HI6026 Audit, Assurance and Compliance

Question 1: 
As part of your planning process, you are considering whether you will need to use the services of an expert in the audit of Double Ink Printers Ltd (DIPL). 
Required: 
Based on the background information contained in the case, explain whether it will be necessary to use the work of an expert in the audit of DIPL.
Question 2: 
You are at the planning stage of the audit of Double Ink Printers Ltd (DIPL) for the year ended 30 June 2017 and have been asked by the audit manager to assists determine the materiality levels. 
Required: 
(a) Referring to the background information contained in the case, identify five factors that would influence your determination of the preliminary figure for overall materiality for the 2017 audit of DIPL.

(b) Explain why the factors identified in

(a) above are relevant to your calculation of the preliminary figure for overall materiality.

(c) Describe how the factors identified in

Answer to Question 1

Determination of the requirement of an expert for the audit of DIPL

The issue that has been raised in the question is that as a part of the planning process the audit of the financial statements of Double Ink Printers Limited have been scheduled. Now, it is needed to ascertain whether the work of an expert is needed in the audit of DIPL or not. For the purpose of ascertainment of the need of an expert, the role of a concerned expert has to be properly understood at first (Bonner, Clor-Proell & Koonce, 2014). The role of an expert other than an assessor or an accountant may be listed down as follows:

• The listing down of the liabilities, present in the working environment of an entity and the cost of cleaning up the sites of the entity
• The approximation of the services related to the concerned sector
• Valuation of rare or uncommon assets like antiques, art work or other acquired assets by business
• Assessment and valuation of complex financial components like taxes and enquiry about their complying standards
• Calculation and evaluation of the liabilities of the entity that are related to the insurance agreements or employee benefit plans

However, the assessor in appointing or hiring an expert or specialist should determine the need of an expert by collecting enough auditory evidence in order to justify his decision. The requirement of an expert or specialist should be judged by the assessor on the basis of the level of objectivity and the competency that is necessary in order to determine the specific area of work of the expert. In case of an external review, the objectivity of an expert may be at stake as the sole requirement of review may call for the need of engagement in enquiry with reference to interests that in all probabilities, may generate threats to the objectivity of the expert. Moreover, the determination of the proper scope and nature of the work that has to be performed by the expert has to be executed in order to evaluate the work done by the specialist (Haines, 2014).

The analysis of the case study of DIPL further reveals that the inventory and the act of purchasing the inventory obsolescence has not been included in prior year in order to cover for the estimated decrease in their value because of the vulnerability of the storage. Therefore, the service of an expert is much required in the auditing of DIPL because the approximation of the value of obsolescence. Further, the report also reveals that the depreciation that is charged on the fixed assets has been calculated using the straight line method. Therefore, in addition to the impairment the service of a specialist is also required for the computation of entire depreciation.

Answer to Question 2 (a)

Identification of the five different facts that impact the preliminary figures of materiality

The term materiality indicates the facts that separately or wholesomely hinder the preparation of the financial statements that in turn affect the true and fair representation of the books of accounts of the firm that have been prepared in compliance with the laid down standards of a regulating body. The proper analysis and scrutiny of the case study of DIPL reveals the five essential factors that can influence the preliminary figures of materiality. The major reason of the occurrence of materiality is the misstatements in the financial assertions disintegrated or wholesomely that poses a major impact on the true and fair view of the material aspects of the corporation of DIPL. The reason for the occurrence of the misstatements in the books of accounts is either fraud or an unintended mistake on the part of the administration of the firm who is in charge of preparing the financial statements of the firm. The exclusion of the specific amounts either by mistake or deliberately along with the disclosure in the accounting statements.

The risk of fraudulent activities that affect the materiality

The risk of fraudulent activity can be considered as on the most important factors that affect the preliminary figures of materiality in the accounting statements of DIPL. Nevertheless, it has been further mentioned in the case study that there has been extreme pressure on the IT department of DIPL by the Board of Directors, which has mandated the IT personnel to manage a new accounting system, on the whole. It should be noted that these activities has exposed business to materiality.

The various procedures of accounting affecting materiality

The accounting procedure or method that has been applied in order to evaluate the raw materials has been inappropriate. This means that the valuation of the inventory especially the raw materials at the average costs were not at all apt and fitting.

The influence of materiality by the environmental factors

As revealed by the provided case study, there have been a number of business transactions that have not been recorded in the books of accounts at the time of preparation, by the administration of DIPL, which has significantly affected the planning in regards to the marketing and selling strategies of the firm. The administration of DPL also failed to compute the values of the macro and micro intentions. These factors also take into consideration the economic and the socio-political conditions as well (Eilifsen, Hamilton & Messier, 2017).

The complexity of the process of appointment of the CEO and its affect on the materiality

The process or method of appointment of the CEO in DIPL, as described inn the case study is very complicated and difficult to comprehend. Thus, the method of appointment of the new CEO of the firm, the transition of the previous CEO and the actions undertaken by William Jackson has not been executed in accordance to the laid down policies and regulations. In addition to this the staff leaving the corporation leave the firm exposed to various risks. Thus, these factors have the potential to affect the preliminary figures of materiality (Keune & Johnstone, 2015).

