Auditing and its Issues: Report on Audit Planning and Risk

This report, titled "Auditing and its Issues," delves into the core concepts of auditing, emphasizing audit planning, risk assessment, and the critical link between auditing and the communication of financial information. It begins by exploring audit planning issues in three distinct cases: City Limited, Web Limited, and Beauty Pty Limited, highlighting liquidity problems, software integration, and inventory transfer concerns. The report then moves on to risk assessment, differentiating between test of controls and substantive testing, and discusses the three types of audit risks: inherent, control, and detection risks. The report also covers audit procedures, specifically focusing on substantive testing for depreciation expense. Finally, the report elucidates the relationship between auditing and financial information, emphasizing auditing's role in verifying the accuracy of financial statements. The report concludes with recommendations for the integration of an internal audit department within every company to ensure full disclosure of financial information.

AUDITING AND ITS ISSUES
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9/5/2017

EXECUTIVE SUMMARY
The title of this report is auditing and its issues. As the title suggest, the concept of auditing has
been focused throughout the report. The main aim of the report is to analyze what type of the
audit planning issues shall be considered by the auditor before starting up the audit and which are
required to be mentioned in the audit checklist. The second aim is to discuss the various types of
audit risk that come during the preliminary assessment. The third major aim is to depict the
connection between the auditing and the disclosure of the financial information. With these aims,
the report has been prepared.

Contents
EXECUTIVE SUMMARY.................................................................................................................................2
INTRODUCTION...........................................................................................................................................4
AUDIT PLANNING ISSUES.............................................................................................................................4
City Limited..............................................................................................................................................4
Web Limited............................................................................................................................................5
Beauty Pty Limited...................................................................................................................................5
RISK ASSESSMENT AND RELATED ISSUES....................................................................................................5
General Issues – Approach......................................................................................................................5
Risk Assessment relation with Approach.................................................................................................6
Audit Procedures.....................................................................................................................................6
AUDITING AND FINANCIAL INFORMATION..................................................................................................7
Auditing...................................................................................................................................................7
Communication of Financial Information................................................................................................7
Relation...................................................................................................................................................7
CONCLUSION AND RECOMMENDATION.....................................................................................................8
REFERENCES................................................................................................................................................8

INTRODUCTION
Auditing plays the vital role in the financial accounting world. It is only after the process of the
auditing that the stakeholders came to know about the discrepancies or the flaws if any existed in
the company. For instance whether the company is operating in losses or is having the profits or
the company is working smoothly and effectively or not. Without having the auditing no one can
have the surety that the information stated in the given document is correct.
In this report, three cases have been discussed. All three are related to the auditing. In the first
case, the issues relating to the audit planning have been detailed. In the second case, the issues
relating to the risk during the audit has been described. In the third case, the relationship between
the auditing and the financial information has been disclosed. With this, the report is then ended
with the proper conclusion and the recommendation.
AUDIT PLANNING ISSUES
Audit planning is the first stage of the audit. In this step, auditor is required to plan the audit
according to the nature and size of the business. It is considered as the most important step in the
auditing process as it is the backbone of the whole process of auditing (Boatsman, Moeckel, and
Pei, 2007). The various audit planning issues in each of the cases have been discussed below:
City Limited
- The first major issue that the auditor is required to consider is the liquidity problem that
the company will be facing in future. As the country is facing sudden downward trend in
the property sector, the ability to get the working capital will be low and which in turn
will lead the company to face the liquidity problem. In the audit plan, the auditor is
required to include the checking of the circumstances and the level of risk that the
company is facing.
- The second major issue that the auditor is required to consider is the ability to meet the
short term and the long term obligations that the company has obtained from the financial
institutions.

- The third major issue is the profitability and the other covenants that are included by the
financial institutions if any loan facility is being availed by the bank. These covenants
may cause the companies to enter into the manipulative transactions. Thus, this issue
shall be included in the audit plan so that it can be checked whether the company has
manipulated the profits so as to meet the criteria laid down by the bank (Boritz, 2005).
Web Limited
- The first major issue for the audit plan is to check the working of the new computer
software with the working of the old computer software. It is so included because to
check whether the reports generated by the new software is better than the old system or
not.
- The second major issue is to include the checks on new software so as to confirm whether
it allows the manipulation at the different levels of the management (Braun and Davis,
2013).
Beauty Pty Limited
- The first major issue for the audit plan is that whether the inventory that is being
transferred from Australia office to the new branch has been so made at zero rate of GST.
It is because companies generally transfers the inventory as samples and does not count
the same as the sales or incomes. Due to this factor, the revenue is understated and hence
the same issue shall be considered in the audit plan.
- Second major issue is that whether the opening of new office has been supported by the
effective due diligence and respective assertions of the management.
RISK ASSESSMENT AND RELATED ISSUES
General Issues – Approach
Test of controls is a procedure of the audit which includes testing of the controls employed by
auditee within the organization so as to identify and prevent any type of misstatement which is
materially stated in the financial statements of the company. It is the result of the test on the basis
of which the auditor will conduct its audit function. If the results of the tests are positive then the
auditor will rely upon the controls established by the auditee in its organization. In case the

