Professional Auditing Kresta Holding Limited

Question: Discuss about theProfessional Auditing for Kresta Holding Limited. Answer: Key Information Gain an Understanding of the Client The auditors should understand the needs and different factors associated with the operations of Kresta Holding Limited. The main function of the process is to examine the risk of material misstatements in the financial statements due to: The business nature of the client The client conduct its own business in the industry Competition in the industry Consumer and suppliers of the client The regulations and policies that need to be followed by the client The auditors should achieve the understanding of the client and then evaluate its stages; those are entity level, economic level and industry level (Berk and DeMarzo, 2007). At an entity level, the business operation of the client needs to be determined and evaluated. Kresta Holdings Limited is a retailer and manufacturer of window furnishing. The entity is engaged in the manufacturing, retailing and distribution of window coverings components and treatments. The firm manufactures and sales window covering segment and the aim is to provide quality products to their customers (Brigham and Houston, 2004). The customers are loyal and paying the client on time as the company provides quality products. The suppliers are supplying high quality products and services (Elliott and Elliott, 2008). The company is having the ability to adjust with the changes in technology and other trends. If clients business operation does not adapt with the technological changes then there will be a risk of l osing the share in the market (Fifield and Power, 2011). The market share of the company is average and its competitors are Hillarys Blinds and horizon Window Treatments. The analysis of external business environment of the company will help to determine and analyze the position of the client in the market. The business environment changes all the time and the business organizations have to adapt with the changing environment (Helbk, Lindest and McLellan, 2010). The main objective of the company is to provide quality products and services to their customers and it is also consider as an important factor for the development of the company. At industry level, the client can be understood by examining the competition level, demand of product and services, rules of the government and reputation of the client (Hillier, 2010). The Kresta Holdings Limited provides quality product and the market demand is high. The competition in the market for the company is high which imposes significant impact on the business operations. The company has adopted different strategies to achieve competitive advantage such as decreasing the price of the products (Holton, 2012). The competition in the market is increasing day by day and all the organization has to compete in the market with the adoption of innovative strategies and techniques (Moles, 2011). The rules and regulations are followed by the company that is implemented by government. The increase in profit margin will help the company to grow in the market and generating maximum returns for the shareholders (Paramasivan and Subramanian, 2009). At economic level, the situation of the client can be understood by examining the economic conditions that affects the business operation which includes financial crisis, change in interest rates and shareholders expectation to increase profitability (Smart, Megginson and Gitman, 2004). The fluctuation in the currency rates, economic downturns affects the business operation of Kresta Holdings Limited. However, the company has the ability to manage economic pressures. The organization has performed well in comparison to its competitors and improves its profitability in order to maximize returns for the shareholders (Spiceland, Sepe and Nelson, 2011). During the upturns, the company remains under pressure to perform and increase its profit margin in order to maximize returns for the shareholders. During downturn, the profit of the company decreases in order to increase its write offs. In financial crisis, the net profit margin of the company decreases and faces several threats (Stittle and Wearing, 2008). In this situation, the company adopts strategies in order to fulfill the demand of the customers. The changes in the interest rates, fluctuation in currency and economic conditions imposes significant impact on the business operation of the company (Wink and Corradino, 2011). The financial report of Kresta Holdings Limited provides significant information regarding performance of the company during a specific period of time. The income statement shows the profit or loss, balance sheet show assets and liabilities and cash flow statement shows the inflow and out flow of cash (Wolf, 2008). The determination and evaluation of the financial statement help to analyze the market value of the company during a specific period of time. The financial statements show the financial performance of a company as well influences the decisions of the investors (Zopounidis, 2008). Therefore, the analysis of the financial report of the client will help to evaluate the actual value as well as financial performance of the company. Identifying Significant Account that are Most at Risk of Being Misstated The accounts of the financial report of Kresta Holdings Limited that can be misstated are account payable, debenture account, expense account, account receivable and sales account. The misstatements in the account impose significant impact on the value of the company (Berk and DeMarzo, 2007). The value of the accounts can be misstated if the account enters wrong entry and other factors associated with that. The material will lead to increase or decrease in debt level, increase or decrease in expenses, increase or decrease in sales and account receivable of the company. The accounts of Kresta Holdings Limited are at risk of misstatement and can result in solvency or liquidity risk. The value of current assets can be affected with the increase or decrease in the account receivable. It is misstated with the change in the value of receivable from clients. The changes in the debenture issue affect the capital structure. The debt level can be examined with the help of financial leverage ra tio, debt equity ratio and current ratio (Fifield and Power, 2011). The debenture issue is misstated due to change in the value of issue and amount received from debenture holders. The auditor