Before initiating the official audit process, the first step would be to gain an understanding of the company and its operational procedures. Understanding the organization's overall business flow, but most importantly specific to their financial operations is essential to being able to analyze and audit effectively (Tests of control and substantive testing | Education | ICAS, n.d.). The second step would be to plan and strategize accordingly, more specifically putting a blueprint of sorts together to plot the steps to be taken. The next step would be the fieldwork portion of the process in which evidence and information about the process/financial records would be compiled. The final step in the process would involve the application of the analytics on the information collected as well as comparing it to the financial records provided by the company (Tests of control and substantive testing | Education | ICAS, n.d.).
Steps Taken to Review Transactions / Financial Records
Applying the following steps and practices into a checklist would be an effective way to audit the organization's financial records successfully.
Understanding Accounts Involved in Transactions
An understanding of the operations would add credibility to the reported financial position of the company. Publicly held entities are often required to file annual reports with the financial statements that could be audited (Tests of controls, n.d.).
Analysis of Source Documents
Source documents have to be analyzed to give account for each transaction by the company. The individual transactions would culminate in a set of financial statements that can be used to file annual reports. Paper tails such as the payroll reports with time cards would have to be checked for accountability (Tests of controls, n.d.).
Analysis of Accuracy
The addition of the source documents into the annual financial reports would then be analyzed to check for accuracy. Source documents that don't add up to the annual reports would hint fraud while source documents that accurately add up to the annual report would suggest proper bookkeeping for the company (Tests of control and substantive testing | Education | ICAS, n.d.).
Analysis of Transaction Effects on Other Accounts
Related accounts are often not independent of each other. Therefore, more stringent rules and additional disclosures need to be applied to the relating accounts. The disclosures should allow users of the financial reports to understand the nature of potential effects on the business (Tests of controls, n.d.).
Apply Vouching Procedures
The audit team will have to inspect documentary evidence supporting transactions of the company. The authenticity of original account records would have to be established by verification of the record books against relevant documentary evidence (Tests of controls, n.d.).
Field Work Review of High-Risk Business Transactions
Multiple variations and steps need to be followed to review the transactions mentioned above successfully. These include identifying the important account in the revenue cycle, assessing inherent risks of misstatements, assessing fraud risks, assessing control risks, use analytical procedures to identify mistreatments and to apply methods for professional decision making as well as ethical decision making. Evidence would need to be gathered for each financial statement and its assertion to successfully investigate these in the field. Relevance will differ across accounts and areas. The above information could easily be displayed across various charts that could be used as supporting evidence
Test to Assess Proper Assertions for Selected High-Risk Business Transactions
Proper assertions would be assessed using the following processes.
Evidence would be explicitly gathered on the validity and propriety of the companies' accounting framework as it regards to balances, errors, transactions and overall abnormalities (Tests of controls, n.d.).
Relationships would be compared between accounting data and supporting information (Tests of controls, n.d.).
Evidence collected on items included in an account balance or other sub-classes. It would obtain direct evidence for the sample and identify specific misstatements (Tests of controls, n.d.).
Tests of Control
Evidence would be collected to analyze the design and effectiveness of procedures and internal control structures as well as the operating efficiency of the above-mentioned
Potential Risk Factors for Amazon
One of the critical challenges for companies based in e-commerce involves managing their lean working capital as well as their overall inventory management process. The issue is rooted in companies of this nature having to build up large inventory in hopes of compensating for the low sales margin. In addition to this ever-changing nature of online product portfolios, a robust inventory control system is necessary to ensure the firm can effectively turn inventory to profit (Touche, 2012).
Recognition of Revenue
The value of companies rooted in e-commerce finds their value in revenue multiples which reasonably so is an integral metric. Due to fraud vulnerabilities, the issue (as it relates to accounting) here is establishing the accrual timing of revenue recognition. Also, primary methods of payment for companies like this are rooted in electronic transactions leaving the company with the primary responsibility to validate these transactions (Arens, 2014).
Classified as expenses related to transporting as per GAAP. Audit procedures would analyze reports of the business to ascertain that they meet safety, quality, and legal principles. The audit would be for safety policies, payroll, legal compliance and equipment maintenance (Arens, 2014).
Complying With Foreign Exchange Earnings as Per GAAP
The audit team must ensure that transactions involving Amazon, across nations, comply with foreign exchange rates as guided by GAAP.
