Understanding the Auditing Process

The assignment delves into the intricacies of the auditing process. It highlights the significance of early recording in financial statements, risk assessment in identifying operational issues, and the crucial role of auditors in detecting quantitative and qualitative errors. The text emphasizes the need for auditors to thoroughly comprehend their clients' businesses through various sources like financial statements, discussions with stakeholders, and internal practices.

AUDITING

Contents
1: Executive Summary.....................................................................................................................3
2: Introduction.................................................................................................................................4
Key information:..............................................................................................................................5
a) Gain an understanding the client.............................................................................................5
b) Identify five (5) significant accounts most at risk of being materially misstated...................6
c) Set planning materiality level..................................................................................................7
d) Identify what can go wrong (audit risk assessment) for each of the five (5) accounts selected
in (b). Justify your Audit Risk assessment..................................................................................9
4: Conclusion.................................................................................................................................11
References......................................................................................................................................12

1: Executive Summary
The basic purpose of preparing financial accounts is to know and to provide correct position of
the company in the market at the ending of the accounting period. Making of financial accounts
is a very long and detailed process to provide correct finance position to its users. Many financial
decisions are dependent on this report. Investors invests in the company only after knowing
many factors like _ financial position, whether the company is running in loss or profit etc. These
accounts shows the true picture of the company's debt. Companies get credit from the bank only
after showing this report to the concerned bank at the time of taking note. The financial reports
also help in finding the materiality and fixing the limits which is helpful in reducing the cost and
expenses of the company. Creditors and investors came to know about the earning, profit, about
debts level, cash flow, investments made by the company during the whole accounting period

2: Introduction
Financial statements are an important aspect of any business organization in analysing the
company's financial position and statement which includes balance sheet, journals, profit and
loss account, and statements of the company. It is necessary for every company to analyse its
financial accounts time to time. It also provides information regarding net profit, gross profit,
operating profit. Sales amounts are divided by these to find out the profit. All activities regarding
investing, financing, sales, profit, operational are summarized under the financial statement of a
company (Blay, 2005). Financial statements are generally audited by the company to know about
the frauds and other fraudulent means in the accounts also the business growth. Accounts are
sometime audited by the Government departments to find out any tax evasion, financing etc.
Financial statement is includes of three statements:
 Income statement
 Balance sheet
 Cash flow statement.
Auditors, Accountants are fully dependent on these statements to prepare financial statement.
These three are also called as Annual report. Financial statements are summarized annual
reports. These statements provide information to many users like managers, shareholders,
prospective investors, financial institutions, suppliers, employers, competitors etc. These
financial reports are made by the company to show the financial position of a company at the
ending of the accounting period. This statement is the main source of information for many
decision makers of the company.

Key information:
a) Gain an understanding the client
MYOB (Mind Your Own Job) is a public company founded in the year 1991 by Christopher
Lee including a team of developers at Teleware, Inc. which develop accounting software’s. Its
headquarters are in Glenwaverely, Victoria, and in Australia. Teleware was acquired by Best
Software Inc. in 1993. MYOB products were republished by Data Tech Software and in the year
1997 it entered into an agreement with Best Software to purchase the company and changed its
name to MYOB, Inc. and also bought the property rights of MYOB software. In 1999 Data Tech
Limited changed its name to MYOB. After that it was listed on the Australian Stock Exchange
on July 9, 1999. In 2009 the bid to completely takeover the company was taken by a private
equity consortium led by Bain Capital. The amount of takeover deal was undisclosed. By this the
Bain Capital acquired a major stake in its shares including the management. Mind Your Own
Business is an Australian Multinational Corporation. It provides more than 50+ products to the
small and medium businesses.
It provides wide range of products and services relating to accounts like _ accounting software’s,
payroll, customer’s relationship management, job management, human resource management,
profession tax products. It also provides tax accounting and other services to the small and large
businesses. The main aim of MYOB is to provide efficient accounting Software’s, tools at very
reasonable price to the businesses. It helps to small start-ups, small and medium businesses by
giving every possible help and guidance through its management. At present MYOB is providing
its assistance to over 1.20 million Australian and New Zealand companies by making available it
50 + products. This company also have around 40,000 accountants, bookkeepers and other
profitable partners working with the company in its development and in achieving its set goals
and objectives (Cook, Brown and Lightle, 2009).
Approximately over 60% companies of Australia and New Zealand use accounting software’s of
MYOB because they are safe, easy to understand and less time consuming in the work. Its real
purpose to give every possible help to the start-ups and small businesses to be more productive,

in saving their time and be more competitive in market. It supplies a large range of desktops,
cloud based management system therefore there are different segments of operations.
b) Identify five (5) significant accounts most at risk of being materially
misstated
In this ASA315 this auditing standard is used by AUASB by the help of this standard by this
entity and environment is identified and the risks can examine which is related to the material
statement. This standard of auditing forms fundamentals and applications and some material is
the responsibility of the auditor. The duty of auditor is to find out the risks with the help of
systematically procedures to the understanding of the entity and the internal system which is
related to the audit. ASA520 shows that with the help of this accounts can examine those
accounts in which statement is wrong (Botica, 2012). ASA230 it is audit documentation is used
to identify the documents and also identify the every aspect of auditing and document must be in
an order. In addition to this, the weakness of the financial report of entity is due to material
misstatement, and also find out those entities which suffered from error and frauds and later this
error and frauds are solve out by engagement team. ASA230 it is documentation is used for
verify the each document in the audit. Following are five accounts at risk of being materially
misstated:
ACCOUNT REASONS
Sales account Sales account can be said as the significant account most at risk of being
materially misstated because MYOB has many different segments from
where they are earning revenues (Young and Coleman, 2010).
Cash and cash
equivalents account
Cash and cash equivalents account is the account that management or
finance manager has to handle carefully because they are highly liquid
and can be manipulated or stolen. Therefore it is possible that cash and
cash equivalents can be materially misstated. In case of MYOB Limited,
Cash and cash equivalents holds significant value in current assets and

in total assets (Burgherr and Hirschberg, 2014).
Inventories Account It can be observed from the statement of financial position, that
inventories has significant holding in total current assets. Since MYOB
has different business segments therefore inventories from different
businesses needs to be taken care and managed (Pickett, 2010). While
valuating inventories, many estimates and valuations bases needs to be
decided.
Reserves Reserves includes amount that are available for business expansion of
business and these amount are kept aside (Spires, 1991). From the
analysis of statement of financial position, it has been observed that
reserves have been significantly reduced from last year’s figure.
Finance cost From the analysis of financial statements, it has beenobserved that
finance cost has been significantly reduced from last year’s figure.
Therefore there is possibility that there can be any material
misstatement.
c) Set planning materiality level
Materiality is defined as it is an auditing tool which is related to any amount, transaction, and
discrepancy it is known as materiality. While preparing the final statement auditors sets the limit
or the level of companies which are small or big that the amount or the item must be in the limit
in the financial statement. It is known as materiality. In this with the help of audit report it shows
the clear pictures of the financial statement of the company but still the audit and assurance does
not provide the 100%gurantee that the financial statement is prepared by the auditors by the help
of this also the financial statement of the company is not may be in the good position (Chen and
Pevzner, 2012). Only with the help of this report, a path can be provided for decision-making.
Audit report works it is based on the decision-making process of the company then only they can

