Accounts Auditing Planning For Beginning Of The Engagement

Part A: Audit planning

Discuss about the Accounts Auditing Planning for Beginning of the Engagement.

The planning of audit starts at the beginning of the engagement. The planning for the audit should not be a discrete and separate part in auditing. The audit planning of the company sincerely starts after completion of previous year’s audit. ISA 300 has given guidance in relation to the audit planning. The guidance has to be followed and following facts to be considered as the part of the planning;

The risk assessment will be the first part which will include nature, timing and the extent of risks.

The audit procedure has to be planned further to assess nature, timing and the extent of audit planning.

Other planned audit engagement that has to be carried out is to be mentioned (ACCA, 2016).

Materiality is the factor that makes difference to the users of annual report. Auditing never gives 100% assurance of the quality of the audit. According to AUS 306, materiality actually means information which is either omitted or misstated and would potentially have negative impact on allocation of the scarce resources. 

If the materiality is to be understood from the point of view of Bob’s Bikes, an example would help significantly to understand what materiality is all about. Bob’s Bikes had a cost of sales $53,271 compared to sales of $ 201,515 in 2016 and cost of sales in 2015 was $63,595 when sales was $187,450. If for some reason cost sales figure was overstated by $1000 in 2015 would not have material impact on the annual report of the company but if it is overstated by $5000, then it would have material impact on the financials.

As the data of trial balance of Bob’s Bikes indicate that there would be some serious doubts on accumulated depreciating figure of the company.

In machinery the company had the accumulated depreciation of $ 46,041 in 2016 and in 2015 it was $ 24,375. The depreciation on the assets have been increased significantly from $$ 24,375 to $ 46,041. This figure has to be analysed.

The wages in 2016 declined at $ 46,816 compared to $53,000 in 2015. The reason for the decline has to be verified.

The other income figure was $25,000 in 2015 but it was reported as $1000 in 2016. The auditor has to see the source of the other income.

The cost of sales has declined to $53,271 despite increase in sales in 2016 compared to $63,595 of 2015, when the sales was lower (Pcaobus, 2016).

Preliminary judgment of materiality

According to the data provided in the trial balance some prima facie irregularities or more appropriately doubts have been found against following accounts;

Accumulated depreciation on machinery

Wages

Other income

Cost of sales

Depreciation

In above all of the accounts the rationale of significant increase in accumulated depreciation on machinery has to be found out. On the other hand the significant decline in wages, other income, cost of sales have to be analysed. The disproportionate increase in deprecation to accumulated depreciation is to be analysed during audit (ACCA, 2016).

The sample selection is being recognized by ACCA. According to ACCA, the economical way of conducting audit is sample selection. The ordinary test will not be economical. It is also advised for 100% testing of data where there is limited high value data available. The sample techniques used in the manner that is appropriate the auditor. Here in this case three samples have been chosen from the revenue part.

24/07/2015	SJ	Accounts receivable		4400
23/10/2015	SJ	Accounts receivable		7245
25/03/2016	SJ	Accounts receivable		6180

The data will be crossed checked with the vouchers and the day book. The cash balance and the bank balance for the proper reflection of those values is also to be verified. The data once verified will indicate that company has rightfully included all sales figures (Accountingscholar, 2016).

The sampling technique shall be of the mix of three methods random, systematic or haphazard. The samples have to be chosen randomly and haphazard way was the auditor is nearly sure that no material omission or misstatement has taken place. Where the auditor has the doubt about the quality of accounts and high value deals, the auditor shall use systematic approach in sample picking and testing. It should be more of a comprehensive effort from the part of auditor.

In case of randomly and haphazard way of choosing samples, it gives an indication that the accounts maintained in the proper manner or not. Whether there was any suppression of facts to be found out from randomly picked samples. It is important to understand that high value transactions would be rightly chosen by the auditor and the systematic approach in sample checking would be appropriate in those transactions (Pcaobus, 2016).

The important aspect of substantive testing is gross testing of one or more account or sector. If some mistakes and errors are found in the expenses segment, then it becomes imperative to conduct substantive testing on all transactions related to that sector or the industry.

Analytical review

The reason for substantive approach is to choose and pick the high value transactions or the transactions with 1% doubt. The substantive approach would yield better result in terms of auditing and pin pointing the actual issues related to the business. The reasons for checking one sector thoroughly are to find out the mistakes in the business and the policy of the company.

