The main objective of auditor is planning the audit to conduct is effectively. The audit engagement partner is further responsible for engagement and performance. The auditor shall plan the audit properly that includes the establishment of overall audit strategy for engagement and development of the audit plan. Planning is not the discrete phase of audit rather it is the iterative and continual procedure that are expected to start just after the completion of last audit (Byrnes et al. 2015). Main objective of this report is to focus on establishing the materiality level for Azure Enterprise. The report will further carry out the analytical procedure to identify the material items from the income statement and will state the key assertions involved with the accounts and the audit procedures required to be carried out for each material item.
Analytical review is carried out to assess the reasonableness associated with the account balance. Analytical review is carried out through ratio analysis and trend analysis and comparing it with the company’s past performance. In case of Azure enterprise trend analysis will be performed for the income statement for the year ended 30th June 2015 and 30th June 2016. Once the concerned areas are recognized through analytical review further plan will be made for the purpose of investigation (Christensen, Glover and Wood 2013). It helps the auditor to set the timing, nature and extent of audit procedure to be carried out. Further, it is used as the substantive procedure as detailed tests are time consuming and less efficient. The analysis for Azure Enterprise will be carried out through horizontal trend analysis as follows –
Computation of changes in percentage form and value form –
Preliminary judgement is the level of reliance that can be placed on the internal control system of the entity. It is formed on the basis of the company’s financial reports issued for the users. Preliminary judgement improves the internal auditor’s independence, objectivity and integrity. It is maximum tolerance level of misstatement with regard to specific misstated account. Materiality is established through taking into some accounts like revenue, assets or net income as the base (Eilifsen and Messier 2014).
iality. Materiality is generally calculated as 5% to 10% of the sales revenue. Hence, in case of Azure Enterprise the materiality will be ($ 243,750 *5%) = $ 12,187.50 to ($ 243,750 * 10%) = $ 24,375. The maximum amount of tolerable misstatement for the company will assumed to be 50% to 75% of misstatement as all the accounts are not misstated for entire amount. Therefore, the level of tolerable misstatement will be assumed around $ 18,000 (Legoria, Melendrez and Reynolds 2013).
While setting the audit budget the audit shall consider the common item those are risk associated like sales, other income, depreciation and wages in case of Azure Enterprise. Hence, if the preliminary assessment is changed it will have great impact on the audit budget. In the given case the, the audit partner suggested that preliminary assessment with regard to materiality shall be set at $ 15,000 whereas as per the calculation the materiality shall be set at $ 18,000. Hence, with increase of materiality level the audit budget will be reduced and the auditor will require checking less number of items while performing the audit (Legoria, Melendrez and Reynolds 2013).
Sales being an important item are always susceptible to misstatement, fraud or intentional error. It is found that the sales revenue of Azure Enterprise has been increased by $ 56,300 that is by 30.03% as compared to the previous year. Irrespective of the amounts involved sales is considered material item by its nature.
Sales are generally misstated through – (i) recording sales for fictitious customers (ii) misstating the amount of invoice while recording (iii) not raising invoice for the sales made and goods delivered or (iv) recognising revenue for the sales not yet made and goods not despatched. Therefore, the assertions pertain to sales are – (i) occurrence that the sales transactions recorded by the company have been taken place and related to the company (ii) accuracy – amounts related to sales transactions have been recorded at proper amount and under proper account (Glover and Prawitt 2014).
It is recognized that the income from other sources was one of the biggest source of of the company’s revenue in previous year. However the receipt has been reduced by a significant amount that is by $ 23,629 or 94.51%. Therefore, the item will be considered as material by amount as well as nature both. Further, as the income from other sources generally includes incomes from various sources, it is susceptible to misstatement. Further, irrespective of the source the managements and employee’s remuneration or bonus are dependent on the income of the company. Therefore, any source of income is always considered as material (Ruhnke, Pronobis and Michel 2014).
