Auditing Report: ISA 260 Communication, Audit Risks in Tuck Co.

This report delves into the core principles of auditing, focusing on International Standard on Auditing (ISA) 260, which addresses the auditor's responsibility for communicating with those charged with governance. The report emphasizes the importance of effective communication throughout the audit process, outlining how it facilitates a constructive working relationship, aids in understanding matters arising from the audit, and helps in the oversight of financial reporting. Furthermore, the report analyzes specific audit risks within the context of Tuck Co., including inventory valuation, accounting treatment of a patent, sales ledger fraud, claims for unfair dismissal, and share issue misrepresentation. For each risk, the report describes the potential for material misstatement and proposes appropriate auditor responses, such as enhanced inventory counts, scrutiny of intangible asset amortization, investigation of fraudulent activities, and verification of financial disclosures. The report underscores the significance of professional skepticism, internal controls, and proactive communication in mitigating audit risks and ensuring the accuracy and reliability of financial statements. The document highlights the importance of accurate financial reporting in the context of the Tuck Co. case study.

AUDITING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
QUESTION 2...................................................................................................................................1
2.1 Importance for auditors to communicate throughout audit with those charged with
governance..................................................................................................................................1
2.2 Five examples of matters which auditors might communicate to those charged with
governance..................................................................................................................................2
QUESTION 3...................................................................................................................................2
3.1 Describing five audit risks in planning of audit of Tuck Co.................................................2
REFERENCES................................................................................................................................8

