BFA303 Auditing as Misstatement of Material System
Service Stream Limited (https://www.servicestream.com.au/)
With reference to relevant Chapters of the textbook, prepare a document for your Audit Manager. Your document must include the followings:
1. Executive summary
2. Introduction
3. Key information:
a) Gain an understanding the client
b) Identify five (5) significant accounts most at risk of being materially misstated
c) Set planning materiality.
Answer:
Introduction
In society, economic decisions are taken on the basis of available information. For instance, decision about making investment in a certain company can be taken by the investor through assessing the information about that company; information about financial condition about the company and the factors which promises higher return on investment are considered as base for making decisions by investors(Gramling, Johnstone, & Larry E., 2012). This information can be accessed through the audit report of that particular company. Therefore auditing is important for both company and for people associated with that particular business organization. In the assignment, discussion about the importance of understanding the client by the auditor firm or the auditor is done. In addition to this, the accounts which can possess risk such as misstatement of material are also discussed as those accounts can put an impact on the report of audit(Oringel , 2012).Besides this planning for materiality is set in this report as well as the assessment of risk concerning with those five accounts exposed to risk of misstated materiality are also discussed in the assignment
(a): Gain an understanding of the client
For planning audit or developing audit plan, initial step in this is to gain understanding of client’s business environment and business process of client. According to Australian Auditing Standard, Understanding the entity, its environment and assessing the risk of material misstatement, auditor is required to undertaken detailed analysis of entity( Thibodeau & Freier, 2013). There are various network providers in terms of telecommunication services in Australia and this requires developing and establishing many network towers. Network towers required systematic design,developing, installing, etc. Following are information collected to gain understanding of Service Stream Limited:
Entity level:
Service Stream Limitedis operatingtheir business in service industry in Australia.They are engaged inproviding services to their customers in relation to network tower and maintenance service. ServiceStream Limited isengaged in the business operations of accessing, designing, building, installing and maintenance services are core business operations of Service Stream Limited.Primary business segment of Service Stream Limitedincludes fixed communication, mobile communication and energy &water segment.Service Stream Limited has 6 directorsin their board of directors or in board forum(Loughran, 2010).Telecommunication services include network providers and retail service providers operating business operations in Australia are major customers of Service Stream Limited.Business operations of Service Stream Limited do not includes any business fromforeign operations or Service Stream Limited does not have any international transactions. Service Stream Limited does not include any long term debt invested in business operations of Service Stream Limited( Pickett, 2010). Therefore there is no financial leverage in the capital structure or sources of finance of Service Stream Limited.Financialperformance of Service Stream Limited has proved to be improved level in last 2 years. Their net profit has been increased to $ 19,983,000 in 2016 from 11,720,000 in 2015.
Industry level
Service industry in Australia is one of the largest and has been operating in huge market. Market place of Service Stream Limited or Australian service sector has many players in it( Hoelzer, 2011). Therefore this possesses huge competition for Service Stream Limited. Demand of telecommunication services in recent past few years has been increased to a great extend in Australia. 98 % of people in Australia are using telecommunication services and requires better management of the same. Therefore this ultimately increases the level of competition for Service Stream Limitedand therefore they require more resources for meeting the requirements of their customers. On the other hand, level of government support for service industry in Australia is at higher side.There are various legal compliances that are required to be complied with( Porter, Hatherly, & Simon, 2014). Service Stream Limited is required to complywith all these legal and regulatory requirements so as to manage their business operations smoothly. On the other hand, government intervention is at higher side and many a times business operations of Service Stream Limited getimpacted with the same.
Economic level
Economic level of the business organisation or industry of business organisation impactsbusiness operations at a broader level or at macro level. Economic levelof business organisation can be assessed form prevailing interest rate, inflation rate in themarket,any financial crises and many other factors are understood( Knapp, 2016). Service Stream Limited is operating their business operations in Australia and therefore economic condition in Australian has impacted the business processes of Service Stream Limited.Availability of financial resources in Australianservicesector is quite less and therefore business organisations are required to use more internal funds as compared to outside debt. In case of Service Stream Limited, same is the case; they had invested more of internal funds or equity funds in their business operations.
