ACCM4400 Auditing and Assurance Report Sample
Assessment Question:
You participated in a vacation program at a local audit firm during your semester break. During the vacation program, you assisted an audit senior with planning a medium-sized company, including developing appropriate substantive audit procedures. You have one more semester to complete your postgraduate course and have indicated to the audit manager that you would like to work full-time at the audit firm upon completing your course.
The audit manager has asked you to write a report to determine your suitability as a candidate for a permanent role in the audit firm. The manager wants to assess your ability to apply the knowledge you gained to the audit planning process, develop appropriate substantive procedures, and develop your report writing skills.
You are required to address the following in your report (refer to rubrics on pages 5 & 6 of this document for a breakdown of marks and achievement criteria by component):
1) Identify 4 business risks of The Company that will increase the risk of material misstatement (specifically inherent risk) at the assertion level for classes of transactions or account balances. For each business risk, identify only 1 class of transaction or account balance (income statement or balance sheet line item), and for each class of transaction/account balance, please identify the assertion most (only one) at risk of misstatement. You need to explain why each business risk will lead to a risk of misstatement to the specific class of transaction/account balance and assertion you have identified.
2) Describe, in detail, the appropriate substantive procedure that will address each class of transaction or account balance and assertion identified as at risk of material misstatement. The description of procedures must be detailed enough for someone with limited auditing knowledge to carry out the procedures correctly.
3) Additional Requirements:
A. Do not use the same combination of account balance/class of transaction and assertion as used in the sample case study discussed in week 6 and week 12 (Refer to workshop notes for weeks 6 and 12).
B. Refrain from repeating the same combination of account balance/class of transaction and assertion in your answers. For example, if you have identified the existence of inventory as the assertion and account balance at risk of misstatement for your first business risk identified, do not use the existence of inventory for the second, third or fourth business risk. You can identify inventory as at risk but for an assertion other than existence, or you can identify the existence of a different account balance to be at risk of misstatement. Remember, though, that whatever account balance/class of transaction and assertion is identified as at risk of misstatement, you must logically and convincingly explain why this is the case based on the business risk you have identified.
C. Where the same combination is repeated, marks will not be awarded for requirement 2 (description of appropriate substantive procedures) as the substantive procedure will be the same.
D. You must include the following in your report:
a) Title page
b) Table of contents
c) Executive summary
d) Introduction
e) Body of the report
f) Conclusion
g)References
Solution
Introduction
The ability to identify business risks and develop substantive procedures to address them is a crucial component of reliable and efficient audit planning in the complex and dynamic environment of financial auditing. This report is created in light of a solicitation from the review director at the review firm where I filled in as an understudy. During my tenure, I participated in a get-away program, which offered me the priceless chance to help a review senior in arranging the review for Inner Diagnostics Restricted (IDX), a medium-sized element. My job enveloped seeing as well as effectively taking part in the review cycle, especially in the underlying periods of review arranging and the advancement of considerable review methodology.
The main goals for university assignment help of this report are two. First, I want to show what I learned during my internship, particularly how to spot potential financial risks and what steps to take to make sure these dont lead to big mistakes in the financial reports. Second, its to prove that Ive got what it takes to work full-time at the firm after I finish my studies. This report isnt just about showing what I know; its about proving I can use that knowledge in the real world of auditing. Recognizing financial risks and knowing what to do about them is key to making sure a companys finances are reported correctly. This protects everyone involved and keeps the companys financial reporting honest and accurate.
Risks impacting Internal Diagnostics Limited
There are different risks that surround the business environment of Internal Diagnostics Limited (IDX) which can have a major bearing upon their financial statements. The section is divided into four parts concerning the business risks that are rapid technological changes, regulatory compliance risk, fluctuations in the foreign currency and economic downturn. Every risk is evaluated depending upon the impact it creates on the particular account balances or transaction classes and the linked financial assertion at risk of material misstatement.
