Auditing and Assurance Report: C&B Partners' DecaSport Audit Analysis

This report provides an analysis of the audit of DecaSport, a listed company specializing in luxury sport shoes, conducted by C&B Partners. The report identifies key issues, including the impact of competition on auditor independence due to non-audit services. It assesses inherent risks associated with DecaSport's new product launch, categorizing them as financial, technological, and organizational risks. Control risks, such as supplier management and quality control, are also evaluated. Furthermore, the report determines planning materiality, calculating a threshold for material misstatements based on the company's turnover. The conclusion emphasizes the importance of professional auditor behavior in accurately reflecting a company's financial position. The report draws on various academic sources to support its findings and recommendations, offering insights into auditing practices and risk management within the context of DecaSport's operations.

Auditing & Assurance
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Executive summary
This report has identified that the primary issue in auditing process is that level of
competition among audit organizations is very high and it is forcing business organizations to
provide non-audit services to their clients which effects independence of auditor. Inherent
risk assessment of DecaSport has identified that there will be three potential risk factors that
can have significant impact on new product launched by this organization i.e. financial risk
for technological risk and organizational risk. In addition to that control risk factors such as
lack of supplier management, quality management and employee management would also
impact the business processes. At last planning material it has been calculated in this report
on the basis of turnover generated by the organization at the end of financial year 2018. It
total accounting errors exceed $206010 then such errors will be considered as material to
stakeholder's decision making process.
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Contents
Executive summary....................................................................................................................2
Competition and Independence issues.......................................................................................4
Risk assessment inherent risk.....................................................................................................4
Planning Materiality...................................................................................................................7
Conclusion..................................................................................................................................8
References..................................................................................................................................9
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Introduction
Main objective of this report is to analyse and identify different aspects of auditing and
assurance services provided by auditors to DecaSport. DecaSport has just started
manufacturing new line of shoes that are expected to reduce the chances of foot injuries. It is
expected that this product is expected to increase total revenue by 10 % and capital required
for this product would be $2000000. Main objective of this report would to identify inherent
risk and control risks associated with this new product launch by DecaSport. Potential risks
associated with this organization are also identified in this repot along with mitigation
strategy to minimise negative impact of these risk factors. At last this report has discussed the
importance of planning materiality and calculation is also done for DecaSport at the end of
financial year 2019.
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Competition and Independence issues
There are various organizations that have started operating a professional auditing market that
has increased the level of competition in this industry. Majority of large scale organizations
are conducting their audit with the help of large-scale audit firms such as KPMG, Ernst and
Young, Deloitte, etc. Level of competition in the market has forced small scale organization
to take non-audit services from their clients in order to increase overall revenue (Stringer,
2012). That one of the primary factors that are given in APES 110 that should be considered
by a while taking a particular audit assignment is independence. The primary responsibility of
an auditor is to provide a fair and independent opinion on the financial statements of a
business organization. One of the key factors that affect the independence of Auditor in a
negative manner is "non-audit services".
The opinion of auditors that are providing non-audit services to their clients might be biased
as they are generating additional revenue from such business organization. There is a
possibility that decisions of auditor might get influenced by the management of the company
due to the level of competition in the market and the risk of losing the audit assignment along
with non-audit services (Carey, Knechel and Tanewski, 2013).
According to rules and regulations applicable to audit organizations, total revenue generated
from non-audit services should not exceed fees receivable for audit assignment from a
particular client in the same financial year. On the basis of this analysis, it can be said that
C&B partners should ensure that there is no impact of undertaking non-audit services on the
independence of auditor as it has become one of the primary issues in accounting (Coram,
Mock, Turner and Gray, 2014).
Risk assessment inherent risk
Potential risk - description Account Assertions Level of
inherent
risk
Financial risk- One of the primary risk associated
with the introduction of new products in the
Revenue Valuation Medium-
This risk is
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market is a financial risk (Moroney, Campbell and
Hamilton, 2014). This risk is associated with the
probability that new product launch in the market
would not provide expected profits to the business
organization. Proper planning and effective
execution are required for ensuring that financial
risk does not impact the financial position of the
company.
medium
because the
new product
is launched
with using
latest
technology
and help in
reducing foot
injuries.
Technology risk- This risk is associated with the
probability that the management of the company
would not be able to implement the technology
that is proposed in a particular product (Niven,
2014). Decasport has introduced a new line of
shoes in which they claim that the probability of
feet related injury will reduce significantly. There
is a probability that this type of facility might not
be fully achieved in the final production of shoes.
