AUDITPLANNING AND CONTROL
1.CRITICALSTEPS IN DESIGNING AN EFFECTIVE AUDIT PROGRAM
Accordingto Mills (2006), audit planning is an iterative process undertaken byauditors and evaluated by a committee. He asserts that the programmust obtain an understanding of the entities, environment and thecontrol system before anything else. Secondly, the program mustassess the risk of material misstatement in the financial statementsand finally design an audit procedure that commensurate with theassessed level of risks. Auditors should design audits to focus onareas likely to have material misstatements and use a methodologythat provides assurance that the misstatements will not exist.
Inplanning the audit and designing an effective audit program, certaincritical steps should be taken for a successful operation. Theprocess seems similar for several engagements and consists of fourstages: Planning/Survey, Fieldwork, Audit report and Follow-upReview. What is of utmost importance at every stage of the auditprogram is client involvement. An audit will always result into adiversion of a great deal of time from the company`s usual routineand minimizing the time taken to avoid disrupting the ongoingactivities is crucial.
Duringplanning, the auditor will notify the client of the audit, discussthe scope and major objectives about the examination Ina a formalmeeting with management, gather information on important processes,evaluate existing control systems, and plan the remaining auditsteps.
Theclient is then informed about the audit in an engagement letter thatcomes from the Company`s Internal Audit Director. An initial meetingis held where the client describes the system that needs review, theorganization, resources, and other relevant information.
Thenext step is on the preliminary survey where the auditor gathersinformation about the unit with the objective of obtaining anoverview of operations. The auditor reviews the system`s internalcontrol structure that usually takes time to complete. It is afterthe completion of the review that the program concludes itspreliminary review phase. The program has an outline of the fieldworkthat is needed to complete the audit objectives.
Onconcluding the fieldwork, the auditor drafts a report. Remember, thegoal of an audit process is its completion and issuing a draft auditreport in 30 days after completing the fieldwork. Summarily, theaudit management has to review the audit papers and discussion draftbefore a presentation to the client for reviews. The exit conferencepresents a better place for holding discussions about the findingsand recommendations of the draft. The auditor, management and ownersvalidate the audit outcomes and define the timeline needed to issue afinal audit report and implement recommendations (Cosserat &Rodda, 2009).
ActionsDell Company Should Undertake During Planning and Designing An AuditProgram
DellCompany in U.S.A is a major player in the industry of technologyhardware and equipment averaging $ 56 billion in sales with an assetsand market value of $ 23.11 and 69.05 billion. Misstated results havecost the computer-maker millions in losses over the years. Anextensive audit is necessary to rectify the earlier mistakes, and itcan be done using a better audit program.
Thecompany should develop an audit strategy that will consider theinternal controls with the help of an external auditor. The auditorshould choose to perform tests of Dell`s internal control overfinancial reporting because it has a higher market capitalization.The test should be incorporated into the audit program for efficiencypurposes. The program should also assess the size, cost and priorresults of the company for control tests. However, an integratedaudit is also necessary for the company.
Theprogram should select the analytical procedure that entailscomparisons of recorded ratios from recorded amounts. Choosing anaudit program that addresses the identified risk is the mostimportant in designing an effective audit program. Based upon resultsof the auditor`s risk assessment, the program should consider thetiming of auditing procedures. The company`s system of internalcontrol process should be reviewed to assess its effectiveness indetecting deviations in the company`s procedures.
Dell`saudit program should gather evidence of relationships between variousaccounting and non-accounting data like the industry and economicinformation. The evidence should be used to confirm on any variationsthat may occur in the future usually on a sample basis. The companyshould, therefore, adjust the audit plan, modify its tests andperform additional procedures to the updated information aswarranted.
2.Performance Ratios and Analytical Procedures That Would Be ApplicableIn Dell
Analyticalprocedures are necessary to assure reviews of financial information.They evaluate the analysis of relationships among financial andnon-financial data. While performing the analytical tests, as anauditor, I would consider the amount of difference from myexpectation accepted with no further investigation to choose on aparticular performance ratio. For the case of Dell, the ratios wouldhelp me link information from the balance sheet to the activities inthe income statements so that I may identify any unusualrelationships on the financial statements. The ratios are categorizedinto liquidity ratios, debt management ratios, asset managementratios, market value ratios and profitability ratios.
Theliquidity ratios measure the ability of meeting debt obligations inthe short term. A higher ratio indicates a higher margin of safetythat a company would possess in meeting its current liabilities. Asan auditor, different assets have different analysis in a cash cycle.A quick ratio uses a company`s most liquid assets while a currentratio comes from the balance sheet financial performance that dependson the company`s resources. Profitability ratios show how well a firmis performing where the margins relate performance with the sales.The return on investments is useful in determining the financialhealth of a company.
Theanalytical procedures include the financial ratios during the reviewof the financial statements at the closing stages of the audit.Appropriate comparisons of previous years from the income statementsaccounts to industry averages are useful in evidence collection.Ratios can also be linked to the trial balance for entries to beadjusted accordingly for comparative purposes. Of most importance toan auditor, are the activity ratios for account receivable andinventory so that the trends in the turnover ratio can help inassessment of the degree of reasonableness to the allowance ofnon-collectable accounts. Inventory turnover ratio identifiesinventory obsolescence (Robertson & Davis, 2008).
