In this paper we are examining the role of the accountant in conducting an audit. To determine this we are examining the audit plan and what approach must be taking during the process. Once this occurs, is when we offer insights as to how this tool will help accountants to identify risk and more effectively focus the audit.
Audit Plan Outline
Over the last several decades, there has been an emphasis on having accountants play a central role in the financial activities of corporations. The reason why is because of various federal regulations (such as the Securities and Exchange Act of 1934). This requires firms to file quarterly reports with regulators. At the heart of this strategy, are procedures that will improve transparency (the independent auditor). This is someone who is working for the company with the intention of ensuring that management is following different accounting procedures. (Palmon, 2011, pp. 165 -- 183)
In the case study that we are examining, Keystone Computers and Networks is preparing for an audit from their accountants. To determine the best strategy that must be utilized during the process auditors need to prepare an outline of their objectives for the review. This is accomplished through creating an audit plan outline. Some of the different areas that will be focused on include: steps to decide if the client should be selected, internal controls, procedures that need to be reviewed, substantive tests and the final reporting steps. Together, these elements will provide the greatest insights as to the role that auditors play in the process and how they can be prepared for these situations.
KCN Audit Strategy
Section
Principle
Strategy
Steps to decide if the Client should be Selected.
To determine what approach will be taken in evaluating a potential client. This reduces the risks to the firm and improves the effectiveness of the audit.
To decide if a client should be selected requires focusing a number of criterion to include:
The accounting standard that is utilized.
If these standards have been changed in the past.
Review all relevant financial information over the last four years.
Evaluate the risks and rewards of conducting the audit.
Internal Controls
Internal controls are procedures inside the company that is used to identify and deal with specific risks.
There are a number of areas that the firm needs to focus on to improve internal controls. These include:
Improving inventory management.
Increasing the amount of committees to monitor the activities of managers.
Reduce the total compensation for executives of the firm away from financial performance.
Monitor how the company is able to achieve growth.
Be watchful of the various losses from using an aggressive strategy (i.e. credit losses).
These elements will help to reduce risks and improve transparency. This is when the growth and operating goals will be achievable.
Procedures that need to be Reviewed.
To determine the proper procedures that need to be reviewed requires looking at the entire organization. This will help us to identify polices that are out of date and must be changed.
There are a number of policies that need to be changed when it comes to KCN. The most notable include:
The inability to account for risks from customers with poor credit.
The way sales are recorded with the income booked once the transaction is closed (versus when the income is received).
Preparing for sudden shifts in the economy or from competitors.
Substantive Tests
The substantive test is when we are determining if the current strategy will be effective in addressing the risks facing the firm. This is accomplished through examining the accounts receivables.
The substantive tests for KCN revealed that there are a number of risks to the balance sheet to include:
High inventories.
The use of allowances for bad debts.
The combination of these factors can cause the firm to face more risks. The best way that this can be addressed is through the test of balances. This is when the transaction must be posted in the ledger and balance sheet simultaneously. (Srivastava, 2008, pp. 577 -- 618)
The Final Reporting Steps
The final reporting is when there will be a report released to upper management, the board of directors, the accounting firm and regulators. Inside is where there will be a discussion of the numbers and what they mean.
In the case of KCN, the required steps include:
Verifying the accuracy of all facts and figures presented.
Addressing different weaknesses that could have an impact on KCN.
Propose solutions for dealing with these challenges.
Present the findings to the board, upper management and regulators.
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