Concept of Auditing - Assignment

Auditing

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................3
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
a. Providing an understanding about the client...........................................................................1
b. Significant accounts which are at risk of being material misstated........................................3
c. Planning materiality level........................................................................................................4
d. Audit risk assessment..............................................................................................................6
CONCLUSION................................................................................................................................1
REFERENCES................................................................................................................................2

EXECUTIVE SUMMARY
This project report is summarises as Auditing is a process of investigation and checking
the accuracy and reliability of financial statements of an organisation. In this project report,
Murray River Organics Group Limited is selected to develop an understanding about the concept
of auditing. In this project report, overview of the company is discussed. Numerous significant
accounts which are at risk are discussed along with ascertainment of materiality level. Various
issues regarding material misstatement are also discussed.

INTRODUCTION
Auditing is a process of investigation and checking the accuracy and reliability of
financial statements of an organisation. The concept of auditing is discussed by selecting an
organisation named as Murray River Organics Group Limited. Main aim of this project report is
to develop an understanding about audit plan for the conduct and scope of audit. In this project
report, various accounts at risk are mentioned which are typically misstated. Audit risk
assessment is conducted for accounts which are misstated in order to set a planning materiality
level. Basic concepts and principle are used to ascertain audit opinion of an organisation which
can help in develop judgements about financial reports. Several audit tools are used in this
project to collect evidence about the chosen company which is operating in organic products
distribution is also covered in this report. (Alles and et. al., 2018).
MAIN BODY
a. Providing an understanding about the client
Murray River Organics Group Limited is a manufacturing and distributing company
which sells organic and natural food products mainly in Australia. This company gains
competitive advantage in food industry as they deals in manufacturing and sells organic food
products. This company is a large scale organisation which is listed on Australian stock
exchange. In order to gain trust of their stakeholders and fulfil compliance of authorities,
management of this company conducts and external audit of their annual financial statements. As
an auditor of this company, audit fee of 170000 dollars are to be received. To develop an audit
plan for this company various audit standards are considered and some of them are quality
control for financial report, audit documentation, materiality and many more (Arens, 2012).
Auditing and assurance services are the independent investigation typically conducted by
external auditors in order to not only check the accuracy of financial statements but to also to
improve information so that decision makers can be more informed. The main reason for the
existence of societal demand of auditing is to protect the interest of investors and other
stakeholders. This reason also applies on the selected company. In order to better understand
auditing of Murray River Organics Group Limited, it is important to review their current
environmental aspects in which auditors of this company operate. Some of these aspects along
with their understandings are discussed below:
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Legal aspect - Murray River Organics Group Limited is a large scale company which
has fulfil compulsory external auditing. For the year 2017, auditor group of this company is
Deloitte Limited which is a large network of professional services. Legal aspects of current
environment which has to face by auditors are financial market development, corporate
ownership structure and corporate policies. Deloitte Limited has to follow all legal requirements
of independent auditors mentioned by the government of Australia in statute of Auditor General
Act 1997. Rules and regulations of this act has to follow by all auditors which directly influences
working of Murray River Organics Group Limited.
Ethical aspect – Auditors are the independent party which has various ethics to be
followed so that issue of corruption and misstatement can be evaded. These ethical aspects are
referred as code of ethics which are stated by Institute of Internal auditors Australia. Some of
these ethics can include integrity, professional care and in-dependency. Code of ethics is
necessary and appropriate for the profession of internal and external auditing, as it is founded on
the trust placed in its objective assurance. Ethics which limits external auditors are described as
rules of conduct. Basic and most important principles of these ethical environment which has to
follow by Deloitte are integrity, objectivity, confidentiality and competency (Furnham, 2015).
Professional aspect – This aspect deals with code of professionalism which has to
followed by all the auditors of Australia. While conducting audit of Murray River Organics
Group Limited, it is important for auditors to follow all their duties mentioned in code of
professionalism. The main aim of this aspect is to maintain a uniformity in the process of
auditing.
Murray River Organics Group Limited is large scale company, which has to conduct
audit. This company is considered as a client and an audit plan is required to be developed. In
order to conduct audit of any company, it is important to understand functions and operations of
a company identified above along with current environment for auditors. The concept of audit is
important to society as it helps to build trust of stakeholders on a company. From the above
information about the client it can be said that this is a public limited company which has to
conduct a external auditor which is independent. This company deals in various products and
earns reasonable amount of profit which is needed to be audited using all standards and
principles of auditing. While conducting audit of this organisation, all above aspects of auditor's
environment should be consider. Auditing is not only a process of investigating but it also
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ensures to find out what are the major problems in the financial reports and statements of a
company (He, 2018).
b. Significant accounts which are at risk of being material misstated
Audit is a process in which independent auditors investigate and check the accuracy of
financial statements. The main aim of this process is to identify any account of the organisational
statements which are materially misstated. Material misstatement is a state where any account or
report of the company is misstated due to some reasons. These reasons can include mistakes,
omission or frauds. Risk of material misstatement is the risk that the financial statements of a
company is misstated to the material extend. This risk can be identified even before
commencement of the process of audit. There are two levels which can help in assessing the risk
of material misstatement. First is assertion level where nature of the risk is identified that is
inherent risk or control risk. Second is financial statement level where risk related to frauds are
identified by determining the possibility of fraud.
It is easy to collect evidence about material misstatement when risk is high. An auditor
like auditor of Murray River Organics Group Limited uses and follows various key auditing
principles, concepts and practices in order to gather evidence of material misstatement (Hope,
2012).
There are few accounts or reports or books which are at high risk of material
misstatement due to the nature of accounts, organisation or situations. Some of the accounts
which are observed to be at high risk of misstated are mentioned below along with their auditing
principles and practices which helps in gathering evidence of material mistreatment are:
Expenditure account – For a company which deals in various products and services it is
crucial to prepare an accurate and reliable expenditure account as all products requires different
expenditures and raw material due to which classifying expenses is hard to do. This account is
observed to be material misstated in the case of Murray River Organics Group Limited. As
auditor report of this company has raised issue which states that it is hard to ascertain from
income statements to identify which expenses are capitalised. In order to gather evidence about
this information, auditor decided to use audit practice. According to this particular audit practice,
auditor obtains understanding about key controls and processes that management use. This
account deals with all the expenditures which are incurred by the organisation in an accounting
year (Knechel, 2016).
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Budgets - Another account which is considered to be at high risk from material
misstatement is budgets. Budgets are the accounts which are prepared in order to forecast future
events. The reason behind the risk of material misstatement in case of budgets are uncertain
future. These budgets are prepared by using predictions and estimations due to which it has
highest chances that these accounts can be material misstated. From the annual reports of Murray
River Organics Group Limited, it has been observed that there is misstatement in the case of
forecasted sales and estimated yield. In order to collect information regarding this misstatement,
as an auditor management's methodology is evaluated and their model of forecasting is
ascertained.
Equity – This account deals with all the items of equity such as shareholder's fund,
issued capital and others. This account is at high risk of material misstatement as changes in
equity is directly proportional to issuance of new shares. According to the auditor's report of
Murray River Organics Group Limited, it has been ascertained that this account is misstated due
to pre IPO recognition. To handle this misstatement, auditor should obtain an understanding
about the structure of the group and their recognition patterns of equity.
Remuneration report – Another account is which is at high risk of material
misstatement is remuneration account or report as this account deals with human resource
department. All the salary or remuneration paid to employees are recorded in this report and due
to ample number of employees there are high chances of material misstatement. Auditor of this
company should follow principle of fair presentation in this case (Liu, 2014).
Inventory account – This account deals with stock related with raw material, work in
process or even warehoused goods. Murray River Organics Group Limited is a large scale
company which has several inventories and due to this chaos, inventory account is at risk of
material misstatement.
The above significant accounts which are at risk of material misstatement are related with
the selected company that is Murray River Organics Group Limited. As an auditor various
principles and procedures which should be followed are also discussed above along with
accounts (Louwers, 2015).
c. Planning materiality level
Materiality level is the maximum amount by which an auditor believe that financial
statement could be misstated. Setting a materiality level is often referred as materiality level
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planning. This misstatement can be a result of mistake, an unknown error, omission and fraud. In
order to set this materiality level it is important to consider various auditing standards and
principles so that auditor's can make informative decisions. This level can be ascertained by
choosing a single base like total revenues which are taken as a whole. After fixing the base,
amount of that base is multiplied by percentage factor which is usually determined as volume of
the base (Nigrini, 2012).
From the auditing standards it has been observed that, a general range of planning
materiality is between 50 to 70 percentage which is considered as tolerable misstatement. When
risk is high at the financial statement level a lower level of tolerable mistreatment will normally
result by using factor percent. There are various factors which should be considered by the
auditor while setting a materiality level and some of them are discussed below which will help in
setting planning materiality level of this company:
Choosing a benchmark – In order to ascertain the materiality level, it is important to
choose a benchmark which is also referred as base. Under the process of choosing a benchmark,
it is important to consider various factors such as nature of entity and the industry. These base
are chosen with the reference to the most concerned element of financial statements.
Appropriate benchmark – Base which is chosen to calculate materiality level should be
appropriate as it influences quality of audit. Examples of appropriate benchmarks which should
be used in the case of Murray River Organics Group Limited are profit before tax, total expenses,
gross profit, total equity and net assets. Auditors are required to use their professional judgement
to determine the appropriateness of the benchmark.
Use of multiple benchmarks – In order to ascertain materiality level of the organisations
it is important to determine accurate level. In order to achieve that two or more benchmarks are
use and than averages are taken. This methodology is used when there is an understanding or
predicting of high materiality misstatement (Vasarhelyi, 2012).
It is the responsibility of an auditor to calculate materiality level. Main aim of this level is
to ascertain the material misstatement so that an accurate and reliable financial position of the
company can be determined and served to the stakeholders. In this case of Murray River
Organics Group Limited, materiality level can be ascertained by using benchmark of total
revenue. Materiality percentage which is advised to be used is 0.5%. calculation of materiality
level is conducted below:
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Benchmark Total revenue
Significant percentage 0.50% 0.50%
Materiality level Total revenue*Significant
percentage
48,521,720*0.5% = 242608.6
From the above calculation of materiality level it has been observed that there is material
misstatement of 242608 dollars. This misstatement is significantly low and can be ignored as this
company is a large scale business organisation which deals in several products in several
locations. In the process of set planning materiality level it is important to ascertain significant
percentage of material misstatement which auditor expects that in this company can be
incorporated. In the case of this company, material misstatement is tolerable. According to this
case determining the lower limit for individually significant items in the financial statements
taken as a whole ranging from ten percentage to hundred percent. Auditing standards clearly
indicate that tolerable misstatement is affected by risk which usually different for each financial
statement classification.
While setting a materiality level it is important to consider various points which are
discussed above that is benchmark of materiality percentage. In the case of this company, total
revenue are considered as a base or benchmark as this is a manufacturing and distribution
company which is mainly concerned with amount of sales which is earned by the business
operations. After analysis the materiality level, it can be planned that materiality level will be set
as 0.5% from which material misstatement is determined as 242608.
d. Audit risk assessment
Audit risk assessment is a process in which audit investigates the level of risk which is
involved in the accounts and reports which are prepared by the company known as financial
statements. The major objective of this process is to identify and appropriately assess the risks of
material misstatement in order to design and implement responses to the risks of material
misstatement. Procedure of risk assessment procedure involves reason of material mistatemen
whether due to error or fraud. Risk of material misstatement can arise from various sources such
as external factors. These external factors can include company specific factors and control over
financial reporting. There can be various problems when it comes to accounts which are material
misstated. Some of the issues of accounts mentioned above are:
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Over capitalisation – The first most issue that can be faced by the company due to
material misstatement is over capitalisation. While preparing expenditure account, it is important
to classify nature of expense. In this account, if the accountant failed to determine nature of
account than account can be misstated. Expenses are of two types first is capitalisation and
second is work in progress. Both types of expenses are differently stated but in the case where
some expenditures are not stated as there nature than there is a huge possibility of material
misstatement (Wang, 2014).
