Audit Procedures Considerations

What are audit procedures considerations?

The audit procedures consideration includes auditor know of previous audit, business and industry, accounting system. Materiality of transaction is also an important audit procedure consideration.

What is importance of audit procedures considerations?

Audit consideration helps auditor to determine nature, timing and extent of audit procedure. Therefore audit consideration play important role in effective planning and performance of audit.

Transaction Integrity

What is transaction integrity?

Transaction integrity means that transaction recorded in the books of account or accounting software, is complete, accurate and properly authorized.

Why transaction integrity is important?

Transaction integrity is important because it is first step for the accurate reporting of financial results. If the transaction is not complete, authorized and accurate, then financial results may not be considered reliable.

How transaction integrity is ensured in E-Commerce?

E-commerce is an automated system of transaction recording, however, transaction integrity is ensured by introducing different control over transaction processing and recording.

What types of control are place for transaction integrity in E-Commerce?

Transaction integrity controls for the E-Commerce included, input validation control, prevention of duplication controls, incomplete processing of transaction checks, and proper recording in accounting system controls, back up of transactions, approved transactions between parties.

What is Auditor responsibility for transaction integrity in E-Commerce?

Auditor primarily focuses on the reliability of system that collects and processes the transactions. Auditor evaluates the effectiveness of controls placed over automated transactions processing for ensuring the transaction integrity.

Risks in E-Commerce

What are the security risks in E-Commerce?

Security risk in E-Commerce includes risk of virus attacks, unauthorized access to the information by the employees, customer, and hackers. The authorized access may result in fraud and therefore financial statement may be misstated due to fraud.

What are foreign currencies risks in E-Commerce?

E-Commerce deals with trading in different currencies being an international trade. Therefore it is difficult to translate the transactions from different currencies into home currency (reporting currency). The regular fluctuation of currency rates makes reporting of financial transaction more complex.

What are revenue Recognition risks in E-Commerce?

Revenue recognition in the E-Commerce is a complex issue due to the establishment of relationship in transaction (i.e. principle or agent), advertising revenue share the advertiser and advertising company, initial discount offers, bonuses subject to completion of certain conditions. Due to complexity in revenue recognition financial statement may be subject to material misstatement due to error.

What are legal risks in E-Commerce?

E- Commerce involves different legal risk which includes the taxation requirement of different countries, legal title issues, privacy of customer, contract enforcement, and risk of money laundering.

What are controls for E-Commerce Risk?

There is some control available for the risk mitigation; controls vary organization to organization and situation. These controls include validation of data, authentication of identity, installation firewall and antivirus, secured payment methods, establishing information protection policies and protocols.

Skills for E-Commerce Audit

Skills for E-Commerce Audit

Skill & knowledge of information technology for E- Commerce audit depends on the complexity of business operations. Skills and knowledge requirement vary organization to organization. The person given the responsibility of E-Commerce audit must understand and seek the knowledge of the following areas.

1.    E-Commerce Strategy & activities

Auditor should have a adequate understanding of E-commerce strategy of the organization and the related E-Commerce activities.

2.    Technological Status

Auditor should have knowledge of basic technology is being used for E-Commerce. The auditor should also know about the skills of IT personal responsible for carrying out the E-Commerce operation within organization.

3.    Associated Risk with E-Commerce

Auditor should have understanding of the risk associated with the E-Commerce. The auditor must also have knowledge of related controls for those risks.  Auditor should also evaluate the adequacy of controls.

4.    Security Controls & Infrastructure

Auditor must have an understanding of security infrastructure for E-Commerce risks and related infrastructure in this regards.

5.    Dependency on E-Commerce

Auditor shall evaluate the organization dependency on the E-Commerce and also impact of E-Commerce on Going Concern assumption of the organization.

Professional Judgment in Audit

Professional Judgment in Audit

Professional judgment is informed decision making by individual by applying the knowledge and professional experience. Professional knowledge and experience is used in the context of auditing, and accounting standard. Professional judgment is required at different stages of audit i.e. audit planning and performance.

Professional Skepticism Advantages

Professional Skepticism Advantages

Professional skeptics mean to remain alert during the audit. There are number of advantages of professional skepticism which includes the following;

1.    Provide addition audit evidence

Professional skepticism provides you additional information or additional audit evidence to auditor and thus auditor can draw more appropriate conclusion from audit evidence.

2.    Audit evidence comparison

Professional skepticism helps auditor in identifying the contradictions between two or more audit evidences. This contradiction may induce auditor to take additional audit evidence in circumstances.

3.    Identify Fraud Condition

Professional skepticism can provide you indication of fraud or error. It is important for auditor to remain more alert toward fraud, because frauds are well planned and difficult to detect by normal audit procedures.

4.    Identify unusual circumstances

Professional skepticism is helpful in identifying the unusual circumstances. The unusual circumstances normally exist due to fraud or error or at least a powerful indication of existence of fraud or error.

