In planning for the audit of a firm, the auditor should understand the industry that the firm operates in. This knowledge is vital because it gives the auditor a glimpse of the risks that are the firm is likely to face. As a result, when carrying out the actual audit, the auditor will be aware of the areas that must be paid much attention.
An auditor may carry out substantive procedures for revenue assessment to be able to detect any financial information misstatement in the income statement. In order to ascertain that the financial records are not manipulated, the auditor may carry a test to determine whether a particular payment was actually made (Hammersley & Ricci, 2018). For instance, they must examine the LPO that was sent requesting for the said goods whose payment was made and also the invoice sent by the supplier thereon. This will give a clear indication of whether the transactions that are recorded in the financial statements actually occurred.
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As part of management assertions, the auditors must also confirm the completeness and the accuracy of the transactions recorded in the financial statements. In this regard, the auditor must carry out procedures to ascertain that all the transactions that occurred have been recorded, and with the correct details such as amount (Hammersley & Ricci, 2018). Most importantly, the auditor must also carry out a test that shows if all transactions have been recorded in the proper accounts. When this is done, it implies that the auditor looks item by item to establish where it is recorded because, at times, an entry might be made in the wrong account but still fail to affect the final balancing figure.
An examination of the internal controls that the company has installed will enable the auditor to ascertain the measures that the management is using to prevent fraudulent activities from happening. For instance, it should be established whether a senior officer of the organization authorizes all the payments made. If the organization does not have a clear procedure, it might imply that the organization has weak internal controls. In such a case, it may portray high risks in that the revenues reported do not represent an accurate and fair position of the company (Nguyen et al., 2018). As such, the auditor must carry out a procedure that will enable them to conceal any fraudulent activities that might have taken place in the organization. The main idea for doing this is to determine which of the financial statements, if any, has been manipulated. It also enables them to ascertain whether there are cases of unauthorized expenditures and if the company has paid the taxes to the relevant authorizes.
In the event the auditor suspects that the company has engaged in fraudulent activities, they can implement some unpredictable audit procedures, such as doing samples on areas that are rarely considered in most audits. Such actions create uncertainty in the firm and make it easier to detect fraud in the financial statements. If these tests reveal to the auditor that there is a high likelihood of fraudulent events in the financial statements, then they can carry out further audit testing as it may prove necessary. The internal audit team should ensure that proper internal controls are put in place so that they facilitate the actual auditing and that the external auditors will not have to dwell on areas that ought to have been sorted out by the internal auditors (Fortvingler & Szívós, 2016). If the external auditor finds that the company’s internal controls that have been put in place are strong, then it might reduce a substantive testing procedure. If it is found that the internal controls are weak, then the auditors will have no other option rather than engage in thorough substantive tests.
Part 1
There appear to be various cases of misstatement, and therefore the auditor might consider issuing a qualified audit report.
Part 2
Jim’s Auto Body Audit report
Jim’s Auto Body
NYC
Introduction Paragraph
The Auditing Company carried out auditing procedures on the books of accounts of Jim’s Auto Body to establish whether the statement of account represents a true and fair state. In carrying out the auditing process, the auditor relied upon the internal controls that the company has implemented to ensure that fraudulent activities do not occur in the firm. Further, substantive tests were conducted in a bid to find more evidence upon which the auditor will be basing their audit report.
Scope Paragraph
The audit was mainly conducted on the revenues of the company. It was to establish whether the statement of comprehensive income represented the true and fair position. In this regard, the test was done on transactions that can affect the income of the company. Assertions were done on the occurrence, completeness, and accuracy of the transactions that were recorded. This established whether the transactions actually occurred by looking at any supporting documents such as invoices. These assertions formed a vital part upon which the auditor drew his opinion from.
Opinion Paragraph
Upon reviewing Jim’s Auto Body financial statements, it was revealed that there was a misstatement in the financial statements. In this case, the company appeared to have overstated its expenditures to reduce its sales and thus record reduced income in its financial statements. The impact was that the company would end up spending less on taxes than it ought to have done. In this regard, the auditor considers giving qualified reports for the audited accounts.
Name of the CPA firm
KPMG
CPA
NYC
30-04-2020
References
Fortvingler, J., & Szívós, L. (2016). Different approaches to fraud risk assessment and their implications on audit planning. Periodica Polytechnica Social and Management Sciences , 24 (2), 102-112. https://doi.org/10.3311/PPso.8436
Hammersley, J. S., & Ricci, M. A. (2018). Using audit programs to improve auditor evidence collection. University of Georgia Press.
Nguyen, T. Q., Tran, M. D., & Hoang, T. V. H. (2018). Impact of internal control on audit program effectiveness: The case of Vietnam. International Journal of Economics and Finance , 10 (9), 1-1. https://doi.org/10.5539/ijef.v10n9p1
