Auditing Theory and Practice : Audit Plan of M Ltd
Discuss about the Auditing Theory and Practice for Audit Plan of M Ltd.
This report is related to the notification of acceptance of audit assignment of M Ltd who are involved in the manufacturing process and sales and distribution of wine in domestic as well as international market. The company had recently changed their legal status of Public Ltd. Company by getting them listed in ASX. After the enlistment, the company had changed their auditors and assigned us the duty of auditing of the financial accounting reports of the company as an external auditor. To consider this assignment as statutory audit for the company we have to consider the rules and regulations imposed by the Corporation Act 2001 of Australia imposed U/S 336 with the necessary compliance under different heads as per specified parts to honor the fundamental ruling of ASX and compliance of AASB norms and regulations. This assignment is a time bound affair with the overall verification and subsequent observations with comments to ensure the proper compliance of the job as per the norms of the act. The respective audit work is assigned for the Financial Year 2015-16 with the calendar month from July 2015 to June 2016. In this report the framework of audit program with planning is to be given to my partner of the audit firm for his necessary knowledge and approval of the same. (AASB, 2001)
Diagram of Proposed Audit Plan
As per the above audit plan, the macro factors of any audit plan is consisting of four major heads in the form of Detection of Audit Risk, Preliminary Plan, Execution and Submission of Audit Report to the respective authorities and company website for publication to make the stakeholders aware of the financial conditions of the company. We will discuss the above issues in micro level with the different steps to be followed to conclude a successful audit plan (Cag, 2011).
Detection of Audit Risk
In the normal process, any audit assignment starts with a plan and the plan had been initiated after detection of audit risks. In theory, audit risk is divided into three micro categories- inherent risk, control risk and detection risk. Audit risk is always connected to material misstatement which is due to the fact of omission or errors with the discretion of intentional or unintentional on the part of the personnel concerned. The basic factor of detection of audit risk is through the formula of anticipated inherent risk x anticipated control risk x anticipated detection risk (Accounting-simplified, 2010).
While the inherent risk is generated from the activities of the personnel of the firm in the form of omission or error may be due to ignorance or incapability to handle the complexity of the situation, the control risk is generated from the impact of internal control which is being exercised by the management of the firm. The detection risk is that risk which may occur due to oversight or ignoring the fact which may cause material misstatement. It is the prime objective of the audit firm to fix the benchmark related to audit risk. Ideally the audit risk should be nil, but in practical filed, audit risks persist in different forms which can be categorized under the headings of inherent, control and detection risk. This entire audit risk detection process is being covered to be ensured through ASA 315 and ASA 330 as per the provision of Audit and Assurance Board of Australian Government, under the coverage of Corporation Act, 2001 (Aicpa, 2006).
So far the detection of audit risk is concerned, it is being concluded that the combined impact of audit risk consisting of inherent risk, control risk, and detection risk is well below the benchmark fixed by the audit firm and this allows the audit firm to accept this assignment. (Board, 2015)
Preliminary Audit Plan
Acceptance of Audit Assignment
The audit assignment is formally offered to our firm and with the common understanding of the partners we are ready to accept the assignment after investigating the audit risk of the company, M Ltd.
Audit initiation notice
After the audit work is assigned to use, I, on behalf the audit firm will issue the preliminary notice to M Ltd covering different areas like the starting date of the audit work, the required documents and registers for the purpose of the audit, the detailed plan of the audit work with time limit specification, the duration of the audit process, the total number of members of audit team, and the meeting with the management before finalization of audit report, etc. this notice will be given to the company 1 month prior to start of audit work (Auasb, 2013).
Fixation of audit team
As the company has not a big infrastructure and the workshop, warehouse and the office is situated in the same place with the entire HR team of 35 heads, I will choose the total team for audit job as six out of which 5 will do the basic jobs of verification and the concluding part of this job is to be taken care by me as the head of the audit team.
Proposed time limit of the audit process
The audit process will take 30 days’ time out of which the initial verification of documents and records will take 20 days’ time. Following 7 days will include the performance of observations and subsequent draft report. The audit process will start from 1st November, 2016 and the final report will be placed on the table of the Board of Directors on 30the November, 2016. There may be some flexibility related to audit process so far some unforeseen situation which may arise during the audit work in progress.
Execution of audit work
Verification and checking
The verification and checking process will start with relevant documents related to the financial year 2015-16 and consisting on financial statements with subsequent verification in the books of accounts. The main emphasis will be given on the transactions related to cash, bank, and the asset evaluation including the intangible assets, the provisions, and the liabilities shown in the books. The physical movement of inventories is also to be taken into account as there was some early observations related to stacked back dated inventories which are lying in the warehouse marked as discard from overseas customers with consequent confusion related to receivable account. The age-wise analysis of receivables is to b checked for identification of doubtful debts which may be suggested to be written off. The entire process will be done as per the provision of Part ASA 2013-1 of AASB regulations. (Aasb, 2013)
Observation of the audit process
The observation will be made on the specific issues of balance sheet items, with the income statement to differentiate the revenue from business and other income. The cost of goods sold is to be verified with the latest competitors in supply chain associates. It is also to be emphasized in the area of overseas business to find out the security of the receivables from the overseas customers. Further exercise is to be taken care of in the fields of detection of working capital which is arising out of the balance between current assets and current liabilities. The strength of working capital gives confidence to the stakeholders of the company so far their interests in the company are concerned. This part will also to be done as per the regulations specified in 2013-1 of AASB. (Aasb, 2013)
Primary report and initial meeting with management
The primary report will be made after the completion of entire verification and observation process. The area of audit risks are to be well considered while doing this work. After the entire process of verification and observation, the primary report is to be drafted with the area of concerns to be highlighted. This report will fetch the comments of management with the deadline to rectify the problem areas. The company CEO is not well versed with the financial matter and the sole responsibility is with the finance director who will be main person to answer the questions with the specific deadline to rectify the odd areas (Pikora, Bull, Jamrozik, Knuiman, Giles-Corti, & Donovan, 2002).
Submission of final report
After the preliminary report is being accepted with proper intention to rectify the odd areas by the management, the final audit report will be submitted to the management for the signature of the CEO and the audit team head as me.
The final report, after signature as a token of acceptance form both the parties, is to be submitted to different authorities like Income Tax, the ASX, the web publication in the company website for easy access of the stakeholders. This report will be instrumental for the stakeholders to raise questions in the ensuing AGM of the company to understand, discuss and seek clarification from the management.
The audit process will be of high importance to us as we are entering in the field of wine industry through this assignment and this work will enrich our experience for future sustainability of our firm to find new assignment and enhance our abilities in different fields of business as a successful audit firm.
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Board, A. a. (2015, 12). Auditing Standard ASA 315. (AASB, Producer) Retrieved 10 16, 2016, from Compiled Auditing Standard : http://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf
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