ACC 640 Final Project Describe how you would conduct the audit process, incorporating the analytical procedures you would use to investigate selected business transactions Nature and purpose of Analytical procedures
Amazon Company
Describe how you would conduct the audit process, incorporating the analytical procedures you would use to investigate selected business transactions
Nature and purpose of Analytical procedures
Analytical procedures include reviewing the relationships between the financial and the non-financial information within the same period. It also involves the financial information from the different periods and different accounting years. The financial and non-financial information will indicate the areas that the auditor will need to focus on. The data that is gathered is re-casted and the consistencies are identified. The analytical procedures can be used in planning the timing of the audit, used as substantive procedures and in the overall review of the audit.
Planning the Audit
Analytical procedures in this case will be based on the interim financial reports and the financial budgets in the entity. They help the auditor to acquire more knowledge about the entity and identify some of the risks that could not have been detected. By examining the various accounts of the firm then the auditor will be able to determine the timing of the audit. Based on the facts gathered then the auditor will therefore understand the level of risks.
Analytical procedures as Substantive Tests
In the planning stage, the auditor will evaluate to what extend will he use the exertions selected based on the risks identified. The auditor will therefore evaluate the data and the information prepared and presented by the management of the entity. The auditor will have to consider the following. First is how predictable the relationships identified areand their comparisons, then consider the objectives of the procedures and the effect on the overall audit results, the information available and its relevance and reliability, the compatibility of the information gathered and finally the knowledge that is gathered in the previous audits.
Analytical Procedures in the overall Review of the Audit
The major considerations in this stage is whether the overall audit is information is consistent with the knowledge about the entity. If the auditor feels that he or she needs more information then he can compute ratios and check for the inconsistencies that are present.
The following procedure will be used when reviewing the data
Compare the similar data with some of the previous year’s financial data and other clients that are within the industry. Ratio analysis will also help to determine the data discrepancies that is available in the industry. This will be easily determine by displaying it through graphs. Trend analysis will also help the auditor to compute data for several years and years and compute for each period in order to determine the level of consistency of data.
What steps will you take to review the company’s business transactions?
Auditors will need to review all the data is recorded by the companies and contained in its books of accounts in order to determine how are the transactions are genuine. As an auditor I will take the following steps.
Reconcile the receivables accounts: the receivables will show how much the company are owing its debtors. The auditor will also go further and contact these debtors in order to ensure that the data that is recorded is true.Reconcile the payables; this is an account that records the obligations of the firm to its suppliers. The auditor will also be required to find out about the facts on the existence of this data.Scan through to determine any future transaction; some transaction and obligation may affect the position of the firm if they are carried over. The auditor will therefore find out on whether need to check on the possibility of these events.Review audit trail changes; the audit changes may be used in reference of the previous years and compare them with this year data. This will ensure that the work is conducted in true and fair manner.
What would your plan be to utilize these procedures?
Comparing data for many past years ago: sampling of computations if the transactions online. Now that most of the transaction in amazon are done online.
Take the trend analysis for longer periods and take the general trend of data within the organization and compare them with other competing firms within the industry. Factors such as tax claims for five years period can be analyzed.
Explain the appropriate field work needed to review high-risk business transactions for cash and revenue
Once the auditor gets to know that the firm transactions are very risk, he can focus on the following areas:
The internal controls: revenues and cash are at risk if the internal controls are weaker and therefore need to detect on the measured that are taken to control these transactions. Completeness of the records for such transactions is a major factor. Internal controls range from segregation of duties and transaction process as a whole.
Complex accounting calculations: consider revenue calculations and how they are arrived at. The number of units that are sold and the price for each unit. Issues to do with revenue recognition must be considered.
Accounting principles: check whether the accounting principles are in line with Generally Accepted Principlesof auditing standards. The auditor should ensure that ensure that there is consistency in the principles that is adopted by the firm. Accuracy of cash transactions will be key in determining whether the transactions are genuine.
What would you need to do in the field to investigate these?
