Impact of Audit Quality on Financial Reporting

This assignment examines the crucial role of audit quality in ensuring reliable and transparent financial reporting. Students will analyze how various factors, including auditor competence, independence, and internal control assessments, influence audit quality. The impact of audit quality on the accuracy and timeliness of financial statements, as well as its implications for stakeholders, will be explored. Students are expected to demonstrate a deep understanding of auditing standards and their practical application in enhancing financial reporting integrity.

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Auditing

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Contents
Introduction.................................................................................................................................................3
1. Report on the knowledge gained of CSR Limitedand its environment:...................................................3
2. Identify and assess its business risk:........................................................................................................4
3. From your risk identification identify three (3) specific account balances (not account classifications)
that you consider at significant risk of material misstatement. For each of the three account balances
you identify:................................................................................................................................................5
Conclusion.................................................................................................................................................14
References:................................................................................................................................................15

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Introduction
This study helps in developing an understanding of CSR Limitedand the different environments which
impact the organization. Industry factors, regulatory factors and various other external factors affect the
working of CSR Limited. To deal with these factors, the management of CSR Limiteddefine overall goals
and objectives of the organization in order to make the plans. This study also provides a detailed
understanding of various business risk of CSR Limited. The business risk also includes various internal
and external events which are relevant to the preparation of financial statements of the organization.
This study also provides details of business risk that may consider at significant risk of material
misstatement in the account balances of financial statements of CSR Limited.
1. Report on the knowledge gained of CSR Limited and its environment:
The Entity and its environment
Industry Factors
The industry factors which impact CSR Limitedare competitive environment, customer relationships,
organization relation with its suppliers and different technologies advancement. The other industry
factors which will impact CSR Limited are energy supply and cost, price competition and seasonal
activities. The industry in which CSR Limited is carrying out its operations may lead towards risks of
material misstatements in the financial statements (Australian Government, 2017). These material
misstatements arise from the degree of regulations and the nature and objective of the business of the
organization.
Regulatory Factors
The regulatory environment of CSR Limited is composed of applicable accounting policies and financial
framework and the political and legal environment. The other regulatory factors which affect the
organization are industry specific practices which are formed by government and the regulations which
may impact the operations of the organization. Foreign exchange policies, monetary policies, fiscal
policies and trade restriction policies are the regulatory factors which impact CSR Limited (Berg, 2010).
Other External factors

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The other external factors which impact CSR Limited are general economic conditions of the
organization, interest rates, availability of loan in the country and revaluation of currency.
Nature of CSR Limited
CSR Limited is carrying out its business activities in according with the industry factors, regulatory factors
and other factors. To deal with these factors, the management of CSR Limited define overall goals and
objectives of the organization in order to make the plans. The management of the organization
formulates various strategies in order to achieve the goals and objectives and theses strategies by the
top management changes from time to time (De Martinis et. al., 2011).
For assessment of risk, the auditor should develop a proper understanding on the nature of CSR Limited.
The nature of CSR Limited primary consists of ownerships, governance and the other types of
investments. The Auditor should also identify the structure of CSR Limited and the availability of finance
for the organization. This understanding will help the auditor to properly make an understanding about
classes of transactions, disclosures and account balances in the financial reporting system (Keane et. al.,
2012). The auditor should also develop an understanding about the ownership and the key personnel of
CSR Limited and their relationship with each other in order to identify the related party transactions in
the organization.
The auditor should develop an understanding about the measurement of the financial performance of
CSR Limited. Financial performance measurement in the organization always creates inbuilt pressure to
take some reasonable steps in order to improve the performance of the organization. This will help the
auditor to identify whether the management actions can lead towards material misstatement or not.
The The auditor should obtain a particular understanding through carrying out various procedures
regarding risk assessment in order to identify the design of controls which can play an important role in
the audit of the financial statements of the organization (Asare and Wright,2012). This will also help the
auditor that these controls have been implemented in the organization or not.
2. Identify and assess its business risk:
There is various business risk of CSR Limited which is discussed here. The business risk can be regarding
to the preparation of the financial statements according to the applicable financial standards and
reporting system prevalent in the country. The business risk to the organization can be to make an
estimation of the importance and assessment of the occurrence of transactions in order to make a

