As the title of report is “Audit Planning and other Related Issues”, the report has focused on the analysis that has been done before the start of the audit. Audit planning is the first process in the audit and it shall be done with the utmost care. For the purpose of the report, the company that has been made available to our team is Alizarin Enterprises and the trial balance for the last two years ending 30th of June 2015 and 30th of June 2016 has been considered.
The major limitation that has been encountered is that the trial balance for the last year is of twelve months and for the current year is of 9 months and thus the total twelve months figure for proper analysis has been obtained on proportionate basis. The report has then ended up with the conclusion by stating the importance of the audit planning and the recommendation to have the audit planning done in an efficient manner.
The report is being produced to enable the team of the audit to perform the audit in the pre-defined manner by providing them with the audit plan ready with the detail of items having the risk of material misstatement and the audit procedures which shall be undertaken so as to ensure the completeness and the accuracy of the books of accounts.
Materiality has been defined as the information, which is either on alone basis or in group, which in case misstated or gets omitted from the books of accounts then it will have the adverse effect on the decision of the users of the financial statements of the company (Budescu, 2012). As per the Auditing standards, the auditor shall define the materiality level for the accounts as whole and for the particular types of transactions and accounts.
The overall materiality level that has been assumed amounting to $15000 is on the lower side. It is inappropriate as per the financials of the company – Alizarin Enterprises.
The first two items are stable and third item is relevant for the purpose of judging the materiality level and as per the level it has been inferred that the overall materiality level is very less and it shall be $20000 (Calculation in appendix-2) at least in order to commensurate with the nature and size of the business of the company (Imoniana, 2012).
It will lead to the change in the audit budget because of the upward change in the overall level materiality level as well as the separate account balances and transactions. Budget will need revision with the amount as well as the time that it would take to complete the audit (Lo, 2011). The revision will lead to change in the effort and time that the audit team members will put into it and also the sample size that the auditor will take into account. As per the materiality level, the auditor is required to increase the sample size and ascertain what changes have been occurred during the period which has led to the requirement of the increased materiality level.
As the trial balance is available for only two years and hence the trend analysis has been done through the percentage change (appendix 3).
Following four accounts have been identified which carries the risk of having the material misstatements:
The revenue of the company has been increased by 30% as compared to the previous year and related cost of sales has been increased by 3% only leading to increase of Gross Profit by 30%. It places the assertion of accuracy on the figure of the sales and cost of sales. The difference between the two is gross profit. There are the chances of having the sales overstated and cost of sales as understated. It is because the figure of cost of sales is inaccurate due to which the gross profit percentage is higher. Therefore, it needs the audit testing in significant way (Gay, 2012).
It is included in the other income and has been increased by $750 only which has led the decrease in the figure of net profit. The figure is understated and thus provides the assertion of completeness on the amount of the service fees and requires significant testing.
The head of the other income has been decreased by $23800 leading to the decrease by 95% and has immediate effect on the net profit percentage. Thus, like the service fees, the amount of other income is understated. It places the assertion of the completeness as there are positive chances that the amount of other income has not been recorded.
Expenses have been increased by 29.94 percent which is equivalent in relation to the sales revenue. As the percentage increase in on the higher side, there is an assertion of the cut off this shall be considered while conducting the audit of the books of accounts. The expenses have been overstated as 30% increase is there in expenses in total with the 30% increase in the sales.
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– Bank charges – Understated |
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– Depreciation – Overstated |
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– Interest expense – Understated |
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– Printing – Understated |
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– Miscellaneous – Overstated |
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– Wages – Overstated |
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– Superannuation- Overstated |
Sample frame- It is decided in the materiality planning stage of audit that materiality limit decided by the management was not as per the financial statement of the company and it should be increased. Sample decided for conducting the process should be decreased if materiality limited is increased. Therefore it is suggested to the auditor of the company that a sample of around 40-60% should be selected for conducting the process. This sample size means that for all the transactions undertaken by management in the current year, auditor should conduct the audit procedure on at least 40-60% of transactions.
Following are the audit procedure for each of the accounts-
The audit procedure of inspection of documents shall be adopted while verifying the cost of sales figure. It includes not only the verification of the book entries but also the evidences which support each book entries shall be verified like sales and purchase invoice with challan, etc. It includes the invoices of the direct expenses, stock register showing the opening and closing stock, good received note and goods dispatch note (Glover, 2014). As there is doubt on the completeness and the correctness of the cost of sales, the sample frame taken is 10%.
