1) Based on the topics listed below, you are required to obtain for each topic at least 2 research journals or articles from the year of 2010-2019. (The journals must study on the related topics listed below.) (please provide the link of journal used, journal may included some institution journal-MIA, ACCA, BURSA MSIA...)

a) Internal control

b) Audit risk

c) Audit procedures

d) Materiality

e) Auditor independence

2) From the selected journals, please make a report which included introduction, 3 objectives, 5 findings and conclusion.

3) Based on the journals above, discuss and explain in detailed with examples (locally or internationally) on impact of the topics towards revenue cycle (combine several or all topics given above for the discussions)

1&2) A) Internal Control:

1/ Introduction: Internal controls are the mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud. Besides complying with laws and regulations and preventing employees from stealing assets or committing fraud, internal controls can help improve operational efficiency by improving the accuracy and timeliness of FS.

2/ Objectives: Internal control should have the following objectives:

Efficient conduct of business:

Controls should be in place to ensure that processes flow smoothly and operations are free from disruptions. This mitigates against the risk of inefficiencies and threats to the creation of value in the organisation.

Safeguarding assets:

Controls should be in place to ensure that assets are deployed for their proper purposes, and are not vulnerable to misuse or theft. A comprehensive approach to his objective should consider all assets, including both tangible and intangible assets.

Preventing and detecting fraud and other unlawful acts:

Even small businesses with simple organisation structures may fall victim to these violations, but as organisations increase in size and complexity, the nature of fraudulent practices becomes more diverse, and controls must be capable of addressing these.

Completeness and accuracy of financial records:

An organisation cannot produce accurate financial statements if its financial records are unreliable. Systems should be capable of recording transactions so that the nature of business transacted is properly reflected in the financial accounts.

Timely preparation of financial statements:

Organisations should be able to fulfil their legal obligations to submit their account, accurately and on time. They also have a duty to their shareholders to produce meaningful statements. Internal controls may also be applied to management accounting processes, which are necessary for effective strategic planning, decision taking and monitoring of organisational performance.

 

3/ Findings: Besides complying with laws and regulations, and preventing employees from stealing assets or committing fraud, internal controls can help improve operational efficiency by improving the accuracy and timeliness of financial reporting.

 

Internal audits play a critical role in a company's internal controls and corporate governance, now that the Sarbanes-Oxley Act of 2002 has made managers legally responsible for the accuracy of its financial statements.

 

4/ Conclusions: As organisations grow, the need for internal controls increases, as the degree of specialisation increases and it becomes impossible to remain fully aware of what is going on in every part of the business.

 

B) Audit Risk:

1/ Introduction: Audit risk is the risk that financial statements are materially incorrect, even though the audit opinion states that the financial reports are free of any material misstatements. The purpose of an audit is to reduce the audit risk to an appropriately low level through adequate testing and sufficient evidence. Because creditors, investors, and other stakeholders rely on the FS audit risk may carry legal liability for a CPA firm performing audit work.

2/ Objectives:Risks must be related to the risk arising in the audit of the financial statements and should include the financial statement assertion impacted. Therefore, audit risks should be related back to relevant assertions.

ISA 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment identifies the following assertions:

·      Assertions about classes of transactions and events for the period under audit - occurrence completeness, accuracy, cut off and classification.

·      Assertions about account balances at the period end - existence, rights and obligations completeness, and valuation and allocation.

·      Assertions about presentation and disclosure - occurrence and rights and obligations, completeness, classification and understandability, and accuracy and valuation.

3/ Findings: ·      

treatment of capital and revenue expenditure - the risk here could relate to existence of property plant and equipment if revenue expenditure has been capitalised rather than charged as an expense in the income statement

·      valuation of inventory - when, for example, there are considerable levels of aged inventory

·      completeness of liabilities - this could arise if provisions have been incorrectly treated as contingent liabilities

·      completeness of revenue - this could be relevant where the entity being audited has significant cash sales.

4/Conclusions: Each scenario will have a variety of audit risks and candidates should, as part of their planning, aim to identify as many as possible.

 

C) Audit Procedures:

1/ Introduction: Audit procedures are used by auditors to determine the quality of the Financial Information being provided by their clients, resulting in the expression of an auditor's opinion. The exact procedures used will vary by client, depending on the nature of the business and the audit assertions that the auditors want to prove.

