Audit and Assurance
The people in today’s era are provided with immense opportunities to invest their money. However, the return that is available depends upon the way the organization in which money is invested is working. To invest the money available, the investors look for the organizations that present the best financial statements. But to get an idea about whether the financial statements are true and trustworthy an external assistance is required. The assistance is in the form of an opinion on the financials. The professional providing the opinion is known as an auditor. However, to frame such opinions various audit procedures are required to be performed.
These audit procedures include computation of the audit risk model, calculation of ratios to perform analytical procedures, computation of materiality, setting the account balances that are considered material, sampling plan and etc. The current report lays down a complete focus upon the different audit procedures that an auditor inculcates in his audit program to gain sufficient and appropriate evidence.
The Resonance Health Company is operating under the health care equipment industry. This is the main specialization area of the said organization. The products developed by the organization are mainly sourced by the pharmaceutical companies as well as by the clinicians. The use is the management and diagnosis of the diseases prevailing in humans. The company is famous globally and has received commendations from famous physicians all over the world. Although the company is situated in Australia it has gained clearance from all regulatory restrictions for the US and Europe as well (Resource Base Limited, 2018).
AUDIT RISK MODEL
It is analyzed that the audit risk model is used or designed to identify the inherent, detention, and control risk associated with the audit procedure of the organization. However, there are several risks that could not be managed and mitigated by auditors of the company irrespective of the assertion test implemented in the audit procedure.
In order to compute the audit risk of the company, we need to multiply detention risk, control risk, and inherent risk associated with the financial statement of a company. There are following risks are given which might be faced by the Resonance Health Company in its audited financial statements (Resource Base Limited, 2018).
The inherent risk of the Resonance Health Company would be determined high as there is the chance that the company has high misstatement in its financial statement due to its increased complexities of the financial statements.
The control risk of the company would be moderate as the company may face issues in identifying the reporting and accounting frameworks issues. In the case of The Resonance Health Company, control risk would be high as the company has been filling its financial statement domestically and internationally (Resource Base Limited, 2018).
In addition to this, the detention risk of The Resonance Health Company would also be moderate as there are fewer chances of fraud, errors, and omission to occur in the financial statements of a company. All the accountants are highly experienced and face fewer issues in preparing the financial statements of the company.
The practical implication of the Resonance Health Company
After assessing all the details, it could be inferred that the Resonance Health Company is having high reporting risk and accounting compliance risk. There is a chance that the company may face issues related to legal compliance and fraud and errors in its financial statements. The audit risk of the Resonance Health Company would be high as it has higher control and detention risk.
In the case of Resonance Health Company, audit risk would be 10% as it has 36% detention risk, 27.8% inherent risk, and 10% control risk.
Audit Risk = Inherent Risk x Control Risk x Detection Risk
0.10 = 0.60 x 0.60 x Detection Risk
0.10 = Detection Risk = 0.278 = 27.8%
(Resource Base Limited, 2018).
Analytical procedures provide a better financial as a well non-financial understanding of the organization. These ratios make a calculation among different financial figures and even nonfinancial figures of the organization. This calculation helps in understanding the trend and direction in which the organization is moving.
That is why the auditor at his place has to decide the account balances which shall be checked in detail. The audit tool that helps in the selection of such account balances is materiality level (Lakis, & Masiulevičius, 2017).
MATERIALITY AND SELECTION OF MATERIAL ACCOUNT BALANCES in the Resonance Health Company
Materiality, as the name suggests signifies the part that is material, i.e. substantial. This part is so substantial that the decision of the person who knows about this part would be completely different from the one who does not. To compute materiality, the professional judgment of the auditor is of utmost importance. However, this judgment has to be applied in the calculation of the quantitative level of materiality (Eilifsen, Hamilton, & Messier Jr, 2017).
This involves the selection of a stable base that is least volatile. This has to be one among, revenues, net profit, expenses, net assets, etc. For the company Resonance health Ltd, the base selected is revenue.
In the given net income is ignored for computing materiality because net income had been negative in two preceding financial years and has shown high volatility (Ruhnke, Pronobis, & Michel, 2018).
The materiality amount is:
Revenues: AUD 2,896,395
2% of revenue: 57,928
As the financials are showing instability, the risk in business tends to be higher.
SELECTED ACCOUNT BALANCES WITH AUDIT ASSERTION, PROCEDURES, AND AUDIT WORK STEPS
ASA 530, audit sampling, helps the auditor in arranging the selection of items that can form a sample base on which the audit procedures can be performed. Considering time and costs constraints, every item of the population comprising account balances cannot be audited by the auditor. Using the materiality level and sampling together, a proper audit can be designed.
Scientific sampling works by choosing a sample on the basis of a certain criterion and not according to any non-reasonable selection in the financial statement of the Resonance Health Company.
Everything gets dependent upon the risks that the auditor recognizes as the audit commences. If during the audit tenure, the auditor feels that the risks are not too prevalent in the business; a smaller sample size could prove enough to provide sufficient and appropriate audit evidence.
To base an audit opinion that is reliable in the most appropriate manner, the necessity is to conduct an audit in a highly professional manner. Auditor independence is the foremost requirement to conduct any audit procedure properly. It is just a matter of provision of reasonable assurance for the financial statement of the Resonance Health Company. The crux of this report is that the Resonance Health Company is having a high audit risk due to the high inherent and detention risk. Nonetheless, the financial performance of Company is good and effective in the market for since last five years.