Forecasting – In the account of budgeting, forecasting is the major issue. Budgeting is a
process which is based on prediction and forecasting. In the process of budgeting, future events
are ascertained in order to identify what are the possibility of earning profit and expenses. Future
is uncertain and so its planning, forecasting is a process which can help in determining future
expenses and revenues. This forecasting can be result in material misstatement.
Recognition – This type of material misstatement is the result of equity account. Equity
account is the statement which includes various types of equities such as issued capital,
shareholder's equity and other. In the case of this company, an initial public offering is executed
which is material misstatement. Due to various issues in the equity, account of ipo can be
material misstatement. the demand exceeds the remaining inventory, the unmet demand is lost
and unobserved. This problem in general has a non linear state evolution, and we use moralized
probability to linearise the system.
Overlapping – This type of material misstatement is occurred due to inventory account.
According to this account, all the stock involved in the company is recorded. This tock can
include warehoused stock, stock in work in progress an draw material. As this company is large
scale organisation, there are numerous amount of inventory present.
Above are some possibilities are stated which can go wrong while conducting a audit risk
assessment. This is a process of determining what are the risk involvement in the accounts of a
company. Accounts which are mentioned above that is equity, expenditure and budgetary
accounts there are numerous possibilities of material misstatement. These issues can be tackled
by auditing principles and procedures such as integrity, objectivity and many more. While
identifying all the risk which are involved in audit risk can be analysed and then handled by
above principles. The main of this identification is to serve a reliable auditing report (Zadek,
Evans and Pruzan, 2013).
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CONCLUSION
From the above project reports it has been summarised that auditing is a process of
analysing, examining and assessing financial statements of an organisation and it is done by the
auditor who is hired by the directors of the business enterprise. There are three different aspects
that may effect the auditor these aspects are legal, ethical and professional. Some accounts like
budget, expenditure, equity, inventory etc. can be materially misstated by the company. Planning
materiality level for the organisation was $242608. The reasons for materiality misstatements are
recognition, forecasting, over capitalisation and over lapping of work. The auditor of the
organisation is mainly concerned with the identification of misstatements of different
information in the annual report of an organisation.

REFERENCES
Books and Journals:
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approach. Boston: Prentice Hall.
Furnham, A. and Gunter, B., 2015. Corporate Assessment (Routledge Revivals): Auditing a
Company's Personality. Routledge.
He, D., Zeadally, S. and Wu, L., 2018. Certificateless public auditing scheme for cloud-assisted
wireless body area networks. IEEE Systems Journal. 12(1). pp.64-73.
Hope, O. K., Langli, J. C. and Thomas, W. B., 2012. Agency conflicts and auditing in private
firms. Accounting, Organizations and Society. 37(7). pp.500-517.
Knechel, W. R. and Salterio, S. E., 2016. Auditing: Assurance and risk. Routledge.
Liu, C. and et. al., 2014. Authorized public auditing of dynamic big data storage on cloud with
efficient verifiable fine-grained updates. IEEE Transactions on Parallel and Distributed
Systems. 25(9). pp.2234-2244.
Louwers, T. J. And et. al., 2015. Auditing & assurance services. McGraw-Hill Education.
Nigrini, M., 2012. Benford's Law: Applications for forensic accounting, auditing, and fraud
detection (Vol. 586). John Wiley & Sons.
Vasarhelyi, M. A. and et. al., 2012. The acceptance and adoption of continuous auditing by
internal auditors: A micro analysis. International Journal of Accounting Information
Systems. 13(3). pp.267-281.
Wang, B., Li, B. and Li, H., 2014. Oruta: Privacy-preserving public auditing for shared data in
the cloud. IEEE transactions on cloud computing. 2(1). pp.43-56.
Zadek, S., Evans, R. and Pruzan, P., 2013. Building corporate accountability: Emerging practice
in social and ethical accounting and auditing. Routledge.
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