Specific documents to be checked- invoice issues by vendors and raw material suppliers and transaction recorded by the management with respect to such invoices.
The audit procedure of inspecting and verifying the time of recognition of service shall be adopted so as to confirm whether the whole service revenue has been accounted for or not or depends upon the percentage completion method. It includes the confirmation from the debtors and the persons to whom the service has been provided and the same shall be tallied with the returns filed under the Goods and Service Tax. If there are no debtors at 30th June then the balances shall be reconciled with the ledger of the company.
Specific documents to be checked- invoice raised by manager with respect to such services and service tax return filed during the year.
The audit procedure of verifying the statement from party shall be adopted so as to confirm whether the whole other has been accounted for or not. It includes the confirmation from the debtors and the persons to whom the service has been provided and the same shall be tallied with the returns filed under the Goods and Service Tax (Lusk, 2016).
Specific documents to be checked- bank statement to verify the credit of such income.
The audit procedure of the inspection shall be undertaken and each and every item of expenses shall be vouched and verified with the invoices of the vendors.
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– Bank charges – Should be verified with bank statement and banker certificate stating the amount of charges deducted. |
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– Depreciation – Shall be verified with the fixed assets register |
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– Interest expense – Shall be verified with bank statement |
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– Printing – Shall be verified with expense invoices |
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– Miscellaneous – Shall be verified with expense invoices |
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– Wages – Shall be verified with salary and wages register. |
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– Superannuation- Shall be verified with salary and wages register. |
In all the above four accounts, it needs to be checked whether the entries have been made in the books of accounts or not and whether the expenses or the incomes relates to the particular current year or any other year (Knechel, 2016).
Specific documents to be checked- bank statement, fixed assets register, expense invoices and salary and wages register
As per the analytical review made in the form of the trend statement it is very clear that there is the proper indication of the fraud. It has been evident from the fact of decrease in the percentage of the cost of sales with the increase in the percentage of sales revenue. There are high chances of having the fraud in the heads of the sales revenue, stock – opening and closing and direct expenses. The major motivation of the frauds is to achieve the target of sales in order to have the high percentage of incentive.
Second indication is of the decrease in other income by 96% and there are the high chances of manipulation with the entries relating to the other income leading to the decrease in the net profit and thus providing the wrong figures to the users of the financial statements.
Conclusion
The report has been framed with the purpose of assisting the audit team in preparing the audit plant and to conduct the audit of the company – Alizarin Enterprises. The report has concluded that the set materiality level is very low in relation to the figures as shown in the trial balance of the company. There are accounts which have the probable risk of material misstatements and the related assertions and the audit procedures to reduce the risk have been detailed in the report. The major finding is that there are the high chances of having the frauds present in the financial statements of the company.
It is recommended that the following steps shall be undertaken for start of the every audit:
List Of References
Budescu, D.V., (2012), the joint influence of the extent and nature of audit evidence, materiality thresholds, and misstatement type on achieved audit risk. Auditing: A Journal of Practice & Theory, 31(2), pp.19-41.
Gay, G.E., (2015), “Auditing and assurance services in Australia” Mcgraw-hill, pg 3-54
Glover, S.M., (2014). Between a rock and a hard place: A path forward for using substantive analytical procedures in auditing large P&L accounts: Commentary and analysis. Auditing: A Journal of Practice & Theory, 34(3), pp.161-179.
Imoniana, J.O., (2012). The analytical review procedures in audit: an exploratory study, Advances in Scientific and Applied Accounting, 5(2), pp.282-303.
Knechel, W.R., (2016), “Auditing: Assurance and risk” Routledge, pg 5-27.
Lo, K., (2011), Materiality and voluntary disclosures. Journal of Accounting and Economics, 49(1-2), pp.133-135
Lusk, E.J., (2016), Client risk calibration in PCAOB audits: an analytical procedures panel risk assignment protocol. International Journal of Auditing Technology, 3(1), pp.1-21
Todea, N., (2013), Considerations Regarding Materiality Calculation and Audit Risk in the Context of the Guidelines for Audit Quality. Anale. Seria Stiinte Economice. Timisoara, 19, p.728
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