Previous data: the data that was recorded in the past will ensure that data records will show how the transactions have been recorded for the past years. The departments that are also responsible for the preparation for this statements will be need to show that not only one person handles all the transactions.
Management charts: this will show the flow of segregation of duties within the organization. This will enable the auditor to determine how transactions are recorded within the organization.
Policy book: this document will ensure that the auditor will also ensure that the auditor will have full knowledge on how accounting transactions are treated. This will ensure that the auditor will have all what he needs to determine the risk involved in the transactions records.
Could you convey this information through charts or other supporting documentation?
After the completion of the audit work, auditors are always required to document their final report on the issues identified. Yes, I would document my work using charts andnarrative notes to provide all the necessary information I gathered in the field. This will explain the timing, who carried out the audit and the findings of the audit and any relevant information.
Create a test to assess appropriate assertions for designated high-risk business transactions
The auditor should consider all the transactions based on the assertions below
| Assertion | Explanation |
| Occurrence | The recorded transactions must have occurred in the organization |
| Completeness | All transactions must be recorded in the financial statements |
| Accuracy | The transactions must be recorded in the appropriate amounts |
| Cut-off | Transactions recorded in the accounting periods |
| Classification | Transactions must be presented fairly |
| Existence | Assets, liabilities, equity truly exist |
PART TWO
Risk factors
The income statement is subject to the following risks
- Overstatement of the revenues for several or particular periods
- Overstatement of the depreciation expense in the firm
- Choice of accounting principles that deviate with the international accounting principles
- The effective dates also may be violated
Risk factors in the balance sheet
- Recording of assets that do not exist or inflating their market process so as to show a strong balance sheet
- Third party transactions and contracts that have been signed may be inflated
- The use of wrong depreciation method of the assets
Using the internal control, analyze the cash and revenue for potential risk factors
- Cash theft in the organization
- Duplication of cash cheques
- Overstatement of the retuned goods
- The total cost of goods sold
1. What risks need to be documented?
- Cash fraud as the major financial risk
- Management fraud
2. How does this information compare to the company or industry averages, or the company’s past performance?
Amazon performance have been far ahead of the averages of the industry. For example the price per earnings of the firm is 423.39 as compared to the averages of the industry of 11.05. the price per cash flows is 35.79 as compared to 14.09 averages of the industry. Its return on equity is 4.92% while that of the industry is 11.78%.
D. Explain the audit universe and how you identifiedit
The audit universe is generally the sample of the transactions in the company. Since the risk is high, the materiality level is high. This caused me to increase the sample size in order to determine the audit risk and the major approach of the audit of the company.
E. Based on your analysis of risk, devise a sampling program for the audit universe.
The company has had must have had some bit of problems problems as it may be shown by drop of sales and almost every account. The sampling program that I will use include the cross sectional design and longitudinal studies in order to determine the fraudulent activities both at some point and over longer period respectively.
F. Choose the most preferable audit testing procedures that could be used in the field, based on the audit universe items sampled in this situation.
Observation: For example observing the flow of management roles in the organization and determining where the problem is lying in the controls established by the management of the organization.
Recalculation: This involves taking the actual figures say the number of sales then multiply by the number of units sold to determine the actual figures of the transaction.
Analytical procedures: The analytical procedures involves several procedures that are aimed at ensuring that the information provided by the management is the actual truth and none of the accounts are manipulated. For example inspecting a sample of the accounts.
PART THREE
MEMOS
AMAZON INTERNATIONAL
New York City KMvZx23,
Amazon Company Office of the Auditor General
February 20th 2016
MEMORANDUM TO: CHIEF FINANCIAL OFFICER
FROM: Cherry Sheringam
Auditor General
SUBJECT: Audit Memorandum-Sampling Work; and
Recommendations to Mitigate Risks
This memorandum is intended to provide the necessary information and clarify some of the issues which are mentioned above. The role of the management is to keep proper books of accounts and preparation financial statements. The results from the audit report carried out on the past few months have raised some concerns in the organization. We have audited the financial statements which comprises statement of financial position of the year ended December 31st 2015. We have taken large samples of transactions of every class with the aim to determine its occurrence, accuracy, completeness and cut off. The simple random sampling and systematic sampling methods were used when analyzing all the transactions. Since most of the Amazon Company transactions are carried online, then it has been a bit challenging to trace all the transactions. This prompted the audit team to perform system checks. Amazon should have its own systems auditor and an independent audit department to review all the financial transactions in every 3 months. This is aimed at ensuring that, Amazon will prepare financial statements that meets international accounting standards.
