Audit Function Quality Deter Management †MyAssignmenthelp.com

Question: Discuss about the Audit Function Quality Deter Management. Answer: Introduction: The auditing process and the big firms in Australia are directed by the provisions of the Corporation Acts, 2001 which is the only Act which is being discussed in the document below. The section 336 of The Corporation Act, 2001 is taken into adherence by the auditors while auditing the company. This act has mentioned all the necessary rules and regulations in the form of Auditing Standards which are needed to be kept in mind while preparing the audit file. The Auditing and Assurance Standards Board (AUASB) is the formulation body which makes the Auditing Standards which are to be taken into consideration by the auditors while preparing the report (Manoharan, 2011). ASA 300 and ISA 300 have the same subject or topic being narrated about the planning of the compiled financial audit report which is issued with the accordance to International standards of auditing AUASB. ASA 30 states that an auditor of the financial report should formulate his plan and remember his responsibility while auditing the statement. If an auditor has a well planned and responsible method to perform an audit, then he will be able to complete his work in the most effective and efficient manner. It is the decision of the auditor whether to use the advice and services of an expert or not as an advice may help the auditor to improve the quality of the work. The advice or help of an expert auditor (ASA 600) is also stated in the AUSAB to teach the other auditors that whether they need the help and assistance of an expert auditor while preparing the audit report of a particular firm. It also helps the incompetent auditors to look and learn by seeing the adequacy of the work which is initiated by the expert auditors while preparing audit report of the firm (Lapsley, 2012). An expert is an individual who is said to have sufficient essential skills and understanding after completing his necessary professional qualifications, and who also gives important advice on the matters related or not related to accounting and auditing (Matthew, 2015). If the inexperienced auditor finds that he is not able to fulfil the requirements of the work then he should positively take help and advice from a senior and much-experienced auditor for completing his work in a professional manner. The auditor decides the method or way in which the expert or experienced auditor will be carrying out or helping for the audit process (Livne, 2015). ASA 315 may be helpful for the auditors to evaluate the entity and the environment of the firm which need to be audited. It also helps the auditor to find whether he needs an expert auditor for guidance or not. ASA 315 helps the auditor to analyze the firms environment and thus helping him to identify the inappropriate statements of the firm while auditing. The case of Double ink printers limited is having the same necessity of analyzing and evaluating all the account balances, types of transactions and the conditions of the firm so that the auditor can be advised if he needs the help of an expert auditor in accordance to the ASA 315 (Merchant, 2012). According to ASA 600, an auditor faces no change in his situation of completing the audit process which keeps it unchanged and unaltered no matter if an expert auditors help is taken or not (Kaplan Kaplan, 2011). Even if the auditor of the firm DIPL takes help from an expert or not, he needs to still needed to find out the data and give an opinion on the financial performance and position of the firm. While checking the background of the company Double Ink Private Limited, it was clearly noted from the financial and non-financial data that the firm was moving rapidly towards making an efficient progress by automating the tasks and also making use of the information technology frequently so as to improve the efficiency of the firm and increase its profit. It is duly noted that it is not possible for every auditor to be familiar with the knowledge and the terms of Information Technology system used by the firm in its mechanism that is how the policy is adapted and used, an auditor for understanding the effectiveness and efficiency of the IT process used by the firm should analyze the past experiences of the firm where the methods and the tricks of using the IT technology have been duly noted with the documents containing financial statements which may help the auditor to work in the limits of the way that the expert have advised him to proceed with the accordance of ASA 600 (Hoffeld er, 2012). It was also found that the main source of revenue generation is from the E-book revenue. The information provided about the terms and agreements of the firm DIPL in the E-book should be always verified and assessed in order to ensure that there may not arise any disputes between the companies and different publishers in future. It was also noticed that the firm DIPL was charging an advance annual 12 months storage fees to its clients which makes it necessary for the auditor to check the financial statements of the storage fee billing and any related documents. If a proper judgment of data is needed then it is not possible for a non-IT professional to assess this type of advanced IT system. Therefore the auditor is required to use the help of a person who attains expertise in the IT field and thus also ensures that all the data is assessed and the IT system is analyzed carefully so that the auditor can finalize his reports in an efficient and effective way (Geoffrey et. al , 2016). It should be clearly known that the auditor has the full right to choose that he or she may choose if they need an expert on the judgement of the audit report as even after the analysis of all the documents, the auditor is left with the lone responsibility to choose whether it needs an expert opinion or not. However looking after the gritty situation of the firms IT advancements, it is advised that the auditor must opt for an expert opinion (Niemi Sundgren, 2012). Materiality in terms of financial aspects may be defined as the negligence of any information which may cause a direct material effect on the financial statements of the business. There are various standards of auditing related to the topic of materiality. A thorough analysis should be made in order to understand these standards in the different parts of the question (Gay Simnet, 2015). In auditing, it is important for an auditor to seek for the materiality of the financial statements of the firm as it is not feasible to give every single item of expense, income and asset and liability equal importance. The materiality of the financial statements id distinguished on, the basis of the balances of the accounts and the divisions of the transactions are to be evaluated on the basis of the entity and the financial statements of the business. ASA 315s principle of Identifying and assessing the risks of materials should be taken into consideration for understanding the environment and financial aspects of the firm (Fazal, 