Auditing Theory And Practice Assignment Report

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.......................................................................................................................8
Conclusion..................................................................................................................................8
References..................................................................................................................................9

AUDITING THEORY AND PRACTICE2
Introduction
The main aim of this report is to undertake the analysis of certain crucial aspects of
auditing; they are inherent audit risk, process of debtor confirmation, requirement for
adhering to the fundamental ethical standards and others. The report is based on three case
studies. The aim of the first part of the report is to analyse the inherent risks and the factors to
be considered for the determination of preliminary materiality level. The second part of the
report undertakes the aspects of debtor’s confirmation such as strengths and weaknesses of
debtor confirmation. The last part of the report considers the analysis of ethical consideration
while conducting the audit operation of a company.
Answer to Case 1
Requirement A
The inherent risk factors of MaxSecurity are discussed below:
1. It can be seen from the provided information of MaxSecurity that the company has its
business operations within a highly specialized manufacturing industry and the
company’s main operation is to manufacture high-tech armour-plated personal
carriers. For this reason, the company is needed to maintain a protected business
environment for ensuring the protection of classified information of its products. All
these aspects create a major complex business environment for MaxSecurity and it is
needed to adopt a complex financial reporting system for such complex business
environment. This financial reporting system may include complex financial
transactions and operations in the presence of uncertain accounting estimated and
judgements. These aspects can lead to inherent risk of material misstatements in the
financial statements (Laitinen & Laitinen, 2015).

AUDITING THEORY AND PRACTICE3
2. It is needed for MaxSecurity to face a tough tendering process for winning large
government contracts in a market full of competition. This is a major source of
inherent risk factor caused from external business environment. This situation can
lead to the circumstance where the management of MaxSecurity is involved in
revenue overstatement or profit overstatement for winning the large contracts through
showing their good financial performance. This can materially misstate the financial
statements of MaxSecurity (Kim & Fukukawa, 2013).
3. MaxSecurity has recently installed an off-the-shelf costing system due to the presence
of advance and cost-sensitive nature of the design of their product. This costing
system is dependent on the manufacturing unit inputs in order to calculate and
produce database; and this system is integrate with the entries of general ledger.
Therefore, wrong entries in general ledger can lead to wrong calculation and
production of database. This is a major inherent risk that can lead to material
mistsement in the financial statements of MaxSecurity (Mock, Srivastava & Wright,
2017).
Requirement B
The auditors are needed to undertake appropriate audit planning process where they
are needed to undertake the preliminary assessment of materiality. Level of audit risk is
related to materiality level; and preliminary materiality assessment aims in establishing a
suitable quantitative level of materiality for the determination of material misstatement in
financial statements. Therefore, the auditors are needed to take into account the quantitative
threshold in order to use this as a benchmark for the determination of preliminary materiality.
There are two quantitative thresholds used by the auditors of the companies for the
determination of preliminary level of materiality. They are as follows: