Audit planning
Audit planning is an important preparatory phase of an audit that includes several necessary processes. It will provide the possibility to develop strategies for dealing with issues identified, which will facilitate the task in the future. Moreover, planning includes the identification of specific audit procedures at each stage. The audit process includes identifying and working with potential risks that are defined for each company. Audit risks include the threat of non-identification of possible deviations in accounting reports from actual data (American Institute of Certified Public Accountants (AICPA), 2018). It can conditionally be divided into two main parts, and the first includes the risk that deviations will not be identified. The second part formulates finding any variations; however, in fact, there are no distortions (AICPA, 2018). The purpose of this paper is to analyze the risks associated with auditing the Thanda company and how one should deal with them in planning an audit.
The Thanda Company’s Auditing Risks
When planning an audit of Thanda, there is a risk of identifying incorrect audit procedures. It is partly due to the new accounting information system introduced, but it was not tested after implementation, which articulates the inherent risk. Thus, one cannot guarantee that the system is not the cause of possible distortions in the company’s balances and settlements. Failure to test the system after implementation may be a reason for the company to justify distortions in the calculations. There may potentially be a deliberate understatement or overpricing of any purchased or sold product. Accordingly, it may be justified by the imperfection of the system since it was not examined after implementation. In this regard, the auditor’s response will be to apply skills to analyze the calculations, given the inaccuracies of the existing system.
The next risk is similarly included in the category of inherent and implies the threat that reporting items will be distorted due to value judgments. Thus, the company may overestimate or underestimate the price of any product that was purchased or sold in view of its own methods of valuing this product. The response will be formulated by searching for up-to-date price information about the product and collecting evidence that the price change was justified.
This next risk is associated with price fluctuations due to the coronavirus pandemic and lockdown, which led to the accumulation of Thanda products. Due to this, it was decided to sell the accumulated goods to Australia; however, the price was below the average market. Thus, to conduct an audit for this period, it will be necessary to consider these fluctuations and make calculations in accordance with them. It falls under the category of detection risk, i.e., the threat that certain misstatements will not be identified due to price fluctuations.
The following risk is related to the fact that when calculating the balance or class of transactions, one did not manage to determine and correct some distortions timely, which formulates the detection risk. It leads to significant difficulties in further calculations since the data were initially changed. As a response to this risk, the auditor should identify where the misstatement has occurred and make calculations accordingly. For this, the auditor should use a detailed analysis and comparison of sample data and pay attention to the payrolls. The amount of numerical data and the necessity to carry out many calculations articulates a certain risk.
Further, when planning an audit of Thanda, there is a risk associated with the company’s activities regarding the useful life of the property, equipment, and plant, which is part of the control risks. The company stated that they spend more money on equipment maintenance than other companies in the industry. Moreover, it was also noticed that Thanda spends significant resources on the maintenance of its equipment, which was the reason for the following decision. The period has been extended from 5 years to 7; however, last year’s audit shows that two units were sold at a loss after five years of use. Thus, the auditor will need to pay special attention to the data about the equipment and compare it with information from the previous audit.
The next risk is related to the invalid amount of the sample, thus, the materials that are subject to verification, which is the control risk. In such a case, the auditor should use analytical skills to determine the correct number of materials. It includes the analysis of accounting data for a certain period and a review of buying and selling lists. The auditor should determine the significant data and form a group of those to which attention should be paid. The correctness of the selected data determines the validity of the audit, which formulates the risk.
The risk is associated with insufficient data related to various company processes in relation to customers and other companies, and it is the inherent risk. Thus, one of the retailers stated in 2021 that Thanda’s products were expired and therefore cannot be purchased. However, Thanda responded that the products were damaged due to invalid transportation conditions and high temperatures. Court proceedings are expected, and depending on their outcome, it will be decided who will be responsible for the damage. In this case, the auditor will have to take into account several outcomes of the situation in order to make the correct calculations. These outcomes include Thanda paying the reimbursements, retail organization paying the reimbursements, transportation company paying damages, or applying insurance mechanisms. Audit’s accounts will depend on what option would be involved and have its features for each variant.
The final risk formulates the inherent risk, and it is due to possible inaccuracies in the calculations related to the policy of borrowing resources from big banks. Namely, the condition was that the borrowed capital of Thanda should not exceed 60%. In this regard, an auditor should apply one’s abilities in order to take into account all the data in this aspect. In addition, one has to take into account the designated interest rate. Finally, there may be evidence in the calculations that the company tried to hide a certain percentage of borrowed capital from its value. It is due to the strict policy of borrowing from banks for Thanda.
Reference
AICPA. (2018). Assessing and responding to audit risk in a financial statement audit. (2nd ed.). John Wiley & Sons