Audit Procedures and Risk Assessment for Financial Statements

This report examines audit risk and its components (identification, control, and inherent risk) in relation to financial statements. It identifies key areas impacting audit risk, including equity shares, treasury stock, and retained earnings. The analysis highlights a decrease in equity shares, the implications of treasury stock transactions, and the use of retained earnings for dividends and share issuance. The report outlines audit procedures for verifying these areas, including evaluating equity capital, reviewing board minutes, examining share buybacks, and assessing dividend payments. The importance of internal controls and compliance with regulations is emphasized throughout the analysis. The report concludes by referencing key auditing and assurance resources.

Auditing & Assurance
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Contents
Audit risk and financial statements............................................................................................3
Equity shares and treasury stock............................................................................................3
Retained earnings...................................................................................................................4
Audit procedure..........................................................................................................................4
Reference....................................................................................................................................6
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Audit risk and financial statements
Audit risk can be defined as the risk of material misstatement in financial statements of the
company prepared by management. There are usually three components of audit risk that are
identification risk, control risk and inherent risk. Multiplication of all this type of risk helps in
estimation of audit risk for a particular financial statement. Risk of material misstatement due
to complexity of financial statements or nature of business is called as inherent risk. Risk of
material misstatement due to non-applicability of internal controls by management is called
as control risk and risk of material misstatement due to inefficiency of internal controls
implemented are called as identification risk. Level of audit risk can be estimated by auditor
with the help of these three type of risk (Griffiths, 2016). Audit risk is generally estimated by
auditor during the planning stage of audit so that proper plans and procedures can be prepared
for audit of financial statements.
Audit model along with the use of financial statement analysis has been used in order to
identify two main areas in section of shareholders capital that can create potential impact on
audit risk of the company. It is important to identify these potential risk factors before starting
the process of auditing. Following are the two components of that should be considered by
auditor-
Audit risk 2018 ($ million) 2017 ($ million)
Issued capital 2508 3259
Treasury stock (115) (206)
Retained earnings 1084 472
Equity shares and treasury stock
According to the data provided in financial statement at the end of year 2018, equity shares of
the company has decreased as compared to last financial year form $3259 million to $ 2508
million. This shows that company has brought back some of the shares from the shareholders.
This process requires various policies and procedures that management of the company
should follow. Non-compliance of any of these rules and regulation can have material impact
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on financial statements of the company (Louwers et.al, 2015). Therefore it is important to
apply additional audit procedures for its verification.
In addition to that compliance in relation to treasury stocks can also affect the financial
statements prepared by the company. Treasury stocks are the part of shares brought back by
the company that are not retires and held under ownership of the company. These are the
stocks owned and management by company itself. According to change in equity statement
of the company, management has acquired some addition treasury stocks during the financial
year under consideration (Arens, Elder and Beasley, 2014). Management has also distributed
substantial amount of this stock to employees working for the company. Total treasury stocks
acquired by the company during 2018 was $162 million and opening balance was $206
million. Management has distributed shares worth $253 million to the employees making
total treasury stock at the end of 2018 at 115 million.
Retained earnings
Retained earnings have been used by the management for two activities in the year 2018.
These activities are dividend and issue of shares to employees. It is important for auditor to
check internal controls implemented by management while using these retained earnings for
these purposes.
Audit procedure
Audit risk Audit
assertion
Audit procedure
Equity shares
and treasury
stocks
Existence,
right and
obligation and
completeness.
1. An external auditor should evaluate the nature of
equity capital is available in the company that done with
the help of financial statements.
2. Authorised capital of company should also be
evaluated and how much shares has been issued out of
this authorised capital.
3. Minutes of every board meeting should be read by
auditor in order to identity that board resolution has been
taken in order to buy back of shares. During the year
under consideration, company has brought back shares
worth $751 million. Sources of this buy back of equity
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shares has to be identified.
4. Auditor should also check the number of shares that
are retired by the company and number of shares that are
held as treasury stock (Eilifsen et.al, 2013).
5. Possession of shares certificates in relation to buy back
of shares should also be checked by the auditor.
Retained
earnings
Completeness,
Presentation &
Disclosure
1. Auditor of the company should assess minutes of the
company in order to check that approval has been taken
before using the retained earnings to distribute shares to
employees and payment of dividend.
2. Auditor should also check the amount of dividend
declared by auditor and dividend actually paid to
shareholders. This can be done with the help of checking
bank account and minutes of the board meeting.
3. Comparison should also be made between the earnings
available with company after payment of equity divided
and amount of profits transferred in retained earnings
account in balance sheet (Reding et.al, 2013).
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Reference
Arens, A., Elder, R. and Beasley, M., 2014. Auditing and assurance services-An integrated
approach; includes coverage of international standards and global auditing issues, in addition
to coverage of. Boston: Aufl.
Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance
services. McGraw-Hill.
Griffiths, P., 2016. Risk-based auditing. Routledge.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C.,
2015. Auditing & assurance services. McGraw-Hill Education.
Reding, K.F., Sobel, P.J., Anderson, U.L., Head, M.J., Ramamoorti, S., Salamasick, M. and
Riddle, C., 2013. Internal Auditing: Assurance & Advisory Services. Institute of Internal
Auditors, the IIA Research Foundation.
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