Sales
return
Accuracy High- this
risk is high
because this
technology is
new market
and also not
tested on
large scale.
Organizational risk- This risk is associated with
the probability that a business organization might
not be able to handle the impact that internal and
external environment would have on the launch of
a new product (Fraser, 2011). This risk associated
with the efficiency of business management and
operations.
Indirect
Expenses
Existence Low- This is
risk is low
because this
organization
has been
operating in
this industry
for a long
time and it is
aware about
its external
and internal
factors.
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Risk Assessment- Control risk
Control weakness Potential misstatements Assertions Transaction level
internal control
Supplier
management
This case study has evaluated
that the raw material used by
DecaSport for production of
its new shoes of inferior
quality that is imported from
China. It is important to
ensure that the quality of raw
material is effective
otherwise the quality of
finished goods produced will
also get inferior and overall
sales will decrease.
Accuracy Management is required
to ensure that Quality
Assurance control is
employed by the
procurement department
of the company. The
balance should be
maintained between
price and quality but the
first priority should be
given to quality
(Sanderson, 2014).
Quality control It is identified in the given
scenario that total sales
returns for the new product is
increasing rapidly and one of
the primary reason for such
case can be internal controls
employed for quality
assurance. Lack of quality
assurance control can result
in decreased revenue over the
period of time and the
popularity of other products
and services will also
Existence Management of the
company is required to
implement a new
department that will be
focused only on
ensuring the quality of
finished goods and
services.
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decrease.
Management of
employees
Store employees and
salesman are not very
attentive towards their work
and do not care about the
company. This can result in
decreased productivity of
business operations as a
number of units sold in a
particular store are dependent
on the experience and skill of
salesman (Laslett and
Steinberg, 2012).
Understand
ability
Management is required
to change its recruitment
and selection policies.
In addition to the
training and
development program
should also be initiated
by the organization.
Planning Materiality
Planning materiality can be defined as a threshold limit set by the auditor of the company for
a tolerance of misstatement. If the total amount of misstatements goes beyond this threshold
limit of training materiality then it can be said that the errors in financial statements will be
material in taking decisions by stakeholders. There are various factors bases that can be taken
by a business organization for deciding materiality such as net profit, gross profit, total asset,
total assets, etc.
In the given scenario it is recommended that auditor should to use total revenue as a base for
calculation of planning materiality. This is due to the fact that the new launch of a product or
service affects the total revenue generated by the organization significantly. In addition to
that year 2018 has been chosen for calculation of planning materiality because as new
product is launched in the year 2018 and audit is undertaken for this year only.
Materiality will be decided as 0.5 % of the total revenue generated by the organization in the
last financial year.
Planning materiality= Turnover for the year ending June 2018* 0.5% (Edgley, 2014)
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= 41202000* 0.5%
= $206010
Total amount of accounting errors and omissions should not exceed $206010.
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Conclusion
On an overall conclusion, it can be said that professional and ethical behaviour of the auditor
is very important to identify the actual financial position of the company. This report has
identified a different kind of inherent and control risk associated with management and
financial statements of DecaSport. It is recommended that the management of the company
should focus on ensuring the quality of product and services that are exiting the factory
premises. Quality of product and services will definitely impact the purchase decision taken
by any customer.
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References
Carey, P., Knechel, W. R. and Tanewski, G., (2013), “Costs and Benefits of Mandatory
Auditing of For-profit Private and Not-for-profit Companies in Australia”, Australian
Accounting Review, Vol 23 Issue 1 No 64, pp. 43–53.
Coram, P.J., Mock, T.J., Turner, J.L., and Gray, G.L. (2011), “The Communicative Value of
the Auditor’s Report”, Australian Accounting Review, Vol 21, Issue3, pp. 235-252
Edgley, C. (2014). A genealogy of accounting materiality. Critical Perspectives on
Accounting, 25(3), 255-271.
Fraser, S., (2011) “The Risk- Based Audit Approach”, Charter, Vol 82, Issue 6, pp. 54-55
Laslett, G. And Steinberg, G. (2012), “Audit Analytics: Practical Applications and
Implications for Auditors”, Charter, May, pp. 46-47
Moroney, R., Campbell, F., and Hamilton, J., (2014) Auditing A Practical Approach 2E, 2nd
Edition, Wiley
Niven, D., (2013), “ASIC Reports on Audit Inspections”, Charter, March, p48.
Sanderson, J. (2014). Audit issues. SMSF Guide: Current Issues and Strategies for the Self-
Managed Superannuation Funds Adviser, 377.
Stringer, A., (2012), “Future Directions in Auditing”, Charter, May, p48.
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