2013). Is should be followed so that there may be no state of confusion when there is a need to gain a proper idea of the account balances or the environment of the firm on the basis of the operations in near future while processing the report. ASA 320 issued by AUSAB gives the brief information about the responsibility of an auditor in accordance with th e materiality in the audit of a firm (Roach, 2010). The five factors affecting the materiality in the levels of the audit report of a DIPL firms financial statements are: Categories of transactions, declaration of items and account balances of the financial statements of the company. For the estimation of materiality, the firm DIPL needs to divide its financial statements into different categories of transaction like E-books, irregular expenses, and storage fee according to their level of importance. The level of materiality will also be changed or altered if there is any disposal of an asset or a part of it during the period of auditing. Also if any business combination takes place, it affects the materiality of the business (Fazal, 2013). The percentage of the specified benchmark of the total expenditure or total revenue like profit before tax, gross profit, and net profit will be very helpful in determining the levels of materiality for the auditing process. The auditor decides the percentage on the basis of the professional judgments made on the circumstances of the firm. Qualitative disclosures like the use of the new and advanced IT infrastructure in the business is also a huge regulating factor which influences the materiality levels of the financial statements of the firm (Elder et. al, 2010). The collective impact of small errors should also be noticed as they may not affect the financial position as the whole but may affect it when combined. Some of the general categories of transaction like the inventory in hand, revenue generated from e-books, storage fee revenue and cash balances are very essential to the business of the firm DIPL and hence they should be given utter importance as far as it is concerned with the financial statements of the firm. The materiality of the financial statements also depends on the nature of the transaction and their relation to these transactions. The introduction of the new advanced IT system by the firm during 2017 should be given utter importance as this event caused a huge change in the working of the firm. The background information about the company clears that the firm is heavily dependent on the newly introduced IT system. The company has also decided to invest in new IT system in order to fully computerize its financial activities (Cappelleto, 2010). Hence it has been mentioned in one of the five factors which are influencing the financial statements of the firm. The use of benchmarks of different levels of percentage has been a useful method for finding the materiality levels of a firms financial statement while auditing. Hence several different benchmarks like the total revenue, total expenses, net profit, gross profit and PAT can be used by the firm to determine the materiality level of the income and expenses of the firm for auditing the financial reports of the firm DIPL. Use of 1% to 5% would be helpful according to the level of activities and quality of transactions. The background information about the company clears that the firm is heavily dependent on the newly introduced IT system. The company has also decided to invest in new IT system in order to fully computerize its financial activities. This also states the reason that why the income and expenditures are wholly collected using the It systems of the company (Baldwin, 2010). It is specially provided in the 27th paragraph of ASA 320 about the collective influence of the incorrect statements and small mistakes should be considered while evaluating the materiality of the firms financial statement. The incorrect statements and financial values may not affect the firms financial condition materially but when they are accumulated as a whole it becomes a material change which should be duly noted while the auditing of the firms financial statement. To know about the factors that are traced in part (a) above will have a bearing on the preliminary figure for materiality of DIPL, it is imperative to know the profit and loss of the company. Revenue of Double Ink Printers Limited Amount in AUD Years Details 2015 2016 2017 Revenue 34,212,000.00 37,699,500.00 43,459,500.00 Less: Cost of sales 28,207,500.00 31,620,000.00 36,855,000.00 Gross Profit 6,004,500.00 6,079,500.00 6,604,500.00 Add: Indirect incomes Obsolescence of inventory Allowance reversed 155,588.00 Income from commission 108,000.00 123,000.00 130,500.00 Storage fee for e-books 667,500.00 1,027,500.00 1,417,500.00 (A): Operating income 6,780,000.00 7,230,000.00 8,308,088.00 Less: Indirect Expenses Expenses for advertisement 83,725.00 115,923.00 125,778.00 Audit fees 112,500.00 127,500.00 135,000.00 Bad debts 150,000.00 195,000.00 210,000.00 Depreciation 249,375.00 274,312.00 472,688.00 Expenses on discount allowed 195,000.00 285,000.00 335,500.00 Legal fees expenditures 74,000.00 111,500.00 137,000.00 Exchange loss (foreign) 38,500.00 49,750.00 Rates 98,500.00 106,000.00 113,500.00 Expenditures on repair and maintenance 224,000.00 276,500.00 306,500.00 Salary expenses 1,965,000.00 2,190,000.00 2,445,000.00 Costs of telecommunication 134,750.00 141,478.00 159,785.00 (B): Total Indirect expenses 3,325,350.00 3,872,963.00 4,440,751.00 Profit before interest and taxes (A-B) 3,454,650.00 3,357,037.00 3,867,337.00 Less: Interest 84,379.00 83,663.00 808,038.00 Profit before tax 3,370,271.00 3,273,374.00 3,059,299.00 Less: Income tax 1,011,081.00 982,012.00 87,116.00 Profit after tax 2,359,190.00 2,291,362.00 2,972,183.00 Going by the items projected in the income statement that is the items pertaining to the income and expenditure, all can be tagged as relevant, as well as material in nature because they are used in determining the profit and loss of the company for three regular years. Moreover, all the inclusion of the sub-items contained in the revenue and expenditure that are surpassing 5% of the overall companys revenue will be deemed to be material for the purpose of financial statements audit. However, the auditor needs to have substantive, as well as analytical procedure on every item of income and expenditure hence; nothing can stop the auditor to extend the procedure of audit on every item of financial statements if he considers it necessary to project an opinion on the financial statements. References Baldwin, S. (2010). Doing a content audit or inventory. Pearson Press. Cappelleto, G. (2010) Challenges Facing Accounting Education in Australia. AFAANZ, Melbourne Elder, J. R., Beasley S. M., and Arens A. A. (2010). Auditing and Assurance Services. Person Education, New Jersey: USA Fazal, H. (2013, May 13). What is Intimidation threat in auditing?.Retrieved from: https://pakaccountants.com/what-is-intimidation-threat-in-auditing/ Gay, G., and Simnet, R. 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