AUDITING, ASSURANCE & SERVICES ACC707 INDIVIDUAL ASSIGNMENT
The study is to be made on the information and affects regarding the material misstatement and audit activities in a firm. In this study, the Caltex Company has been chosen for the evaluation of the material misstatement and audit activities and responsibilities. The study requires the brief discussion of the financial accuracy regarding the material misstatement and audit activities regarding the ASA 701 and revised ASA 570.
In the modern age financial activities and operation there exist several financial risks that affect the financial standards and the quality of the financial reports. Thus, the identification of the financial crisis and the misstatements are to be done in accordance with the financial stability of a firm. In this study, the research is to be made on such company which is suffering from financial crisis and are affected by lack of modern financial techniques. Thus in order to maintain the accuracy of the financial reports several investors of a financial firm have identified factors regarding the audit work of the financial instruments which are to be modified in order to create the appropriate audit report. Hence the introduction ASA 701 or communication of Key Audit Matters was done in order to exclaim the auditing factors required to develop a suitable audit and finance report during a financial year. In this, the research the Caltex firm has been chosen. The company has been chosen as it is observed that the firm has been obtaining financial practices without the concerning the auditing factors and hence the firm has been suffering several financial misstatements and losses in the financial reports.
Areas of higher assessed risk of material misstatement, or significant risks
Identified in accordance with ASA 315
The section consists of the identification process material misstatement and the effect of the following in the financial valuation the firm. It is to be stated materiality misstatement is a factor that needs to be identified rectified by the firm in order to generate sufficient amount of revenues for the financial operations of year. Thus in order to discuss the material misstatements of the Caltex it is important to know the concept, reason and the effects of the material misstatement in a firm financial statement during a financial year. Hence, in order to meet the financial stability, several modified auditing methods and techniques are introduced under ASA. The introduction of the auditing standards will help the auditors to develop and identify the factors and aspects, which are effective to the financial operations of a firm during the financial year.
Material misstatement is the manipulation of the financial values if the organizational material in the financial reports. The material misstatements are mainly intentional from the perspective of the employees. The reason for the material misstatement occurrence is to conduct fraud or theft in the materiality. The misevaluation of the materiality of the firm conducts serious financial losses to the firm, as the firm is unable to provide the valuation of the financial aspects in their financial report at the end of the year, hence the firm will suffer lack in market investments and essential findings. The investors, bank loans, creditors, debtors are interested in the valuation of the annual reports of the firm and hence minor misplacement of the financial values can result in loss of such financial parties which will lead the company towards financial losses. Thus it is important for a firm to retain its accuracy in the financial valuation of the annual reports. However, its is also observed that the firm's intentionally over values their financial valuation in order to attract new investors and debtors in the financial operations. The intentions to create extra revenues are the main reasons for such misstatement in the financial report. Hence, it is to be stated that the discussed cases led to manipulation in the quality of the financial reports of the firm (Ye and Simunic, 2013).
In this context, the material misstatement of the Caltex firm is to be discussed in order to identify the factors regarding the material misstatement of the firm. The company has provided the annual reports regarding their financial valuations during the financial year. The firm has provided the information regarding their financial valuation at the end of the year, they have disclosed the valuation methods and figures by which they valued their financials. However, the company did not obtain the practices of the Key Auditing Matters and thus the firm has failed to meet the requirements of the ASA 701 (Legislation.gov.au. 2017). Thus, it is to be observed that the Key Auditing Matters has not practiced by the firm over the years. Thus, it can be stated that the auditor of the firm has not followed the ethics and principles of the Key Auditing Matters and the report is not qualified for the presentation of the financial strengths off the firm to the stakeholders.
The material misstatements have been identified in accordance with the ASA 320. The materiality misstatements are as follows
According to the working note C4 of the company financial report 2016, it is observed that the firm has provided the information regarding their financial valuation at the end of the year, they have disclosed the valuation methods and figures by which they valued their financials (Caltex. 2017). The assets valuation process of the firm has obtained the methods and discussion of the key auditing matters. According to the annual report, it is observed that the firm has disclosed the values of the asset purchasing and carrying amount of the next year, which was $312897(Caltex. 2017). The depreciation also has been calculated according to the company valuations and rates. However, the disposed of amount of the assets purchased during the year are not shown in the annual report and thus it can be assumed that the firm intentionally misplaced the valued of the assets during the year and the depreciation of the assets may be not accurate as the disposable amounts are not given. Hence, according to the ASA 320, it can be stated as the material misstatements of the firm (William et al. 2016).
The working note E of the annual report of the firm has disclosed the amount of taxation to be paid by the firm (Caltex. 2017). The financial figures and the rates have been observed in the annual reports. However, the methods and techniques used in the taxation calculations were presented in the annual reports. The firm takes on specific amounts and rates for the calculations of the several tax calculations during the year (Pendley and Habegger, 2014). However, the specific income amounts and the rates applicable to the amounts have not been presented in the annual reports. It is also to be stated that the firm has also not obtained the required provisions of the taxation during the year. The provisions are to be done in order to maintain the taxations amounts even though there are fluctuations in the income amount and tax rates. The company keeps a standards amount of money in order to maintain the balance of the relations accounting. Thus, the absences of the proper rates, income amounts and the provisions in the annual reports can be stated as material misstatement according to the ASA 320.
According to the working note C2 and C3 of the company financial report 2016, it is observed that the firm has provided the information regarding their financial valuation at the end of the year, they have disclosed the valuation methods and figures by which they valued their financials Caltex. 2017). The inventory valuation has been provided in the annual report after adjusting the inventory turnover during the financial year. It is to be stated that the firm has been using the First In First Out inventory valuation during the financial year in order to maintain the inventory valuations of the firm. However, the days of the inventory turnover are not providing clear information regarding the inventory activities of the firm. This is to be stated that the firm has also not disclosed the proper inventory methods rather than the First in First Out inventory valuation. It is also to be stated that the First In First Out inventory valuation is not assured to be providing suitable valuation of the inventories during the year. Thus, the lack of information regarding the inventory valuation, method accuracy can be stated as the misstatement of materiality in accordance to ASA 320 (Legislation.gov.au. 2017).
Significant auditor judgments relating to areas in the financial report that involved significant management judgment
According to the annual report, it can be seen that the company auditors have conducted several opinions regarding the accuracy of the annual reports of the company. The auditors have also opined in favor of the methods and techniques obtained by the company and the results of the financial valuations during the year. It is to enable stated that the auditors have also added that the firm has followed the regulation methods qualified in the Australian Accounting Standards in order to establish the financial calculations of the company activities during the year. The accuracy and the correction of the accounting values have been within the regulation of the Corporation Act 2001. The financial reports of the company also comply with the International financial reporting standards. Thus it can be said that the Annual financial report created by the company are right from all the needs of accounting as well as auditing standards (Knechel, 2013).
It can be said that there exist various aspects regarding the final calculations, which were not presented in the annual report. The company in the evaluation of their financials dur4ing the financial year did not consider the factors. Thus, the annual reports have not met the requirements of the auditing standards of Australia and the report qualifies to accurate in regards to the financial valuations and accuracy of calculations. The auditors did the opinions regarding the financial accuracy of the firm without considering the facts of the financial reports and statements during the year. Thus the auditors have skipped the considerations of the material misstatements, thus this shows the auditors were not educated regarding their allocated responsibilities. The introductions of the ASA 701 and the revised ASA 570 have been beneficial for the auditors to reconsider the facts regarding the accuracy of the annual reports and financial statements (Legislation.gov.au. 2017).
The effect on the audit of significant events or transactions that occurred during the period
As per the above discussion in the study, regarding the financial accuracy and material misstatements, it is observed that the firm Caltex has suffered from the misstatements of their asset valuations, taxations figures and inventory valuations. It is to be stated that the material misstatement of the financial valuations can be harmful to a company's financial activities and operations along with its market position holdings. The misevaluation of the materiality of the firm conducts serious financial losses to the firm, as the firm is unable to provide the valuation of their financial aspects in their financial report at the end of the year, hence the firm will suffer lack in market investments and essential funding. The investors and other essential parties of the firm can be demotivated by the presentation of inaccurate financial statements and can reconsider their decision to invest further in the Caltex Company. Thus, it is important for the firm to maintain the materiality accuracy along with the firm's overall financial valuation in order to maintain the financial strengths and market positions of the firm (Hua and Zhou, 2017). The firm has provided the information regarding their financial valuation at the end of the year, they have disclosed the valuation methods and figures by which they valued their financials. However, the company did not obtain the practices of the Key Auditing Matters and thus the firm has failed to meet the requirements of the ASA 701. Hence the practice of Key Auditing matters was absent in the practice of accounting activities of the firm during the year thus it can be stated that the firm should obtain the practices of the newly introduced ASA 701 and a modified version of ASA 570 in their accounting practices and financial valuations (Glover et al. 2016).
Conclusion and recommendations
Concluding on basis of the above discussion it can be stated that Auditing and Assurance Standards Board's regulation are to be primarily followed by an external auditor while conducting an auditing process. This is because the following regulations provide an extensive guideline to the auditor, which help the following to conduct the audit in an authentic and standards way. This will also help an auditor in increasing the quality of the audit report. The introduction of ASA 701 and revised ASA 570 has embarked the concept of communicating all the key matters, which an auditor face while conducting their auditing process. There are some recommendation made in this sections to determine better ways, which will help an auditor to conduct audit process in a better way, the recommendations are as follows:
In the above, it has been defined that there have been various instances where the auditor have been facing difficulties while investigating the errors in the annual report of the company. In this case, it can be said that the independent process of investigation in auditing has been hampered. It would be recommended that independence of investigation has to be maintained by the company, as this will help the auditor to conduct the audit process in a better way. It can be said that following the independent investigation procedure will help the auditor to maintain the quality of auditing process. This can be done by staying independent form internal control of the company’s management.
It is highly recommended that the auditor follow all the essential requirement states in ASA to maintain and authenticate the auditing process, as it will help the auditor to carry out an effective audit process. The following will increase the quality of the disclosures made in the audit report and will also help the duty to state an effective opinion about the fairness of the financial statement created by the company in an annual financial. It can be stated that though the auditor will be able to maintain the quality of the audit report.
Following ASA 701 and revised 357 will help the organization to maintain an effective communication with users of an audit report. This will also increase the stakeholder’s reliability on the auditor's report and will increase the quality of the audit report created by the audit.
It also is seen that failure to establish proper audit report is due to the lack of communication between the management and the external auditor while the auditor is conduct investigation. Therefore, it is recommended that the author establish effective communication with management, which will help the auditor to improve the auditing process and will help the auditor to maintain the quality of the report.
In the case above case, it is seen that the auditor failed to recognize the material misstatements in the inventory valuation as the company is not able to follow a standard inventory valuation method because which the mistreatment has occurred. It would be recommended that the company follows a standard inventory valuation method which is ethical and easy to verify for both the firm and auditor.
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