Financial Auditing Theory and Practices: Risk Analysis Report

This report delves into the core concepts of auditing theory and practices, emphasizing the critical role of risk assessment in financial auditing. It explores the different types of audit risk, including inherent, control, and detection risks, and their impact on the accuracy and reliability of financial statements. The report examines the processes involved in identifying and mitigating these risks, with a specific focus on the Coca-Cola Amatil case study. It discusses the importance of internal controls and the various techniques used by auditors to gather evidence and form an opinion. The report also covers the auditor's responsibilities in assessing material misstatement risk and the steps involved in planning an audit, including the application of ISA 315. Furthermore, it highlights the significance of proper disclosures, particularly regarding goodwill impairment, and the tools used by financial analysts to reduce inherent risk. Overall, the report provides a comprehensive overview of auditing principles and their practical application in the context of financial reporting.

Auditing theory and practices

Table of Contents
INTRODUCTION...........................................................................................................................1
Question 1...................................................................................................................................1
Question 2...................................................................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
In business, there are various factors that are to be taken into consideration so that all
processes will be performed in an effective manner. Out of all, risk is the most important aspect
that shall be controlled (Stewart and Shamdasani, 2014). For this, it is required that it shall be
identified and for this, professionals will have to be hired so that it can be undertaken. They will
then take such steps by which it can be avoided. The risk related to Coca-cola is very high and it
is one of the leading company in world. There are various factors which are responsible for this
and those will be discussed in report presented below as by that profits are being affected.
Question 1
In the process of audit, there are various risks which are faced by auditors and are known
as audit risk. Due to them auditor will not be able to provide appropriate opinion in report. Under
this, report can be presented in many ways by auditor. Such as he will be presenting a qualified
report but it is not necessary to mention some qualification under this. There can be situation
under which he will be failing to report any imperative matter or an unqualified report is
produced (Garg, Jia and Datta, 2011). There may be a situation in which the scope of audit is
restricted and so views will not be presented in proper manner on financial statements.
In audit, risk is classified in various categories which involve detection , inherent and
control risk. All the risks will be affecting audit performance as effectiveness and efficiency
bears impact of it. The main aspect which is to be evaluated on priority is inherent risk and in
that various factors shall be noted.
Under inherent risk, all the errors are made due to misstatement and in this, control is not
the reason. It is difficult to be identified as it is incorporated within the system and so, leads to
vast impact. There are various situation in which it will be higher and those arise when
predictions are made or judgements are made at higher level of degree or when all the
transactions which are undertaken are of complex nature. The business which is new and
recently established will have to face higher risk than that of the one which is old and has made
its place in competitive world (Audit and Assurance, 2017). This is because; the new
organisation will not be knowing all conditions and is working in unstable market where lots of
changes are to be faced by it. So, due to the same, risk involved is also higher.
1

In order to administer and determine risk, the concept which is followed by Coca-Cola
Amatil is stringent and deep. The main risk involved in it is from core activities which are
performed there. All the particular risks present are related to confidentiality maintained in terms
of customers. Also, the nation’s economic conditions are negative in which operations are
carried out. There are many such rules and regulations which are to be followed in respect of
which alterations have been made (Chan and Vasarhelyi, 2011). So, all of them leads to risk
development. In Asia-Pacific region, the main aspect which is there is CCA. The main
shareholder of company is TCCC with which agreement of 29.2 percent has been made under
which trademarks are to be produced and then distribution will be made in some six countries.
The group enjoys a strong position in market and brand names as well as goods are there which
shows that portfolio is also strong. The distribution network which is there in organisation is
large and due to all this, group enjoys a greater market share. Because of all this, there can be
seen emergence of competition in various places such as New Zealand and Australia. Also, the
fluctuations which take place in Asian market are exposed to whole group.
There are various reasons because of which misstatement arises and most common
among them are frauds and errors. The budgets are made in which estimated figures are
identified but when difference arise among estimated value and what is actually derived, then
comes the situation of misstatement. This may happen because of various causes which include
both intentional and unintentional means. This can be the result of either default which is made
in compliance with standards specified for financial reporting or could have been due to
decisions taken. There are the chances that while making estimates, wrong technique or policy
would have been selected and due to the same, deviations arise.
The main inherent risk are lack of proper internal control, frauds and errors, misstatement
and coordination among all departments.
In the process of auditing and investigation, it is required that this risk shall be
determined. But due to its nature, it is not an easy task to identify material misstatement
(Weigand and Elsas, 2012). There are various aspects with respect to CCA and for that, proper
understanding shall be developed according to ISA 315 and some of them are:
 The operations which are performed by organisation together with their nature and
ownership shall be identified.
2

 In financial reporting framework, various factors such as issue in external market or the
rules which are specified for particular industry are there which are to be known. By this
only, proper functioning is done and so, information about this shall be gained.
In order to gain the understanding regarding internal control it is very much necessary
that ISA 315 shall be taken into consideration by auditors. Control risk is that which is occurred
due to weal internal control and by that misstatement will be there which cannot be controlled.
Also it is not possible to determine it on regular basis (Broberg, Umans and Gerlofstig, 2013). So
in process of risk assessment, it is important to consider audit risk.
Assessment of material misstatement risk:
In financial statements there are various misstatement and the auditor is person who is
held responsible for the identification of it as he has rights to make assessment of accounts. Also
all the accounts balances and transactions which are taking place shall be checked to known
whether proper disclosures in respect of material information is made or not. This is required as
by this the manner in which further audits will have to be conducted is determined.
In this process of risk assessment there are various actions which are to be performed and
it includes investigation or can say enquiry which shall be done from management and others.
Then observation will be undertaken in which acquired data is to be examined. Under this it is
very necessary that prioritisation shall be done of all the risk which are identified. Due to this
only it has been mentioned in 315 that which shall be given more consideration under audit. So it
will be opinion of auditor to classify risk as crucial in which transaction complication, frauds and
other aspects shall be noticed.
In the process of planning an audit, the above mentioned step of risk assessment shall be
undertaken firstly. With the development it will be required that more investigation shall be
made in the operations of business and also of internal control. By the help of this risk will be
identified in advance and then steps are taken to avoid them.
In the matters of goodwill impairment it is needed that disclosures shall be made in
respect of all the intangibles. For this knowledge about AASB 136 shall be gained by company
as judgements are to be made in this. For this recoverable amount shall be identified as then only
required calculations can be made.
The areas in which inherent risk id present will be identified by financial analyst so that
reduction in it can be achieved (Gonzalez, Sharma and Galletta, 2012). For this purpose various
3

