Sim Project Issuing Audit Report

Topics: Auditing, Audit, Auditor's report Pages: 5 (1917 words) Published: November 9, 2008
ClariCall is a leader in the telecom industry. They have survived the pitfalls of a seemingly sloth industry. Due to their survival skills, questions of how they survived have become an instant issue. Audit and investigation staffs are required to verify that the correct amount of revenue is declared or quantified. In doing this, it may be necessary to test the information provided and the assertions made by or on behalf of ClariCall. Therefore, the Revenue Verification Process will play a major factor in discovering if the industry leader is really a leader or a pretender. During the last three quarters, the pitfalls of the telecom industry have been well documented and caused ClariCall to make all efforts to sidestep the threat. After all is said and done, the most important factor must be completed, the auditor must select the suitable Audit Report that will show the industry that ClariCall’s financial statements were reviewed clearly and without impaired judgment. Alicia White, Senior Partner, KRA, suggests asking the customers for verifications due to the high volume of sales ClariCall’s Revenue Account shows. Confirmation procedures for receivables are important audit tests that lead to sales verification. I would agree with requesting for external confirmations first. In doing so the customer would verify the validity of the company’s claims. Having actual proof in hand is better than taking the company’s word at full value. This means the first step in the revenue verification process is to confirm accounts receivables totals owed to the company. Letters are sent to the audited company’s vendors/customers, asking them to verify the amount they owe the company. If they are not in agreement, the letter states they should include an explanation and proof. This will help the auditors determine if all ClariCall’s information is correct and the totals are equal in comparison to the vendors/customers response. My decision yielded this response: “You have received External Confirmations from some of the clients. Most match, but there are some material confirmations that do not correspond. The value of the transactions that these confirmations involve is 5 percent of my Planning Materiality. This is almost double the industry average of 2.5 percent and is not an acceptable figure.” If there are such a high percentage of material confirmations, my first guess would be to determine if it is due to payments not posted by the audited company’s clients. Perhaps the funds/payments have not arrived. This would cause a discrepancy in totals. My next step would be to determine subsequent receipts. I would then be able to verify a large percentage of payments made by the audited company. Being that I am ‘on the right track’, per the simulation feedback, I will then have to determine which audit report to issue ClariCall. I chose to issue a Qualified Report. The application of materiality can be an important, but confusing factor of the financial reporting process of auditing. Materiality depends on circumstances. In the ClariCall case, the use of a percentage, such as 2.5%, may provide an assumption that anything less than that percentage, in regards to items on the company's financial statements, are not likely to be material; items exceeding it more than likely are. The application is not a steady or consistent percentage. It can be determined by the size of the company, the quality of the client’s control environment and/or how large the client’s rate of return on assets. An additional determinate is how complicated the engagement may be; the larger the risk, the larger the percentage of the auditor’s materiality. The auditors of ClariCall based the 2.5% on the industry. The correct application of materiality should be a mechanism to heighten the effectiveness of financial reporting and auditing, a tool used from the viewpoint of auditor sincerity. Conducting the revenue verification process involves testing the validity...
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