The novel schemes of cataloguing accounts that affect materiality

Lastly, the factor that may affect the preliminary figures of materiality are the assertion by the management of DIPL that the recording of the cash receipts by the concerned cashier of DIPL have been maintained by adhering to the proper principles. It may be further noted that most of the expenditures undertaken by the firm can be carried out via the electronic payment system (Singh & Peters, 2015). However, the method of maintenance of the document of receipt post downloading the receipt from the webmail and carrying out the reconciliation of the statements may be adopted by the accountant of DIPL. The accountant should carry out the practice of reconciliation more often. It might be further noted that the revenue generation procedure of DIPL via e-book marketing and republishing the text books might also affect the materiality of the firm.

Answer to Question 2 (b)

The relevance of the identified factors to the computation of materiality

The errors that result in materiality might occur at the time of collection financial information or during recording such information that is while preparing the financial statements of the firm. The faulty assessment of certain financial factors along with unreasonable estimations or assumptions at the time of preparation of the accounting statements may result in misstatements. Moreover, the mistakes in the application of a proper accounting standard in relation to classification and providence of disclosures may also affect the materiality as they pave the pathway for the occurrence of fraud. Therefore, it depends on the auditor to implement the required internal controls in order to mitigate the occurrence of misstatements.

As revealed in the case study the corporation of DIPL lacks the required objectivity along with the integrity. This puts a question mark on the ethical conduct of the firm and lay the road to the factors that lead to materiality. The faulty information produced in the financial statements may also mislead the users or the stakeholders of business. The forceful implementation of the novel accounting system along with unjustified pressure on the employees may also lead to fraud in the firm. Thus, affecting the quality of the accounting statements and becoming relevant from the viewpoint of materiality (McAlister, 2016).

The process of appointment of the CEO also should be transparent in order to reduce the degree of fraud. Thus, this too contributes in the list of factors affecting materiality.

Lastly, the process of valuation of the raw materials at their average cost will very effectively lead to the generation of factors that will affect materiality, as it will hinder the true and fair view of the firm. Similarly, the inability of the firm to integrate environmental factors will also affect materiality (Messier & Schmidt, 2017).

Answer to Question 2 (c)

The ways in which the identified factors will affect materiality

The executive at the IT department was clearly dissatisfied with the adopted method for the implementation of the machines of the firm. Moreover, unjustified pressure was also imposed on the staff of the corporation for evaluation of the novel system and for reconciliation.

The various procedures of accounting affecting materiality

The procedure of valuation of the raw materials on the basis of average costs was not at all appropriate. The unreasonable assumption or estimation might even the level of materiality by influencing the substantive processes of accounting.

The influence of materiality by the environmental factors

The incapability of the administration of DIPL to measure the micro and macro factors and the exclusion of some particular transactional amounts lead the way to the improper preparation of the financial statements. This might essentially lead to misappropriation of the accounts by the stakeholders of business along which may very evidently lead to faulty decision-making.

The complexity of the process of appointment of the CEO and its affect on the materiality

The process of appointment of the CEO also appears to be extremely complicated and confusing. Thus, the adoption of a more transparent and easy to comprehend procedure should be adopted in order to appoint the CEO of the firm.

The novel schemes of cataloguing accounts that affect materiality

The expenses incurred by the firms are recorded using the electronic payment system that influences the procedure of maintenance of the records of receipts and reconciliation of the assertions. But, the inability of the firm to record and reconcile the financial statements might be the primary reason of an impending disaster that may lead to the downfall of DIPL due to large amounts of materiality. These activities are surely to affect the preparation of the financial statements, which might make it difficult for the assessor to express a specified perspective in relation to the materiality of the accounting assertions.

References

Bonner, S. E., Clor-Proell, S. M., & Koonce, L. (2014). Mental accounting and disaggregation based on the sign and relative magnitude of income statement items. The Accounting Review, 89(6), 2087-2114.

Eilifsen, A., Hamilton, E., & Messier, W. F. (2017). The Importance of Quantifying Uncertainty: Examining the Effects of Sensitivity Analysis and Audit Materiality Disclosures on Investors’ Judgments and Decisions.

Haines, F. (2014). Corporate fraud as misplaced confidence? Exploring ambiguity in the accuracy of accounts and the materiality of money. Theoretical Criminology, 18(1), 20-37.

Keune, M. B., & Johnstone, K. M. (2015). Audit committee incentives and the resolution of detected misstatements. Auditing: A Journal of Practice & Theory, 34(4), 109-137.

Khan, M., Serafeim, G., & Yoon, A. (2016). Corporate sustainability: First evidence on materiality. The accounting review, 91(6), 1697-1724.

McAlister, L., Srinivasan, R., Jindal, N., & Cannella, A. A. (2016, April). Advertising effectiveness: The moderating effect of firm strategy. American Marketing Association.

Messier, Jr, W. F., & Schmidt, M. (2017). Offsetting Misstatements: The Effect of Misstatement Distribution, Quantitative Materiality and Client Pressure on Auditors' Judgments. The Accounting Review.

Singh, M., & Peters, S. J. (2015). Materiality: Investor Perspectives.