Auditing is generally perceived as dry, number-crunching work, but beneath that appears to be an orderly and revealing investigation of a company's integrity, workings, and fiscal reality. This was exactly what happened to Sheridan AV, an audio-visual wholesaler and retailer that is based in Brigstowe and was established in 1971 by John Sheridan. The company is founded on the credo of quality versus quantity, acquiring an exclusive mix of high-end speakers, projectors, AV receivers, and television sets. But when an auditor enters the picture, even an established firm like Sheridan AV is compelled to expose its financial and operational soul to inspection.
The Initial Step: Making the Decision to Take On the Client
Auditing starts well before financial records get scrutinized. The second most important decision is whether or not the client is appropriate for an audit engagement. This means considering the integrity of the management, current professional relationships, potential exposure to risk, and one's technical capability as an auditor. Sheridan AV's open book accounting of non-current assets, inventory, and payables showed that this is a management that is honest. Moreover, the firm's image among other professionals and industry associates provided further assurance.
Another critical consideration is risk assessment. Auditors might want to walk away if a company is involved in litigation or known to make misstatements. None of that was apparent, however, at Sheridan Ave. Its operating model was sound, and its financial reporting seemed sound as well. With reasonable professional fees in play and an operational scope to manage, Sheridan AV cleared preliminary screening, enabling auditors to move ahead in confidence.
Planning the Audit: Creating the Roadmap
The planning of the audit process commenced once the client was accepted. This included formulating a customized plan to review financial data and identify any possible misstatements. Planning also meant acquiring a thorough knowledge of Sheridan AV’s accounting systems, especially in respect of sales, inventories, purchases, and cash handling.
Audit planning is not an administrative requirement but an intelligent move that increases efficiency and accuracy. It allows auditors to target high-risk areas, establish the evidence load and type needed, and reduce misunderstandings with the client. In the case of Sheridan AV, planning also included a review of historical financial records and direct contact with any previous auditors, which provided the new auditors with an informed foundation of the company’s working environment.
The planning process included tests of valuation, occurrence, and classification. They were used to evaluate if financial information correctly showed the position of the company and if transactions were real, complete, and correctly classified.
Revealing Risks Before They Become Issues
In the early part of the audit, preliminary risks were assessed to pinpoint areas that were likely to include material misstatements. This is an alerting process that singles out which sections of financial statements require more attention. In the case of Sheridan AV, risks were identified in purchasing systems, non-current assets, inventories, and revenues.
An awareness of these areas of possible trouble informed the design of certain audit tests and procedures. Instead of taking a one-size-fits-all approach, the auditors tailored an approach to Sheridan AV’s specific risk environment, achieving a more effective and efficient audit process.
Placing Value on Precision: Materiality is Key
One of the most crucial and technical phases of the audit process is determining preliminary materiality. This is putting in place a threshold of what exactly is meant by an error of materiality in the financial statements. Essentially, it's determining just how much inaccuracy is intolerable.
Auditors at Sheridan AV reviewed financial statements, vouchers, inventories, and historical cash flow reports to assess what misstatement level would be material in order to identify whether errors were simply trivial or possibly misleading to financial report users. This determination served as an underlying consideration for audit testing and ensured that resources were applied where they mattered most to them.
Inherent Risk: Risks That Lie In Wait
A number of risks remain, no matter how well managed an entity is. They can be referred to as inherent risks, which coincide with the character of an enterprise and its financial sophistication level. At Sheridan AV, these risks were determined to be in areas labeled as asset valuation, cash transactions, and recognition of revenues.
These areas of the business were subjective, unquantifiable, or susceptible to fraud. Even well-established companies that are ethical can struggle in these areas, which is why auditors pay them additional attention. At Sheridan AV, this area of high risk was identified early and was scrutinized closely throughout the audit process.
Control Risks: When Systems Fail
Risk of control arises when an organization's internal control systems fail to protect against, or to detect, errors or fraud. In the audit of Sheridan AV, red flags were observed. Among these were inadequate segregation of duties in the handling of inventories, inconsistencies in processing returns of sales, and heavy reliance on manual methods in critical areas. Although the firm had put in place certain controls, deficiencies in oversight grew as the chances that misstatements might not be detected increased. Improvements like automating major systems, making documentation standards better, and performing recurring reconciliations were recommended by auditors. Not only does this minimize risk, but operational efficiency is also enhanced.
Conclusion: They Are Not Just Numbers
Sheridan AV's audit accentuates the role of strategic planning, professional judgment, and financial acumen in auditing. The process also evaluated management integrity and internal control, creating a more precise image of the financial reality of the company. The audit reinforced Sheridan AV's dedication to quality and financial accountability, building a firm foundation for its future growth. An audit is not merely an obligation but also an opportunity to establish a company's credentials and reinforce stakeholder confidence. Want to know more? Visit DeskLib’s website and learn more about this subject using our AI researcher tool.
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