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decision regarding the results which have to be attained. The business risk also includes various internal
and external events which are relevant to the preparation of financial statements of the organization.
The internal and external events in the organization have the ability to affect the financial reporting and
the financial data consistently (Aldamen et. al., 2012). The management of the organization can make
plans and actions in order to mitigate the risks. The business risk in the organization can arise due to
some changes in the circumstances-
 When there is a change in the operating environment of the organization then there arises a risk
of competitive pressure which can lead towards the risk in misstatements of account balances
regarding assets and liabilities and equity interest (Lary and Taylor,2012).
 When new personnel is hired in the organization than this raises the risk of misstatement in the
transactions of the financial statements because the individual may have different focus towards
development on understanding of accounting policies and practices adopted by CSR Limited.
 If the new information technology system is implemented in the organization than this arises
the business risk of misstatements in the financial statements because rapid changes in
technology can made the personnel of CSR Limited incapable of development of an
understanding of how the calculations has to be done with these new systems of the
organization (Azim, 2012).
 If CSR limited wants to do corporate restructuring than it arises the risk of misstatement of
assets and liabilities because the professionals will face difficulties in segregation of the liabilities
and assets.
 Adoption of new accounting practices and policies by CSR limited can lead the business risk of
misstatement in the financial statement because changes in accounting principles always have
affect on financial reporting (Stanley and Marsden, 2013).
 CSR Limited is thinking of entering into new business areas and wants to expand its business
which may lead towards business risks as it will lead towards misstatement in the transactions
of the various account balances of the organization (Mazza and Azzali, 2015).
3. Three (3) specific account balances (not account classifications) at significant risk of material
misstatement
Specific account balance

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Assets and
Liabilities
Equity
Interests Transactions
(a) Explain why the account balance is at
significant risk of material misstatement.
The account
balance of
assets and
liabilities can
be at significant
risk because
there can be
over statement
in the assets
and liabilities of
CSR limited.
There can be
inclusion of
fictitious
receivables or
inventory
which can lead
towards
material
misstatement.
This
phenomenon is
very much
related to the
happening of
occurrence of
transactions in
the
organization.
The account
balance of
equity
interests of
CSR Limited
can be at
significant risk
when equity
interests are
not valued and
recorded
properly and
all the
information
regarding
account
balance of
equity
interests are
not disclosed
properly.
There arises a
significant risk
if the balance
of equity
interests has
not shown an
appropriate
amount at the
The account
balance of
transactions
of the
organization
is at
significant risk
of material
misstatement
because if the
transactions
are not
recorded
when actually
occurs and
does not
relate to the
organization.
If there have
been errors at
the time of
preparation of
financial
statements or
at the time of
posting the
transactions
into ledger
than it can

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There can be
omission in the
assets and
liabilities Of
CSR Limited
that has not
been disclosed
by the
organization
and thus
generates the
significant risk
of material
misstatement
(Christensen et.
Al., 2012).
time of
valuation and
the balance of
equity
interests has
not recorded
in the proper
accounts. If the
equity
interests of the
current
accounting
period are not
recorded than
it can lead
towards
material
misstatements.
lead towards
significant
risk. The
transactions
are not
measured
properly at
the time of
putting them
into financial
statements,
than it can
lead towards
material
misstatement.
(b) Explain the key assertion at risk of not being
valid.
The key
assertion at risk
of not being
valid for assets
and liabilities
for CSR Limited
is that the
organization
represents the
yearly financial
statements
according to
the applicable
The key
assertion at
risk of Equity
interests is not
being valid for
the
organization
i.e. CSR Limited
because Equity
interests are
appropriately
recorded in the
financial
Risks of
material
misstatement
at the level of
assertion for
the classes of
transactions is
not being
valid for the
CSR Limited
because the
organization
at a

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provisions and
policies of the
financial
framework of
reporting and
other statutory
reporting
requirements
and according
to the policies
of Government
of the country
(Eilifsen and
Messier, 2014).
CSR Limited
follows all the
prescribed
regulations
regarding
measurement,
recognition and
presentation of
assets and
liabilities and
other events
and provides all
the required
disclosures.
statements
and a full
description is
provided for
them by the
organization.
The related
disclosures and
understanding
on equity
interests is
provided by
CSR Limited in
according to
the current
accounting and
financial
reporting
framework
(Chen and
Roberts, 2010).
considerable
level assists in
determining
the nature
and class of
transaction to
the extent of
procedure of
audit in order
to get
sufficient
evidence and
disclosures to
put in the
financial
statements
(Cao, 2010).
(c) Detail one (1) relevant substantive audit
procedure to address the assertion at risk as
identified in b) above.
The audit
procedure of
CSR Limited

