Understanding of the Client
The auditing procedure of the financial statements of a company are essentially carried out for the purpose of evaluating the fact as to whether the financial report that is prepared for a stipulated financial year reflects the true image of the corporate entity. This means that the controlled set of guidelines or structures should be necessarily complied with for the purpose of reflecting the fairness of the accounting statements of the selected corporate entity. Furthermore, the primary logic behind the financial reporting activity in case of a selected organization refers to the fact that the third party investors or the stakeholders of business will receive a clarified image in regards to the business operations of the particular firm whose financial reports are being prepared. In this particular study, the selected organization is Nanosonics which is a listed organization. This fact however, redoubles the significance of the accounting statements.
It has been further mentioned in the case study that has been presented that as an external auditor it has been asked to carry out the audit of the accounting statements of the corporate entity of Nanosonics. The audit fees that has been conveyed to the client in the particular letter in regards to Audit engagement is $100,000. The particular auditing standards that have been utilized in order to carry out the required evaluations are ASA 315.
Thus this report that has been prepared aims to give an overview of the particular auditing procedures and regulations that would have to be adopted for the purpose of executing the required procedures.
Our understanding of the client
The client firm that has been chosen for the purpose of this particular study is Nanosonics. This particular corporate entity has been founded in the accounting year of 2001. The headquarters of the business entity has been based in Sydney, Australia. The management of the corporate entity of Nanosonics have been an innovator in regards to the prevention of infection. The unique product that has been manufactured by this organization is the automated trophon ERP high level disinfection device that has paved the way around the world in regards to the establishment of a new standard that are utilized in ultrasound probe disinfection practices (William Jr, Glover and Prawitt 2016).
Moreover, the particular organization has been listed on the Australian Securities Exchange in the financial year of 2007. Next, in the financial year of 2009 the corporate entity had launched trophon which had been an automated technology for the HLD of intra-cavity and ultrasound probes in regards to the surface. Next, in the financial year of March 2015, the corporate entity had been included in the Australian Stock Exchange ASX300 Index. In the following year the corporate entity got included in the list of the ASX200 Index. In the recent times the corporate entity of Nanosonics has offices in North America, Canada, Europe, United Kingdom and employs more than 150 people.
Identification of Accounts Subjected to Material Misstatements
The core values can be developed as follows:
Safety – trophon, an unique product that has been developed by the corporate entity of Nanosonics has led to the development of a new benchmark in regards to the protection of the patients, staff and the environment in regards to the potential hazards that is reflected from the utilization of the chemical soaking methods.
Versatileness – the particular features that have been reflected by trophon has been that the product is self-contained and compact in nature. This means that the installation procedure of the product requires no critical or complicated processes. Moreover, the compatibility of the product with different brands of ultrasound probes has increased the scope of utilization of the product.
Simplicity – the operations in regards to the utilization of trophon has been simple. Moreover, the particular process required minimal training on the part of the staff utilizing the probe.
Therefore, it can be concluded from the operations of the particular corporate entity that Nanosonics has been a successful corporate venture and has achieved a higher degree of success in a very short period of time. Moreover, the success story of this particular corporate entity can be summarized with the help of the following attachment (William Jr, Glover and Prawitt 2016).
Figure: Financial Results
Source: (William Jr, Glover and Prawitt 2016)
Before beginning with the process of identifying the accounts that have chances or are vulnerable to the risk of material misstatement, the procedure that has been adopted by the auditors for carrying out the particular task of identification of the issue in regards to the material misstatements should be understood. Thus, it can be understood here that it is very important on the part of an external auditor to carry out the identification of the particular accounts that might be subjected to the risks of material misstatements. The method that should be followed by the auditor for the purpose of identifying the issue of materiality in the financial statements of the corporate entity whose books are being audited has been established by the particular auditing principles of ASA 315 (Contessotto and Moroney 2014).
The auditing framework that has been established by ASA 315 can be listed down as follows:
The auditor initially has to obtain the understanding in regards to the nature to which the particular organization, whose books are being audited, belongs. The auditor should also consider the external factors that are applied for the purpose of preparing the accounting statements of the particular corporate entity
Selected Accounts for Material Misstatement Determination
The auditor should also have to consider the nature of the operations that have been carried out by the business, the ownership of the firm along with its governance structure that has been utilized in the particular corporate entity. Moreover, the type investments that the management of the corporation indulges in should also be verified by the auditor.
