Auditing and Assurance Financial Statements

Question: Why Revenue from Passenger Accounts is at Significant Risk of Fraudulent Financial Reporting. Answer: Introduction Notably, most business entities have their financial statements audited to give an assurance about the credibility of the financial statements. The accounting procedure gives reports that may not be up to the standards that are required by a company. Professional auditors are hired so that they perform an analysis of the economic records to give a fair representation of facts. Also this gives an opportunity for assessing the compliance level within the organization systems. The process needs to be carried out by competent professionals to ensure that the audit report is presented as per auditing standards. However, this does not imply that the auditor has the responsibility of detecting fraud. He/she only excises due care diligence to perform the assignment. Thus, it is imperative that the management should ensure the financial reports are prepared and reported as provided by the international financial reporting standards. (DeLoach, 2015) Materiality is a concept of substance. Amounts that are considered material by the auditor should be accounted well or are appropriately recorded in the relevant journal. The emission of substantial values clearly indicates that the management has compromised materiality concept. Usually, materiality judgment is vested upon the auditors intuition. For instance, some values may be perceived by the management as immaterial, but for the auditor, he may judge them as material. The materiality concepts are recognized in the preparation of both the income statement and adjustable values in the statement of the financial position. And therefore, the auditor is required to observe diligence and due care in testing about materiality concepts of any particular organization. (Amer, 2011) The paper has precisely explored the concept of materiality, assertion, risk, and substantive audit procedure. Further, the discussion is split into two parts where the first area basically dwells on materiality concept. To help come up with a pretty discussion, a case study on QQQ Limited, an airline company was used. The audit based on the revenue recognition policy and aircraft maintenance costs policy in examining fraudulent reporting on the income statement and examining the effectiveness of internal controls. And the second part has customized on the revenue and depreciation costs policies in assessing the risk, assertion, and substantive procedure. On substantive procedures, a suggestion is given in ascertaining the valuation and accuracy assertions. (Chan, 2008) In reference to the case of QQQ limited, the basis of revenue recognition is not very clear. Usually, the International Accounting standards board recommends the use of either cash basis or accrual basis. Cash basis refers to a method where the revenue is recognized by the payment for a service or product is done after the service. While accrual basis refers to a method where the revenue is recognized once a transaction occurs. Honestly, the company revenue recognition has not stuck on one recognized method provided by the International Accounting Standard Board. Actually, there is no appropriate provision given by the management to guide on the daily price to be charged on passengers. This creates a room for fraudulent persons to charge a different price and record a lower price in the journal entries. (Ashby, 2014) It could be reasonable if the daily price is set by the management. And an independent team to vouch for source documents for daily sales. Also, revenue should be recognized the moment an order is confirmed and a service offered. Then stringent measures should be established to deal with cancelling and reversal of unexecuted order. The policy taken should be recorded in the journal entries and total transferred to the income statement. The adjustments made should be clearly indicated in the journal entries and provided for the auditor if he/she needs them for justification. (Armour, 2009) Competition on the market especially transport industry is inevitable. Thus, the management is required to strategize on the safest, effective, and appropriate measures to enhance the achievement of the organization goals. To be specific, the established strategies should propel the company in achieving profit maximization objective. The management should embrace the ethical code of standards to help them avoid fraudulent deals. The use of ineffective internal controls should also be checked and establish effective ones. In reference to QQQ limited, the policy applied in revenue recognition is not appropriate. And it exposes the organization to a high fraud risk. While planning the audit in such an organization, the auditor should assign a high rate to inherent risks. To be certain of the audit process, the auditor has to intensify the approaches used confirm the truthfulness in the data given on revenue. It is recommendable the audit to base on the source documents. (Bodine, 2007) Internal Control Measures to Minimize Fraudulent Reporting The workability of the used policy largely depends on the effectiveness of the internal controls of the organization. In our case, XYZ has been working serving QQQ Limited for several years. It is a fact that the audit firm understands the management ability in establishing effective internal controls. The effectiveness is measured by the ability of the controls to prevent most if not all fraudulent activities in the organization. Thus, the auditor analyses and assigns a particular percentage of control risk on the effectiveness of the control systems before embarking on the audit process. (Armour, 2009) In combating the earlier discussed fraud risk, the management should first change the revenue recognition policy, and if the policy is not changed, it should assign various independent teams to ascertain all recordings pertaining organizations revenue. The former will allow the application of a specific approach. For instance, once an order is placed, the system should once and for all recognize it as revenue if it is for the case of actuarial basis. Also, the use of cash basis can be adopted and record the final value in the income statement. (Bodine, 2007) In addition, the management should establish various independent departments to oversee the adjustment process in situations where the order was cancelled. The teams will be tasked with verifying the journal entries and making final postings about the sales of the organizations. The last measure can be rotating the people working under this department so that the employees cannot get time for planning and executing frauds. Reviews of the records should be periodically done by the internal audit department. (Armour, 2009) References Agrawal, N. (2015). Retail Supply Chain Management: Quantitative Models and Empirical Studies. Amer, T.K. (2011). Context-Dependence of Auditors: Interpretations of the SFAS No. 5 Probability Expressions. Contemporary Accounting Research. Armour, M. (2009). Internal Control: Governance Framework and Business Risk Assessment at Reed Elsevier Ashby, W.R. (2014). Introduction to Cybernetics: NewYork:Willey Bodine, S.W. (2007). A Road Map to Risk Management: Accountancy. Chan, L. (2008). The Structure of Government Accounting Standards: Auditing of government agencies. London: Palgrave- Macmillan. Ellmeier, A. (2009). Enterprise Risk Management: Framework KEY Concepts Briefing Document. DeLoach, J. W. (2015). Enterprise-Wide Risk Management: Strategies for Linking Risk and Opportunity.