External Audit: Risk-Based Approach
The audit approach which will be used in Auditing Home Retail Group plc is risk-based. Some of the risks in this particular case will be accepted after quantifying its risk level. The audit risk will be derived from three main assessments.
Inherent risks would be derived from characteristics of Home Retail Group plc products and the accounts being examined. The performance of Home Retail Group plc in recent years has been positive considering its massive expansion and this could reflect the risks expected during the audit. Since the audit firm I work for is offering auditing services for the first time, all the factors would be considered to provide a clear overview of the risks (Cosserat. G.W, Rodda, N, 2009).
Controls risks in Home Retail Group plc would be examined to ensure that the internal control system is effective and has been regularly reviewed to meet its objective. The supervision is tight conducted according to the organizational policy. Since the accounting system has been fully computerized, control risks are minimized. Recruitment risk can be detected by considering the recruitment procedure of Home Retail Group plc and the qualification of the management team. Audit risk is the product of inherent risk, recruitment risk, and control risk (Millichamp, 2000).
Before the actual audit, we would access the risk of the materials available for the activity of material errors and misstatements in areas of financial statements and all components in it. Emphasis would be put on cash stocks, creditors, and debtors while assessing risk in the balance sheet. On the other side, the emphasis would be put on purchases, expenses, and sales when assessing risks in the profit and loss account of Home Retail Group plc.
To get the real picture, the assessment would be put under close and constant review during the auditing process (Gray, Manson, 2008). In the process of auditing, errors are expected to arise and as an auditor, I should be alert in all possible circumstances in which the errors may occur. The expected errors may occur intentionally or unintentionally. Materials misstatement may cause serious irregularities in the company’s financial system including fraud (Auditing and Assurance Standards Board, 2011). To assess exhaustively material irregularities during the audit process, I will consider several areas to make it conclusive and accurate.
The first to consider is the business environment of Home Retail Group plc. The nature of business Home Retail Group plc is retail, its home appliances are sold to customers on both cash and credit basis and this means the money can be easily misappropriated. Accounting methods being used must be critically considered. The management integrity would also be considered as the conduct of the management team may be avoiding generally accepted accounting procedures. Expenditure on research and development expenditure must be considered too as these are prone to misappropriation (Home Retail Group plc, 2011). Location of Existing warehouses, offices and shops would be of important consideration. The transactions with its customers must be considered as some of them may fall short of expected levels.
The control environment of Home Retail Group plc would be considered when assessing the risks. The skills, effectiveness, and integrity of the management team would be of vital importance during this process. Its corporate structure, unusual transactions, and competence of control personnel will provide the much-needed information while assessing risks. Since Home Retail Group plc has an existing internal auditing function, its effectiveness would be considered closely (Gray, Manson, 2008). During the audit, the effectiveness and independence of the internal audit department will be assessed to determine the extent to which we shall rely on coming up with the audit opinion. The existing procedure for recruiting and training staff of Home Retail Group plc will help to undertake a risk assessment of material misstatement (Millichamp, 2000).
Home Retail Group plc 2011, Home Retail Group plc Half-Year Results.
Millichamp, 2000, Auditing, 7th Edn, Letts Educational, London.