In order to mitigate any possible financial risks, we recommend that the firm must frequently review its internal control systems and perform system checks. This will ensure that no unauthorized persons will have access of transaction records. Secondly, Amazon must ensure that its employees are rotated and none of them one should hold certain managerial position for longer periods. We also recommend that Amazon must segregate its duties so as to reduce any attempt of theft or corruption. There should be no manager who performs everything but duties and responsibilities are shared among the all the officers within the various departments.
Yours faithfully,
Cherry Sheringam
Chief Auditor
AMZON INTERNATIONAL
Washington DC 85965Az,
Amazon Company Chief Financial Officer
February 20th 2016
MEMORANDUM TO: BOARD OF DIRECTORS
FROM: CHIEF FINANCIAL OFFICER
Cherry Sheringam
SUBJECT: Audit Memorandum-Findings of the audit
Recommendations to Mitigate Risks
The external audit report that concerning the financial statements released last month have indicated some internal deficiencies and made some of the recommendations. The management is responsible for preparing the financial statement in accordance in accordance to generally accepted accounting principles, the firm therefore, must put in place structures internal control structures that meets international standards in order to reduce the possibility of occurrence of financial material misstatement in the financial records and reports. Since most of the firm’s transaction are carried online, effectiveness of the firm’s internal controls are at risk. This has been a point of concern of the auditor. The management audit indicates that the relationship between the management and the employees has deteriorated and the firm has to improve on this. Good relations amongst employees will motivate the employees to be satisfied with the management and thereby improve production. Another point is that the firm must ensure that all the duties in the organization must be shared by the respective departments. This will reduce the chances of fraudulent activities.
Based on the findings above, the firm therefore must outsource system analyst who will perform system checks. The internal controls is very key to firm and it has to meet international levels and all the information of the firm has to employ experts to this job. The firm has to maintain its financial standards and this can only be achieved by employing staff who are able to handle the job demands.
In regard to implementation of strategy, my recommendation is that the firm needs to adopt a mix of centralized and decentralized strategy in supervision and communication within the organization. This will improve communication process in the entire organization and establish effective information delivery. Social events needs to be held more frequently in order to improve the relationships between the management and the employees. This will reduce the possibility of occurrence of constrained relationships as the social audit indicated. Regular trainings also is recommended in order to improve the abilities of the employees.
How to incorporate the findings
- Outsource the program specialist to monitor the firm’s systems and transactions
- Adopt 360 degrees of job evaluation of the employees and managers
- Before any transactions are authorized, it should be signed by a minimum of five different persons
- The firm has to adopt distinct job responsibilities in order to improve accountability
Yours,
Cherry Sheringam,
Chief Financial Officer.
References
Trochim, W. M. K. “Probability Sampling” Research Methods Knowledge Base 2nd Edition. Accessed 2/24/09.
Jolly, Adam (2003). Managing Business Risk. A Practical Guide to Protecting your Business. Kogan Page Limited p. 6-7. ISBN 0-7494-4081-3
The Financial Risk Assessment Report of Indiana Department Revenue (2012) Deloitte and Touché. Retrieved Oct 24, 2015.
Davis, Robert E. (2005). Information Technology Auditing: An Adaptive Process. Pleier Corporation. ISBN 978-0974302997
Gilbert W. Joseph and Terry J. Eagle (December 2005). “The use of Control Self-Assessment by Independent Auditors”. The CPA Journal. Retrieved 10 March 2012
Power, Michael (1999). The Audit Society: Rituals of Verification. Oxford: Oxford University Press
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