tools are available which can be used. By the implementation of all the policies, the inherent risk
can be controlled or reduced but it can never be completely eliminated. The currency problem is
faced as business carries its operations in various parts of world and by the strategy
implementation risk can be reduced in respect of it.
Question 2
In audit of financial statements which is conducted by auditor, he is required to provide
with an opinion but sometimes it is inappropriate and this is due to audit risk (Bell and Griffin,
2012). There are various ways in which this can be done and that include issuance of audit
documents which are inappropriate, or in spite of correct accounts qualified report is given or
sometimes the data which is mentioned in report does not meet quality standards. The several
elements involved under this are as follows:
 Control risk: In business there are many activities which are undertaken and it is
required that proper control shall be established over them. When this is not done then
control risk arises. In order to minimise frauds and errors, it shall be ensured that proper
internal control system shall be made. In case of negligence by auditor when he ignores
frauds, this risk is made. There are various processes which are undertaken and it is
possible that errors shall be there in then because of which this situation is faced. By this
real position will not be represented in records which will have negative impact on
organisation as various decisions are made with the use of them.
 Inherent risk: the information is not presented in appropriate manner and so correct data
is not provided. The cause of this may be omission and this affects the final outcomes. If
more calculations and judgements are there then risk will also be higher.
 Detection risk: This arises when all the errors or misstatement which are there in books
are not identified by auditors (Sarens and Abdolmohammadi, 2011). For this it is required
that the procedure which is specified shall be followed so that mistakes are not made in
results and this helps in proper decision making. This can be reduced if proper checking
is made by auditors and so condition of business is improved by there elimination. So all
valuable information shall be taken into consideration.
There are many such options which can be used in the process of audit by which evidence
can be collected. This will be decision of management that which method shall be adopted so
that best results can be obtained. Some of the techniques which can be undertaken are as follows:
4

 Observation: At the organisation there are various operations which are performed and
under this tool all of them are to be observed. This way the work of staff is evaluated.
Then after this site can be visited to ensure that whether proper functioning is carried out
or not and then steps shall be taken accordingly.
 Inspection: In this all the information and records which are present are to be examined.
The data which is provided by some other person will have to be checked and by this
evidences are obtained (Davidson, Desai and Gerard, 2013). Such as balances can be
cross checked, as in this sales figure can be reconciled by asking from customers.
 Inquiry: This will be done when third party confirmation is required. In this
communication will be made between two persons and by that evidences are obtained. In
this direct questioning can be done as purchase department can be asked the reason for
increase of it. By the help of this complete information will be obtained in respect of any
particular topic. For making use of this it is required that person who will be able to
provide data shall be present. So if such person is not there then this method cannot be
used.
CONCLUSION
From above mentioned report it can be concluded that the main aspect because of which
negative impact will be made on organisation is risk. In this material misstatement has been
described which is main risk. The inherent risk is the main risk which is to be undertaken and for
that various steps are to be taken which are provided above. To have advantage over other
competitors it is required that proper skills shall be used in the business so that reduction in risk
can be achieved.
5

REFERENCES
Books and journals
Bell, T.B. and Griffin, J.B., 2012. Commentary on auditing high-uncertainty fair value estimates.
Auditing. 31(1). p.147.
Broberg, P., Umans, T. and Gerlofstig, C., 2013. Balance between auditing and marketing: An
explorative study. Journal of International Accounting, Auditing and Taxation. 22(1).
pp.57-70.
Chan, D.Y. and Vasarhelyi, M.A., 2011. Innovation and practice of continuous auditing.
International Journal of Accounting Information Systems. 12(2). pp.152-160.
Davidson, B.I., Desai, N.K. and Gerard, G.J., 2013. The effect of continuous auditing on the
relationship between internal audit sourcing and the external auditor's reliance on the
internal audit function. Journal of Information Systems. 27(1). pp.41-59.
Garg, D., Jia, L. and Datta, A., 2011, October. Policy auditing over incomplete logs: theory,
implementation and applications. In Proceedings of the 18th ACM conference on
Computer and communications security (pp. 151-162). ACM.
Gonzalez, G.C., Sharma, P.N. and Galletta, D.F., 2012. The antecedents of the use of continuous
auditing in the internal auditing context. International Journal of Accounting
Information Systems. 13(3). pp.248-262.
Sarens, G. and Abdolmohammadi, M.J., 2011. Monitoring effects of the internal audit function:
agency theory versus other explanatory variables. International Journal of Auditing.
15(1). pp.1-20.
Stewart, D.W. and Shamdasani, P.N., 2014. Focus groups: Theory and practice (Vol. 20). Sage
publications.
Weigand, H. and Elsas, P., 2012. Model-based auditing using REA. International Journal of
Accounting Information Systems. 13(3). pp.287-310.
Online
Audit and Assurance. 2017. [Online]. Available through:
<https://home.kpmg.com/uk/en/home/services/audit.html> . [Accessed on 7th October
2017] .
6