Receipts from other sources are generally involved with the assertion that all the transactions related to income from other sources might have been recorded wrongly by mistake or intentionally. Further, another misstatement may be that the receipts are not recorded under proper period. Therefore the assertions are – (i) Accuracy that the transaction related to income from other sources have not been recorded under proper head and related disclosures have not been made (ii) cut off that is the transaction related to income from other sources for another period have been recorded under current period.
Depreciation for Azure Enterprise has been increased from $ 15,590 to $ 34,280 that is by $ 19,230 or 123.35%. Therefore, depreciation will be considered as material by amount. Generally, depreciation goes up when the method of charging depreciation is changed by the company or there is purchase of any new asset. However, it is found that the company has not purchased any new fixed asset during the year (Louwers et al. 2015).
Various assertions associated with the depreciation account is – (i) occurrence that is transactions related to fixed assets actually taken place during the accounting period (ii) ownership that is the company has lawful claim on the assets those are recorded under balance sheet.
Wages expenses shall be considered as material item as a major proportion of revenues are consumed by this and it is an important expense for normal daily operation of the company. Therefore wage expense is material by its nature. It can be identified that the wage expenses of Azure Enterprise has been increased by $ 3,180 or by 6%.
While auditing for wage expense the auditor is mainly concerned regarding (i) the wage payment made to fictitious employees (ii) expenses has been recognised without making the payment (iii) payment has been made but the expenses has not been recorded. Therefore, the assertions pertain to wages are – (i) occurrence that the wages expenses recorded by the company have been actually for the payment made during the accounting period (ii) accuracy – amounts related to wage expenses have been recorded at proper amount and under proper account (Kharisova and Kozlova 2014).
While performing the audit for sales revenue the auditor shall verify the recognition method for sales used by the company and shall check that the company is using the method on consistent basis. Further, sales transaction with big amount shall be checked with the customer name, bill raised to the customer, quantity and the price shall be verified with the approved price list. Sales receipt shall be further segregated as sales made on cash basis and sales made on credit basis (Leung et al. 2015).
While performing the audit procedure for income from other sources the auditor shall verify the sources from where these incomes are received. Further, the income from various sources shall be compared with the previous year’s receipt (Coetzee and Lubbe 2014). For significant difference found the auditor shall ask the management for justification or can even contact the third party for confirming the reason.
The auditor shall confirm the amount of fixed asset and purchase or sales of fixed asset through the asset register. Auditor shall further verify the method used for charging depreciation, rate of depreciation for particular asset and shall be matched with the amount recorded as depreciation in the accounts (Wali 2015).
Wage payment made to the employees under the accounting period shall be verified with the employee register with the details like name of the employees, number of employees, number of days worked by each employee, amount of wage entitlement for each employee, arrear of wages for any employee and advance payment, if any paid to any employee (Arens et al. 2016). Further, the employee register shall be verified for engagement and retirement of any employee during the year and wage payment pertains to them.
Fraud is the intentional error committed by any employee or management to fulfil own objectives. Auditors while carrying out the audit procedure is responsible for identifying the reasonableness of the financial statement presented to them. As it is done purposefully therefore in most of the organization fraud is committed by all levels of employees. Therefore, even if the audit partner is in the view that the employees are trustworthy, the audit team is responsible for detecting fraud and carrying out audit for detecting fraud (Titera 2013). Further, from the analytical review it is found that some items like sales, other income, depreciation and wages will be considered as material. However, no instances of fraud were found from the analytical review.
Conclusion:
From the above analysis it is concluded that the auditor of Azure Enterprise shall conduct its audit with the objective of detecting the material misstatement presented in the income statement through establishing the tolerance level of materiality. Based on the nature and amount various accounts like sales, wages, depreciation and other income shall be audited for detecting material misstatement. Further, based on the materiality the auditor shall plan the procedures to be followed for detecting misstatement and fraud.
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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