Planning Auditing and Professional Practice

Question: Discuss about the Planning Auditing and Professional Practice. Answer: Introduction: Planning pays a crucial role in carrying out the proceedings in a systematic manner. In regard to auditing, the planning occurs at every stage throughout the entire auditing process; however, it has greater significance at the initial stage of auditing. The standards of auditing require that the auditor should plan his work adequately before taking the actual work under process (Delaney Whittington, 2010). The auditing planning not only assists in allocation of the resource optimally, but it also assists the auditor in identifying the crucial areas of auditing and thus, finding out any critical risk factor related to those areas. At the initial stage, the auditor should plan to study the business environment in which the company operates and based on this study, a preliminary assessment of inherent and control risk should be made (Delaney Whittington, 2010). In the current case, the auditor has to plan for audit of City Ltd which is property developer in Australia. In this regard it is crucial that the auditor studies the business environment and the circumstances in which the company is operating (Gray Manson, 2007). The study of the circumstances reveals that the company is in problematic situation that indicate a serious risk to its business. Thus, the auditor needs to be alert while preparing the audit plan in regard to the audit of City Ltd. Following are the major points the auditor should consider in its planning document: The study of the circumstances reveals that there is slump in the commercial property industry in Brisbane, where the company operates. The sluggish demand in the market is going to affect the companys revenues in the upcoming years (ISA 315, 2009). Further, there been passed an order by the government of the state which provides for abundance the office spaces in the city. This implies that the demand for the commercial spaces is going to be affected adversely (ISA 315, 2009). Further, the fact that company has many construction projects under process without any buyer being secured also adds to the business risk. In this situation, the company might fail and go into liquidation (ISA 315, 2009). In this case Web Ltd has enhanced its IT capabilities by installing new computer software. From the auditors perspective, its a change in the record maintenance system of the company and thus; it requires careful attention while formulating the audit plan. In this regard, following are the points that the auditor should consider as crucial: There has been a change in the information system due to installation of new software. This change may have crucial impact on the entire auditing process and particularly on the evidence collection process (Pickett, 2006). Further, the change in the information system also has impact on the internal controls. Thus, the auditor should include in its plan a rigorous verification of the internal controls (Pickett, 2006). Further, the auditor should focus its verification of the areas where the change in the information system is having great bearing in regard to improvement in the quality of management reporting. Lastly, the auditor should not forget to evaluate the impact of change in the information system on the risk assessment. The auditor should consider the risk of manipulations in the financial statements which arises due to the change in the information system (Pickett, 2006). In the current case, audit planning for Beauty Pty Ltd which is engaged in manufacturing and selling the cosmetic products is under consideration. In this case, it could be observed that there has been a new event which is opening of an overseas branch by the company. The audit needs to emphasis this fact while preparing an overall audit plan in regard to financial audit of the company (Pickett, 2006). The following are the crucial issues which auditor should take into consideration while preparing overall audit plan: In regard to the branch operations, the auditor should include in its planning document, the assessment of materiality of the foreign branch. If the branch operations are material considering the overall operations of the company, the auditor needs to take assurance that the records of branch operations are free of risk and misstatements (ISA 600, 2009). In case the branch is being audited by another auditor, the company auditor can use the report of branch auditor subject to compliance with the provisions of auditing standard 600. Thus, if it is the case, the planning documents should include the steps to use the report of branch auditor (ISA 600, 2009). The purpose and the result of both the tests such as test of controls and the substantive test are different (Johnstone, Gramling, Rittenberg, 2015). The test of controls is performed to check the adequacy of the internal control system. On the other hand, the purpose to apply substantive test is to gather corroborative evidences which confirm the amount of items presented in the financial statements of the company. Thus, first and foremost, it is the auditors objective which will affect the decision as to application of the test of controls