An audit plan is a crucial element of the auditing process as it establishes the suitable procedures for specific items. (Mills, 2008) In that respect, it is a key risk management tool and its application in this case is crucial in managing the risks involved in auditing for the three items of work in progress, trade receivables and payables. (AICPA, 2002) In that view, the following is an explanation of why the three items are crucial for evaluation owing to the control and audit issues facing Falmer metals.
Justification for the items identification as areas key to audit risk
The business situation provides environment for audit risk. First, the lack of inclusion of information relating to New York in the financial statements presents a risk to the audit as its is not known of the material facts that are not considered in the financial statements and position. In addition, the three is a need for public accountability hence the misrepresentation being an issue of concern. (Messier & Austen, 2000) Further, standards of accountability are particularly important here as the need to ensure the company follows relevant standards regarding its internal controls and internal audit duties. Further, the inadequate controls result to great concern over audit risk. (Picket, 2006) Finally, establishing the new auditor independence is crucial given New York information is not provided hence difficult to establish whether they could have a relationship with the company. (Rittenberg & Schwieger, 2014) In that view, the following three areas have been found to be key to audit risk.
– Work in progress
The value of work in progress is material and has the effect on profit and loss for the business. However, the business has a practice that entails starting of the work on commission before approval by the customers. Those presents risk in the evaluation of work in progress. (Hayes, Wallange & Gortemaker, 2014)
– Trade payables and receivables
There is a lack of reconciliation between accounts payables as well as receivables and supplier/ buyers statements. In addition, the company’s credit term being 30 days while customers are invoicing and revenue recognition could be done several months later.
Audit plan elements for the three items
As a means of reducing audit risk in the three areas, the following procedures should be followed.
– Work in progress
There should be application of rollback procedure in which the auditors should first establish closing stock and if there is a misstatement. Then, they should reconcile the closing stock with stock take and the actual stock records and afterward perform tests of the stock movement between opening and closing dates. That should be followed by reconciliation of opening stock balances with stock take and stock records. Finally, an evaluation of the stocks by reconciling purchases and sales, as well as the stock records.
– Accounts payables
The firs process should be existence confirmation by communicating with clients, vouching the payables to the shipping documents as well as vouching the payables transactions to purchase orders and shipping documents (Bedard & Wright, 2000) Then, there should be establishment of the payables completeness followed by establishment of their fair value. Finally, there should be a check on their presentation and disclosure to ensure they are all included. (Davies & Aston, 2010)
– Accounts receivables
The procedure should begin with existence confirmation by communicating with clients, vouching the receivables to the shipping documents as well as vouching their transactions to customer orders and shipping documents. Then there should be a check on their completeness to ensure they are recorded in all financial statements. That can be done by comparing years ratios, industry averages and budgets as well as by reconciling the sub-ledger to the control accounts for trade receivables (Knechel, 2001) It should be followed by establishing the right to collect those receivables as well as their valuation. Finally, there should be a check on their presentation and disclosure to ensure they are all included. (Soltani, 2007)
Thus, it is clear that the weak internal controls within the organization touch on the three areas with lack of proper presentation and disclosure, as well as maintenance of suitable records. In addition, there are violations of accounting principles regarding invoicing and full disclosure. Thus, the three areas are crucial for consideration in the audit risk evaluation. In addition, the procedure for each item has been outlined as a means of establishing the three items existence, completeness, value and presentation.
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