Auditing Theory and Practice: Analysis of Three Case Studies

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
Case 1.........................................................................................................................................2
Requirement (a)......................................................................................................................2
Requirement (b).....................................................................................................................3
Case 2.........................................................................................................................................5
Requirement (a)......................................................................................................................5
Requirement (b).....................................................................................................................5
Case 3.........................................................................................................................................7
Requirement (a)......................................................................................................................7
Requirement (b).....................................................................................................................8
Requirement (c)......................................................................................................................8
References................................................................................................................................10

AUDITING THEORY AND PRACTICE2
Introduction
Auditing is considered as the process to undertake the financial statements and
records of the companies in order to make sure that they are accurate and have been prepared
in accordance with the required accounting rules and regulations. The main aim of this report
is to undertake the analysis of three provided situation in auditing. Analysis of the first case
study undertakes the analysis of involved inherent risks along with determining the factors to
consider for determining preliminary materiality. Analysis of the second case study
undertakes the valuation of the strengths and weaknesses of the debtor confirmation. Analysis
of the last case study undertakes the evaluation of ethical issues in auditing along with audit
report and recommended course of actions.
Case 1
Requirement (a)
Inherent risks are considered as those risks that cannot be protected by the internal
control of the companies (Ruhnke & Schmidt, 2014). It can be seen from the provided
information of MaxSecurity that there are certain factors that can lead inherent risks; these
are mentioned below:
I. As per the provided information, MaxSecurity operates in a highly specialized
manufacturing industry where they manufacture high-tech armour-plated personal
carriers. For this reason, the company has to maintain a highly secure environment
because of sensitive and confidential nature of the design of its vehicles. It implies
that business operations of MaxSecurity is complex in nature and this complexity in
the business operations can be connected to the complexity in the financial
transactions of the company where high accounting judgments as well as assumptions
can be involved. Complex nature of financial transactions can lead to material

AUDITING THEORY AND PRACTICE3
misstatements in the financial statements that can affect the company’s financial
reporting process (Coetzee & Lubbe, 2014).
II. According to the case, MaxSecurity has to face a competitive market tender process in
order to acquire large government contracts and this can be considered as a major
external environmental factor for inherent risk. This aspect can create pressure on
MaxSecurity in order to strengthen their financial statements in order to win the
contracts. This can lead to material misstatements in the financial statements of in
order to strengthen their financial position in manipulative manner. This can lead to
the development of inherent risk (Griffiths, 2016).
III. As per the provided information, MaxSecurity has recently installed an off-the-shelf
costing system in order to support their highly sophisticated as well as cost-sensitive
nature of product design. It can be seen that this manufacturing costing system is
highly dependent on the manufacturing unit inputs in order to calculate and produce a
database (Johnstone, Gramling & Rittenberg, 2013). In addition, this system is
integrated with the general ledger entries. Therefore, any error in the general ledger
can lead to wrong calculation as well as production of database of all product cost and
recommended sales price. This aspect can affect the financial statements of
MaxSecurity in major negative manner and this can be considered as a major inherent
risk of the audit of MaxSecurity (Botez, 2015).
Requirement (b)
At the time of audit planning, the auditors are needed to consider the aspects that can
make the financial statements materially misstated due to the fact that there is a relationship
between materiality and level of audit risk. The main aim of preliminary assessment of
materiality is the establishment of a suitable quantities materiality level in order to plan audit
procedures along with the selection strategies (auasb.gov.au, 2019). Therefore, it is needed