I. Risk Assessment
II. Non-substantive Planning Analytics
III. Debt trade Ledger
The purpose of this paper is to provide a report to the Audit Engagement Partner, Little Diggers Ltd, which comprises a summary of the elements of the audit risks model, the assessment of materiality levels, the performance of non-substantive planning analytics and the audit procedures performed in order to establish the key financial statement assertions of existence and valuation.
The independent Audit firm, “Jones Cleese and Chapman”, is appointed to carry out an effective investigation of the Little Diggers records and the financial statements prepared under the responsibility of the directors. The firm acts as an external auditor, which according to its definition, must perform an independent examination and verification of the evidence regarding the assertions upon which the financial statements of an organization are based, in order to obtain reasonable assurance that the financial statements are free from material misstament and thereby express an opinion as to whether the financial statements represent a “true and fair view” and have been prepared in accordance with the applicable reporting framework.
According to ISA 200 the “Overall objectives of the independent auditor and the conduct of an audit” is to enhance the degree of confidence of intended users in the financial statements. This is achieved and guaranteed if the auditor acts according to the following principals: Objectivity, Professional behavior, Professional Competence and due care, Integrity, Confidentiality.
I Risk Assessment
The audit risk is the risk that the auditor provides an inappropriate audit opinion. This is further developed by ISA 315 (revised) Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment as the objective of the auditor to identify and assess the risk of material misstatement, whether due to fraud or error, at the financial statement and assertion levels, through understanding the entity and its environment, including the entity’s internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement. (definition)
1.1 Understanding the Entity’s Environment (ISA 315)
Little Diggers Ltd is a large manufacturer of construction machinery based in the UK. It operates in the manufacturing industry of construction, demolition and agriculture.
Audit Risk is comprised of two components: Risk of material misstatement and detection risk.
The inherent risks for the Little Diggers Ltd include:
-There is a constant pressure made by the CEO Joseph Bamthorpe that the Company be listed on the London Stock Exchange and it requires stronger sales and profits. This constitutes a primary reason to believe that Inventories have been manipulated and show a significant increase of 46.40% in order to decrease in Cost of sales and boost in Revenue. This puts under question the Existence assertion of the Inventories, especially after this has also been a problem raised by the previous auditors and also by the internal Control.
-transactions are made in different currencies. This makes the Valuation Assertion more difficult to assess. Purchases made in various currencies might raise issues at the inflation rates and exchange rate.
-Stock control, as assimilated by last year Auditors and internal control. The significant increase in Inventories makes difficult to count. Therefore the existence assertion is doubtful.
-Lack of non-executives board members. The purpose of non-executives board members is, as stated by “The Cadbury Report”, produced in 1992, “they should bring an independent judgment…