Auditing and Professional Practice Australia

Question: The engagement partner has requested a meeting tomorrow to discuss audit plan for MTI She has requested several documents for that meeting. 1. A preliminary audit plan assessing internal control risk and providing preliminary judgment for detection risk. 2. A description of specific substantive procedures that could be conducted for the WIP inventory. You are required to justify the audit plan by referring to theoretical grounds learnt from this unit. Answer: Internal control is basically the processes well designed, implemented and maintained by those charged with governance, management and other personnel. The main objective of the internal control is provide reasonable assurance about the achievement of the entity objective with regard to reliability of financial reporting. It is the responsibility of the auditor to plan the audit of the financial audit. As per ASA 300 Planning an Audit of Financial report, the partner and other the team member of the engagement team shall be involved in planning the audit. (Board A. a., 2011) As per ASA 300, the auditor shall establish an overall audit strategy that set the timing, direction and scope of the audit and that guides the development of the audit plan. In the given case also Engagement partner of Dalen jay want to hold a meeting to discuss the audit plan of MTI. Before making any audit plan the Engagement partner must identify the characteristics and scope of their Engagement in the audit of the organization. As per ASA 315 (Board, 2013) Assessing and Identifying the risk of Material Misstatement through understanding the entity and its environment the auditor should identify the risk of material misstatement in the organization, whether due to fraud or error, at the financial statement and assertion levels. Thomas Smith also needs to understand the MTI and its environment including the internal control before starting any Audit plan. This will help Mr. Smith to reduce the risk of material misstatement at an acceptable low level. Business Risk is a risk which is resulting from significant event, condition, action, circumstances or inaction that could adversely affect an entity ability to achieve the objective of the entity. MTI is basically engaged in production of environmental friendly product such as recycle containers. However, the company also deals with variety of metal as well as plastics. Audit Plan Assessing risk and Judgment in detection risk for different department of MTI is as follows: Control regarding availing service of another organization: As per Guidance Statement GS 007 Audit Implication of use of Service Organization (Board A. a., Guidance Statement 007, 2011) it is duty of the auditor to obtain understanding of the nature and significance of service provided by the service organization and their effect on the users entity control. In the given case MTI is using the service of Machining and turning center suppliers which helps MTI to develop efficient operation by furnishing sample numerical control program for standard machine operation and by providing training to employee of the employees. In regard to the Service provided by the said organization Mr. Thomas need to identify the risk and internal control of MTI to deal with such risk. It has also been observed from the past working paper that due to lack of control one of the suppliers unfortunately sent the program which was infected with virus as a result of which entire system need to be clean by Tiffany with the antivirus. To avoid this time of situation Mr. Thomas smith would ask the management to prepare a report regarding service organization system, control objective, related control which has been designed and implemented during the period. Mr. Thomas Smith can also asked for the report of the service auditor with the objective of conveying reasonable assurance that include the service auditor opinion on the description of the service organization system and control objective. Further, MTI should first install all the Software purchase from the vendor in one standalone computer and after its successful installation it has been installed to another computer to reduce the risk of virus spreading in the entire network. Further, MTI must make an agreement with the supplier in case of any infected software supplied by them, they make to make good the amount of loss caused to the company due to installation of the infected software in the system. Control regarding Equipment maintenance: As per the previous working paper it has come to notice of Mr. Thomas Smith that the company used to purchase all the equipment from Tony Lee, the owner of the computer shop conventionally located three blocks away. In this regard Mr. Thomas must ask the company to get the quotation from at least three suppliers to compare the rate of the machinery which has been supplied by Tony Lee. Further, Mr. Thomas should also ascertain that what is the company procedure to ensure that proper maintaining and upgrading of the software has been done by the Tony Lee. Further, Mr. Thomas should also ask the company regarding the frequency of the updation and should check record that whether proper up gradation at regular interval has been done or not. Control regarding accounting software password: Mr. Thomas should also ensure that every person have different password. Further a log book in the system is maintained in which the details of the person using the system and making change should be recorded in order to prevent loss of data. However, in case of any undesired situation proper record should be there so that the person can be held for such undesired situation. Backup of data: Data Backup is one of the most important task of the organization. Mr. Thomas should check the company procedure for back up of data, person who are reasonable for back up of data, time interval between two back up and what document is maintained for backup. Further, since as per the company experience of lost of back up of data Mr. Thomas should ensure that the company back up is now store at a safe place. Control regarding the company data: Mr. Thomas should check what control has been adopted by MTI regarding the employee copying the Image and take it to their home. As there might be changes of theft in which the copied image can also be given to the competitor who might misuse the image of the company. Control regarding generation of reports: Mr. Thomas should have to understand how payroll is generated. How the working hours of the employee have been recorded and who authorize the working hours. Further, Mr. Thomas should also ascertain what control has been implemented in entering the input resource in the payroll system. Whether any system of cross checking is possible or not. If the cross checking is possible, then Mr. Thomas must cross check the payroll generated with the source document for some of the weeks and give their suggestion or view on the same. After generation of pay book and during payment of money to the worker the company must take signature of the worker in the pay book in