or the substantive test (Johnstone, Gramling, Rittenberg, 2015). Further, another crucial factor is the assessment of the inherent and control risk and the detection risk. The inherent and control risk can be reduced by enhancing the level of substantive testing while detection risk can be reduced by enhancing the level of test of controls. Thus, if the combined level of inherent and control risk is assessed as high, the auditor will have to take more rigorous testing of the book records which implies decision to use substantive testing (Johnstone, Gramling, Rittenberg, 2015). On the other hand, if the detection risk is assessed as high, the auditor will have to apply test of controls. In the current case of Vroom Ltd, the detection risk is assessed as high in the case of measurement and completeness of depreciation expense. In this case, the auditors approach could be observed to be emphasizing more on application of test of controls. Thus, the auditor relies more on applying the test of controls rather than substantive testing in this case. In another case, inherent and control risks are assessed as high in regard to valuation of the vehicles. The auditors strategy gets changed to rely more on substantive testing rather than test of controls in this case. Further, in the case when the auditor assesses medium risk, the strategy of the auditor changes to apply test of controls as primary mechanism to obtain audit evidences. In this case, the substantive testing has been used to a minimal extent only (Johnstone, Gramling, Rittenberg, 2015). In the current case of Vroom Ltd, the preliminary assessment of audit risk in relation to the depreciation expense reveals that inherent and control risks are low but the detection risk is high. The high detection risk indicates that the auditors substantive checking may not be able to detect the error or fraud in regard to depreciation expense. Keeping this in mind, the auditor designs a strategy to apply the test of controls more stringently while at the same time reducing the substantive testing. In this strategy, the auditor should use following procedures to verify the accuracy and completeness of depreciation expense: Firstly, the auditor should verify the accounting system, its process and level of automation. Further, the competency of the staff operating the accounting system should also be considered (King, 2011). The auditor should ensure that adequate records in relation to fixed assets are maintained and kept up to date. The auditor should verify the checks and controls on the acquisition and sale of fixed assets. Further, the auditor should ensure that acquisition and sale of fixed asset is made with the sanction of appropriate authority (King, 2011). If necessary perform recalculations for depreciation on test check basis (King, 2011). Accounting is a comprehensive process that involves various steps such as recording, summarizing, classifying, and presenting the events and circumstances in the form of reports. The accounting process produces important information relating to the financial performance and position of the business which is communicated through reports and statements such as annual report, income statement, and the statement of financial position (Gray Manson, 2007). The communication of the accounting information is not only made to the shareholders, but it is also made to other stakeholders such as government and the lenders. The shareholders, government, and the lenders, all are outsiders and do not take part in the preparation of the information which is communicated to them. Thus, there remains a risk that the information communicated to them is free of errors and fraudulent influence or not. In order to mitigate the risk of error or fraud, it becomes necessary to subject the financial statemen ts of the company to auditing. The auditing is about examining that whether the information conveyed by the financial statements is true and complete. The financial statements of the company are audited by an impendent third party so that creditability of the information is enhanced. The auditing of the financial statements is always carried out before communicating the information to the stakeholders (Gray Manson, 2007). References Delaney, P.R. Whittington, O.R. (2010). Wiley CPA Exam Review 2011, Auditing and Attestation. John Wiley Sons. Gray, I. Manson, S. (2007). The Audit Process: Principles, Practice and Cases. Cengage Learning EMEA. ISA 315. 2009. Identifying and assessing the risks of material misstatement through understanding the entity and its environment. Retrieved January 24, 2017, from https://www.ifac.org/system/files/downloads/a017-2010-iaasb-handbook-isa-315.pdf ISA 600. 2009. Special ConsiderationsAudits Of Group Financial Statements (Including The Work of Component Auditors). Retrieved January 24, 2017, from https://www.ifac.org/system/files/downloads/a033-2010-iaasb-handbook-isa-600.pdf Johnstone, K., Gramling, A., Rittenberg, L.E. 2015. Auditing: A Risk Based-Approach to Conducting a Quality Audit. Cengage Learning. King, A.M. 2011. Internal Control of Fixed Assets: A Controller and Auditor's Guide. John Wiley Sons. Pickett, K.H.S. 2006. Audit Planning: A Risk-Based Approach. John Wiley Sons.