Statistical Sampling and Risk Analysis †Free Samples to Students

Question: Discuss about the Statistical Sampling and Risk Analysis. Answer: Introduction: Audit is the post facto checking of the books of accounts and financial statements of the entity, whether profit oriented or loss making. The purpose is to confirm the stakeholders and the management that whether it is showing the unbiased and true status of the business and whether it can be relied upon, it is not done with the view to find out the frauds and errors. It can be done in multiple ways including substantive and analytical audit procedures. Substantive audit procedures are inherent and are the overall checking of the books of accounts using sales checking from invoices, purchase checking, checking of incomes and expenses from the relevant supporting, and verification of assets and liabilities shown in the statement of accounts. In case these are not enough to expression an opinion on the viability of the financial statements, auditors resort to the analytical audit procedures like key financial ratio analysis, balance sheet review, trend analysis, bar charts, comparison of the actual from the budget and the forecasted figures, establishing the reason of the deviations, etc.(Raiborn, Butler Martin 2016) In addition, these preliminary audit procedures guide the auditor in planning further and setting the nature, extent and timing of the audit procedures to be set further. Besides, this entire auditor also needs to check on the control procedures maintained in the entity like internal financial controls, which have assumed huge importance since the adoption of the IFRS and Sarbanes Oxley Act. If the level of internal control are weak in the entity, they need to perform more audit procedures as the risks are multiplied, whereas if the internal control is strongly build in and there is a segregation of the duties, less risks are there and hence, less checking will suffice the cause(Jones 2017). In the given case, DIPL, a printing press is getting its accounts audited by the new firm that is why the checking of the opening balances is become as necessar y. The profitability, debt management and liquidity ratios have been analysed to check the financial position of the entity. In the absence of the industry trends, the comparison in the basis opf industry has been ignored. Given below is the analysis table with the results.(DeZoort Harrison 2016) There are inherent risks that are present in the audit of the organisation. Such type of risk is not in the hands of the management. The main job of the auditor is to mitigate these risks to the best of his ability. In case of DIPL, the company faces some inherent risk. The first one is associated with the changes in the accounting policies and assumptions that may have material effect on the functioning of the company and in the books of the account(Knechel Salterio 2016). The management is considering changing the methods of inventory valuation and calculation of depreciation without proper research and is based on the mere experience. This may lead to undervaluation or over valuation of the inventories and the fixed assets. The second type of risk is the one that is associated with the adoption of non-routine work, like the installation of the new IT system. The management did not adopt any precaution before installing the new system, there was no proper research done by the mana gement in case of the same. Hence, there is a risk of material misstatements that might affect the overall profitability of the company. The main aim should be develop the new System and use it after proper risk analysis(Bae 2017). Fraud occurs when the management or the employees get involves in certain activities in which their personal motives are involved. In case of DIPL, there can be certain fraud elements involved in two areas. First is that there is no segregation of duties. The company has given the most important duties to single person, in that case even if there is any defalcation of the account. The management or the auditor wont be able to catch it(Grenier 2017) Thus the main work of the auditor is to ensure that all the major departments like cash collection, maintenance of receivables and management of the It system are segregated and there is proper control established. The other area of fraud is the installation of the new system; the management has done the same, without any precaution. There are high chances that there might be some personal motive of the management in the same. The auditor must verify all the documents related to the new system, should make sure that proper reconciliation o f the accounts is done. Care should be taken to ensure that there is no undervaluation or overvaluation of the new system. In these ways, the management will be able to mitigate the risk of fraud and ascertain that the books reflect the true position of the financial statements(Fay Negangard 2017). Bibliography 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, NEW YORK. 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.