Theanalytical procedures applicable with Dell Company are influenced byits extent. As an auditor, extent of testing depends on themateriality of the accounts or transactions and the assessed risk ofmaterial misstatement. Being independent, a variety of procedures areopen for operation: inspection, observation, inquiry, confirmation,recalculation and analytical procedures. The analytical proceduresenhance comparison of recorded amounts against expectations. The bestanalytical procedures (ratio analysis) consistent with the operationsof Dell Company are liquidity, solvency and profitability. In each ofthe procedure, an auditor compares the balances and ratios againstthe expected balances and ratio. In each process, I would compare theCompany`s data with industry data, similar but prior-period data,Dell`s determined expected results and the auditor`s determinedexpected results.
3.Dell’s Balance Sheet, Income Statement Analysis and Determining theSufficiency of the Evidence Collected
Asof the financial statement of 2013, the balance sheet record foraccounts receivable, financing receivables, inventories were $ 6493,3643 and 1301 million. The total assets averaged $26.9 billion.Consequently, the current ratio, quick ratio and cash ratio asrecorded were 1.489, 1.42 and 0.737. Return on investment, grossmargin, operating margin were 0.17%, 18.53% and 5.44%. For thesolvency ratio, the debt ratio and debt to equity ratio were 0.798and 3.97. Revenue increased by less than 45 from 2012 to $ 6.62billion while net income declined to $ 810 million. The company had agood fiscal year since all the main profitability ratios increasedfrom 2012. The profitability measure indicates that Dell isperforming fairly well.
Auditevidence is useful in arriving at the conclusions on the opinion ofthe audit process. Audit evidence is classified into physicalexamination, documentation, observation, re-performance andconfirmations. I would select the analytical procedure to collect yevidence because it would use the expenses as a percentage of netsales with the previous year`s percentages and also the receivablesby comparing the ratios of Dell Company. An analytical procedure thatstudies relationships among the collected data would be more suitedfor Dell Company. Considering that unusual fluctuations will occurwhenever significant differences are not expected but exist, theprocedure would be necessary for completing the phases on the auditprocess. I would obtain the evidence by performing audit proceduresthat afford a reasonable basis for an opinion concerning thefinancial statements under audit. The audit procedures are composedof test controls and substantive procedures. The test of controltests the system for sufficiency. The key controls will contribute tothe reliance of figures obtained from the financial statements.Substantive procedures also help in obtaining sufficient evidencewith the help of the assertions and risks identified in the planningphase guide. I would use the preliminary assessment of the riskattached to material misstatement to evaluate the sufficiency of theevidence collected (Pickett, 2006).
4. The Audit Risk Model and Sampling Technique to Use In Order ToEstablish a Preliminary Judgment about Materiality
Anauditor uses the audit risk model to help in estimating the amount ofassurance required from the substantive procedures. It is useful whenconsidering the desired levels of audit risk during the audit and theassessed level of inherent risks and control risk for a specificaccount balance. It forces an auditor to consider each of the risksin the context and make decisions. Inherent risks are assessed oneach of the assertions from the clients. Detection risks are thenexpected to reduce the audit risk to acceptable levels in an auditprocedure. Financial statements should be free of materialmisstatements due to fraud. Materiality and audit risk form the basisof the audit process, but their application has always been foundwanting. Materiality is allocated on establishment to determine therequired sample size in light of the assurance required (Millichamp& Taylor, 2008).I would allocate materiality based on the allocation to accountswhere sampling is applicable.
Beingthat there are two approaches to audit sampling-statistical andnon-statistical, professional judgment in evaluating a sample wouldbest suit the statistical approach in the case of Dell Company. Thesufficiency of an audit evidence is related to the size of the auditsample on most cases. The rigidity of quantitative materiality guidesdiscourages in making appropriate judgments in auditing. I wouldconsider the nature and context in trying to make materialityjudgments. In the case of Dell Company, I would consider the contextto make a judgment in relation to the general view of financialstatements, corresponding amounts in previous years, and the total ofwhich errors have formed within the years. The reason for choosingthe above criterion is due to the size of the company and the auditmistakes that were experienced from 2004 to 2008.
5. An Unqualified Audit Report and Responsibilities of an Audit Firmafter It Issues the Report
Anunqualified report is issued under various circumstances such as whenall statements are included in the financial statements, sufficientevidence has been accumulated and the auditor has verified that thethree field of work standards have been met, financial statements arein accordance with the accounting principle and there are nocircumstances requiring modification of the report. As such, it isthe firm`s responsibility to adopt accounting policies, make fairrepresentations and maintain an internal control that is adequate.
Robertson,J. C., & Davis, F. G. (2008). Auditing.Plano, Tex: Business Publications.
Cosserat,G. W., & Rodda, N. (2009). Modernauditing.Chichester, UK: John Wiley & Sons.
Mills,D. (2006). Qualityauditing.London: Chapman & Hall.
Millichamp,A. H., & Taylor, J. R. (2008). Auditing.London: South-Western/Cengage.
Pickett,K. H. S. (2006). Auditplanning: A risk-based approach.Hoboken, N.J: Wiley.