order to avoid any future litigation. Control regarding Approval and updation of Quotation in the System: Mr. Thomas must check who is authorized to approve the quotation which has been entered in the stand alone electronic data interchange system. Further, Mr. Thomas will also check how frequently the quotation is updated in the system. Further, he should also check once the quotation has been approved by the customer how payment has been received by the company and its payment term. Mr. Thomas will also made sure that proper documentation has been maintained by the company for each and individual case. Control regarding monitoring staff hours: Mr. Thomas should check what procedure has been adopted by the company to monitor the total hours worked by the staff in an organization. Further, he should also check what type of report has been generated in the organization and what procedure has been adopted to rely on such report. Thomas should must cross check the report with the device which record the sign in and sign out time of the employee in order to cross check correct pay register has been generated. Beside this he should also check that labour hour rate provided by calculation is also correct. Control regarding Accounting Entry: Mr. Thomas should check the company internal control regarding Accounting Entry such as who authorizes the voucher, when entry has been done in the system, who is responsible for Entry e.t.c. After entraining the vouchers in the system what procedure is being adopted to ensure that the entry is correct. Control regarding Check issue: No one will be issued until and unless there balance is known. Further as and when an entry has been done in the system and it has been confirmed that the balance is being due to the suppliers then only payment should b ad to the suppliers. Control regarding backup of Accounting software: Once the Entry has been completed daily backup of the Accounting Software must be taken in order to avoid any unwanted circumstances of loss of data. Mr. Thomas should check the company policy of back up of data i.e. the person responsible for data back up, type of back up and the frequency of back up taken by the representative. Answer to Question No :2 Substantive test of procedure or transaction helps to reduce the level of detection risk so that the audit objective can be fulfilled. (James, 2011) . This test helps the auditor to detect the material misstatement in the financial statement. Substantive procedure include test of details of transaction details and analytical procedure of disclosures and account balance. (Not for Profit Orgnisation, 2009). As per ASA 501 on Existence and valuation of Inventory the auditor shall obtain appropriate audit evidence regarding the existence and valuation of inventory material in the financial statement. (Board A. a., April 2006). The auditor should must use the following assertion: Presentation and disclosures Records completeness, accuracy, cut-off Obligation Valuation and allocation Existence The following Steps to be followed by Mr. Thomas for conducting WIP Audit First of all Mr. Thomas needs to check the opening balance of the WIP as recorded and reconcile/ cross check the same with the closing of financial statement of the last year. Then Mr. Thomas will check the Cost sheet statement as prepared by the clerk and cross check each and every figure of the spread sheet as provided by the accounts clerk with the data available in the accounts. Before Finalizing the value Mr. Thomas must agree with the accounting records of the MTI to ensure the completeness / correctness of the data. Thomas then checks that proper Job no. has been allocated to each jobs by reviewing the working paper and other document maintained by the client. Thomas will also ensure that the quantity entered must tally with the customer order for each job other and should review each and every job card. All the raw material and quantity used in the completion of the jobs has been properly recorded and if any quantity has been cut from the normal practice of the production procedure, then the same must be noted and authorized. Further, Thomas. Should also check what procedure is following by the company to record such situation and how quality assurance team should be aware of such practice. Thomas should then check the company procedure for valuation of the WIP, that is to say which method is followed by the company to value the company WIP and the method adopted should not differ from its accounting policy. Thomas while valuing the work in Progress MTI has taken correct rate for its material and labour. Mr. Thomas should ensure that the valuation is done as per the company changed costing and allocation method of absorption costing. Mr. Thomas should ensure that all the overhead cost has been absorbed by using absorbtion costing method rather than any other method. Thomas should understand the company procedure to record the actual hours worked by the workers on particular jobs and how these hours are being recorded and who authorize the total hours worked by the worker in particular jobs. Then the hours worked by the worker need to cross tallied from the cost sheet and the pay register along with the rate of payment. Further Mr. Thomas should also ensure that proper accounting entry has been done in the accounts department regarding booking of the wages expenses. Thomas Should ensure that each job order should sale at a price which ahs been approved as per the quotation. Further, Mr. Thomas should also ensure that the payment from the buyer has also been received as per the agreed time limit without any delay. And in case of any major delay penal interest will be charged by the company as per the company policy. Currently MTI has the policy not to take advance from the customer. However, if the customer is new and the jobs require substantive material to be purchased, then advance may be taken from the customer and the company used to make progress billing, This progress billing is then deducted from the closing WIP. Mr. Thomas should check that in case of progress billing the amount has been actually received and the same should be shown as advance in the accounts department. Thomas should also check the company policy regarding how the completion of the work has been decided and who decided the percentage of the work completion. Further, Mr. Thomas should also check the calculation done by Isabella as per the given formula to ensure that the correct calculation has been done and the closing figure of work in progress inventory has been arrived correctly. Bibliography: Board, A. a. (2011). Auditing Standard ASA 300. Planning an Audit of Financial Statement , 35. Board, A. a. (2013). Auditing Standard ASA 315. Idntifying and Assessing the risk of Material Misstatement , 48. Board, A. a. (April 2006). Auditing Standard ASA 501. Existenance and valuation of Invntory , 13. Board, A. a. (2011). Guidance Statement 007. Audit Implication of the use of Service organoztion , 45. James. (2011). Test of Control and Test of Details. 12. Not for Profit Orgnisation. (2009). SA , 10.