Wednesday, May 6, 2020
Modern Auditing and Assurance Services Material Misstatement
Question: Discuss about theModern Auditing and Assurance Services for Material Misstatement. Answer: Material misstatement is an important factor in the process of auditing. Material misstatement can be seen in the financial statements of the business organization (Simnett 2012). One of the major effects of material misstatement is that it negatively affects the decision-making process of the organization. In the process of material misstatement, the financial information of the organizations is manipulated to influence the financial decision (Cao, Chychyla and Stewart 2015). From the above case study of Amistad, it can be seen that there are two asset accounts that are in the risks of material misstatement. They are current assets account and total assets account. As per the above case study, the bank wants the company to maintain a current ratio of 1.2. However, as per the financial condition of the company, the current ration of Amistad is 1.24. Hence, it can be observed that there can be a possibility of material misstatement in the current asset account of the company. As pre t he case study, Amistad is in financial crisis. In this position, its shareholders fund to total asset ratio should be affected. However, it can be seen that there is not any such change in that particular ratio. Thus, it can be said that the total asset account of the company may be in the risk of material misstatement. One of the major issues in the figure of prior years is the amount of net sales. As per the requirement of the bank of Amistad, the company must maintain minimum sales of $100,000 per quarter. However, it can be seen that the company had a total yearly sales of $350,000. The annual amount was less than what it needed to be. This is a major issue. In the business process of Amistad, three factors may bring into question the going concern assumption of Amistad. The first factor is the declining financial condition of the company. As per the going concern assumption, a business organization will continue to operate in the near future without any liquidation and insolvency (Carson et al. 2012). The current financial condition of the company can break this rule. The second assumption is that all the assets will be realized from its sales. However, this is not happening for the organization. The third assumption is that the liabilities will be recognized as the settlement price. However, the liabilities of the company are not recognized based on settlement price. Audit planning is a crucial stage in the process of auditing as all the necessary processes of the audit operation is chalked out in this stage. One of the major requirements of the process of audit planning is the uninterrupted flow of correct and appropriate financial information (Kerr 2013). In relation to Amistad, it can be seen that there are risks of different kinds of material misstatement in the process of accounting and finance. As per the earlier discussion, the process of material misstatement manipulates the financial and accounting information of the business organizations. hence, it can be said that the effect of material misstatement will reduce the effectiveness of the process of audit planning. As per the provided information, one of the major internal control issues of Amistad is the approval authority of the sale or return process. From the provided information, it can be seen that the marketing manager if authorize to issue all the credit aspect of the process of sale or return. The main responsibility of the marketing manager is to take care of the aspects of marketing and sales (Hoitash, Hoitash and Johnstone 2012). It is the responsibility of the accountants to issue credit periods and to take care of the stocks of the company. For this mismatch, the company has to face many financial difficulties. The authority of sale or return must be on the hands of both the marketing manager and the accountant of the company. One of the fraud risk factors of Amistad is the sales bonuses. From the provided case study, it can be seen that the sales staffs are given bonuses on unfair basis as the criteria of sales bonus is not achieved in most of the months. Another major fraud risk factors of the bonus of the sales managers. It can be seen that the sales managers has received 20%% bonus on regular monthly basis despite of not achieving the target on each months. These are two fraud risk areas of Amistad (Knechel and Salterio 2016). One account balance at risk is the sales account of the organization. As per the inspection of the auditors, it can be seen that the sales target of the company has not been achieved in most of the months and still the sales employees have been provided with sales bonuses. Hence, the sales account of the company is at the risk (Vona 2012). The first assertion is 10% and 20% bonus on the achievement of the sales target of the sales employees and sales manager respectively. This statement is in risk as bonuses are given to the sales employees on an unfair basis despite not achieving the sales target. The second assertion is the implementation period of sales bonus. It can be seen that in the mentioned period of six months, the amount of sales has not been increased and still the employees received bonuses. First, the internal control of the organization needs to be effective (Power 2013). The accountants of Amistad need to ensure that the sales bonuses are given to the employees at the achieving of the monthly sales target. This will eradicate the risk of fraud in the process of sales bonus. Second, proper financial control must be established in Amistad to avoid fraudulent. This process will ensure that the employees will get the sales bonus at the achievement of the monthly sales target. These two procedures need to be implemented in Amistad to address the issues of material misstatement. References Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement audits.Accounting Horizons,29(2), pp.423-429. Carson, E., Fargher, N.L., Geiger, M.A., Lennox, C.S., Raghunandan, K. and Willekens, M., 2012. Audit reporting for going-concern uncertainty: A research synthesis.Auditing: A Journal of Practice Theory,32(sp1), pp.353-384. Hoitash, R., Hoitash, U. and Johnstone, K.M., 2012. Internal control material weaknesses and CFO compensation.Contemporary Accounting Research,29(3), pp.768-803. Kerr, D.S., 2013. Fraud-risk factors and audit planning: The effects of auditor rank.Journal of Forensic Investigative Accounting,5(2), pp.48-76. Knechel, W.R. and Salterio, S.E., 2016.Auditing: assurance and risk. Routledge. Power, M., 2013. The apparatus of fraud risk.Accounting, Organizations and Society,38(6), pp.525-543. Simnett, R., 2012. Assurance of sustainability reports: Revision of ISAE 3000 and associated research opportunities.Sustainability Accounting, Management and Policy Journal,3(1), pp.89-98. Vona, L.W., 2012.Fraud risk assessment: building a fraud audit program. John Wiley Sons.