Auditing and Professional Practice Process of Auditing

Question: Describe about the Auditing and Professional Practice for the Process of Auditing. Answer: Case Study 1(a) It is customary for the auditor to be well prepared in advance before the start of actual process of auditing. For this purpose, it is essential that the auditor draws a plan taking broader understanding of the nature of business of the client and the industry conditions. Planning helps the auditor to allocate appropriate amount of resources to the right areas (Ernst Young LLP, 2012). In this context, following major issues have been identified as in the current case of City Ltd from planning view point: The evaluation of the audit risk needs to be made cautiously because the business conditions are adverse for City Ltd. There is overall industrial downturn in the construction industry in Australia, which gives rise to the risk of material misstatement. The company has under processed projects for which no buyer has yet been found. This situation gives rise to significant business risk (IAS 300, 2009). The risk of top management manipulating the financial performance is high. There may be window dressing of financial statements, thus, the auditor should plan extensive checking (IAS 300, 2009). Major areas for extensive checking should be revenues, accounts receivables, and cash. Case Study 1(b) In this case Web Ltd has expanded its IT capabilities through installation of new computer software. In the connection following audit planning issues have been encountered: There would be a change in the accounting process and consequently other internal processes, having bearing on the internal controls, will also undergo a change (Millichamp, 2002). The auditor must consider a thorough evaluation of the internal control system of the company. The auditor has to consider the overall impact of change in the information system on the audit risk (Millichamp, 2002). Case Study 1(c) Beauty Pty Ltd has established an overseas branch, which the main event that the auditor needs to consider while preparing overall plan for the audit. In this regard, there are various planning considerations for the auditor as detailed below: The inventory is transferred to the overseas branch from the domestic unit; therefore, the auditor should plan to check internal controls in relation to inventory transfer (Gramling, Johnstone, and Rittenberg, 2012). Assessing the materiality of overseas operations, the auditor should plan the resources needed to be allocated for the verification of the breach operations. The auditor should consider the risk of fraud and error in relation to the overseas operations and analyze the impact of that risk on the overall audit of the company (Gramling, Johnstone, and Rittenberg, 2012). Case Study 2(a) The test of controls is the process employed by the auditor to assess the adequacy of the internal control system. Thus, the focus of test of controls is on verifying and assessing that whether the internal control system of the company is adequate for the purpose (Gramling, Johnstone, and Rittenberg, 2012). However, the substantive approach is followed when the auditor desires to verify an amount of financial statements. Substantive testing entails more rigorous and in depth checking and it helps the auditor to collect corroborative evidences. Therefore, it could be inferred that its the purpose that forms the basis for selection between test of controls and substantive testing. Further, the initial risk assessment of the auditor also plays crucial role in deciding as whether to apply test of controls or substantive tests. Case Study 2(b) Audit approach refers to the methodology adopted by the auditor. In the cases involving high risk, the auditor adopts risk based audit approach, which requires auditor to maintain professional skepticism and alertness throughout the audit. Thus, it is the risk factor that affects the auditors mind set and thus, the audit approach (Gramling, Johnstone, and Rittenberg, 2012). At the planning stage, the auditor assesses the inherent and control risk to evaluate the risk of material misstatement in the financial statements. If the auditors assessment is that the combined level of inherent and control risk is high, it would be necessary for the auditor to adopt more rigorous checking. The increased extent of verification will help to reduce the detection risk low and thereby controlling the overall audit risk within the risk appetite. Case Study 2(c) Depreciation is the material item of expenses to be verified by the auditor, thus, it is crucial that the auditor deals with it carefully. The auditor should be completely satisfied with the accuracy and completeness of the amount disclosed as depreciation in the books of accounts. In order to ensure that the amount of depreciation as shown in the books of accounts is correct, the auditor should perform the following procedures: The auditor should perform recalculations by computing the amount of depreciation himself and cross verify the results with the books of accounts (Gramling, Johnstone, and Rittenberg, 2012). Further, the auditor should ensure that proper internal controls are in place to safeguard assets. Apart from that the auditor should also check completeness assertion to ensure that the all assets which should have depreciated have in fact been depreciated. For this purpose, the auditor should consider physical verification of the assets and tally the results with the books. Case Study 3 The financial reporting is the process of preparation of financial statements which comprises of income statement, balance sheet, and cash flow statement. These financial statements are prepared to communicate the required information to the investors and other stakeholder such as government and lenders. Thus, the question of reliability of the information communicated to the group of stakeholders arises, which gives rise to the need of auditing. The auditing is carried out by an independent third party to verify that the information communicated through the financial statements is true and correct. Thus, in this way the auditing and financial reporting is linked to each other (Gramling, Johnstone, and Rittenberg, 2012). Further, it is also important to note that auditing increases credibility of the financial statements prepared by the entity and generates faith in the stakeholders. Thus, it is inevitable to carry out auditing after preparation of the financial statements (Gramling, Johnstone, and Rittenberg, 2012). References Ernst Young LLP. 2012. Ernst Young Tax Guide 2013. John Wiley Sons. Gramling, A.A., Johnstone, K.M., and Rittenberg, L.E. 2012. Auditing. Cengage Learning. IAS 300. 2009. Planning an Audit of Financial Statements. [Online]. Available at: https://www.ifac.org/system/files/downloads/a016-2010-iaasb-handbook-isa-300.pdf [Accessed on: 09 December 2016]. Millichamp. A.H. 2002. Auditing. Cengage Learning EMEA.