenue and account receivable. Key assertion that will be associated with the misstatement
of sales and account receivable is (i) Occurrence that is the transactions reported under sales
have actually taken place and (ii) accuracy that is the amounts reported under sales
transactions have been recorded at proper amounts (Graham, Bedard and Dutta 2018).
As one of the customers of the company claimed that the latest batch of delivery contains
high level of boron that will eventually affect the strength of metal, it is likely that they will
not place big order with the company immediately. It will result into obsolete inventory and
slow movement of the inventories. To cope up with this company may not use the lower of
realizable value or cost, whichever is lower for recognizing inventories. Key assertion
involved with misstatement of inventories is accuracy that is the amounts reported under
inventories have been recorded at proper amounts using proper recognising method (Sindani,
Sakwa and Namusonge 2017).
Under fully integrated payment system that is recently upgraded by Steel Limited for
accounts payable has been detected with some issues with creditor ledger regarding splitting
off the $AUD amounts and $US amounts. It eventually led to inaccurate balances of
creditors. It further led to issues related to month end rollovers for creditor’s balances. Key
assertion involved with misstatement of account payable is accuracy that is the amounts
reported under accounts payable have been recorded at proper amounts using proper
valuation method (Barndt, Fuller and Flynn 2016).
Recommended audit plan
As the inherent risk and the control risk of the company is at higher levels, the audit plan
must be made to lower the level of detection risk with the help of substantive audit procedure.
Audit plan shall be made to test and analyse the transactions related to sales, inventories and
accounts payable in detail. As sales is the major source of income sales transaction are always
susceptible to misstatements. Sales transactions shall be verified with the sales register along
with the name of customers and unit selling price. Further, the sales made on credit basis that
is directly associated with accounts receivable shall be verified through balance confirmation
from third parties as per the requirement of ASA 505. Inventories shall be verifies with
inventory register and physical stock checking as per the requirement of ASA 501. Further,
the recognition method of inventory shall be verified to assure that the inventories are not
over stated or understated. Accounts payable shall be properly segregated into $ AUD and $

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US to assure that the month end creditors balance is recorded at proper amount. Finally, for
all the above mentioned account the auditor shall carry out the audit for detecting fraud as per
the requirement of ASA 570. Further, the representation letter from management shall be
obtained for documenting the management’s view regarding the expected performance of
Steel Limited.

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Reference
Barndt, Richard J., Lori R. Fuller, and Kevin E. Flynn. "Teaching Inherent Risk and
Tolerable Misstatement in Auditing: A Modified Delphi Method as a Teaching Tool."
In Advances in Accounting Education: Teaching and Curriculum Innovations, pp. 125-140.
Emerald Group Publishing Limited, 2016.
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 K. Dutta. "Practitioner Summary of"
Managing Group Audit Risk in a Multiple Component Audit Setting"." Current Issues in
Auditing(2018).
Knechel, W. Robert, and Steven E. Salterio. Auditing: Assurance and risk. Routledge, 2016.
Louwers, Timothy J., Robert Joe Ramsay, David H. Sinason, Jerry R. Strawser, and Jay C.
Thibodeau. Auditing & assurance services. McGraw-Hill Education, 2015.
SINDANI, Mary Nelima LYANI, Maurice SAKWA, and Gregory S. NAMUSONGE.
"Accounts Receivable Risk Management Practices and Growth of SMEs in Kakamega
County, Kenya." (2017).