(b): Identify five significant accounts most at risk of being materially misstated
Materiality concept can be defined as the process of identifying and analysing level oftolerance limit that an auditor sets in auditing financial statements of business organisation(Johnstone, Gramling, & Ritte, Auditing: A Risk-Based Approach to Conducting a Quality Audit, 2013). Materiality concept is used at each and every level of auditing i.e. planning and performing the audit. This is the limit which is decided and set by auditorin order to design anddevelop in terms financial management. Setting materiality is the most important process in auditing and assurance and this process is completed done on the basis of professional experience, judgement and individual case or audit.Under this concept, accounts that are at significance misstatement will be identified and analysed. Then decision related to audit procedure will be applied i.e. whether to apply substantive procedure or to perform analytical procedure for collecting sufficient and appropriate audit evidenceswill be decided( Young & Coleman, 2010).In case of Service Stream Limited, there are various accounts that can be at material misstatement and in order to perform audit procedures these are to be analysed. Following are some accounts(i.e. 5 accounts) of Service Stream Limited thathas been identified after understanding the entity and its environment:
Accrued revenue account
Accrued revenue is the revenue which is technically or logically earned by business organisation but not yet billed by the business organisation. It is earned by the entity but bill is not provided to customers. In other words, work or transaction has been physically completed in terms of business operations of the Service Stream Limited but customer is not yet billed. Therefore in these transactions undertaken byService Stream Limited, there is higher level of possibility material misstatement. Since amount is certain or amount to be charged from customers are certain but recoverability of the same is not certain. These amounts are covered under accrued revenue and not under sundry debtors of the Service Stream Limited( Thibodeau & Freier, 2013). In case of Service Stream Limited, process of revenue recognitionwill get hamper son various basis. In case of accrued revenue process, payment claims of the Service Stream Limited can be rejected by their customers to whomservices already provided. There is huge risk of non-recovery of revenue from services already provided but not yet billed to customers.
Intangible assets account
In case of Service Stream Limited, from the analysis of financial statements (statement of financialposition) it has been observed that intangible assets covers significant amount of their investment. Management of Service Stream Limited has invested majority of their capital into intangible asset (under the head of non-current assets). Management of Service Stream Limited has allocated goodwill to all of their subsidiaries in past years. From the analysis of intangible account of Service Stream Limited and from notes to accounts of the same, carrying amount of goodwill is materialaspect to be considered at the time of planning and performingmateriality. For the purpose of assessing carting amount of goodwill of the Service Stream Limited, future cash flows are to be estimated( Thibodeau & Freier, 2013). These estimationsare based on management anticipation and outsideexpert’s opinion. Future is uncertain and unpredictable and in case of goodwill calculation management is required to estimate future cash flows. Therefore there is certainty of material misstatement in the amount of intangible assets and more particularly in goodwill account.
Cash and cash equivalent account
Cash and cash equivalent can be defined as the financial resource of the business organisation that can be used in the business operations. Cash and cash equivalents are the liquidity of the business entity that is used to repay or make payment of current obligations of the business entity. In case of Service Stream Limited, cash and cash equivalents in last year has been significantly increased as compared to other reporting period. In 2016 their cash and cash equivalent is $ 41,086,000 and in 2015 it is $ 14,756,000.There is significant different in cash and cash equivalent position of Service Stream Limited( Pickett, 2010). Cash is the most easy and most reachable asset of business organisation that can be easily misstated or there are high changes of cash fraud or theft. Therefore significant increase in cash and cash equivalentpossess risk of material misstatement or misappropriation of cash resources.
Sales account
Sales account is one the significant account of the Service Stream Limited that can be at material misstatement or may include any fraudulent figures. Service Stream Limited has been receiving revenues from majorly three sources i.e. revenue from contraction contracts, revenue from contracts for providing services to customers and other sources of revenues. Among these three sources revenue from contract services or revenue fromcontract made to provide services is at higher risk of material misstatement(Oringel , 2012). This is because in this contactedservices, revenues isreceived from various customers as there are higher volatility in contract service transactions. On the other hand, revenuesrecognition from the construction contracts is complex process and includes various elements to be considered. Construction contract includes stages of completion of contact, total contract revenue & cost, customer approval in terms of completion of contractionactivities and dates of activities completion are to be determined( Porter, Hatherly, & Simon, 2014). Therefore sales account is at significant risk of being materially misstated.
Debtors and creditors account
Debtors and creditors are two different accounts that are at significant risk of material misstatement in case of Service Stream Limited. Debtors represent that account which are receivable in near future and included in current assets of the business organisation. On the other hand, creditors can be defined as the accounts payables or current obligation of business organisation(Brag, 2011). In case of Service Stream Limited, it has been analysed from the financial statements of past years that debtors and creditors has higher amount involved.In case of Service Stream Limited, it can be analysed that amount of both debtors and creditors is at higher side. Huge investment is done in debtors and current obligationin terms of creditors is also very high.
