Audit plan is particular guideline required to be followed while conducting the audit. It assists the auditor to obtain the appropriate and sufficient evidence for carrying out the audit with minimum level of cost. It further assists in avoiding the misunderstanding with client. Audit plan is the major part of the audit procedure for external as well as internal audit. If the audit procedure is planned in an effective way it can minimize the risk, meet the objectives, and improve the efficiency with minimum effort (Kerr 2013). The auditors are required to prepare the appropriate audit plan for ensuring the recognition of all the identified audit risk and correct the strategy that are deployed for detecting all the concerned risk areas.
Analytical review includes the evaluation of the financial information through the analysis of non-financial as well as financial data. Analytical review is carried out for obtaining the understanding of business and the environment. The main objective of this review is to analyse the risk with regard to material misstatement for determining the timing, audit procedure required and nature of audit(Luippold and Kida 2012). It will assist the auditor to develop the audit programme and strategies.
Preliminary judgement on materiality is maximum value by which auditor believes that the statements are misstated and still will not have impact on the decisions of the reasonable users. It is one of the most crucial decisions taken by the auditor. It requires significant professional judgement(Stewart and Kinney Jr 2012). Various factors taken into consideration while making the judgements are –
From the trial balance and income statement of Ryanco, it is identified that the sales of the company has been increased from 187,450 to 194,525 over the time period of 1 year. However, the gross profit of the company has been increased from 123,855 to 135475 (Glover, Taylor and Wu 2016.). Therefore, the sales have been increased by 3.77% whereas the gross profit has been increased by 9.38%.
With the increrase of sales level the cost of sales shall also be increased. However, in case of Ryanco the sales and cost of sales has inverse relation. Chances are there that the cost has been under recorded or the cost for the same period has not been included in the period (Eilifsen and Messier 2014). There also may be the instances that all the cost related invoices are not counted properly or recorded at lower amount to show higher amount of profit.
The sales records and all the associated costs shall be analysed. Further, the sample shall be selected randomly for checking the invoices related to sales and cost of sales. If any mismatch found then the sample size shall be increased(Trotman and Wright 2012). Further, the numbers of the invoices shall be checked to ensure that all the invoices are taken into consideration. The cash receipts shall be checked with the cash balance and account receivable account.
The net profit of the company Ryanco is shown at 87,993 for the year 2017. The figure of net profit has decreased from the previous year which was 94,407. The net profit of the company considers the various expenses of the business. The total expenses of the company have increased from 86498 to 106768 over the 12 months period. There has been a decrease in the net profit rate of the company by 6.79%.
The net profit of the company depends on the sales of the company and the total expenses of the company. Here in this case, Ryanco company there has been an increase in the gross profit and the sales figure of the company during the year. However there has been a decrease in the net profit of the company by 6.79%. The total expenses of the company has also increased from last year figure. The increase in the cost figure of the company can be due to manipulations in the cost figure by the management.
The auditor will be applying audit procedure on the various expenses to check whether such expenses are recorded appropriately. The auditor will apply the matching concept to get a clear idea of the revenues which was generated from different activities. The auditor will also be verifying the accuracy of the transactions (Zadek 2013). The income and expenses which the company generates will be verified from the vouchers and other records maintained by the company.
The balance sheet of Ryanco Company shows the inventory figure of the company from last year has increased. The inventory of the company has increased during the year by 1.43%. The inventory of the company showed 174000 in 2016 which increased to 176489 in 2017.
In any business, the relevance of inventory is of utmost importance in the procedure of audit. Inventory is an item which the business needs to have a strict control of, as in many cases frauds and manipulations takes place in this area. Moreover, different companies use different methods of valuation of inventory and thus the auditor needs to check this. In addition to this, physical inventories are always at risks of thefts and frauds and there is always a chance of error in calculations.
The auditor will be checking the physical inventories of the company in order to ensure that the inventory count matches the records of inventory which is maintained by the company. The auditor then needs to check the method that the company utilizes in valuation of the inventory of the company (Serrat 2017). The method may be LIFO or FIFO method which are mostly used by companies in valuation of inventory. Further the auditor needs to check inventory records, inventory requisition slips, invoices and ensure these add up with the figure shown in the balance sheet of the company. The auditor will also be checking the accuracy of the records of inventory.
