Preliminary materiality judgement is based upon the financial statement of the company. It is the maximum tolerable level for misstatement that will be regarded as material for any particular account balance. However, the amount of tolerable misstatement is depended upon the preliminary materiality judgement. Tolerable misstatement is always lower than the preliminary judgement while considering materiality. Generally, 1% to 5% of sales or 2% of total assets are considered for the amount of materiality (Eilifsen and Messier 2014). In the given case, 1% to 5% of sales are $ 1945.25 to $ 9,726.25 and 2% of total assets is $ 10,650.59. Therefore, preliminary assessment amounting to $ 15,000 by the audit partner is not appropriate. They shall set the amount at $ 10,000.
Preliminary assessment indicates the reliance that can be made on the function of the internal auditor. It improves the objectivity and independence of the internal audit function. While the audit budget is set the auditor takes into account the common and risk associated items like wages, inventories, cash and other expenses into consideration for expressing audit opinion (Byrnes et al. 2015). Therefore, when the preliminary assessment is changed, for instance, planning materiality has been changed from $ 15,000 to $ 10,000 audit budget will also increased. The auditor will have to increase the audit procedure for more number of items.
It is used by the auditors for assessing reasonableness of the account balances. It is done through comparing the changes in the account balances over the period of time or by comparing with associated accounts. It is useful in highlighting the general areas where the financial statements seem to be incorrect or where the transactions are misstated or misclassified. Once the review identifies the concern areas, the auditor will start further investigation for pinpointing the sources of underlying issues (Arens et al. 2016). Based on the findings and knowledge the auditor develops the audit plan that sates the procedures to be followed for effective and efficient audit. The main objectives of performing the analytical review are as follows –
From the income statement of Fawn Enterprise it is found that the consultancy fees have been increased by 3.95% over the year from 2016 to 2017.
As the consultancy fees has been increased there may involve the chances of manipulation for the fees. Generally the fees remain same unless the increase is approved through an agreement or the company changed the consultancy service provider (Coetzee and Lubbe 2014). The assertion here is the accuracy that is the amount has been recorded at appropriate amount without any misstatement.
Depreciation on non-current assets has been increased from $ 15,738 to $ 35,546 that is by 125.86%.
Generally, the depreciation is maintained at the same amount if straight line method is applied or in reducing amount if the diminishing method is applied. However, the depreciation is increased only when the company purchases any new asset and depreciation is provided on that asset. It is found from the balance sheet of fawn Enterprise that the company has not purchased any new asset over the past 2 years. Therefore the depreciation shall also be provided at the same amount. The assertion involves here is cut-off that is the transactions were recorded under the correct period of reporting (Kharisova and Kozlova 2014).
Sales revenue plays major role in any kind of business. It has been found that the sales revenue for Fawn Enterprise is increased from $ 187,450 to $ 194,525 that is by 3.77% over the years from 2016 to 2017. Further, sales revenue is always susceptible to misstatement, error and misappropriation.
Although the amount of increase is not big, as sales revenue are always subject to misstatement, error and misappropriation. Further, as different entities use different methods for recognising sales revenue and sells good on both cash as well as credit terms, there is always involvement of risks with the sales revenue computation if the method is not applied on consistent basis. The assertion involves here is the accuracy and classification that is the account balance for sales revenue has been recorded at full amount without any error and transactions are recorded under correct accounts (Legoria, Melendrez and Reynolds 2013).
Wages plays major role in any kind of business as it involves large amount of business expenses. It has been found that the cash at bank for Fawn Enterprise is reduced from $ 53,000 to $ 52,570 that is by 0.81% over the years from 2016 to 2017. Further, irrespective of the amount involved wages are always susceptible to misstatement and misappropriation.
As wages are always subject to misstatement and misappropriation, irrespective of the involvement of amount wages shall always be regarded as a special item for auditing purpose. The assertion involves here is the accuracy and cut-off that is the account balance for wages has been recorded at full amount without any error and transactions are recorded under correct accounting period (Glover and Prawitt 2014).
The auditor shall carry out the reasonable check procedures for checking the incomes related to consultancy fees and determining whether the fees are in line with the ordinary consideration. If the fees from any client are increased through any new agreement or the company added any service for any particular client then the agreement of engagement or enhancement of fees shall be checked properly (Titera 2013). The auditor shall also check the whether the fees received were one time fees or paid on monthly basis. The associated transactions and recording in the account books shall also be checked properly.