Compliance Requirements With E-retail
Must ensure they are registered with all necessary regulatory authorities etc. The Federal Reserve
Analysis of Risk Factors and Compliance Issues with GAAP or IFRS on Balance Sheets
The risks that exist have been identified by the firm to be rooted in its sales and collection cycle. Goods bought from Amazon are paid for upon ordering with a credit card approved through a third party, regarding their ethics. Many Amazon orders are fulfilled by third parties, as well. The success of Amazon in this initial section is subject to numerous risks, comprising the dependence on quality, accuracy, and timeliness from vendors fulfilling Amazon orders. The significant risks are data records accuracy (directly affects the value of assets as they can be misreported) and choice of depreciation method (values change based on the plan selected) (Jolly, 2003).
Analysis of Cash and Revenue for Potential Risk Factors Using Internal Control
Misuse by those managing this asset is possible. For example, embezzlements and cover-ups are a possibility. As a result, cash limit must be determined and maintained (Jolly, 2003).
Monies can easily go missing internal audit controls such as reconciliation of accounts are not in place or a weak. Daily reconciliation can reduce and possibly eliminate this threat (Jolly, 2003).
Risks That Need Documentation
Compliance risks are one of the common risks. This particular risk is one in which management can deviate from applicable regulations. Procedural risks arise due to the failure to adhere to the right processes laid down by the administration to protect the assets of the company. Other processes that are created may be faint thus giving chances for occurrence of fraud (Touche, 2012).
Identification of Audit Universe
An audit universe is a group of sampled transactions selected by an auditor to use in an audit case. While the risk is high, the level of materiality is high. As a result sample size must now be increased to decide the audit risk and the detection risk (Jolly, 2003).
Sampling Program for the Audit Universe Based on Risk Analysis.
The sampling programs that will be in play will be the cross-sectional design as well as longitudinal studies to determine the fraudulent activities over a period. As stated earlier, companies rooted in e-commerce bear the burden of such transaction which translate to a loss in revenue and product (Arens, 2014).
The Most Preferable Audit Testing Procedures to be used in the Field
The desirable testing procedure in the field would be recalculation. One an understanding of the firm's procedures are established following to methods to determine if you reach the same results as recorded is the most effective way to test results and validate records.
Audit Review Memo from Audit Team
TO: CHIEF FINANCIAL OFFICER
FROM: AUDIT TEAM
SUBJECT: AUDIT REVIEW OF AMAZON COMPANY
DATE: June 8, 2018
We are issuing this audit memorandum to bring forward outcomes of the audit process carried out by the auditing team, with the aim to highlight relevant issues that affect the performance of the company regarding financial performance and risk mitigation. In addition to that, this memorandum also proposes additional audit and sampling work to be done, a proposal that we strongly recommend.
After going through the auditing process, we concluded that we included an extra sampling method in this process to have a clearer picture of the financial accounts. This sampling method that we wish to recommend is the Monetary Unit Sampling (MUS). The following are the reasons as to why I am proposing this additional work. To start with, this a value-weighted sampling procedure, that involves sample size selection and evaluation to give a precise picture of the monetary amount. It determines the fiscal accuracy of financial accounts. There are a couple of steps involved in MUS, which include; determination of sample size, sample selection, audit performance and results from evaluation. Samples are placed into two classes, i.e., exception and non-exception, and monetary units which get converted according to sample size. Variation in the degree of exception will hence catch the auditor's interest regarding misstatements.
The advantages that this sampling method aims at providing includes but not limited to; the auditor will not have a limitation of stratification when he uses this system; this technique requires not complicated calculations in the determination of sample hence ease in determining unit samples. This method has a reduced amount of errors, and also it accommodates all sizes of samples regarding their value thus increasing error detection. Therefore I recommend this additional work to be undertaken by the company (Adelphi, 2018).
Business transactions in Amazon Company may face potential risks. I saw it fit to make the following recommendations to mitigate these risks using cost-effective ways. To start with, Amazon Company may face risks such as financial misstatements that will cause the auditor to provide an inaccurate opinion after conducting an audit of fiscal statements. All this will be as a result of the exhibition of fiscal statements that do not conform to financial reporting framework. Some of these misstatements might be due to human...
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