5.    Avoiding in appropriate assumption

Auditor need to make a number of assumptions during the audit, and professional skepticism helps auditor for making the appropriate assumption only.

What is Reasonable Assurance

What is Reasonable Assurance?

Reasonable assurance means that a high degree of assurance, but not absolute assurance, because due to inherent limitation of audit absolute assurance is not possible.

What are auditor responsibility, where reasonable assurance not possible?

In circumstances where reasonable assurance is not possible auditor will adopt following course of actions

1.    Express the Qualified opinion ( where qualified opinion is sufficient)

2.    Disclaim or Resign from the assignment ,if resign is possible under circumstances (where qualified opinion is not sufficient)

Objective of Auditor

Objective of Auditor

The objectives can be classified as under

1.    Obtain Reasonable Assurance

Auditor wants to obtain reasonable assurance that financial statements prepared by the management are accurate and free from misstatement. The misstatement may arise due to fraud and error.

2.    Express Opinion over Financial statements

Auditor is required to express an audit opinion that whether or not financial statements are consistent with applicable financial frame work

Audit Quality Control Review Objectives

Audit Quality Control Review Objectives

Audit quality control review is basically performed for following objectives.

1.    Judgment Evaluation

Significant judgment of audit team is objectively evaluated by the independent reviewer to ensure that judgment is appropriate in the circumstances. Judgment provides bases for the conclusion and conclusion provides bases for audit opinion.

2.    Conclusion Evaluation

Conclusion drawn by the audit team is also evaluated for appropriateness. Conclusion evaluation is important element because conclusion provides bases for audit reports.

Audit Quality Control Review Timing

Audit quality control review is performed on or before the audit report because basically it is done to ensure that audit opinion expressed by the auditor is appropriate and supported by the appropriate judgment and conclusion.

Audit Quality Control Reviewer Responsibilities

Audit Quality Control Reviewer Responsibilities

Audit quality control reviewer performs quality control review of the audit. The main responsibility of audit engagement review is to objectively evaluate the judgments of the audit team and conclusion drawn by the audit team. 

The audit quality control reviewer must have professional qualification and required experience for performance of aforesaid tasks. The quality control review may be an individual or a team of professionals.

1.    Evaluation of Judgment

Audit review evaluated the significant judgment made by the audit team. Audit reviewer checks the appropriateness of that judgment in the relevant circumstances.

2.    Evaluation of Conclusion

Audit reviewer also evaluates the conclusion drawn by the audit team based on the significant judgment. Reviewer ensures that conclusion drawn is appropriate in the circumstance and based on the audit evidence.

Engagement Partner Responsibilities

Engagement Partner Responsibilities

Engagement partner is an individual of audit firm, who is responsible for performance of audit. Engagement partner exercises authority over the audit performance. Engagement partner is basically a controlling authority of audit and responsible for overall audit engagement.

1.    Audit Planning

Engagement partner is responsible for planning of audit. Audit planning is an extensive and important process. Successful audit planning is required for smooth and timely completion of audit.

2.    Performance of Audit

He is responsible to conduct the audit and exercise the authority during the audit. Engagement partner ensures required audit documentation, audit procedures, communication, and other task related with the performance of audit.

3.    Compliance of regulator requirement

 Engagement partner is also responsible for ensuring the compliance with regulatory and professional requirement during the conduct of audit.

4.    Appropriate Opinion

Engagement partner ensures that audit opinion is appropriate in the circumstances.

Audit Quality Control System Objective

Audit Quality Control System Objective

Audit firm establishes the audit quality control system within firm mainly for following reasons.

1.    Compliance with professional Standard

Audit is conducted in accordance with the some professional standard and guideline. Professional standards are basically internationally recognized best practices which provide basic guideline for audit. The international auditing standard is a typical example of professional standards.

2.    Compliance with Regulatory Requirements

Every country has some rules and regulation for conduct of audit. These rules are specifically designed to meet the need of the respective country. Quality control system also ensures compliance with those rules and regulations.

3.    Appropriate Reporting

Auditor provides opinion (reports) and these reports are widely used by different user. Auditor reports are widely used for informed decision making .Therefore it is very important that auditor must issue appropriate opinion.