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firstly includes
the
consideration
of auditor for
making the
required
disclosures in
the account
balances of the
organization.
The auditor use
both
quantitative
and qualitative
disclosures in
order to
identify the
risks and the
misstatements
respectively.
Substantive
procedures are
carried out by
the auditor in
order to detect
material
misstatements
and to address
the assertion.
The auditor
design details
of the tests to

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be undertaken
in order to
assess the risk
with the major
objective of
getting relevant
evidence for
the audit
procedure. This
will help the
auditor to
achieve
planned level
of assurance at
the assertion
level. In
designing the
substantive
procedure
regarding
existence of
assertion, the
auditor selects
various items
and
transactions
from the
financials of the
organization
and thus
obtains the
audit which can

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be considered
relevant. In
designing an
audit
procedure and
to get a
complete
assertion at risk
of
misstatement,
the auditor
investigates
different items
of the financial
items and their
reasonability
on inclusion in
the financial
statements
(Margret and
Hoque, 2016)
The nature and
extent of the
substantive
audit
procedure
depends on the
financial
reporting
complications
of the
organization

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and the risk
associated with
material
misstatement.
(d) Detail one (1) relevant practical internal
control that would mitigate the risk in relation
to the assertion at risk as identified in b) above.
Communication
and
enforcement of
integrity and
ethical values is
one of the
practical
internal
controls that
would help in
mitigation of
the risk in
relation to the
assertion at
risk. Integrity
and ethical
behaviour of
the individuals
in the
organization
brings the
effectiveness in
the control
system will
help the
organization.
The

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enforcement of
integrity and
ethical
values will help
the
management
to remove or
mitigate risks
of the
individuals
acting
dishonest or
illegal for some
temptations.
When the
organization
communicates
the
organization
policies on
ethical values
and integrity
than the
behavioural
patterns of the
individuals can
be set in order
to mitigate the
risk. This will
help the
organization to
mitigate the

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risk of any
fraudulent
activities in the
organization
and helps to
maintain the
reputation of
the
organization in
the market
(Contessotto
and Moroney,
2014)
Conclusion
From the above study it can be concluded that CSR Limited is carrying out its business activities in
according with the industry factors, regulatory factors and other factors. The industry factors which
impact CSR Limited are competitive environment, customer relationships, organization relation with its
suppliers and different technologies advancement. It is also analyzed from the above study that the
business risk to CSR Limited can be regarding to the preparation of the financial statements according to
the applicable financial standards and reporting system prevalent in the country. It is also identified
from the above study that the account balance of CSR Limited can be at significant risk because there
can be over statement in the assets and liabilities of CSR limited. There can be inclusion of fictitious
receivables or inventory which can lead towards material misstatement.

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firm performance during the global financial crisis. Accounting & Finance, 52(4), 971-1000.
Asare, S. K., & Wright, A. M. (2012). Investors', auditors', and lenders' understanding of the message
conveyed by the standard audit report on the financial statements. Accounting Horizons, 26(2),
193-217.
Australian Government (2017). Federal Register of Legislation. [Online]. Available at:
https://www.legislation.gov.au/Details/F2016C00028 (Accessed: 7 September 2017).
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Berg, H. P. (2010). Risk management: procedures, methods and experiences. Risk Management, 1(17),
79-95.
Cao, L. (2010). In-depth behavior understanding and use: the behavior informatics
approach. Information Sciences, 180(17), 3067-3085.
Chen, J. C., & Roberts, R. W. (2010). Toward a more coherent understanding of the organization–society
relationship: A theoretical consideration for social and environmental accounting
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estimates: Implications for audit assurance. Auditing: A Journal of Practice & Theory, 31(1), 127-
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Change. Australian Accounting Review, 26(1), 21-33.

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Mazza, T., & Azzali, S. (2015). Effects of internal audit quality on the severity and persistence of controls
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Stanley, T., & Marsden, S. (2013). Accountancy capstone: Enhancing integration and professional
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