Next, the objectives of the organization, the strategies utilized by it for the purpose of carrying out the promotional activities should be evaluated and judged by the auditor for the purpose of understanding the primary motive of business of the particular corporate entity.
The auditing procedures that have been mentioned above aid the process of identification of the particular accounts that might be subjected to the issue of materiality misstatement.
It must be further noted here that the issue of materiality in the books of the financial statements that is the overstatement or the understatement of the various accounts will result in the occurrence of fraud on the part of the accountant of the corporation preparing the accounting statements of the organization.
In order to facilitate the identification of the accounting statements in which the material misstatement has occurred the auditor has to carry out the verification of the transactions that have occurred and have been recorded in the accounting statements. Moreover, he should also check the completeness, reliability and the degree of accuracy of the accounting statements of the corporate entity.
Furthermore, it is the primary duty of the auditor to carry out the evaluation of the disclosures and the assertions that have been provided by the management of the corporation in the financial report of the corporate entity. The business entity should also provide enough financial information in regards to the particular financial accounts that have been included in the annual report of the corporate entity for a stipulated financial year.
The auditor is also responsible for executing the assessment procedures in regards to risk that is an essential component in the particular process of identification of the accounts that might be subjected to the risk of material misstatement. Furthermore, it is the primary duty of the auditor to collect sufficient amount of evidence for the purpose of supporting the risk assessment.
Therefore, from the above points it can be deduced that the auditing framework that should be followed by an external auditor carrying out the audit of the financial statements has been carried out. Moreover, the steps that should be followed by him for the purpose of identifying the materiality in the books of accounts have been explained in the above mentioned points (Contessotto and Moroney 2014).
The particular accounts that have been selected for the purpose of determining the fact whether the financial statements of the corporate entity of Nanosonics have been prepared properly or whether there have been any issue of material misstatements in the books of accounts of the corporate entity for the financial year of 2017 are as follows:
Cash and Cash Equivalents Account
Trade and Other Receivables Account
Inventories Account
Prepayments and Other Current Assets Account
Borrowings Account
Cash and Cash Equivalents Account – the cash and cash equivalents account that has been selected in order to determine the particular matter as to whether this particular account has been exposed to the occurrence of the material misstatements can be evidenced by the fact that the particular account balance displays an abnormal increase in regards to the particular account balance. This means that the balance of this particular financial component for the financial year of 2016 has been $48,841. On the other hand the account balance for this particular financial component has increased to $62,989 for the financial year of 2017. This means that the increase in the particular account balance should be justifiably clarified as there has been an abnormal increase of $14,148. More information should be provided in regards to short term deposits and deposit on call.
Trade and Other Receivables Account – the trade and other receivables account that has been selected in order to determine the particular matter as to whether this particular account has been exposed to the occurrence of the material misstatements can be evidenced by the fact that the particular account balance displays an abnormal increase in regards to the particular account balance. This means that the balance of this particular financial component for the financial year of 2016 has been $7,734. On the other hand the account balance for this particular financial component has increased to $8,923 for the financial year of 2017. This means that the increase in the particular account balance should be justifiably clarified as there has been an abnormal increase of $1,189.
Inventories Account – the inventories account that has been selected in order to determine the particular matter as to whether this particular account has been exposed to the occurrence of the material misstatements can be evidenced by the fact that the particular account balance displays an abnormal increase in regards to the particular account balance. This means that the balance of this particular financial component for the financial year of 2016 has been $6,935. On the other hand the account balance for this particular financial component has increased to $7,728 for the financial year of 2017. This means that the increase in the particular account balance should be justifiably clarified as there has been an abnormal increase of $793. The increase in the price of raw materials and stores should be further explained by the management of the company.
Prepayments and Other Current Assets Account – the prepayments and other current assets account that has been selected in order to determine the particular matter as to whether this particular account has been exposed to the occurrence of the material misstatements can be evidenced by the fact that the particular account balance displays an abnormal increase in regards to the particular account balance. This means that the balance of this particular financial component for the financial year of 2016 has been $1,050. On the other hand the account balance for this particular financial component has increased to $1,379 for the financial year of 2017. This means that the increase in the particular account balance should be justifiably clarified as there has been an abnormal increase of $329.