Common Stock Valuation Examples

Common Stock Valuation Examples

There are possible situation

1.    Dividend with no Growth

2.    Dividend with Constant Growth

3.    Dividend Growth and then consist Growth

Dividend with no Growth Example

ABC Company is paying dividend $ $ 2 and cost of equity of the company is 12%. Then share price may be calculated as under

Share price = Dividend/Cost of equity

= $ 2/.12

= $ 16.667

Dividend with Constant Growth Example

XYZ Company is paying dividend $ 2 with constant growth rate of 4 % .cost of equity of the company is 12%. Then share price may be calculated as under

Share Price = Do (1+g)

                      Ke – g

g = Dividend growth Rate

Ke = Cost of Equity

Do =Current Dividend

= $ 2 (1+.04)

      12% - 4%

= 2.08

     8%

= $ 26

Dividend with abnormal Growth & normal Growth

A & Co paid a dividend is $ 5. Expected growth for two year is 8 % and thereafter the growth will be normal i.e. 5%. Cost of equity is 12%. Calculate the share price

D1	5 x ( 1.08)1	5.4
D2	5 x (1.08)2	5.83
D3	5.83 x (1.05)	6.12

Present value of D3 may be calculated

= D3/ (12% - 5%)

=6.12/6%

=102

Discount the dividend and share price at year end 3

D1	5.4 (1+.12)-1	4.82
D2	5.83 (1+.12)-2	4.64
D3	6.12 (1+.12)-3	4.35
P3	102 (1+.12)-3	72.6
Total Share price (Po)		86.414

Preference Share Valuation Example

Preference Share Valuation Example

Preference share provides a constant rate of return (Dividend) to the preference share holder and therefore future dividend may be discounted by perpetuity formula.

Preference Share price = Dividend / Cost of Capital

Preference Share Valuation Example

Two companies A and B are offering dividend of $ 8 and $ 10. Cost of capital of both companies is 5% & 6 % respectively. Calculate the share price.

Solution

Dividend	$ 8	$ 10
Cost of capital	5%	6%
Share price = Dividend/Cost of Capital	160	166.67

= $8/5%

= $ 8/.05

= $ 160

= $10/6%

= $ 10/.06

= $ 166.67

Preference Share Valuation

Preference Share Valuation

Preference share offered a constant return on the investment. Preference share valuation can be determined by the following formula. The formula is basically perpetuity i.e. present value of indefinite future dividend.

Preference Share Valuation Formula

Share price = Dividend / Cost of Capital

Preference Share Valuation Example

ABC Company offered a dividend of $ 5 on the preference share. Cost of capital is 6%. Another company offer same dividend with a cost of capital of 8% .Calculate the share prices for both companies.

Solution

Dividend	$ 5	$ 5
Cost of capital	6%	8%
Share price = Dividend/Cost of Capital	83.33	62.5

= $5/6%

= $ 5/.06

= $ 83.33

= $5/8%

= $ 5/.08

= $ 62.5

Above example indicates that cost of capital and share price has inverse relationship, it means that high cost of capital will lower the share price and therefore companies try to keep the cost of capital as low as possible to boost share prices.

Dividend Growth Rate Examples

Dividend Growth Rate Examples

Dividend growth rate is very important element of dividend valuation model and without constant growth rate we cannot value share price under dividend valuation model. Dividend valuation model is based on assumption that dividend will grow with a constant rate.

Share Growth Rate = [Do/Dn]^1/n-1

Do= Current Dividend

Dn = Previous year Divided

n = previous years (when dividend was paid last time)

Dividend Growth Rate Example Single period

ABC Company announced dividend $ 6 for the current period. Dividend announced last year was $ 4. What is Dividend growth rate?

= [ 6/4]^1/1-1 x 100

= 50%

Dividend Growth Rate Example multiple periods

ABC Company declared dividend $ 6 for the current period. Dividend declared 3 years ago was $ 4. What is Dividend growth rate?

= [ 6/4]^1/3-1 x 100

= 14.4 %

Dividend Growth Rate Example (5 Years)

XYZ has paid dividend in current year $ 6; dividend paid 5 year back was $ 4. Calculate the dividend growth for XYZ?

= [6/4]^1/5-1 x 100

= 8.44 %

What is annuity

What is annuity?

Annuity is a regular guaranteed payment offered by a financial institution (like insurance or bank). Annuity is basically a contract between individual and financial institution in which financial institution agrees to pay a guaranteed regular payment in future in return of upfront payment. Annuity may allow payment in regular installments.

What is Distribution?

The future payment made by the financial institution is known as distributions. The distribution may be received either by annuity holder or spouse of annuity holder according to term of annuity.

What are different types of annuities?

There are basically two types of annuities i.e. immediate and deferred annuities. In immediate annuities distribution starts immediately while in deferred annuities distributions start at some future date (typically after 10 or 15 years).

What is present value of annuity?

Present value of future cash flow is calculated by applying some discount factor. It means what is the current value regular guaranteed payment (Distributions) that has been guaranteed by financial institution. This provides useful information to annuity holder for making informed decision.

How present value of annuity is calculated?

Present value of annuity is calculated by multiplying annuity factor with the regular guaranteed payment (Distributions), the annuity factor can be found by using the annuity table or may also be calculated by the following formula.

What is formula of annuity Factor?

The annuity factor may be calculated by the following formula

1-(1+i)^-n

     i

I= Discount Rate

n= Number of Distribution (in years)