DCOM204 Auditing Theory and Practice Report 2022

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
Name of the Student
Name of the University
Author’s Note

AUDITING THEORY AND PRACTICE1
Table of Contents
Introduction................................................................................................................................2
Answer to Case 1.......................................................................................................................2
Requirement (A).....................................................................................................................2
Requirement (B).....................................................................................................................3
Answer to Case 2.......................................................................................................................4
Requirement (A).....................................................................................................................4
Requirement (B).....................................................................................................................5
Answer to Case 3.......................................................................................................................6
Requirement (A).....................................................................................................................6
Requirement (B).....................................................................................................................7
Requirement (C).....................................................................................................................7
Conclusion..................................................................................................................................8
References..................................................................................................................................9

AUDITING THEORY AND PRACTICE2
Introduction
Auditing profession involves in the examination and inspection of the client
company’s financial statements and records in order to ensure their accuracy and to ensure
that proper accounting regulations have been used in order to prepare them (Knechel &
Salterio, 2016). This report undertakes the analysis of different aspects of auditing such as
audit risks, debtor confirmation process and need to comply with the ethical standards in the
profession. There are three case studies which shows different issues in auditing. The aim of
the first case is to discuss about the major inherent risks in the audit of MaxSecurities along
with the determination of preliminary materiality. The aim of the second case is to discuss
about strengths and weaknesses of debtor confirmation. The aim of the third case is to discuss
about the ethical issued faced by Meg along with the audit report option and
recommendation.
Answer to Case 1
Requirement (A)
The following discussion shows the major inherent risks in the audit of MaxSecurity
that include both industry and entity risk:
The provided case indicates the operation of MaxSecurity in a highly specialized
manufacturing industry and it involves in the manufacturing of high-tech armour-plated
personal carriers. This requires MaxSecurity to keep a secure business environment in order
to protect the confidential and sensitive nature of its vehicles’ designs. This indicates towards
a crucial aspect that this complex nature of the operations of MaxSecurity might be
associated to the complex nature of accounting and financial transactions where the company
is needed to use different accounting estimates and accounting judgments. There can be the

AUDITING THEORY AND PRACTICE3
occurrence of material misstatements in the financial statements in the presence of complex
financial and accounting transactions (Nam, 2014).
The case states that MaxSecurity needs to go through a competitive market tender
process for getting big government contracts and this can lead to inherent risk coming from
external environmental factor. In order to get these orders, MaxSecurity can manipulatively
strengthen their financial statements. This is a crucial aspect that can materially misstate the
financial statements of MaxSecurity in the presence of financial manipulation which can
develop inherent risk of auditing (Brasel et al., 2016).
It can be seen from the case that there has been the installation of an off-the-shelf
costing system in MaxSecurity for supporting its highly sophisticated and cost-sensitive
nature of product design. High reliance of this costing system can be seen on the inputs of
manufacturing units for the calculation and production of database. Integration of this system
can also be seen with the general ledge entries. Therefore, there can be occurrence of
incorrect calculation of database related to product cost and sales price in case of incorrect
general ledger entries. This incidents can materially misstate the financial statements of
MaxSecurity which can develop inherent risk of auditing (Nam, 2014).
Requirement (B)
Audit planning considers the factors that can materially misstate the financial
statements; and this shows the relationship between audit risk level and materiality. The
objective of preliminary assessment of materiality is to establish an appropriate quantitative
level of materiality for audit planning. This puts the obligation on the auditors to take into
account the quantitative threshold which can be considered as a guide to determine
preliminary materiality (Sunderland & Trompeter, 2017). Following are certain quantitative