International Financial Accounting Standards †MyAssignmenthelp.com

Question: Discuss about the International Financial Accounting Standards. Answer: Introduction: With the release and introduction of International Financial Accounting Standards and other regulations of Accounting Standard Board, Audit has taken special significance and holds utmost importance. It gives the reasonable assurance to the users of the financial statements, both internal and external, which includes customers, shareholders, creditors, debtors, banks, financial institutions, etc. Audit is an independent check of the financials prepared and reported by the entity, whether government or private, small or large, with a view to express and opinion whether the same has been prepared on an unbiased basis. Management also makes use of the estimates, assumptions and judgements in several areas, which cannot be clearly defined, for all such areas; auditor needs to verify whether the appropriate assumptions have been taken(Knechel Salterio 2016). There are various methods through which the auditor carries out his checking. This includes inspection of the critical and importan t general ledgers, observation of the activities happening within the premises of the client like physical verification of the stock, taking external confirmation from the banks and financial institutions and creditors. Along with that inquiring from the external parties and customer about the client business and it environment, performance of the significant activities and calculations like tax, which may have a huge bearing on the cash flow and applying further analytical procedures. Auditors generally apply substantive procedures to see the viability and the existence of the numbers recorded to evidentiate substance over form. They want to check the completeness of the transaction along with the supporting and relevant evidences, disclosures which have been given in the financials and whether the valuation has been correctly and reliably done or not for the cases where it requires so. Substantive audit procedures included vouching of the expenses and incomes recorded in the books and verification of the liabilities and the assets, which are appearing in the statement of affairs as on the reporting date. The sales are checked with the invoice and bills, the costs and expenses incurred are reconciled with the purchase orders raised and vouchers, etc. The assets are checked from the agreement or lease deed, etc., and for the liabilities, their existence is determined by external confirmation(Jones 2017). Besides all the above procedures, analytical procedures holds a special significance as to determine the nature of checking, timing to be assigned and the extent to which the sample verification is to be done. All this determines the final qualification of the audit report and it is all dependent largely on the internal control procedures being followed within the company. More effective the test of control and test of design within the organisation, lesser the risk and lesser is the application of audit procedures to be applied. On the other hand, the more ineffective the control within the organization, the more are the chances of the risks and more would be the extent of the checking required. Analytical procedures, hence, are applied on both the financial and non-financial data(Raiborn, Butler Martin 2016). Examples of some of the procedures include ratio analysis over a period of time, trend analysis based on the industry figures, variance analysis, reasonableness testing and a nalysis of the actual data at the end of the period with the expected and budgeted figures. All this procedures depend directly on the understanding of the auditors of the business environment and its businesses. All the testing and verification done should be adequately documented in order to draw the conclusions at the end(Grenier 2017). In the given case, Stewart and Kathy are taking over as the auditors of DIPL from the old auditors Jay and Associates. Therefore not only substantive and analytical procedures, but the checking of the opening balances is also required to ensure that there is no material misstatement and it poses no risk to the financials. Here the analysis has been done using the limited data given which helps in establishing the trend of the profitability, debt management and liquidity ratios over a period of last 3 years. Besides this, auditor also needs to validate the procedure of payment to vendors in foreign currency that whether the exchange rate fluctuations is properly accounted for, whether the inventory is correctly valued as per the accounting standards at the end of the period. It is important to see whether the revenue is being recognised using the correct ways using IFRS 115 or simply the dispatch or movement of goods out of factory determines the revenue recognition. All this is impor tant to check the validity of the financials of the company and judge its overall liquidity(Fay Negangard 2017). From the above ratio analysis, it can be inferred that the both the liquidity ratios namely current and liquid ratio are below industry standards of two one respectively. In addition, the debt equity ratio is below the standard of 2:1 therefore, it is having the cushion of trading on equity in the future and incurring low interest costs. As per the results, it does not suffice the bank loan terms of current ratio of at least 1.5 and debt equity ratio of 1:1; hence, it may be that the loan may be revoked if the company is not able to meet the given standards. In addition to this, the asset management ratio show that the receivables ageing as well as the inventory liquidation ageing has increased by around 50% which means the cash collection and the inventory cycle has increased in terms of days, this will badly impact the DSO. In addition, the asset turnover ratio has decreased drastically over the period of last 3 years implying that the assets are having wear and tear and it is not generating the amount of sales as it was doing in the initial years. The last but not the least, profitability