INTRODUCTION
Auditing is referred as systematic and independent examination of accounts, books,
statutory records, vouchers and documents of a business to ascertain about financial and non
financial disclosures present a true and fair aspect of concern. The present report will discuss
about international standard of auditing 26 with its importance and examples of matters might
communicate which are charged with governance. Further, this will reflect audit risk and how
auditors would response for evaluation of Tuck company.
QUESTION 2
2.1 Importance for auditors to communicate throughout audit with those charged with
governance
International standard of auditing (ISA) 26 deals with responsibility of auditor for
communicating with those charged with governance within audit of financial statements
(International standard on auditing 260 communication, 2019). The reason that auditors must
communicate throughout audit with those charged with governance as it helps in below stated
ways:
 It helps auditor for assisting and those charged with governance in appropriate
understanding matters on basis of audit and to develop constrictive working relationship.
 It is highly effective for purpose of auditing financial statements for ending period.
Usually, it has need of auditors for reporting particular matters arising through audit of
financial statements in enough time for enabling its appropriate action.
 It assists auditor for getting through those charged with governance and relevant
information to the audit.
 It directly fulfils responsibility for purpose of overseeing process of financial reporting
and by decreasing risks of material misstatement of financial statements.
 It ensures auditors for having attention of people who are responsible for financial
reporting and accounting function of business entity (Smith, 2019).
 With context of lack of technical knowledge in management, it might be not appreciated
for specific accounting policy as in breach of acceptable accounting practice. So with
relevant information by auditor, management could resolve issue through deciding on
innovative accounting policy.
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2.2 Five examples of matters which auditors might communicate to those charged with
governance
The matters which might be communicated are stated below:
 The responsibilities of auditors to give an opinion on financial statements which are
carried out to work as per international standards on auditing.
 The auditor must provide explanation about planned approach to audit along with
timetable of audit.
 Any key audit risk determined at stage of planning must be communicated and any
significant matter arose during audit along with significant adjustments of accounting.
 Any significant deficiencies with context of internal control system determined must be
communicated verbally or writing.
 Any other matter arise through audit there is significant for oversight of process of
financial reporting.
 On basis of listed entities, confirmation about auditors which compiled with ethical
standards along with proper safeguards which is put in place for determined ethical
threats.
 The audit adjustments whether recorded or not through entity, which can have material
effect on financial statements of entity. For instance, bankruptcy of material receivable
shortly after year end which must give outcome in adjusting entry.
QUESTION 3
3.1 Describing five audit risks in planning of audit of Tuck Co.
Audit risk Audit risk Auditor's response
Inventory count
after year end date
Inventory is held in three
warehouses across the country as
organization has planned for
conducting entire inventory counts
on 2nd, 3rd and 4th April along with
necessary adjustments would be
made for reflecting inventory's post
year end movement. This count has
Tuck Co. involves internal audit
system for count, as attending of
every branch so inventory could be
counted on efficient and quick
aspect. The inventory counting
should send count team for each
branch for commencing count as it
should be performed on closing of
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been attended with internal audit
teams. It is considered as internal
audit risk as inventory is referred as
high risk area of audit. This
transaction is aged inventory which
represents wrong financial position
of company.
business on 31st March. However,
auditor's team should form detailed
set of records of count which has
been valued with staff of Tuck co.
This situation could be mitigated
with application of independent firm
as counters of inventory and might
be further mitigated with presence of
strong internal audit team in Tuck
Co. Furthermore, the dated report is
after ending of fiscal year so in this
concern, it should be investigated
and rectified in last year's financial
statement.
Accounting
treatment of patent
In this year, Tuck Company had paid
£2.1 m for purchasing a patent which
allows organization for exclusive
right for 3 years to attain competitive
edge in the industry. According to
IAS 38 intangible assets, which must
be considered as intangible asset and
amortised over its 3 year life. In this
aspect, management has not
accounted patent in correct manner,
intangible assets and profit could be
easily overstated
In this aspect, audit team is in
requirement for agree on purchase
price for purpose of supporting
documentation and to provide
confirmation about useful life of 3
years. In the similar aspect, charges
of amortisation must be recalculated
with context of ensuring accuracy of
charge where intangible is valued
correctly at year end.
Sales ledger fraud In year 20X7 (November), there was
discovering of significant lading and
teeming fraud carried through its 4
members of sales ledger department
In this aspect, responsibility of
auditor is to know about risk of non-
detection of fraudulent material
misstatements which is higher
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which had colluded. Funds had been
stolen through wholesale customer
receipts and for recovering this,
there was allocation of customer
receipts against the older
receivables.
compared to misstatement because of
error. The auditor must be able for
maintaining professional scepticism
during audit performance and must
be capable for determining and
material misstatement because of
fraud which exist despite experience
of auditor on basis of honesty and
integrity of management. Auditor
must inquire management, internal
audit team and those who were
charged with governance whether
any instance of alleged or actual
fraud which has incurred in past and
to gain respective views about fraud
risk. In the similar aspect, auditor
must communicate it with
appropriate level of management on
timely basis, as it should be charged
with governance with involve of
fraud management as employee
performing internal control and any
other. Identify information on basis
of fraud to be communicated to
particular outside party of entity as
auditor's legal responsibility is to
override due of confidentiality. On
basis of documentation, significant
decisions on basis of susceptibility of
material misstatement in financial
because of fraud as determined and
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assessed risk of material
misstatement because of fraud at
level of financial statements and
assertion level as well.
Claim for unfair
dismissal
With context to December 2017,
financial accountant of Tuck Co was
dismissed as he was employed
through company for nine years and
threatened company for unfair
dismissal. With this outcome of this
dismissal as his replacement was
commenced in month of April as his
all responsibilities were handled
with members of finance department
so in this period, there was absence
of supplier statement reconciliation
and purchase ledger control account
reconciliation performed. In similar
aspect, it is replicated as risk of
material misstatement to Tuck Co.
The auditor could response for this
risk of material misstatement might
establish requirements for purpose of
introducing unpredictability for
testing control on yearly aspect along
with audit in multi location. In this
risk, it was potential misstatements
on basis of disclosures which
comprises omission of required
presentation or disclosures of
incomplete and inaccurate
disclosures. In the similar aspect,
reliance on control is supported
through enough and proper evidence
of audit which allows auditor for
assessing control risk at less than
maximum with outcome in lower
assesses risk of material
misstatement. In order to this, it
allows auditor for modifying timing,
nature and extent of planned
substantive procedures. With this
risk, auditor might use strategy of
benchmarking for automated
application control in subsequent
years audit. Simultaneously, this
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issue must be disclosed with finance
director for understanding about
method to address risk of
misstatement as team must be alert
with audit for purpose of evidence of
these errors.
Share issue Misrepresentation of bankruptcy of
company which had publicly
announced about creditors who
gained pay-out of 40% of owned
balance. The Tuck Co. Has
considered it as current asset of
£420000 in statement of financial
position and in profit and loss
statement. This amount was
misrepresented in financial
statements and income statements as
this mislead financial position of
tuck co. and its right place for
accounting is in statement of
changes in equity as dividend arose.
It could give outcome as increment
in profit and loss along with
overvaluation of current assets as
well.
This problem should be
appropriately discussed with
management and finance department.
In this aspect, there must be
appropriate review of reasonableness
of valuation and to recalculate and
method must be addressed on basis
of risk of misstatement and team
must be given adequate time to
obtain understanding of company
and risk along with detailed aspect
and consideration must be given at
year end. Th e treatment of this owed
balance must be ensure in other
statement about its appropriateness.
Use of service
organization
Tuck Co. has outsources its
processing of sales ledger to external
service organization. This
organization handles every element
of sales ledger cycle along with sales
This issue should be discussed with
management and there must
appointment of internal auditing
team with honest audit which leads
to transparency and clarity of entire
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invoicing along with chasing of
receivable balances and send
monthly report with detail amount of
sales and receivable. The main risk
behind this is of mishandling of
business or failure not caused with
its main players.
financial operations.
Key control not
performed
Financial accountant of Tuck co has
threatened to sue organisation for
unfair dismissal so his
responsibilities was allocated to
other members. It might lead to very
serious problem as financial position
is articulated with help of financial
accountant.
With discussion through
management, accounting is logical
term as it could be outsources such as
extracting firm compatible for
observing budget along with
operations. Hence, firm could
manage tax preparation, accounts
receivable and payable and other
financial responsibilities as well.
Transfer of date to
service
organization
The Tuck co. has transferred its sales
ledger on 31 January. This will lead
to reallocate order invoices in
current month for avoiding
withdrawal of funding of 90 days.
This should be appropriately
discussed with management, and
treated fairly with meeting of internal
audit team for fair practice.
(Source: AS 2301: The Auditor's Responses to the Risks of Material Misstatement, 2019)
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REFERENCES
Books and Journals
Smith, K., 2019. Tell me more: A content analysis of expanded auditor reporting in the United
Kingdom. Available at SSRN 2821399.
Online
International standard on auditing 260 communication. 2019. [Online]. Available through
<http://www.ifac.org/system/files/downloads/a014-2010-iaasb-handbook-isa-260.pdf>.
AS 2301: The Auditor's Responses to the Risks of Material Misstatement. 2019. [Online].
Available through <https://pcaobus.org/Standards/Auditing/Pages/AS2301.aspx>.
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