DPA 50153 : AUDIT 2 MINI PROJECT
- Verify the potential impact of these variations on the company's business risk, going concern status and any relevant issue.
a) Liquidity Ratios: A decline in liquidity ratios can indicate potential cash flow problems, increasing business risk and raising questions about the company’s ability to meet short-term obligations.
b) Profitability Ratios:Decreased profitability ratios in net profit(96.70%-36.48%) may signal operational challenges, suggesting that the company could struggle to maintain its operations in the long term, which could threaten its going concern status.
c) Trend Analysis: It's essential to compare these ratios with industry benchmarks and historical performance to assess whether the changes are part of a broader trend or isolated incidents.
d)Management Commentary: Consider management’s insights regarding the financial changes, which can provide context for understanding potential risks and the strategic direction moving forward.
In conclusion, significant shifts in these financial ratios can indeed raise concerns about the company's business risk and going concern status. A comprehensive analysis will help identify relevant issues and inform stakeholders of potential implications for future operations.
2. Prepare the steps would you take to corroborate the information obtained from this analytical procedure with other audit evidence, such as documentation supporting management's assertions and external sources of information.
A. Identify Key Assertions
Start by clearly defining the key management assertions relevant to the financial statement items under review. These assertions typically include existence (assets are real), completeness (all transactions are recorded), accuracy (amounts are correct), rights and obligations (entity owns the assets), and valuation (assets are recorded at appropriate amounts). Understanding these assertions will guide your corroboration efforts.
B. Gather Supporting Documentation
Collect relevant internal documents that support management’s assertions. This includes financial statements, trial balances, invoices, contracts, bank statements, and board meeting minutes. Pay close attention to the context of each document and how it supports the specific assertions being tested. The goal is to build a robust framework of evidence that will corroborate the analytical results.
C. Analyze and Compare Results
Once you have gathered the documentation, conduct a thorough comparison with the results from your analytical procedures. This involves looking for trends, ratios, and patterns that either confirm or contradict your findings. For instance, if your analytical procedures suggest an unusual spike in sales, compare this with sales documentation and historical data to assess the validity of the claim.
D. Engage with Management
If inconsistencies or significant findings arise during the corroboration process, engage with management to discuss these issues. This dialogue can provide insights into potential explanations for discrepancies and allow management to provide additional evidence or context. Open communication is vital for understanding the rationale behind management’s assertions.
3. Explain additional audit procedures would you recommend to understand the underlying reasons behind these variations.
1. Variance Analysis
Conduct a detailed variance analysis to compare actual results against budgeted figures or prior periods. This will help identify specific areas with significant deviations and prompt further investigation into the reasons for those discrepancies.
2. Trend Analysis
Examine trends over time for key financial metrics. Analyzing historical data can reveal patterns or anomalies, allowing you to contextualize current variations and understand their implications.
3. Management Interviews
Engage in discussions with management and key personnel to gather insights on the reasons for the variations. Their explanations can provide context and may highlight operational or strategic changes influencing financial results.
4. Detailed Transaction Testing
Select a sample of transactions related to the areas with significant variations. Performing substantive testing on these transactions can uncover errors, unusual transactions, or adjustments that may explain the discrepancies.
5. Review of Internal Controls
Evaluate the effectiveness of internal controls related to the areas experiencing variations. Weaknesses in controls may lead to inaccuracies in financial reporting and can help explain discrepancies.
6. Industry Benchmarking
Compare the entity’s performance metrics with industry benchmarks. This can provide insights into whether variations are specific to the entity or reflective of broader industry trends.
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