ratios imply that it has remained constant over the last 3 years at around 6%. Even the return on equity has remained the same at 24%, which implies that the company has not been able to meet the increased demand of the shareholders even after increasing the amount of debt in the capital structure. Overall, the financial position of DIPL is constant and is below average. There are different types of risk that are associated with auditing. The three major type of risk are inherent risk, control risk and detection risk. Inherent risks occurs when things are not in the hands of the management even after applying proper internal control methods, the control risk occur when there is lack in internal control by the management, and detection risk occurs when the auditor fails to detect major errors in the books of the company. In case of DIPL, also, the company faces few inherent risks in the audit process and the same is given below. s.no Issue Involved Type of risk Reason of risk Mitigation of risk 1 The main issue is that there is a change in the non-routine methods of the company. It is type of inherent risk that is associated with changes in the overall procedures of an organisation. The main reason of risk is that in cases where the company is trying to adopt new methods and procedures, the auditor will find it difficult to quantify the changes materially. Like in case of DIPL, the coo is considering changing the method of calculation of depreciation, adopting new methods and making changes. These changes are based on the knowledge of the CEO and tree has been no proper research in that regard. Also the company wants to change the method of valuation of inventory. We see that with all these changes the overall functionality of the organisation get changes. There are few assumptions that the company is making, it may be possible that it is not financially viable(Sonu, Ahn Choi 2017). The auditor can mitigate the risk, by asking the management to undertake proper research before making such changes. It is important proper disclosures regarding all the major changes are properly given by the auditor so that the financial statements show the true state pouf affairs of the company. 2 The second issue is associated with the launching of the new IT system. It is type of risk that is associated with change in the current procedures without undertaking proper research. The main risk is associated with the launching of the new IT system without proper research. It may be possible that there is undervaluation or overvaluation of the system that might affect the overall profitability of the company. It is thus important that before taking such steps the management does not haste and undertake expert opinion(DeZoort Harrison 2016). The auditor can mitigate the risk by asking the man agent to provide with all the valid details regarding the new system and also thy must undertake proper research before undertaking so. Fraud occurs when the management or employees of the company indulges in certain activity that might affect the financial viability of the company for their own personal motives and gain. It is important for the auditor to apply all kind of substantive and analytical methods to make sure that the books of the company are able to portray the true state of affairs and there are no errors or fraud. In case of DIPL, there are few potential fraud risk factors, the same has been explained here under- s.no Issue Reasons of fraud risk Mitigation of fraud 1 The major fraud risk is associated with no segregation of duties between the employees in case of important work department The main reason of risk is that in case of DIPL, there is no proper segregation of work. The account receivable department is handled by a single clerk, who does all the work of making the invoices, deciding the pricing, verifying the transaction and making the payment. The cash collection is also handled by a single clerk who downloads the e receipts, verifies the accounts, updates the books and reconciles them. Thus there is an issue of no segregation of important work between the employees and hence it would be very difficult for the management to ascertain proper authority in case there is failure on part of the employees(Bae 2017). The management can mitigate the fraud by taking important steps of segregation of work, and asserting that proper controls are there. The auditor can ask the management to do surprise checks and verify the accounts regularly so that the employees cannot indulge in any kind of fraud. This is very important that proper authority is established by the management so that work is properly dividend and check points must be there to ascertain their overall validity. 2 The second type of issue is in the installation of the major IT system by the management without any proper research. The main reason is that there are high chances that the management has installed the new system in so much haste because there was some personal motive involved of the management. The new system was installed without any reconciliation, any research, it might affect the overall profitability of the company hampering its growth and development. There might be undervaluation or overvaluation of the new system which might have risk of material misstatement on the books of the company(Jones 2017). It is important that the auditor takes important steps to mitigate the overall risk of the company. The auditor should ask the management to present them with important documents regarding the company, to make take expert opinion before installing the new system. It should also reconcile the overall cost and profit to see the profitability of the system and should also check its effect on the financials of the company. The management should provide the auditor with all the support and documents. In case the auditor finds any discrepancies, he can modify the audit report and give a disclaimer opinion. These are the few ways in which the auditor can mitigate the overall risk of fraud that is associated with the company. 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.