Rapid Technological Change: Impact on Research and Development Expenses; Assertion: Accuracy
In the present scenario, the industries are highlighted by major technological advancements and hence it is imperative for the companies to invest in R&D for remaining competitive. When it comes to IDX, the company needs to allocate amount for the innovation of the current products. The primary assertion at risk is the exactness of the expenses of R&D. The major technological changes can lead to major increment in the R&D expenses leading to risk of misclassification between revenue and capital expenditure or improper allocation of costs (Internal Diagnostics Limited 2023). Herein, the over or understatement can have a major influence on the financial statements thereby hampering the accuracy, and providing wrong information to the stakeholders in terms of companys investment in innovation and the future growth plans.
Regulatory Compliance Risk: Effect on Legal and Professional Expenses; Assertion: Completeness
Operating within a highly regulated sector imposes strict compliance demands on IDX, covering environmental rules, health and safety norms, and sector-specific directives. Adhering to these mandates often requires substantial legal and professional outlays. The risk herein lies in the potential for these outlays to be reported less than fully, endangering the assertion of completeness. Insufficient accounting for legal and professional costs may cause a diminution of liabilities and costs on the books, thereby inflating the organizations financial well-being. This misrepresentation could influence the decisions of stakeholders and might lead to legal consequences for failing to adhere to reporting norms
Economic Downturn: Influence on Accounts Receivable; Assertion: Valuation and Allocation
The financial stability of the IDX customers can be majorly influenced by the economic downturn that enhances the default risk and even impacts the accounts receivables of the company (Internal Diagnostics Limited 2023). The valuation as well as allocation assertion comes to risk as the skills of the customers in the fulfillment of the obligations becomes at risk which leads to accounts overvaluation of the accounts receivables if the allowances for doubtful accounts are not estimated correctly. Proper valuation is imperative to project the entitys true financial position where receivables are projected in terms of the realizable value considering the present economic scenario
Foreign Currency Fluctuations: Affect on Sales Revenue; Assertion: Accuracy
IDXs worldwide activities subject it to currency exchange risk, especially in recording sales income from abroad (Internal Diagnostics Limited 2023). The accuracy assertion is jeopardized when exchange rate fluctuations, not properly accounted for in the financial reports, occur. Inaccuracies can appear from application of the incorrect exchange rate to the dealings of foreign currency that results either in over or underestimation of the sales income. Accuracy in income recognition is vital for the stakeholders in evaluating the financial performance of the company mainly in understanding the influence of the international operations on the overall earnings.
Overall, such risks highlights the interactions which are complex between external commercial forces and the process of internal financial reporting. The accurate identification as well as evaluation of such risks is vital in terms of formulation of audit strategies that confirm to the reliability as well as integrity of the IDX financial report.
Substantive Procedures for Addressed Risks
Substantive audit process are imperative while addressing particular risks pertaining to the audit planning phase that ensures the financial statements are addressed in an accurate manner reflecting the companys financial position. Herein, the substantive process are outlined which are tailored to reduce the risks linked to R&D expenses, legal and professional expenses, accounts receivables, and sales revenue mainly stressing upon the accuracy linked to transaction in foreign exchange and revenue recognition.
Research and Development Expenses
Inspect Supporting Documentation: Invoices, contracts and other relevant documents pertaining to R&D needs to be verified followed by their nature and expenses incurred (Oussii & Boulila 2018). Such a step ensures that only valid R&D costs are recognized as well as recorded accurately.
Analyze Expense Trends: The current year R&D needs to be compared with that of past year as well as budgeted figures. Major deviation if any needs to be properly investigated for knowing the underlying reasons whether it is due to enhanced investment in the new projects or error in the expenses recognition.
Review capitalization: It needs to be ensured that R&D costs that meet the criteria of capitalization needs are capitalized as well as amortized over the useful lives while other needs to be expensed. Such review helps in maintaining the R&D accuracy (Oussii & Boulila 2018)
Legal and Professional Expenses
1. Obtain a Listing of Legal and Professional Expenses:
Request a detailed report of all expenses related to legal and professional services during the period. This report will be used for deeper analysis..
2. Confirm with External Parties:
Where possible, directly verify significant engagements of legal or professional services with the providers themselves. This action helps ensure the recorded expenses are complete and accurate (Setiany et al., 2017).
3. Review Subsequent Events:
Evaluate activities as well as transactions that happened after the balance sheet date that might reveal obligations that are unrecorded or liabilities that pertains to the legal and professional services (ACCA 2018). This step is vital to ensure that all expenses that are relevant needs to be recorded.
