Statistical Sampling and Risk Analysis Function †MyAssignmenthelp

Question: Discuss about the Statistical Sampling and Risk Analysis Function. Answer: Introduction: Audit is an independent examination of the books of accounts of an entity conducted by the auditors with the view to express an opinion on the financial statements whether they are prepared on an unbiased and true basis and whether they can be relied upon to take the critical and significant business and financial statements. It gives reasonable assurance to the users of the financial statements, both internal and external, including government, shareholders, banks, financial institutions, creditors, etc. to help them take decision on their investments. The regulation on audit on the entities has increased over time by ACCA and other regulatory bodies. There has been many guidances being issued by the IFRS committee for recording the transaction and maintenance of the books which needs to be verified by the auditors while conducting the audit of the entity. The requirements of audit do not end here and audited report is required in the stock exchanges in which the companys shares are listed. To conduct an audit, the auditor 1st needs to understand the business and it environment, the industry in which it is operating, the government regulation, other economic and political factor, if any, affecting the business and several other micro and macro economic factors to give a proper audit report. Auditors also need to validate and comment upon the estimates and management judgements being taken upon in preparation of the accounts such that they are viable(Raiborn, Butler Martin 2016). They also need to check on the materiality, going concern assumption and whether or not the basic concept of consistency has been followed or not. With all this objectives in mind, the auditor audits the books of accounts using substantive and analytical audit procedures. Substantive audit procedures include vouching of the incomes and expenses recorded in the books falling above the materiality level for whether they actually exist or not, whether they have been completely recorded, reconciling the same from the supporting evidences in the form of vouchers, bills, invoices, etc. Substantive procedures are usually given effect to using inspection of records, observation of processes and procedures being followed, taking external confirmations from the parties dealing with the business or company like debtors, creditors, banks, etc., verifying the related party transactions, etc. They also check the arithmetical accuracy in some cases to check whether this has been taken care of or not. Besides all this, a check is also made on the assets and liabilities recorded in the books for their actual existence and reporting to check substance over form(Knechel Salterio 2016). Once all this is given effect to and still the auditor is not able to express his / her opinion, then he/she resorts to the analytical audit procedures, which include ratio analysis of certain specific ratios, comparison of the actual from the budgeted and expected figures, trend analysis with respect to the industry and the past period, etc. Before further steps, the auditor generally checks on the level of internal control being maintained in the entity before making further audit plan and determining the nature, extent of checking and time of audit procedures to be undertaken. If the internal control is strong, it implies less risk, and therefore less of routine checking can be done on the other hand, if the internal control itself is weak, the risk of material misstatements rises and in such a case the auditor needs to increase the extent of checking(Jones 2017). In the given case, a printing press is to be audited and the new auditor is taking over from the old one. Besides this, as per the records, the company has had several accounting changes having huge bearing on the results like changes in the depreciation policy, a loan being taken with some conditions, the management being changed at the top level and the new IT system being introduced without any proper checking and back up. All these financial and non-financial data asks for an audit, which can justify the accounts prepared and point out the material misstatements, if any to the management. For this, a detailed ratio analysis has been shown below from the perspective of debt management, liquidity, asset management and profitability. Furthermore, industry ratios are missing and hence the same has been ignored in workings(Grenier 2017). Risk assessment and analysis is an important part of auditing. It is important for the auditor to apply all kinds of procedures to identify all the probable risk factors. There are generally three types of risk associated with an audit, inherent risk, control risk and detection risk. Inherent risk occurs when things are not in the hands of the management even after applying all the possible control measures. Control risk occurs when the management fail to ascertain proper control level in the organisation and detection risk occurs in situation where the auditor fails on his part to detect the major risks and errors(Fay Negangard 2017). The main implication of the same is that it is the duty of the auditor to make sure that proper judgement is established on his part. In case of DIPL, there are two cases of inherent risk and the same has been explained here under First case is where the management is considering changing the methods of valuation