Audit Procedures For Obtaining And Evidence -Myassignmenthelp.Com

Question: Discuss About The Audit Procedures For Obtaining And Evidence? Answer: Introduction Audit assertions are the claims of both implicit and explicit nature, made by the management of the client entity of the auditor, regarding the appropriateness of different elements of entitys financial statements and their disclosures. As the management of the company is involved in the preparation and presentation of financial statements of the company, it makes various assertions in relation to the recognition and measurement criteria and the presentation of all the elements of financial statements such as assets, liabilities, incomes and expenditures etc. The management also make claims for the adequate disclosure of such elements in the financial statements in accordance with appropriate financial reporting framework applicable on the entity. Key financial report audit assertions Following are the key financial reports assertions and their objectives for the audit of inventory of GHT Ltd.: Existence of inventory in the companys warehouses: Inventory audit is carried to verify whether the inventory shown in the financial statements of the company actually exists in the warehouses of the entity. For this purpose the data sheet of stock records GHT Ltd is not sufficient to provide a reasonable assurance on the true existence of inventories rather physical inventory taking must be attended to confirm the existence of the inventory. Completeness of records regarding the inventory: Another objective of inventory audit is to ensure whether the all the inventories units and items that must have been recorded, have been completely recognised in the companys financial statements. Moreover, the inventory units that are lying with the third parties on behalf of the present company have been incorporated in inventory balances (Quizlet, 2018). The completeness of the records must be checked using the stock data provided in the excel sheet provided by the company. Rights and obligations of company regarding inventories: The next audit objective is to determine whether the client is owning and controlling the inventory that has been actually recognised in the financial statements of the company. It must also be ensured that the inventory held by the company on behalf of other parties is not recognised as the part of companys inventory in the financial statements (Arens, et al., 2007). The legal management of the inventory can be judged on the basis of supporting documents i.e. invoices and tax certificates. But the inventory data provided in the excel sheet cannot be used to obtain reasonable assurance for the same. Valuation of inventories: It must be ensured that the inventories of the company are recorded at the appropriate values as per the relevant accounting standards in the financial statements of the company. Any cost component that could not be adequately allocated to the cost of production and any abnormal wastage is excluded from the inventorys cost. Also, the the appropriateness of the method of inventory valuation must also be examined. As in the present case, the management of the company has employed FIFO method of inventory valuation so it is to be checked whether the said method is reasonable to be applied to the inventory of the company on the basis of its nature (Accounting Simplified, 2013). Accuracy of records of inventories: It is to be evaluated whether the inventory records are maintained with complete accuracy without any significant arithmetical or logical errors. All the inventory balances are posted to the appropriate accounts with proper classification (DeHoratius Raman, 2008). Inventory Audit Procedures: To achieve all the above discussed audit objectives necessary audit procedures will have to be applied. As inventories are the significant part of entitys business, it must be ensured by the auditor of the company that these are recorded, valued and disclosed in the financial statements appropriately. Hence, it is required to apply both test of controls and other substantive procedures such as test of details and analytical procedures to obtain evidences based on which it can be concluded that financial statements are not misstated in the areas of inventories (Office of auditor general of Canada, 2017). The internal controls of the company in the areas of inventory must be tested to check the correctness and completeness of inventory records. Since it is not possible for the auditor to attend the physical stock taking due to time or inventory locational constraints, the auditor must consider applying additional auditing procedures to verify the existence and condition of the inventory so that the inability of attending the physical stock count does not cast any limitation on the scope of audit (Choy, Lee Cheung, 2004). In such case, the forward calculations can be made taking the amount of closing inventory from the financial statements prepared as on 31.03.2018. This figure of closing inventory can be adjusted for the purchases and sales figures taken from the data sheet provided by the management, to determine the amount of inventory available at the date of physical stock count. This method is known as backward calculation. The figure so obtained can be reconciled with the actua l physical stock on that particular date. This procedure can provide a reasonable level of assurance about the existence of inventory as on 31.03.2018. The (Hoffman Zimbelman, 2009). Moreover, the auditor must reconcile the inventory records with the relevant invoices in such context. The invoices of purchase and sale of goods helps the auditing to identify the actual inward and outward movement of inventories during the period covered under audit (Louwers, Ramsay, Sinason, Strawser Thibodeau, 2008). To check the correctness of the inventory records, the internal control system in regards to inventory will be checked. If internal controls in these areas are found to be weak the auditor will have to substantive audit procedures such as test of details and analytical procedures (Whittington Pany, 2010). Under the analytical procedures the auditor will make the comparable studies of inventory records to understand the basic trend followed every year in the business (AS 2510) The cut off analysis can be undertaken using the stock data provided in the excel sheet. Under this analysis the cuts off can be set for the sales figures and cost of sales figures. In the excel sheet the filter to the column of purchase and sales date will be applied to verify the last purchase and sales transactions that have impact on the available inventory and the transactions that occurred before and after the month of march are identified separately with different colours and their impact on the overall financial results has been removed (Chung Monroe, 2001). The sales figures for post period 31.03.2018 have been added back and purchase figures have been deducted to incorporate the reversal impact are reversed back to remove their impact on financial results. The similar process was applied to transactions before the month of March to ensure that no transaction is recorded in the books. This reverse calculation is performed because of the fact the company in case operates on perpetual stock taking approach. Therefore, the sales and transactions entered in the periods prior to the commencement of concerned year have already been accounted for in the prior period itself as per the perpetual approach. Outcomes of audit procedures: The value of the inventory held by GHT Ltd at the end of the year is not in accordance with the relevant accounting standards. The inventories must be valued at lower of cost and net realisable value of such inventories. Through the use of this method the value of inventory has been identified as $ 622532 whereas as per the financial statements prepared and presented by the management of the company the inventory is valued only at $ 455319.55. This undervaluation of inventory has made the financial statements to be materially misstated and therefore they are not depicting the profitability of the company. Moreover, the inventory records are also not containing the accurate data as there is a negative figure shown in the sales quantity for order number 364163 and 3788411. The sales quantity cannot be negative in any case. It has been observed that the company has a wide range of products in which it is dealing which shows that the company has weak internal controls in these areas to c lassify the inventories according to the nature and purpose of such inventories. Audit materiality for sales transactions has been determined at $10000 and therefore sales transactions made for $ 10000 or more during the year have been critically analysed using detailed audit procedures to the authenticity of the inventory records. The inventory items for which the company has reported gross loss have also been evaluated critically by identifying the reasons of such loss and its impact on the overall profitability of the company. The gross profit and loss has been determined in the excel sheet. It was found that company has incurred higher cost of production due to the abnormal wastage of inventory items and due to allowance of excessive discounts to the buyers and it has therefore lead to the operating losses. The detailed audit procedures in these particular cases have been applied such as analytical procedures to identify the past trend of operating profits and losses of the comp any (Gay and Simnett, 2005). Conclusion: The ultimate objective of conducting the audit of any entity is to enable the auditor to form an opinion on the true and fair view of financial statements of the company. In the present case, the inventory value in the financial statements is highly misstated and therefore the financial statements are depicting quite low profitability of the company. This might have been done by the management with the intention to show reduced profits to avoid the heavy tax obligations. The auditor must ask the management to make the requirement adjustments to the inventory values to make the financial statements free from material misstatements. However, since the identified material misstatements are significant enough to be communicated to the users of auditors report and hence the auditor must issue the adverse opinion in this case to show the impact of undervaluation of stock for the purpose of preparation and presentation of financial statements. Since the identified material misstatement does not only impact the value of inventory but it has material influence on other aspects of financial statements the auditor cannot issue a mere qualified opinion. 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