Question

From the following audit concepts: audit planning and Analytical procedures, internal control, inherent risk, materiality, audit sampling, control risk, tests of controls, substantives tests of transactions; what concepts will be most useful to your professional life in the accounting field or as an employee of an audited company? Please explain and provide specific examples. 

Answer 1

As a professional in an accounting field or an employee in the audited company Following will be useful or not useful audit concept :

Internal Control means a set activities performed with in the organization by the management for ensuring integrity of financial statements and prevention of frauds and errors and their reduction to the minimum.

For example : as an accounting professional my main aim would be to present the financial statement in an integral manner that is giving true and fair view of the organisation's financial position . And this can be made possible with the help of maintaining proper internal control within the accounting entity.

Hence as an accounting professional Internal control is a useful concept for me.

Audit Planning : Planning is the beginning of each and every big or small initiative . Plan is the essence every activity . Someone has greatly said : " If u have failed to plan means u have planned to fail". So do with audit planning . Audit planning is set a framework of activities and procedures that will be performed by the auditor during the entire course of audit .

Auditor can not proceed further unless he has planned what is to be done .

Hence we can conclude audit planning is important for the audit professional but not for the accounting professional.

Analytical Procedure : By analytical procedure , we mean activities performed to analyse the relationship between various financial and non financial data's.

As an employee in accounting firm , Applying analytical audit procedures is a daily activity . We have to compare current financial position with the past year data or with various firms within the industries . Not only that trend analysis , ratio analysis are also part of analytical procedure .

Hence as an accounting professional analytical procedures are useful concepts for us

Inherent Risk : Financial statement of the organization is highly effected by inherent risk and inherent risk is something that is most difficult to detect by auditor due to the inherent limitation of audit. Inherent risk is generally the risk of manipulation of financial statements by the managers of the organisation.

As frauds and errors are committed themselves by the persons who have prepared it , it becomes difficult to the auditor to form opinion on financial statement of the organisation .

So as an employee in audit firm , concept of inherent risk is most useful to understand but as an employee in accounting firm we have not to do anything with inherent risk.

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Materiality : This concept has a great influence in audit . While forming an opinion on financial statement of the organisation the thing auditor considers the most is the materiality of the event. With materiality we mean : A situation which has the capacity to effect the economic position of the entity .

Volume of materiality is always subject to judgement : there is no formula enabling what is material and what is not. Error of 100000$ may be material for a firm having turnover 10000000$ but it may be immaterial for firm having turnover 100000000$.

Materiality has nothing to do with accounting professional , it is a term of importance for the auditors.

Audit Sampling : as we know auditor can just give reasonable assurance not an absolute assurance on financial statements . And even it is not possible to check each and every event in the organization . So what auditor do is to select some particular item for audit that is the representative of all the items in the population .And this entire process of selecting particular items for audit is called audit sampling.

For Example there are 25000 Accounts receivable in the organization and instead of checking the authenticity of all the receivables , auditor decides to to check only 3500 samples. Such a sampling is called audit sampling.

Hence as an accounting professional , we have nothing to do with audit sampling.

Control Risk : It is a risk that financial statement of the organisation is materially misstated due to ineffective internal control. If Control Risk is Higher auditor has to make an extra effort and has to be more attentive during audit activities.

As an accounting professional we have to give attention to the control risk as it is the organization's responsibility to maintain internal control.

Test of control : It is a process under which auditor checks the efficiency of control mechanism applied by the management . Efficient control mechanism reduces auditors audit hustle and increases faith in management's control activities .

Hence as an accounting professional , we have nothing to do with test of control.

Substantive test of transaction : It is a detailed detection of material misstatement due to fraud at assertion level . Under substantive tests auditors check the existence , completeness , value analysis , rights and obligations of various items.

Most common example of substantive procedure is external confirmation in respect of loans and advances and debtors or inventory lying with third party etc,

Hence as an accounting professional , we have nothing to do with substantive test of transaction.