The substantive approach in picking the accounts has helped the auditors to resort to the conclusion that the accounting in part b is indicating more of occurrence. There are still entries that are important part of ascertaining fair accounting practice is missing. There would be several other transactions that needed to be included in the accounting process.

The tracing and vouching are important in auditing but vouching is more appropriate as it first selects an item and then starts finding the links of the items from accounting entries and the concerned vouchers and records. The journals and the ledgers are first checked against the item and then vouchers are matched against the item.

Another important assertion would be reconciliation. The reconciliation of the banks and the cash items and the cash flow with cash balance would indicate the proper financial statement of the company. The reconciliation would indicate any mistake or omission or suppression of accounting facts (Accountingexplained, 2016).

The reconciliation process would indicate the actual cash position of the organization. The cash balances would be reconciled with bank balances and the cash flows. The discrepancy would be wide open. Any difference in the cash balance and the cash flow statement balance would indicate discrepancy in the accounting procedure or omission or willful misstatement (Auasb, 2001).

The important aspect of materiality indicates that negligible mistakes do happen in industry but a bigger mistake has no place to consider as just omission. Here the transaction of $20,000 cannot be ignored. The criteria for materiality are well known;

1. 5% discrepancy in income from continuous operation
2. ½% to 1% of revenue or expenses
3. ½% to 1% of assets

These are the simple examples. But $5 million difference in revenue figure of $3.5 billion Company is immaterial but $5 million difference in revenue figure of $35 billion Company is material fact. Here the transactions are indicating that the company has barely managed to reach $200,000 sales where the omission or misstatement of $20,000 is really material as it represents 10% of the revenue.

If the testing are mainly related to control instead of substantive testing, these bigger mistakes relevant. The size of the mistake is worrisome from the point of view of control and substantive testing.  The transaction is significantly large and should have been included in the accounting. It has to be found out whether it is barely a omission or willful misstatement of the fact or the suppression of the fact. These sorts of mistakes put the doubt on the control system of the company (Study, 2016).

The other information regarding remuneration of the promoter, the related party transactions, the transactions at the arms length are important aspect of auditing. There is no scope for any mistake from the point of view of the auditors. Scams do happen in those transactions where material facts are suppressed for the benefit of the promoter and for the evasion of income tax.

In concerning to the transaction of the part A case, the substantive test would resume its relevance only if there is misstatement of various accounting entries. If the accounting entries are mainly related to one sector, it needs to be verified with substantive testing. The complete testing of one segment of accounting is like checking of all expenses or matching of revenue with expenses by each entry would be considered as part of substantive testing.

ACCA. (2016, 09 28). AUDIT SAMPLING. Retrieved 09 28, 2016, from www.accaglobal.com: https://www.accaglobal.com/zm/en/student/exam-support-resources/fundamentals-exams-study-resources/f8/technical-articles/audit-sampling.html

ACCA. (2016, 09 28). PLANNING AN AUDIT OF FINANCIAL STATEMENTS. Retrieved 09 28, 2016, from www.accaglobal.com/: https://www.accaglobal.com/an/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/audit-financial-statements.html

Accountingexplained. (2016, 09 28). Bank Reconciliation. Retrieved 09 28, 2016, from accountingexplained.com: https://accountingexplained.com/financial/cash-and-equiv/bank-reconciliation

Accountingscholar. (2016, 09 28). What is Materiality? Retrieved 09 28, 2016, from www.accountingscholar.com: https://www.accountingscholar.com/determine-materiality.html

Auasb. (2001). AUS 306- Materiality and Audit Adjustments. Retrieved 09 28, 2016, from www.auasb.gov.au: https://www.auasb.gov.au/admin/file/content102/c3/AUS_306.pdf

Pcaobus. (2016, 09 28). AU Section 350. Retrieved 09 28, 2016, from pcaobus.org: https://pcaobus.org/Standards/Auditing/pages/au350.aspx

Pcaobus. (2016, 09 28). Audit Risk and Materiality in Conducting an Audit . Retrieved 09 28, 2016, from pcaobus.org: https://pcaobus.org/Standards/Auditing/pages/au312.aspx

Study. (2016, 09 28). SUBSTANTIVE AUDITING TESTS. Retrieved 09 28, 2016, from study.com: https://study.com/academy/lesson/substantive-procedures-in-auditing-definition-lesson-quiz.html