results come out as negative then the auditor is required to perform the substantive testing. The
test of controls include three stages replaying of the controls that has been employed by the
company, observing the business process and inspecting the documents which indicates that the
required controls have been performed. Substantive testing is performed when the result of the
test of controls is negative and includes the analytical procedures and the test of details.
Risk Assessment relation with Approach
The risk is defined as the chances of occurrence of the particular event despite of the fact of
establishing the various controls and checks. There are many ways of assessing the risk. The
assessment of risk shall be done with the proper method. Risk assessment is purely related to
choice of the two approaches namely the test of controls and the substantive testing. There are
three types of risks – Inherent Risk, Control risk and detection risk. Each of the risk is different
and is separately valuated. If the risk assessment is related to the inherent and control risk then
the auditor will be required to adopt the substantive testing and if the risk assessment is related to
the detection risk then the test of controls will be used (Hogan, 2008).
Audit Procedures
The substantive testing will be adopted while checking the accuracy and the completeness of the
depreciation expense. For accuracy and completeness of the depreciation expense the following
procedure shall be followed:
- Checking of the invoices and tallying the whether the correct amount has been recorded
in the books of accounts,
- Whether the total of all the bills is reflecting in the books of accounts or not
- Check whether the method of depreciation used by the entity for the financial year is in
consistent with the methods prescribed by the generally accepted accounting principles
and the accounting standards.
- Check whether all the fixed assets as shown in the physical verification report are on the
balance sheet or not and whether the depreciation has been calculated on all the assets or
not (Rezaee, 2011).

AUDITING AND FINANCIAL INFORMATION
As Jim Strong is unaware of the nature of relationship between the attributes of the auditing and
the financial information, following is the detailed explanation of the two terms and their
relation.
Auditing
Auditing is the act adopted by the auditor to verify whether the information stated in the financial
statements or any other related statements are as stated in the books of accounts and other related
documents or not. In other words, auditing is defined as the independent checking of the books
of accounts of the company and other records related with so as to ascertain whether the financial
statements represents the true and fair view of the state of affairs of the company (Getie, Mihret
and Yismaw, 2007).
Communication of Financial Information
Communication of the financial information plays the key role in the industry. It is because
without communicating the financial information to the users of the financial statements no one
can understand whether the company is profitable or not and the investor will not be able to
decide whether he should invest in the company or not. The financial information are presented
in the in the financial statements of the company which are prepared on the quarterly basis or the
half year basis or the yearly basis. It includes statement of balance sheet, statement of profit and
loss and the other annexed schedules to the financial statements. The communication of financial
information is made by the company through the financial statements of the company which
forms part of the annual report of the company (Hines, 2008; Higgins and Merrill Lynch and
Company, 2013).
Relation
Auditing ensures that the financial information so communicated to the stakeholders of the
company is correct and represents the true and fair position of the company. On the basis of the
audit opinion given by the auditors, the banks and the other financial institutions make
themselves ready for giving the finance to the company. Thus, auditing gives the requisite and
reliable information on which everyone believes without any doubt. Only after auditing the

financial information is communicated to the shareholders and the other stakeholders of the
company.
CONCLUSION AND RECOMMENDATION
Throughout the report, the emphasis has been on the audit planning and the related issues. The
audit plays very important role and helps in providing the true and fair information to the
stakeholders of the company. Thus, in order to conclude, auditing is step which ensures full
disclosure of the financial information.
It is recommended that every company shall have an auditing function as an integral part and
shall employ independent audit department internal to the company.
REFERENCES
Braun, R.L. and Davis, H.E., 2013. Computer-assisted audit tools and techniques: Analysis and
perspectives. Managerial Auditing Journal, 71(10), pp.665-691.
Boatsman, J.R., Moeckel, C. and Pei, B.K., 2007. The effects of decision consequences on
auditors' reliance on decision aids in audit planning. Organizational Behavior and Human
Decision Processes, 82(2), pp.213-234.
BORITZ, J.E., 2005. The effect of information presentation structures on audit planning and
review judgments. Contemporary Accounting Research, 1(2), pp.193-218.
Getie Mihret, D. and Wondim Yismaw, A., 2007. Internal audit effectiveness: an Ethiopian
public sector case study. Managerial Auditing Journal, 22(5), pp.470-484.
Hines, R.D., 2008, Financial accounting: in communicating reality, we construct
reality. Accounting, organizations and society, 13(3), pp.251-261.

Higgins, G.M., Merrill Lynch & Company, Inc., 2013. System for distributing, processing and
displaying financial information. U.S. Patent 5,270,922.
Hogan, C.E., 2008. Financial statement fraud: Insights from the academic literature. Auditing: A
Journal of Practice & Theory, 27(2), pp.231-252.
Rezaee, Z, 2011. Continuous auditing: the audit of the future. Managerial Auditing
Journal, 16(3), pp.150-158.