Non-current Borrowings Account – the borrowings account that has been selected in order to determine the particular matter as to whether this particular account has been exposed to the occurrence of the material misstatements can be evidenced by the fact that the particular account balance displays an abnormal decrease in regards to the particular account balance. This means that the balance of this particular financial component for the financial year of 2016 has been $1,349. On the other hand the account balance for this particular financial component has decreased to $946 for the financial year of 2017. This means that the decrease in the particular account balance should be justifiably clarified as there has been an abnormal increase of $403. No sufficient information has been disclosed by the management of the corporate entity in regards to the non-current borrowings account.
The planning in regards to the level of materiality refers to the particular process that is necessarily adopted by an external auditor for the purpose of estimating the amount of materiality. The materiality amount that has been planned by the auditor should be included in the auditor’s report. It must be noted here that the particular amount of materiality is arrived at by the auditor with the help of the consideration of the financial elements like the net profit of the corporate entity, revenue in regards to the particular financial year. Moreover, the phenomenon of material misstatement might occur at the time when the amount of materiality exceeds the projected amount of materiality then the auditing issue of material misstatement occurs in the books of accounts (Pain 2014). In regards to this particular study the materiality level has been determined as follows:
0.5% of sale of goods and services = 0.5% of $67.5 million = $67.5 million x 0.005 = $337,535.
For the purpose of determining the essentialities that might go wrong the particular risks that are associated with the audit of the particular accounts should be discussed. The risks that are associated with the audit processes that is utilized for the purpose of evaluating the selected accounts should be understood at first (Baranov caes et al., 2017).
The audit risks refer to the particular risks that occur at the time of performance of the audit. The audit risks can be divided into inherent risks, detection risks and control risks. Inherent risks refer to the particular risks that have been associated with the occurrence of material misstatements in the books of accounts. The reasons for such an occurrence can be cited as the errors of omission or errors of carelessness or intended error in order to commit fraud or embezzlement on the part of the accountant or the administration of the company.
Control risk refers to the particular risk that has been associated with the occurrence of material misstatements due to the lack of particular internal controls in the organization (Baranov caes et al., 2017).
Lastly, the risk of detection can be identified as the risk of occurrence of material misstatements due to the errors that cannot be detected by the auditor of the corporate entity due to a high degree of complications in regards to the financial report of the corporate entity (Baranov caes et al., 2017).
Therefore, total audit risk can be defined as follows:
Total audit risk = Control risk x Detection risk x Inherent risk
Accounts |
Inherent Risk |
Control Risk |
Detection Risk |
Cash and Cash Equivalents Account |
High degree of risk on account of carelessness of the accountant |
High degree of risk as the internal controls might not be properly implemented in the organization |
Low degree of risk as the proceedings of the particular account is not complicated in nature. |
Trade and Other Receivables Account |
Low degree of risk as errors of omission is less in regards to this particular account |
High degree of risk as the internal controls have not been implemented in the organization |
High degree of risk as the financial proceedings of the trade and other receivables are complicated in nature |
Inventories Account |
High degree of risk on account of carelessness of the accountant |
High degree of risk as the internal controls might not be properly implemented in the organization |
Low degree of risk as the proceedings of the particular account is not complicated in nature. |
Prepayments and Other Current Assets Account |
Low degree of risk as errors of omission is less in regards to this particular account |
High degree of risk as the internal controls have not been implemented in the organization |
Low degree of risk as the proceedings of the particular account is not complicated in nature. |
Non-current Borrowings Account |
High degree of risk on account of carelessness of the accountant |
High degree of risk as the internal controls might not be properly implemented in the organization |
Low degree of risk as the proceedings of the particular account is not complicated in nature. |
Conclusion
The conclusion that can be derived from the discussions that have been held above reflects the fact that the corporate entity of Nanosonics should be more vigilant towards the preparation of the accounting statements of the corporate entity. The accounting procedures should be further clarified in order to reduce the risk of material misstatement in the books of accounts.
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