Auditing is traditionally viewed as dry and number-intensive, but behind that is careful and revealing scrutiny of a firm's integrity, workings, and financial reality. Such was true for Brigstowe-based wholesaling and retailing firm Sheridan AV, which was established by founder John Sheridan in 1971. Based on an ethos of quality rather than quantity, it sells a carefully curated selection of high-quality speakers, projectors, AV receivers, and television sets. But when the auditor is introduced, even an established firm such as Sheridan AV has to lay bare its financial and operational soul for inspection.
The Initial Step: Making the Decision to Take On the Client
Auditing starts well before financial records are scrutinized. The very important preliminary decision is whether or not the client is audit-worthy. This includes an assessment of the integrity of management, professional relationships, potential exposure to risk, and technical capability of the auditor himself or herself. Sheridan AV's openness of non-current assets, inventories, and payables reflected an administration that is honest. The company's professional reputation among other professionals and industry partners further reinforced such a belief.
Risk assessment is also something that needs to be taken seriously. Whether or not a firm is involved in litigation or has made misstatements in the past, auditors might opt to walk away. Such issues were not seen in Sheridan AV, though. Its business, financial disclosure, and overall financial health were in order. Acceptable professional fees were on the table, as well as an operation scope that could be managed, so Sheridan AV cleared the preliminary screening, enabling auditors to move forward confidently.
Planning for Audit: Creating the Roadmap
Subsequent to accepting the client, audit planning began. That included creating an individualized plan to analyze financial data and reveal any possible misstatements. Planning also necessitated that auditors gain an in-depth understanding of the accounting systems of Sheridan AV, most importantly in terms of sales, inventories, purchases, and cash handling.
Planning is not an exercise in bureau-mandated requirements but an efficiency-and-effectiveness measure that allows auditors to target areas of high risk, establish the scope and quantity of evidence needed, and clear up any misunderstandings about expectations from the client. In Sheridan AV's case, planning included reviewing historic financial records and having direct communication about any previous auditors, which enabled the new auditors to gain an initial understanding of the working environment of the company.
Valuation, occurrence, and classification tests were incorporated into the planning process. They gauged whether financial information adequately represented the position of the company and whether transactions were real, complete, and correctly classified.
Revealing Risks Before Issues Arise
Throughout the audit process, prospective risk evaluations were made to pinpoint areas that were most likely to include material misstatements. This process serves as an alerting mechanism, indicating what components of the financial statements require more attention. In the case of Sheridan AV, risks were found in non-current assets, inventories, purchasing systems, and revenues.
Identifying these potential trouble spots informed the design of certain audit tests and procedures. Instead of following the one-size-fits-all, auditors tailored their methodology to Sheridan AV’s specific risk profile, creating an even more effective and targeted audit process.
Placing a Value on Precision: Materiality Counts
One of the most technical and significant phases of audit procedure is determining preliminary materiality. This is about determining what level of discrepancy in financial statements is material. Put simply, it’s determining how much discrepancy is unacceptably high.
The auditors at Sheridan AV reviewed financial statements, vouchers, inventory returns, and historical cash flow reports to establish what materiality level of misstatement existed. This computation served to differentiate immaterial errors from material errors that might mislead financial report users. The materiality level served as a guiding consideration for audit testing and ensured resources were allocated where they were most needed.
Inherent Risk: The Challenges Within
All companies carry risks no matter what kind of management is in place. They are referred to as inherent risks, and it is related to the type of business and its financial sophistication. For Sheridan AV, risks were identified in asset valuation, cash transactions, and revenue recognition areas.
These areas of the business were subjective, not easily quantified, or subject to manipulation. Even ethical companies like these find these areas problematic, which is why these areas receive additional scrutiny from auditors. At Sheridan AV, these risk areas were identified up front and were scrutinized closely throughout the audit process.
Control Risks: Where Systems Fail
Control risk is created when an organization's internal controls do not protect or identify errors or fraud. At Sheridan AV, several red flags were encountered in an audit. Among them were inadequate segregation of duties in managing inventories, inconsistencies in processing returns from customers and reliance on manual procedures in critical areas. Despite having instituted some controls, areas where that control was lacking ensured that misstatements were more likely to remain undetected. Improvements like systems automation, better documentation practices, and reconciliations on an ongoing basis were recommended by the auditors. Not only would these minimize risk, but they would also enhance efficiency in operations.
The Bottom Line: Beyond Numbers
Sheridan AV's audit underscores the need for strategic planning, expert judgment, and financial acumen in audit procedures. The process evaluated management integrity and internal controls, giving an even better picture of financial reality for the company. The audit reinforced Sheridan AV's dedication to quality and financial integrity, creating a strong foundation for years to come. An audit is no obligation, but an affirmation for companies to demonstrate that they deliver and build stronger stakeholder confidence. Want to delve in further? Go to desklib’s website and search further on this subject using our AI research tool.
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