2/ Objectives: The goal of any audit is to decide whether a company's financial statements fairly represent its finances and cash flows. However, there are lots of smaller objectives under that big umbrella. Different procedures accomplish different goals:

·      Classification testing. These procedures test whether transactions were written up properly in the ledgers.

·      Completeness testing. Auditors study records to see whether they're complete to determine if some transactions were left out.

·      Cutoff testing. This test looks at whether transactions were recorded in the correct period. Shifting a purchase from one month to the next, for example, makes the first month's net income look better than it really was.

·      Occurrence testing. Audits determine whether transactions actually occurred by going over sales ledgers and supporting documents.

·      Existence testing. This procedure checks that assets on the books, such as inventory, exist.

·      Rights and obligations testing. This test determines whether the business owns all the assets it claims.

·      Valuation testing. Valuation testing determines whether the accounts set the right value for assets and liabilities.

3/ Findings: The procedures that auditors use must turn up "sufficient and appropriate evidence" to back up their audit results.

"Sufficient" depends on circumstances. If the evidence is good quality, the auditor doesn't need much. The measure of quality is whether the evidence is reliable and relevant. For example:

·      Evidence the auditor collects directly is more reliable than indirectly gathered evidence.

·      Original documents are better than photocopies or digital versions.

·      Evidence from independent sources is better than internal company sources.

·      Internal evidence is more reliable when the company's controls over that information are effective.

The relevance of evidence depends on how it relates to the objective of the audit.

4/ Conclusions: A complete set of audit procedures is needed before the auditor has enough information to decide whether a client's financial statements fairly represent its financial results, Financial position, and Cash Flows.

 

D)Materiality:

1/ Introduction: Materiality is first and foremost a financial reporting, rather than auditing, concept. It isn't defined in IAS 320 but the ISA highlights the following key characteristics:

·      Misstatements are considered to be material if they could influence the decisions of users of the financial statements

·      Judgements about materiality are based on surrounding circumstances, including the size and nature of the misstatement

·      Judgements are based on the users' common needs as a group.

2/ OBJECTIVES: The objective of a financial statement audit is to enable the auditor to express an opinion as to whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. This is a separate responsibility and a separate decision from that made by the entity itself when preparing the financial statements.

 

In auditing, materiality means not just a quantified amount, but the effect that amount will have in various contexts.

 

During the audit planning process the auditor decides what the level of materiality will be, taking into account the entirety of the financial statements to be audited. Materiality relates to both the content of the financial statements and the level and type of testing to be done. The decision is based on judgements about the size, nature and particular circumstances of misstatements (or omissions) that could influence users of the financial reports. In addition, the decision is influenced by legislative and regulatory requirements and public expectations.

 

If, during the audit, the auditor acquires information that would have caused it to determine a different materiality level, it will revise the materiality level accordingly.

 

3/ Findings: A classic example of the materiality concept is a company expensing a $20 wastebasket in the year it is acquired instead of depreciating it over its useful life of 10 years. The matching principle directs you to record the wastebasket as an asset and then report depreciation expense of $2 a year for 10 years. Materiality allows you to expense the entire $20 cost in the year it is acquired. The reason is that no investor, Creditors, or other interested party would be misled by immediately expensing the $20 wastebasket.

Materiality also justifies large corporations having a policy of immediately expensing assets having a cost of less than $2,500 instead of setting up fixed asset records and depreciating those assets over their useful lives.

4/ Conclusion:Auditors need to document materiality, the evaluation of misstatements and the rational for both. There will be a number of communications with management and those charged with governance during the audit in relation to materiality and the misstatements identified and the guide focuses on what might need to be communicated at the planning stage, as the audit progresses and in the final stages of the audit.

 

E)Auditors independence:

1/ Introduction: Auditors are expected to provide an unbiased and professional opinion on the work that they audit. An auditor who lacks independence virtually renders their accompanying auditor report useless to those who rely on them.

2/ Objectives: One of the primary goals of an independent auditor is to examine the company's financial statement to ensure the financial books are accurate and compliant with fiscal laws and regulations. Independent auditors inspect the accounting system and account books of a company for accuracy. Auditors also compare their financial assessment with a company's corporate financial reports. External auditors are permitted to publicly release the results of their evaluation.