Accounts Receivable
1. Perform Aging Analysis: Look at the ages of the accounts receivables to find out which ones are late. This check is important to see if the company will likely get the money back and if theyve set aside enough money for the ones they might not collect (ACCA 2018).
2. Confirm Balances with Customers: Confirmation needs to be sent to selected customers to ascertain the existence and accuracy of reported receivable balances. Any differences need to be investigated and resolved (Grayston 2019).
3. Evaluate Allowance for Doubtful Accounts: The methodology as well as assumptions used in computations of the allowance for doubtful accounts needs to be evaluated to ensure that they are reasonable based on current economic conditions and past collection experience (Hussin et al., 2023).
Sales Revenue
1. Verify Accuracy of Revenue Recognition: Look at sales agreements and other papers to make sure money from sales is recorded correctly, especially when it comes to when to record sales and when goods or services are given (Grayston 2019).
2. Test Foreign Currency Transactions: For sales in different currencies, check how currency exchange rates were used to change these sales into the main money used in reports. Make sure these rates are correct by comparing them to trusted financial info on the dates the sales happened..
3. Reconcile to Bank Statements: Match the sales recorded in the reports with the money that actually came in according to bank records. This matching helps make sure the sales recorded are correct, especially for sales in other currencies (Kitiwong & Sarapaivanich 2020).
4. Review Cut-off Procedures: Look at sales right before and after the end of the reporting period to make sure theyre recorded in the right time period, to avoid mistakes in when sales are recorded.
Conclusion
Business risks needs to be carefully ascertained and detailed plans needs to be chalked out for checking the financial details are key parts of checking a companys finances, making sure the reports about its money are right and trustworthy. This report has highlighted how important it is to understand how certain risks, like quick changes in technology, following rules, economic downturns, and changes in foreign currency rates, directly affect the financial statements of a company named Internal Diagnostics Limited (IDX). By analyzing these issues closely and suggesting specific checks, we not only protect the financial reports from big errors but also build trust among people interested in the companys financial well-being.
Being able to move through these complex areas of auditing, spot the hidden risks, and come up with smart plans to check them shows a deep knowledge of how to audit and a readiness to take on the challenges that come with checking finances. So, this report shows my dedication to keeping the highest quality in auditing and shows that Im ready and fit for a full-time job at the audit firm. With the knowledge and skills Ive developed from this work, Im ready to make a big contribution to the firms goals and to the wider community of people who check finances.
References
ACCA 2018, Key Audit matters: Unlocking the secret of the audit, viewed 13 February, https://www.accaglobal.com/content/dam/ACCA_Global/professional-insights/Key-audit-matters/pi-key-audit-matters.pdf
Grayston, C 2019, Audit quality: is it time for a different approach? Viewed 13 February https://www.intheblack.com/articles/2019/02/01/audit-quality-time-for-new-approach
Hussin, N., Mohd Fairuz, M.S., Ahmad, A. & Rahmat, M.M. 2023, The association between audit firm attributes and key audit matters readability, Asian Journal of Accounting Research, vol. 8, no. 4, pp. 322-333.
Internal Diagnostics Limited 2023, Internal Diagnostics Limited 2023 annual report & accounts, viewed 13 February, https://integraldiagnostics.com.au/wp-content/uploads/2023/08/IDX-Investor-Presentation-FY23_FINAL-VERSION-FOR-RELEASE.pdf
Kitiwong, W. & Sarapaivanich, N. 2020, Consequences of the implementation of expanded audit reports with key audit matters (KAMs) on audit quality, Managerial Auditing Journal, vol. 35, no. 8, pp. 1095-1119.
Oussii, A.A. & Boulila, T.N. 2018, Audit committee effectiveness and financial reporting timeliness, African Journal of Economic and Management Studies, vol. 9, no. 1, pp. 34-55.
Setiany, E., Hartoko, S., Suhardjanto, D. & Honggowati, S. 2017, Audit Committee Characteristics and Voluntary Financial Disclosure, Review of Integrative Business and Economics Research, vol. 6, no. 3, pp. 239-253.
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