plays a significant role in analyzing the accounts in the financial statement. The net profit margin of Kresta Holdings Limited is affected by change in the sales and cost of goods sold. The return on assets shows how much efficient is the company in utilizing its assets and return on equity shows the ability of the company to generate returns from the shareholders funds (Helbk, Lindest and McLellan, 2010). The account payable is misstated and affects the value current liabilities. The account payable is misstated due to change in the payable value. The risk in the accounts can be examined with the help of financial ratios such as liquidity ratios and profitability ratios. The sales and expenses account are misstated due to change in the value of received amount and cost of goods sold. The inv estment and capital ratio affects the value of share capital of Kresta Holdings Limited. The ratio shows the profitability and liquidity level of the company and differences in the value means that there is material misstatement (Elliott and Elliott, 2008). The investment decision of the stakeholders and shareholders depends on the total value of the company. The current assets can be misstated with the change in the value of items in the current assets. The financial report shows the profit, expenses, liabilities, assets and flow of cash within a period of time. The operating expense can be affected by the changes in the use of resources for production (Hillier, 2010). It is the responsibility of the auditor to determine the differences in the accounts as well as profitability and liquidity level. If the profit margin of Kresta Holdings Limited varies then it shows misstatement in the accounts. If there is large difference then it shows ineffective and inappropriate estimation of the accounts (Holton, 2012). The changes in the budget at the end of the accounting year show inefficient management and it should be determined and analyzed by the auditor. The trends in the ratio will show the performance as well as profitability and liquidity of the company. Set Planning Materiality The planning of materiality helps to examine the financial situation of Kresta Holdings Limited. It helps to provide significant information to the investors and shareholders (Moles, 2011). The investors invest funds into the organization and support in the future development. The audit firms implement strategies to set materiality and analyzing the risk of Kresta Holdings Limited. The estimation of materiality is done as per the guidelines described by AASB 1031. The auditor has to select appropriate base for the calculation of materiality misstatement (Paramasivan and Subramanian, 2009). The auditor has to make judgment on basis of the knowledge and skills of the client. The profit margin should be appropriately estimated on the basis of sales and cost of goods sold. The revenue and asset is used as the base for estimating the value of Kresta Holdings Limited. The material percentage is to be calculated on the profit margin of the company. The analysis of the market environment hel ps to evaluate the value of the company during a period of time. The capital structure should be prepared appropriately to issue debt. The material used in the production process should be examined appropriately (Smart, Megginson and Gitman, 2004). The items of the current assets and current liabilities should be appropriately valued in the balance sheet. The materiality planning helps the administration to attract the investors to invest into Kresta Holdings Limited and auditors to know the financial statements. The materiality of Kresta Holdings Limited is estimated 0.25%. The materiality level of the company is as follows: Materiality level= 0.25% * $95.93 = $239,828 The planning materiality amounts help the accounts department to determine and analyze the risk associated with the company (Spiceland, Sepe and Nelson, 2011). The misstatement in the financial statement will increase or decrease the value of the company. Audit Risk Assessment The manipulation of the account payable, debenture issues, account receivable, sales and expenses can alter the value of the company. The value of Kresta Holdings Limited can either increase or decrease during a specific period of time (Wink and Corradino, 2011). It is the responsibility of the auditor to determine misstatement in the financial statements of Kresta Holdings Limited and taking appropriate steps to solve it. The presentation of inappropriate value of the financial report can influence the decision of the investors and shareholders. The act of presenting wrong value is an illegal act and the court can take serious action against the company. The misstated values can be correct with the help of appropriate auditing strategies. The values of account payable, debenture issues, account receivable, sales and expenses should be corrected with changing and putting the correct values in the accounts. The misstatement in the current liabilities will affect the debt level of the organization as well as total liabilities of Kresta Holdings Limited. The misstatement in the current assets and current liabilities will affect the asset value (Wolf, 2008). The asset value of a company is very much important as it shows the ability of the company to pay off its due amount from the assets. The changes in the operating expenses will increase the expense and share capital will affect the investment value of Kresta Holdings Limited. The changes in the sales will affect the profitability and correcting value will help to show appropriate value. The shareholders and investors analyses the financial statement of the company in order to evaluate the actual value of the company. In case, the accounts are manipulated then the financial performance will either increase or decrease imposing significant impact in the market (Braiotta, 2004). However, auditors play a significant role in determining the misstatements in the financial statements and showing exact value of Kresta Holdings Limited. References Berk, J. and DeMarzo, P. (2007).Corporate finance. Boston: Pearson Addison Wesley. Brigham, E. and Houston, J. (2004).Fundamentals of financial management. Mason, Ohio: Thomson/South-Western. Elliott, B. and Elliott, J. (2008).Financial accounting and reporting. Harlow: Financial Times Prentice Hall. Fifield, S. and Power, D. (2011).Managerial finance. [Bradford, UK]: Emerald. Helbk, M., Lindest, S. and McLellan, B. 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