3/ Findings:

The following are the five things that can potentially compromise the independence of auditors:

1. Self-Interest Threat A self-interest threat exists if the auditor holds a direct or indirect financial interest in the company or depends on the client for a major fee that is outstanding.

ExampleThe audit team is preparing to conduct its 2020 audit for ABC Company. However, the audit team has not received its audit fees from ABC Company for its 2019 audit.

IssueThe audit team might be tempted to issue a favorable report so that the company is able to secure a loan to settle the fees outstanding for their 2019 audit.

2. Self-Review ThreatA self-review threat exists if the auditor is auditing his own work or work that is done by others in the same firm.

ExampleThe auditor prepares the financial statements for ABC Company while also serving as the auditor for ABC Company.

IssueBy having the auditor review his or her own work, the auditor cannot be expected to form an unbiased opinion on the financial statements.

3. Advocacy ThreatAn advocacy threat exists if the auditor is involved in promoting the client, to the point where their objectivity is potentially compromised.

ExampleThe auditor is assisting in selling ABC Company while also serving as the auditor for the company.

IssueThe auditor may issue a favorable report to increase the sale price of ABC Company.

4. Familiarity ThreatA familiarity threat exists if the auditor is too personally close to or familiar with employees, officers, or directors of the client company.

ExampleABC Company has been audited by the same auditor for over 10 years and the auditor regularly plays golf with the CEO and CFO of ABC Company.

IssueThe auditor may have become too familiar with the client and, thus, lack objectivity in their work.

5. Intimidation ThreatAn intimidation threat exists if the auditor is intimidated by management or its directors to the point that they are deterred from acting objectively.

ExampleABC Company is unhappy with the conclusion of the audit report and threatens to switch auditors next year. ABC Company is the biggest client of the auditor.

IssueThe auditor's independence may be compromised, as ABC Company is their biggest client and they, quite naturally, do not want to lose such a client. Therefore, the auditor may issue a report that appeases ABC Company.

 

3) As part of a financial audit, the auditor must assess the inherent risk associated with the revenue cycle and perform tests to determine it is relatively free of error or fraud. The inherent risk for this cycle is related to the cutoff dates for particular types of sales and the pressures from management to misstate revenues. By conducting so-called substantive tests and tests of controls, the auditor can provide some assurance that the revenues of the company are recorded accurately.

Issues

Revenue recognition issues usually stem from consignment sales, round-trip sales, refund and return rights, gross sales and bill and hold transactions. Sometimes management feels pressure to misstate revenues to encourage investors or impress upper-level management or the board of directors. Other times it is simply a case of human error and recording the revenue at the wrong time. Before performing the audit, the auditor should develop an understanding of both the entity and industry in which the organization operates so he can better assess the outcome of the auditing procedures.

Analytical Procedures

Analytical procedures often include running various financial ratios and comparing them to industry benchmarks. For the revenue cycle, the auditor examines the gross profit margin and the amount of growth that the company has experienced in one year. As part of the analytical procedures, he should analyze the organization's maximum capacity for sales if its facility and employees were fully utilized. He must also examine the accounts receivable account to ensure it is not outgrowing sales. If it is, this could indicate that the company is a credit risk and may have cash flow problems in the future.

Tests of Controls

The main component for the internal controls of an organization, no matter which cycle they are pertinent to, is management's adoption and adherence to high ethical standards and strong controls. Tests of controls for the revenue cycle include who accepts and approves credit sales; the separation of duties for filling out, shipping, and recording sales orders; appropriate documentation for collecting and depositing cash and recording the receipts; the appropriate authority and documentation to grant discounts for early or cash payments and sales returns; and management authorization to determine that an account is uncollectible and should be written off to bad debts.

Sustantive Tests

Performance of substantive tests will help to find any errors or misstatements within the accounts or documentation associated with the revenue cycle. These tests include checking the trial balance that the accountant creates at the end of the cycle, confirming receivable amounts with the company or person who owes money and evaluating the accuracy of the allowance for uncollectible accounts by reviewing the history of the entity. They also include vouching, tracing and performing cutoff tests for all sales, sales returns and cash receipts. To do this, the auditor examines all documentation related to a customer and also examines a journal entry; she then either works forward from the initial sales order to the journal entry or backward from journal entry to initial sales order to determine accuracy.