The Role of Account Subjectivity and Risk of Material Misstatement Paper Example

A) The risks of material misstatement to be taken into account in planning the final audit.

In financial audits, a material misstatement refers to the misstatement that can affect the financial decisions of the company or the individual that relies on the statement. On the other hand, audit risk s the risks that the audit do can fail to properly modify his opinion o the financial statement that has been materially misstated unknowingly (Statement on Auditing Standards No. 82.). During the planning phase of the audit, the auditor is mainly focusing on matters that can be material to the company's financial statement. The auditor is not under obligation to plan and conducts the audit to get a reasonable assurance that misstatements that are not material to the company's financial statements are detected. Risks of material misstatement include:

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• Errors

Errors are unintentional misstatement or omission of disclosures in the financial statement. Errors arise from mistakes in gathering and processing data from the books of original entry. Other sources of accounting errors include unreasonable accounting estimates that arise from oversight or mistakes in the application of accounting principles (Public Company Accounting Oversight Board, 2018).

• Fraud

Fraudulent acts may also cause a misstatement in the financial statement. Misstatement can arise from fraudulent financial reporting and misstatement as a result of misappropriation of assets. The auditors must define the materiality of any loss, misstatement or errors. Most errors are immaterial in that they did not have a significant impact on the financial decision making (Dritsas & Petrakos, 2018). Section 311 requires that the audits must plan the audit and take into consideration the materiality level, nature if audit as well as the timing and extent of audit planning as they have a bearing on the audit risk and materiality (Alexander, 2010).

The auditor is required under ISA210 to agree on the terms of audit engagement to determine the acceptability of any financial reporting framework adored by the firms. Additionally, the ISA 315 also states that the auditor must know the company's objectives, the strategies used by the company and the business risks (Bhattacharjee, Maletta & Moreno, 2016). To properly identify the risk f materials misstatement, it is important for the auditors to use a business risk approach. If the auditor understands the internal controls, then he can easily heighten his concern about the risk of material misstatement. In practices, the audits are under obligation to assess the risk of materials misstatement of the company's financial statement that might arise due to fraud.

(b) How to use analytical procedures to provide audit evidence and reduce the level of detailed substantive procedures.

The analytical procedures are used on the four stages of the audit. For example, the auditor would use the analytical procedure during the planning phase to check the nature, timing and the general degree of auditing procedures that need to be used to obtain a better audit evidence for each account balance and class of financial transaction. The auditor would also evaluate the general financial statement presentation to determine if it is reasonable in the light of financial data (Bhattacharjee, Maletta, & Moreno, 2016).

In the planning stage, analytical procedures are used to obtain adequate evidence to identify and confirm that there was no material misstatement in the accounts thereby reducing the risk of misstatement (Alexander, 2010).

The auditors can also use the analytical producers to establish the threshold for the misstatement. The analytical audit process is used to determine the expectation of an account balance and identify any variation between the expected and reported amounts.

(c) The principal audit work to be performed in respect to:

(I) Inventories

A company that faces business risks involving the risk of fall or declining the demand for its products might involves in materials misstatement when valuing its investor. In such cases, the risk of material misstatement is only at the assertion level. The researcher therefore conducts assertion for auditing of investitures. The analytical procedures for inventory audits include comparing the gross margin number of this year with that of the previous years as well as comparing the inventory turnover ratio of the other previous years to see I there is a large variation. Finally, the researcher would compare the unit costs of investor with that of the previous years. Finally, the auditor would test the details of balances to determine if the recorded balance compare with the inventory count.

(ii) Cash and cash equivalents

The cash and cash equivalents principle audit would be conducted based on assertion and substantive procedures for auditing cash and cash aqua[anent as follows. For existences, the audited would examine the actual cash owned by the company in bank and cash at hand. For completeness, the audit would assess the balances for any unrecorded cash. For accuracy, the auditors would compare the cash at bank and recorded on reconciliation to ensure that they are actually accurate. Finally, any cutoff would be examined in the records to entre that each cash and cash equivalent are correctly recorded in the financial statement. However, the cash in banks that is stated in the reconciliation foots would be examined to check if they agree with the records on the ledger. The auditor would also test dual custody and dual control measures such as controls procedures fir reeve cash, off time deposits and conducts surprise cash counts

(iii) Receivables

The principal audit work to be performed in respect o receivables includes tracing receivables report to the general ledger and the receivables totals. The auditors must also investigate the reconciling items, check and confirm the accounts receivables. It is also the duty o the auditors to review the cash receipts. The main account receivables audit assertions include a positive confirmation from the customers

References

Alexander, D. (2010). Material Misstatement of What? A Comment on Smieliauskas al et ., 'A Proposal to Replace "True and Fair View" with "Acceptable Risk of Material Misstatement" Abacus, 46(4), 447-454. doi: 10.1111/j.1467-6281.2010.00327.x

Bhattacharjee, S., Maletta, M., & Moreno, K. (2016). The Role of Account Subjectivity and Risk of Material Misstatement on Auditors' Internal Audit Reliance Judgments. Accounting Horizons, 30(2), 225-238. doi: 10.2308/acch-51363

Blay, A., Kizirian, T., & Sneathen, L. (2007). The Effects of Fraud and Going-Concern Risk on Auditors' Assessments of the Risk of Material Misstatement and Resulting Audit Procedures. SSRN Electronic Journal. doi: 10.2139/ssrn.1010676

Dritsas, S., & Petrakos, G. (2018). Risk of Material Misstatement in Fluctuated Economic Environments: The Case of Greece. International Business Research, 11(6), 243. doi: 10.5539/ibr.v11n6p243

Public Company Accounting Oversight Board. (2018). AU 312 Audit Risk and Materiality in Conducting an Audit. Retrieved from https://pcaobus.org/Standards/Archived/Pages/AU312.aspx