examine the different business operations and the financial position of the company. A material
error or frauds can occur so to solve these error auditor must have to examine all accounts or the
material amount. In addition to this auditors must have to finalize the limit of the material
amount if the amount is beyond the limit it affects the stakeholders and the decision-making
process. It is the responsibility of the auditor to solve out the problem of auditing and the also
solve out the financial statement material account.
In this two types of materiality is mention and they have to be managed by the auditor’s i.e.
performing and planning materiality. These standards set by ASA320 for the organization which
sets the accounting standards. The performing materiality is used by the audit team to sets the
process of the audit and the planning materiality is used by the auditor at the starting level of
auditing. In this the planning materiality can be used or not as final planning, even changes can
be done. In this condition must identify these issues. The identification of the materiality is
known as a professional experience. In this level of skills of the audit is needed for the
materiality (Knechel and Salterio, 2016).
In this MYOB limited, materiality level can be check while considering the revenue comes by
examining the sale of the company of the previous year and till now. The base is the most
important for any company if the base is not found of any company it became tough to calculate
the materiality same as in MYOB Financial statements are an important aspect of any business
organization in analysing the company's financial position and statement which includes balance
sheet , journals , profit and loss account, statements of the company. It is necessary for every
company to analyse its financial accounts time to time. It also provides information regarding net
profit, gross profit, operating profit. Sales amounts are divided by these to find out the profit. All
activities regarding investing, financing, sales, profit, operational are summarized under the
financial statement of a company (Ianniello, 2015). Financial statements are generally audited by
the company to know about the frauds and other fraudulent means in the accounts also the
business growth. Accounts are sometime audited by the Government departments to find out any
tax evasion, financing etc.
Materiality = $ 370,417,000 * 0.001 % = $ 370,417

d) Identify what can go wrong (audit risk assessment) for each of the five (5)
accounts selected in (b). Justify your Audit Risk assessment
Audit risk is of three types auditing assurance and risks. These risks are considered of
controllable risks and uncontrollable risks. Audit risks mainly consist of or it is a combination of
three types of risks in the auditing 1) Audit risk is a bigger risk in audit and these risks are
considered only after considering the all three risks. 2) Audit risks are also known as auditor’s
inability for e.g. while preparing the financial statement of the organization is posted wrong and
the auditors are also failing to identify the error (Sidortsov, 2014).
Audit risk = Control risks x Inherent risk x Detection risk
Inherent risk: Inherent risks are those risks which occur due to risks which include the judgment
and estimations are required. Inherent risks are those where the decision is taken on the basis of
personal experience and judgment and due to this inherent risks factor increase high. This
inherent risk is known as uncontrollable risks and risks can be controlled based on the judgments
and non-estimated decision and as a result, failure can be control.
Control risk: Control risk can occur due to having the lack of internal control system is executed
in an organization and due to this effect is on the financial statement and error and frauds done.
The control risk is not used at the level of the control system and due to this control risk occurs
in the business operation (Hoelzer, 2011).
Detection risk: Detection risk can occur when the auditors cant is able to detect the errors and
frauds in the financial statement of the company. The risk can be detected or it depend on the
ability of auditors skills of auditing.
(Samociuk and Iyer, 2017)
ACCOUNT Inherent risk Control risk Detection risk

Sales account Moderate risk High risk Moderate risk
Cash and cash equivalents account High Risk High risk Moderate risk
Inventories Account High risk
(Singleton and
Singleton, 2011)
High risk High risk
Reserves Low risk High risk Moderate risk
Finance cost Moderate risk Moderate risk Moderate risk
(Handsworth, 2012)

4: Conclusion
The method of auditing used for that the financial transactions are recorded properly or not in the
financial statement of the company at the end of the year. Auditing method is used for ensuring
that the books of accounts are proper manage or not books of accounts must be proper
management and there is no error occurs and also pay attention that there are no frauds done in
the books of accounts. With the help of auditing, the business organization can easily evaluate
the risks as soon as possible in the books of accounts. The auditing process is also used in
finding the features related to the operation of the business property. With the help of audit
process, auditors must have to pay attention for finding the errors related to the qualitative and
quantitative aspect. Errors can also affect the audit process and by this audit report can be
affected. In this auditing, it is most important for auditors to understand the client business. As
working continuously it has become easy for the auditors to estimates the transactions events and
practices, financial information and also the practices related to financial aspects. Auditors also
have the power to understand the entity of a number of sources such as company’s financial
statement of current and previous years, books of accounts, discussion with client and employees
etc.

References
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Burgherr, P. and Hirschberg, S. (2014). Comparative risk assessment of severe accidents in the
energy sector. Energy Policy, 74, pp.S45-S56.
Chen, Krishnan & Pevzner, 2012. Pro forma disclosures, audit fees, and auditor resignations.
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