(c): Set planning materiality
Setting materiality is the most important process that is required to be undertaken by auditor before starting auditing of financial statement of business entity. Therefore materiality level shall be set at the initial level i.e. at the time of planning audit process and procedure. Planning material is the process under which audit plan materiality level or threshold level. Threshold limit can be set in both in dollar amount ($) or in percentage (%)terms. Auditor is required to decide base of setting materiality level and base can be of different type’si.e. net income, gross profit, earnings before interest and tax, operatingprofit, current asset or current obligation level and many other level of materiality level( Rachchh, Gadade , & Gunvantrai, 2015).
In case of Service Stream Limited, materiality level has been decide or set after considering its business operations in terms of volatility of transactions, nature of transactions and level of business operations. Analysis of business environment, other factors both at macro and micro level has been analysed, level of financial performance has been analysed and then following materiality level has been decided:
Percentage terms: 2.50 % of earnings before interest, tax and depreciation is the percentage terms audit materiality that shall be applied during the audit performance(Well, 2017).
Dollar terms: From the prospective of dollar or amount of transactionsthat has been undertaken by Service Stream Limited in recent financial years; materiality level will be s$ 895,000.
This materiality level means beyond the limit of materiality level i.e. 2.5 % of earnings before interest, tax and depreciationor $ 895,000, each and every transaction taken place shall be audited. In other words, substantive or analytical audit procedure shall be performed on each transaction beyond the materiality.
(d): Assess what can go wrong (audit risk assessment) for each of the five accounts selected
Audit risk can be defined as the risk which is combination of all three risk related to audit of the business entity. Inherent risk, control risk and decision risk are three risks that are present in the audit of any business entity( Griffiths, 2016). Audit risk model is used to analyse and assess level of risk present in the financial statements or internal control system of the business organisation. Audit risk assessment includes analysis of all identified accounts during audit which are at risk of being materially misstated.
Inherent risk: It can be defined as risk which ispresent in the external environmentof the business entity. Inherent risk is the risk of material fraud and errors in the financial statements which are beyond the control of management of business organisation(Singleton & Singleton, 2011).
Control risk: Control risk can be defined as the risk which states that management will not be able to control (identify and prevent) errors and frauds in the business operations and in terms of businessactivities.
Detection risk: Detection risk is the risk which states that auditor will not be able to identify and prevent frauds or errors in the financial statements of the business organisation( Young & Coleman, 2010).
Statements showing risk assessment of 5 accounts which are at significant risk of being material misstatement:
|
Account |
Inherent risk |
Control Risk |
Detection risk |
|
Accrued revenue account |
Higher risk As accrued revenuesare difficult to identify in normal course of business. |
Moderate risk Control risk is at moderate level because management or managers are able to identify accrued revenue transactions(Singleton & Singleton, 2011). |
Higher risk Detection risk will be at higher side because it will be difficult for auditor to detect and prevent accrued revenue transactions. |
|
Intangible assets account |
Higher risk Since estimates are uncertain and unpredictable therefore inheres risk is at higher side. |
Moderate risk Management are not able to deal with intangibletransactions. |
Moderate risk Intangible asset account will be at moderate risk level in terms of detection risk as auditor will have to conduct detailed analysis( Handsworth, 2012). |
|
Cash and cash equivalent account |
Higher risk Cash transactions are inherently risky as cash can be easilybe manipulated by the employees or other managers( Delaney & Whittington, 2009). |
Higher risk Since cash or cash equivalents are small in no and therefore can it becomes difficult for management to identify and tally cash(Gramling, Johnstone, & Larry E., 2012). |
Higher risk Auditorneed to keep its detection risk at higher side since cash and cash and cash equivalents are at higher amount. |
|
Sales account |
Higher risk There are three sources of sales revenue and revenue from contractservices is mostcomplex and volatile. Thereforeinherent risk in this case is at higher side(Brag, 2011). |
Moderate risk Control risk is at moderate level since it will be complextask for management to verifyeach and every sales transaction because of high volatility level. |
Moderate risk Detection risk is at moderate level since inherent risk is at higher level and control risk at moderate level. |
|
Debtors and creditors account |
Moderate risk These accounts will be at moderate level of inheresrisk because of higher amount involve in both debtor and creditor accounts. |
Higher risk Control risk is at higher side because it is very difficult for management to cross check with each external party. |
Moderate risk Detection risk will be at moderate level since inherent risk is atmoderate level in this case( Griffiths, 2016). |
Conclusion
Auditing ensures about company`s financial statements that financial transactions are recorded properly, accounts are maintained in proper manner. In addition to this, through auditing a business organization can also check the possibility of accounts manipulation or misuse of the business`s property. Both the qualitative and quantitative errors are considered by the auditor as these errors can cause effect on the process of audit and in turn audit report of the business organization. The assignment concludes that the auditor shall gain knowledge about client`s business which enables the auditor to assess the events, practices and transactions in context to financial information or condition. There are number of source from which auditor can gain knowledge about the clients business such as- financial statements of previous and current year assimilating budgets, discussion with clients. To understand the client, auditor can also assess the audit working papers of previous years as well as other relevant files. These aspects can help the client in preparation of its audit report and assessing the risk which are associated with the accounts of that particular business organization.