and adopting new procedures that are deviation from the normal routine matters. In these cases, it becomes difficult for the auditor to ascertain the proper trail of work. The CEO of the company wants to change the method of calculation of depreciation by taking the life of asset to be twenty years, whereas as per the industry standards the life must be thirty years. Therefore, this is a deviation from the normal procedures and the company has taken no research before applying them. The second case is the installation of the new It system without proper research, oat may be possible that it leads to overvaluation of the accounts. The new system has been installed without any reconciliation; any research, and in case it fails it might affect the overall profitability of the company. Thus, it is important for the auditor of the company, to make sure that the management is providing proper disclosure for any kind of changes they are incorporating(Sonu, Ahn Choi 2017).The results after implementation must also be monitored so that any case of misevaluation may be ascertained. This in these areas there are no proper control by the management and thus leads to inherent risk on part of the company The management should provide the auditor with all the proper details that might be needed. The auditor must do its own research before commenting on the validation of the new IT system. It is important that expert opinion must be taken before such changes are made. Strong control measures should also be incorporated, so that risk is reduced. These are the few ways by which risk can be identified and mitigated(Bae 2017). Fraud occurs when the management or the employee of the company indulges in certain activities for their own personal gains that are harmful for the working of the organisation. It occurs when the internal controls are not strong which gives the employees to do such activities. Often the management might be the culprit, the auditor should not rely on what the management portrays and should apply his own research techniques before reaching a conclusion In case of DIPL, and there are two cases where we see that fraud risk factor is present. First case is in the non-segregation of important work, which gives the employees a chance to easily defalcate the money. In case of DIPL, a single person has been given the responsibility to manage the accounts and reconcile the same. This shows that the management of the company is lacking proper internal control measures. The auditor should make sure that the work is properly segregated between the employees, proper authority must be established and in any case the employees indulges in any kind of fraud they must be penalised. The second case of fraud is the installation of the new It system by the management. The management has undertaken the same in allot of haste. It has not applied any research before doing the same. There are high chances that personal motives of the magemnt might be involved in the same. In this case, we see that before installation of the system no reconciliation of the cost and the result was done, it may be possible that the new system fails. This will a ffect the overall profitability of the company. In all cases the management should make sure that, the accounts are not under or overvalued. In any case, the auditor finds that there are certain fraud risk factors involved, the auditor can question the management and then can modify the audit report. . Expert opinion of the outsiders must be taken in case of the same. Thus, it is important that the auditor must see that proper records must be checked in relation to the new system .The main job here is to make sure that the books of account shows the true state of affairs and any kind of fraud risk factors must be identified and must be eliminated. In these few ways, the auditor can help I identification and mitigation of the overall fraud risk factors that might be associated with the company. It is the duty of the auditor and the management to make sure that suppose visits and timely checking of the accounts are done to keep a check on the sincerity of the employees. In addition, t he management must establish proper controls. All these will help in mitigation of the major fraud risk factors in the company and support the auditor in conducting his audit properly(DeZoort Harrison 2016). References Bae, SH 2017, 'The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From Korea', Journal of Applied Business Research, vol 33, no. 1, pp. 153-172. DeZoort, FT Harrison, PD 2016, 'Understanding Auditors sense of Responsibility for detecting fraud within organization', Journal of Business Ethics, pp. 1-18. Fay, R Negangard, EM 2017, 'Manual journal entry testing : Data analytics and the risk of fraud', Journal of Accounting Education, vol 38, pp. 37-49. Grenier, J 2017, 'Encouraging Professional Skepticism in the Industry Specialization Era', Journal of Business Ethics, vol 142, no. 2, pp. 241-256. Jones, P 2017, Statistical Sampling and Risk Analysis in Auditing, Routledge, NY. Knechel, WB Salterio, SE 2016, Auditing:Assurance and Risk, 4th edn, Routledge, New York. Raiborn, C, Butler, JB Martin, K 2016, 'The internal audit function: A prerequisite for Good Governance', Journal of Corporate Accounting and Finance, vol 28, no. 2, pp. 10-21. Sonu, CH, Ahn, H Choi, A 2017, 'Audit fee pressure and audit risk: evidence from the financial crisis of 2008', Asia-Pacific Journal of Accounting Economics , vol 24, no. 1-2, pp. 127-144.