Audit plan is the particular guideline that is required to be followed during the procedure of audit. Before carrying out the audit the auditor shall determine to what extent the audit procedures shall be carried out for obtaining required evidence (Coetzee and Lubbe 2014). This is required for getting assurance that the financial statement of the company is free from any material misstatement. Audit planning includes the establishment of overall strategies for audit to develop and engage the audit plan. Planning is not a particular phase rather it is a iterative and continuous process that starts immediately after the completion of previous period audit (Ruhnke, Pronobis and Michel 2014).
It is the study of significant trends and ratios and the investigation of unusual fluctuation in the balance sheet or income statement (Titera 2013). The level of reliance that is placed by an auditor on the financial statement depends on the materiality of items included under assessment. Analytical review is carried out –
The preliminary judgement for materiality is the set for financial statement. Tolerance level is the maximum misstatement that will be considered as material for the particular account balance. The amount for tolerable misstatement for the particular account will be dependent on the preliminary judgement regarding materiality. Generally, the tolerable misstatement for the particular account shall be less than preliminary judgement for materiality (Byrnes et al. 2015). In few instances, it is considered to be significantly lower as the misstatement possibility for various accounts in total cannot be more than the preliminary judgement regarding materiality.
It is identified from the income statement of Fly group that the cost of sales increased by 2.78% only whereas; the sales have been increased by 30.03%.
Generally the costs of sales increase in proportion with the increase in sales level. However, in case of Fly Group the sales have been increased by 30.03% and the cost of sales increased by only 2.78%. The assertions involved here is that the management may have been recorded the cost at lower amount for showing the profit at higher amount. Further, the current year cost may have been deferred for net period (Eilifsen and Messier 2014).
The auditor shall first segregate the costs as fixed and variable as the variable cost increases with the number of products whereas the fixed cost remain same for a particular level of units. Further, all the cost vouchers shall be tallied with the payment register to assure that the amounts have not been misstated. Further, the cost of the products shall be checked with the cost of inventories and ensure that there is no difference in the prices.
Other incomes of the company have been reduced from 25,000 to 900 over the 9 months period and are expected to go up by 300 for 3 months period. The reduction is 95.20%.
For the year 2014-2015 the income from other source was a major source of income for the company as the amount was big. However, in next year that is during 2015-2016 the same reduced to very nominal amount (Christensen, Glover and Wood 2013). The assertion involved here is that the income may have been misstated that is shown at lesser amount to record lower amount of profit. Recording the profit at lower amount will assist the company to evade tax on income.
The auditor shall first compare the sources of other income for the current year and compare it with the previous year. They must find the reason for the sources from where income has not been generated for this year. If the management is not able to provide satisfactory answers then the third party involved may be investigated regarding this.
For any kind of business inventory plays major role as it is an important part of business to carry on the regular activities and operation. The inventory for Fly Group is expected to increase by 11.09% over the 1 year period from 2015 to 2016.
Irrespective of the amount involved in inventory it shall be checked properly as it is exposed to error, fraud or misstatement. Further, different methods of computing the inventory is used by different entities (Legoria, Melendrez and Reynolds 2013). Therefore, the risk is also involved with the computation of inventories if the applied method is used consistently for all the items under inventories throughout the year.
The auditor shall carry out the physical counting for entire inventories and match it with the inventory register. Further, the auditor shall match the level of inventory with the cost of goods sold and the opening as well as closing stock. The auditor shall further analyse the method used by the management for computing the inventories to ensure that the applied method is used consistently for all the items under inventories throughout the year. If any variance is found then the management shall be questioned regarding that.
Irrespective of the increase or decrease in the amount of cash, it shall always be investigated with great focus as the cash is exposed to the risk of embezzlement, fraud and intentional or unintentional errors as it is most liquid form of asset.
It is identified from the balance sheet of Fly group that the cash has been reduced from 102,503 to 99.251 that is by 3.17%. Chances are there that the cash has been recorded at lower amount or all the cash receipts have not been taken into consideration (Leung et al. 2014). Further, the cash payments may have been shown at higher amount and the receipt may have been recorded at lower amount.
The cash shall be reconciled with the bank account to ensure that that all the transactions have been treated properly. Further, the payments and receipts shall be checked with the cash register. Further, the auditor shall check that the payments have been properly authorised from the authorised person.
The superannuation amount of Fly Group has been increase from 4,770 to 5,336 that is by 11.87%, however, the wages increased by only 6%.
The superannuation expenses are the contribution made by the employer for providing retirement benefits to the employees. However, it is identified that the superannuation expenses have not been increased proportionately with the wage expenses (Arens et al. 2016).
The names of the employees shall be matched with the employee register and the days for which they have worked. The auditor shall carry out this procedure to assure that the superannuation expenses have been contributed for the employees who were actually entitled to. Further, the auditor must check that the employee register is updated to assure that the retired employees and the employees who left during the year are not paid wages and the company did not contribute superannuation for those employees.
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.
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.
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.
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