References
Delaney, P. R. & Whittington, . . R., 2009. Wiley CPA Exam Review 2010, Auditing and Attestation. s.l.:John Wiley & Sons. .
Griffiths, P., 2016. Risk-Based Auditing. s.l.: CRC Press..
Handsworth, A., 2012. Risk Management Audit Guide. s.l.: Xlibris Corporation. .
Hay, D., Knechel, . R. & Willekens, M., 2014. The Routledge Companion to Auditing. s.l.: Routledge..
Hoelzer, D., 2011. Audit Principles, Risk Assessment and Effective Reporting. s.l.:EnclaveForensics.
Knapp, M. C., 2016. Contemporary Auditing. s.l.:Cengage Learning.
Pickett, K. H. S., 2010. The Internal Auditing Handbook. s.l.:John Wiley & Sons..
Porter, B., Hatherly, D. & Simon, J., 2014. Principles of External Auditing. s.l.:Wiley.
Rachchh, M., Gadade , S. T. & Gunvantrai, 2015. Introduction to Auditing. s.l.:Vikas Publishing House.
Thibodeau, J. & Freier, . D., 2013. Auditing and Accounting Cases: Investigating Issues of Fraud and Professional Ethics. s.l.:Wiley.
Young, B. & Coleman, ., 2010. Operational Risk Assessment. s.l.:John Wiley & Sons..
Bragg, S. M., 2009. Wiley Practitioner's Guide to GAAS 2010. s.l.:John Willey & Sons.
Bragg, S. M., 2010. Wiley Practitioner's Guide to GAAS 2011. s.l.:John Wiley & Sons..
Brag, S. M., 2011. Wiley Practitioner's Guide to GAAS 2012. s.l.:John Wiley & Sons..
Gramling, A. A., Johnstone, . M. & L. E., 2012. Auditing. s.l.:Cengage Learning.
Johnstone, K., Gramling, . & Ritte, L. E., 2015. Auditing: A Risk Based-Approach to Conducting a Quality Audit. s.l.:Cengage Learning.
Johnstone, K., Gramling, A. & Ritte, L. E., 2013. Auditing: A Risk-Based Approach to Conducting a Quality Audit. s.l.:Cengage Learning.
Knechel, W. R. & Salterio, . . E., 2016. Auditing: Assurance and Risk. s.l.: Taylor & Francis. Copyright. .
Loughran, M., 2010. Auditing For Dummies. s.l.:John Wiley & Sons..
Oringel , J., 2012. Effective Auditing For Corporates. s.l.:A&C Black.
Singleton, T. W. & Singleton, . J., 2011. Fraud Risk Assessment. s.l.:John Wiley and Sons..
Singleton, T. W. & Singleton, . J., 2011. Fraud Risk Assessment. s.l.: John Wiley and Sons..
Vona, L. W., 2012. Fraud Risk Assessment: Building a Fraud Audit Program. s.l.:John Wiley & Sons..
Well, J. T., 2017. Corporate Fraud Handbook: Prevention and Detection. s.l.:Wiley.
Buy BFA303 Auditing as Misstatement of Material System Answers Online
Talk to our expert to get the help with BFA303 Auditing as Misstatement of Material System Answers to complete your assessment on time and boost your grades now
The main aim/motive of the management assignment help services is to get connect with a greater number of students, and effectively help, and support them in getting completing their assignments the students also get find this a wonderful opportunity where they could effectively learn more about their topics, as the experts also have the best team members with them in which all the members effectively support each other to get complete their diploma assignments. They complete the assessments of the students in an appropriate manner and deliver them back to the students before the due date of the assignment so that the students could timely submit this, and can score higher marks. The experts of the assignment help services at urgenthomework.com are so much skilled, capable, talented, and experienced in their field of programming homework help writing assignments, so, for this, they can effectively write the best economics assignment help services.