Before carrying out the detail testing of depreciation charges the auditors shall review and assess the control over non-current assets and depreciation associated with those assets. It will assist the auditor to test the depreciation expenses in more efficient manner. Key controls that shall be looked upon by the auditor are purchase of assets, physical control over it, methods used for charging depreciation and recording of these expenses under the financial statement. While auditing for depreciation the auditor must review the rate of depreciation and the auditor shall apply professional scepticism to analyse that the rate of depreciation will not help the management to charge the expenses as per their desire. If required, the auditor shall recalculate the depreciation expenses taking into account the amount of accumulated depreciation and reconcile the income statement with the balance sheet for analysing the amount of depreciation (Wali 2015). Finally, the auditor shall perform the test for reasonableness for evaluating that amount charged for depreciation was appropriate.
While carrying out the audit procedure for sales revenues the auditor shall use various analytical procedures for analysing the recognition methods used by the entity. The auditor shall further confirm the financial records for sales revenues with the transaction records. As sales revenues can be used for paying of various expenses it is regarded as a key item for the financial statement and therefore it is always exposed to misappropriation (Ruhnke, Pronobis and Michel 2014). The auditor shall perform substantive procedure that is verification of actual numbers under the financial statements. Further, for performing audit with regard to sales revenues the auditor shall discuss recognition procedures and observe the method’s application along with test for some of the transaction of sales.
While auditing for wages the auditor shall obtain the reasonable assurances that wages expenses are reported accurately. Preliminary procedure for auditing wage balance is confirmation from the wage register and employee register. The process of confirmation also has the unintended advantage that is the auditor at the same time can confirm if the company has any unpaid or arrear in wages or any wages is paid in advance. Further, all the payment related vouchers and transactions shall be confirmed with the account balances. Further, for the payments of big amounts proper authorization shall be checked with the authorised person. The wage payments shall be matched with the employee register and their entitlements (Leung et al. 2014). The auditor shall also verify the ledger account for each wage payment transaction. Further, the auditor shall verify whether any new employee has been engaged or retired and their payment details.
Assessment of fraud risk is the tool used by the auditor to assess the risks of fraud involved in internal control. Frauds are generally committed to get higher incentives or rationalize any unjustified fraudulent activities. Therefore, even if the staffs of the company are trustworthy there always exists the inherent risk of fraud with regard to some of the accounts like cash, inventories and receivables. As these accounts are subject to misstatement, theft, fraud and misappropriation the auditor shall check these accounts with special attention (Louwers et al. 2015). Though no indication of fraud existed in case of Fawn Enterprise, the auditor shall check for fraud risks.
Reference
Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016. Auditing and assurance services. Pearson.
Byrnes, P.E., Al-Awadhi, C.A., Gullvist, B., Brown-Liburd, H., Teeter, C.R., Warren Jr, J.D. and Vasarhelyi, M., 2015. Evolution of auditing: From the traditional approach to the future audit. Audit Analytics, 71.
Christensen, B.E., Glover, S.M. and Wood, D.A., 2013. Extreme estimation uncertainty and audit assurance. Current Issues in Auditing, 7(1), pp.P36-P42.
Coetzee, P. and Lubbe, D., 2014. Improving the efficiency and effectiveness of risk?based internal audit engagements. International Journal of Auditing, 18(2), pp.115-125.
Eilifsen, A. and Messier Jr, W.F., 2014. Materiality guidance of the major public accounting firms. Auditing: A Journal of Practice & Theory, 34(2), pp.3-26.
Glover, S.M. and Prawitt, D.F., 2014. Enhancing auditor professional skepticism: The professional skepticism continuum. Current Issues in Auditing, 8(2), pp.P1-P10.
Kharisova, F.I. and Kozlova, N.N., 2014. Applying the category of «Assertions (or preconditions)» In audit of financial statement. Mediterranean Journal of Social Sciences, 5(24), p.180.
Legoria, J., Melendrez, K.D. and Reynolds, J.K., 2013. Qualitative audit materiality and earnings management. Review of Accounting Studies, 18(2), pp.414-442.
Leung, P., Coram, P., Cooper, B.J. and Richardson, P., 2014. Modern Auditing and Assurance Services 6e. Wiley.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.
Ruhnke, K., Pronobis, P. and Michel, M., 2014. Audit materiality disclosures and credit lending decisions.
Titera, W.R., 2013. Updating audit standard—Enabling audit data analysis. Journal of Information Systems, 27(1), pp.325-331.
Wali, S., 2015. Mechanisms of corporate governance and fixed asset revaluation. International Journal of Accounting and Finance, 5(1), pp.82-97.
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