The wages of the companyhas reduced from 53000 in 2016 to 52570 in 2017 that comes to reduction by 0.81%. There can be manipulations in the payroll system of the company in order to misstate the books of accounts.
In a normal audit process the auditor does not put that much emphasis on the wage policy of the company. If the management of the company wants to verify specially its wage control policy then an investigation or an internal audit is the appropriate approach. In some the external auditor may also have to analyse the wage system of the business where such auditors can rely on the reports of the internal audits. In order to further acquire more evidences, the auditor will be applying vouching techniques for wages.
The auditor will be applying vouching techniques for assessment of wage policy of the company. The auditor will be looking into the wages account of the company in order to determine the wages distribution and if the amount matches with the trial balance and the income statement of the company (Ibrahim, Almoutaz and Abdelmageed 2013). The auditor will also ensure if there are any discrepancies present in the records of the company.
The expenses relating to the superannuation have been reduced to 4995 in 2017 as compared to 5035 for the year 2016. Therefore the superannuation has been reduced by 0.79% which can be related to the number of employee of the company and the wages which are given to them (Arens et al. 2016).
Superannuation expenses are incurred by the employer in order to provide the employees with retirement benefits in the form of lumpsum payments when they retire(Basu and Andrews 2014). The superannuation of any employee depends on the wages of that particular employee. In this case the wages as well as the superannuation expenses of the company has gone down. However the change in both the figure are not in same proportion and hence audit procedures must be applied.
The auditor must analyse the list of employees which are currently working in the company and also ensure that such employees are qualified for such superannuation benefits as per the rules and company’s policies. The auditor also needs to verify the wages account and corresponding ledgers to confirm or deny the presence of any discrepancies on the part of the company.
The amount of other income has increased from 57000 in 2016 to 59250 in 2017. It increases by 3.95% as compared to the previous year.
The other income of the business includes Consultancy fees and interest income which is a minor part of the total other income (Legoria, Melendrez and Reynolds 2013). The auditor needs to analyse the consultancy fee part as there are chances of manipulations as they are material enough to affect the company.
The auditor should be analysing the income receipts books and confirm the figures recorded in the statement of income and trial balance. If the need arises the auditor can confirm the figures as stated in the trial balance from the parties involved in the consultancy service receivers. The auditor can also ask for management representations for the reasons for reduction in the income of the company.
Reference
Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016. Auditing and assurance services. Pearson.
Basu, A. and Andrews, S., 2014. Asset allocation policy, returns and expenses of superannuation funds: recent evidence based on default options. Australian Economic Review, 47(1), pp.63-77.
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., Taylor, M.H. and Wu, Y.J., 2016. Current practices and challenges in auditing fair value measurements and complex estimates: Implications for auditing standards and the academy. Auditing: A Journal of Practice & Theory, 36(1), pp.63-84.
Ibrahim, A., Almoutaz, M. and Abdelmageed, A.M., 2013. Factors Affecting the Determination of Wages of Auditors and their Relative Importance (A case study of Sudan). Nature & Science, 11(4).
Kerr, D.S., 2013. Fraud-risk factors and audit planning: The effects of auditor rank. Journal of Forensic & Investigative Accounting, 5(2), pp.48-76.
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.
Luippold, B.L. and Kida, T.E., 2012. The impact of initial information ambiguity on the accuracy of analytical review judgments. Auditing: A Journal of Practice & Theory, 31(2), pp.113-129.
Serrat, O., 2017. Auditing knowledge. In Knowledge Solutions(pp. 15-20). Springer, Singapore.
Stewart, T.R. and Kinney Jr, W.R., 2012. Group audits, group-level controls, and component materiality: How much auditing is enough?. The Accounting Review, 88(2), pp.707-737.
Trotman, K.T. and Wright, W.F., 2012. Triangulation of audit evidence in fraud risk assessments. Accounting, Organizations and Society, 37(1), pp.41-53.
Zadek, S., 2013. Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.
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