Overview: For The Final Project, You Will Work Through Compo ✓ Solved

Overview: For the final project, you will work through compo

For the final project, you will work through components of a case study in which you will assume the role of a lead auditor at Willis & Adams. Your firm has been approached by EarthWear Clothiers to perform an audit. In your role as lead auditor, you will evaluate internal and external factors to determine client engagement, develop an audit plan, determine recommendations for improving internal controls, and communicate the audit opinion. Your organization has decided to move forward with the audit of EarthWear Clothiers.

As lead auditor, you will select one of EarthWear Clothiers’ business objectives and create an audit plan of their financial statements. The business objectives are:

  • Expand further into the global market by launching internet sites into South American countries
  • Increase customer base by introducing a new extreme sports product line to attract younger consumers
  • Reduce pricing to be more competitive in the marketplace by seeking out additional vendor relationships to lower costs of goods sold
  • Implement an employee stock purchase plan to increase productivity and employee morale
  • Reduce delivery and distribution time of products and services by adding additional warehouse locations

Using your selected business objective, create an audit plan of the organization’s financial statements that addresses the following: business risks, management assertions, audit risk, internal controls, and the effect on audit procedures. Support your plan with the appropriate auditing standards. Also, determine materiality by conducting a preliminary risk assessment, and explain which factors were used in making this determination.

Specifically, the following critical elements must be addressed:

A. Using your selected business objective, create an audit plan of the organization’s financial statements that addresses the following, and support each with the appropriate auditing standards:

1. Business risks

2. Management assertions

3. Audit risk

4. Internal controls

5. Effect on audit procedures

B. Determine materiality by conducting a preliminary risk assessment, and explain which factors were used in making this determination.

Your audit plan must be 2 to 3 pages in length (plus a cover page and references), with double spacing, 12-point Times New Roman font, and one-inch margins. You should use current APA style guidelines for your citations and reference list.

Paper For Above Instructions

Audit Plan for EarthWear Clothiers: Expanding into the Global Market

This audit plan focuses on one of EarthWear Clothiers' strategic objectives: to expand further into the global market by launching internet sites in South American countries. As the lead auditor, I will evaluate the associated risks, management assertions, audit risks, internal controls, and the auditing procedures necessary for assessing the financial statements of EarthWear Clothiers.

1. Business Risks

Expanding into the South American market presents several business risks for EarthWear Clothiers. First, there are geographical and cultural risks, such as understanding local consumer behavior and regulations. The entry into these new markets requires substantial investment and may not yield immediate returns. Additionally, there are operational risks associated with establishing logistics and supply chains in unfamiliar territories. Currency exchange risks may also affect pricing strategies and profit margins, leading to potential financial instability. Lastly, potential competition from local brands poses a threat to market penetration.

2. Management Assertions

The management assertions related to this audit focus on three key areas: existence, completeness, and valuation. The assertion of existence confirms that transactions related to sales in these new markets are legitimate and verified. Completeness involves ensuring that all transactions related to international sales are recorded accurately in the financial statements. Valuation is critical, as it assesses whether revenues are measured accurately at the exchange rates applicable at the time of sale, particularly in cases of currency fluctuations.

3. Audit Risk

Audit risk refers to the possibility that an auditor may issue an incorrect opinion on the financial statements. In this case, audit risk may be heightened due to the expansion into international markets. Factors that contribute to increased audit risk include the novelty of international operations, complexities in compliance with foreign regulations, and language barriers that could affect communication and documentation. Assessing the internal control systems in place will be essential in evaluating and mitigating these risks.

4. Internal Controls

Effective internal controls are crucial for managing the risks associated with international expansion. EarthWear Clothiers should implement robust internal controls covering sales tracking, order fulfillment, and inventory management. Automated systems can help ensure accuracy in transaction recording and reporting. Additionally, regular audits and compliance checks should be in place to monitor adherence to corporate policies and foreign regulations. The establishment of a clear reporting structure and accountability is key to ensuring that risks are managed and financial statements are accurate.

5. Effect on Audit Procedures

The risks identified in the previous sections will directly affect the audit procedures employed. A thorough assessment of the internal controls will be necessary, focusing on system documentation, transaction flows, and compliance with regulatory requirements. Analytical procedures will be essential to evaluate market trends, sales performance, and currency impacts. Given the complexity of international operations, more significant emphasis will be placed on substantive tests to verify completeness and accuracy in financial reporting across different regions. The auditor will also need to ensure that the company’s fraud risk assessments are comprehensive and address the specific challenges associated with international sales.

Determining Materiality

Materiality is an important concept in auditing as it helps determine the significance of financial information. To establish materiality for EarthWear Clothiers' audit, a preliminary risk assessment will be conducted. Factors considered in this risk assessment will include revenue thresholds from international operations, regulatory requirements in South American countries, and potential financial impacts of exchange rate fluctuations. For instance, if sales from the new market segments represent over 10% of total revenues, they could be deemed material. Furthermore, the auditor will need to evaluate the qualitative aspects, such as the potential for misstated financial information affecting stakeholder decisions.

In conclusion, this audit plan addresses key business risks and outlines management assertions pertinent to EarthWear Clothiers’ expansion into the South American market. It emphasizes a strategic approach to audit risks, internal controls, and auditing procedures, supported by an understanding of materiality derived from a preliminary risk assessment. This comprehensive audit plan will ensure the financial statements provide a reliable representation of the company’s position as it navigates the complexities of international business.

References

  • Arens, A. A., Elder, R. J., & Beasley, M. S. (2016). Auditing and Assurance Services: An Integrated Approach (15th ed.). Pearson.
  • American Institute of Certified Public Accountants. (2018). Statement on Auditing Standards (SAS) No. 122 - AU-C Section 200. AICPA.
  • Cosserat, G. & Roberts, C. (2012). Modern Auditing: A Comprehensive Guide. Cengage Learning.
  • Kacker, M. (2011). The Essentials of Internal Auditing. Wiley.
  • Williamson, W., & Williams, B. (2014). International Financial Reporting Standards. Wiley.
  • Needles, B. E., & Powers, M. (2014). Principles of Accounting (12th ed.). Cengage Learning.
  • Financial Accounting Standards Board. (2020). Statements of Financial Accounting Standards. FASB.
  • Institute of Internal Auditors. (2013). International Standards for the Professional Practice of Internal Auditing. IIA.
  • Whittington, O. R. & Pany, K. (2016). Principles of Auditing and Other Assurance Services (20th ed.). McGraw-Hill Education.
  • International Federation of Accountants. (2019). International Standards on Auditing. IFAC.

Related Assignments