Auditing Essay Example | Topics and Well Written Essays - 500 words - 1

Auditing - Essay Example An auditor who works for a mid size firm takes on the assignment of auditing Telechubbies for the first time based on information that is provided to the auditor by Rachel Jones, the financial controller of Telechubbies. The basic information given to the auditor is that there is a requirement to maintain a 2:1 debt to equity ratio based on a loan contract. The provision for inventory obsolesces is 10% which is was cut 100 per cent from the previous year’s levels and the company wants another 100 per cent reduction this year to bring it down to 5%. A third piece of data given is that the long term receivables in the books belong to an R&D company owned by one of the directors. The auditor would start this audit by inspecting the balance sheet, income statement, annual report, code of ethics, and physical warehouse of Telechubbies. The balance sheet requires special attention. This financial statements has the data to calculate the debt to equity ratio. The auditor needs to inspect that the company is complying with the 2:1 requirement. After verifying the metric the auditor should go back a few years and compare the current debt to equity ratio level to the last three years results to find any tendency in the metric that might place the contract at risk in the near future. The company recently changed its inventory obsolescence provision to 10%. The auditor has to immediately verify if this changed was notified to the shareholders in the financial statements in the form of a note to the financial statements. This change represent a new discrepancy in the way the accounting methods thus it must be notified for purposes of following the accounting principle of consistency. The desired to cut the provision down to 5% requires certain numerical and physical auditing procedures. The long term receivable information is a worrisome sign since lending money to a company that is owned by a company director