Auditor’s main objective is to develop a plan for audit so that the audit can be performed in efficient manner. Audit plan highlights the risk areas and based on the findings audit procedures are carried out for the risk – prone areas. 3 major components of successful audit are – (i) Timing – it is the continuous procedure that starts with the ending of previous audit and finishes after completion of audit (ii) assessment of risk – risk is assessed on the basis of the client’s external, internal and regulatory factors that may have impact on audit (iii) audit team – it considers the professional experience of the auditors included in the team. It shall assure that right people have been included under the audit team (Leung et al. 2014).
1.1 Analytical review
It is the crucial part of the audit procedure that includes the analysis of the financial data provided in the financial reports of the company. It starts from the simple comparison and can be extended to complex models that involves various relationships and data elements. It involves the comparison of the reported amounts or financial ratios to expectations of the entity or with the industry standards or with the entity’s data for previous year (Louwers et al. 2015). The auditor uses the analytical procedures for the following purposes –
1.2 Preliminary judgement for the purpose of materiality
Professional standard stated insufficient guidance regarding assessment of materiality on reasonable basis. AASB 108 stated material misstatement as the omission that can have impact on the user’s financial decision making individually or in aggregate with any other item. However, for establishing the materiality level various factors like the nature and type of the industry in which the company operates shall be taken into consideration as per the requirement of ISA 320. Thouse the sufficient bases have not been provided to the practitioners as per AICPA and FASB, there must have some base for evaluation of materiality (Eilifsen and Messier 2014).
It is assumed that is the materiality is established on the basis of sales revenue the amount will be 1% to 5% of sales revenue. Hence, for Chamoisee Enterprise materiality will be ($ 189,000 * 1%) = $ 1,890 to ($ 189,000 * 5%) = $ 9,450. However, the tolerable misstatement may be set at lower limit as compared to overall materiality as it is unlikely that all the accounts are not misstated with full amount. Therefore, materiality can be established at around $ 8,000 (Legoria, Melendrez and Reynolds 2013). Hence, the estimated materiality of the audit partner that is $ 15,000 is not appropriate for Chamoisee Enterprise and shall be reduced to $ 8,000.
The audit budget is the number of items required to be selected for the purpose of carrying out the audit procedure based on materiality level. If the materiality level increases the auditor will be required to select less number of items and vice versa. Therefore, as the materiality level shall be reduced from $ 15,000 to $ 8,000 the audit budget will be increased and the auditor will be required to select more items for the purpose of assessing material misstatement (Glover and Prawitt 2014).
1.0 Trend analysis
Sales and the collection procedure under any business operation is the set of procedure that starts with the sales of services or goods and completes with the receipt of payment. It is found from the income statement of the entity that the sales have been increased only by 0.83%. However, sales transaction shall be verified to assure that internal control on sales transaction is sufficient and the revenues are not misstated materially (Ruhnke, Pronobis and Michel 2014).
3.1.3 Assertion and explanation
Audit assertion related to sales transaction are – (i) accuracy – amounts related to the sales transactions have been properly recorded (ii) classifications – transaction related to sales have been listed under proper heads (iii) occurrence – tractions recorded under sales have actually taken place under the concerned period. Further, the assertions involved with the disclosure and presentation of revenue balance are – (i) classification – all the sales transactions are properly classified under proper head, for instance, credit sales and cash sales (ii) occurrence – all the related disclosed transactions and events actually taken place and is related to the company (Coetzee and Lubbe 2014).
Rational for selection
COGS are generally tested at the same time while the tests for inventories are completed. Cost of sales is regarded as material by its nature as it requires large amount towards the sales. COGS include various costs as labour, material and overhead expenses. Generally, the COGS increase in the same rate with the sales (Wali 2015). However, it is found from the income statement of the entity that though the sales have been increased by only 0.83% the COGS have been increased by 9.28% over the same concern period.
Assertion and explanation
As there is large gap among the increase rate of sales and COGS likelihood is there that the expenses related to COGS have been misstated. The assertions involved with the COGS are – (i) accuracy – amounts related to the COGS have been properly recorded (ii) classifications – transaction related to COGS have been listed under proper heads (iii) occurrence – tractions recorded under COGS have actually taken place under the concerned period (iv) cut – off – transaction related to COGS have been listed under proper accounting period (Christensen, Glover and Wood 2013).
Rational for selection
It can be seen from the income statement of the company that the expenses towards repairs and maintenance was one of the biggest expenses during the previous year. However, the expenses under same head have been reduced by 71.49% during the current period.
Assertion and explanation
Various assertion involved with repairs and maintenance expenses are – (i) occurrence – all the related transactions and events actually taken place and is related to the company (ii) cut – off – transaction related to repairs and maintenance have been listed under proper accounting period (iii) classifications – transaction related to COGS have been listed under proper heads (Kharisova and Kozlova 2014).
Rational for selection
Payment of wages or payroll processing is considered as an important part of day to day business operations. Further as large amount is involved with the wage payment wage payment shall be considered as a material item that requires analysis and evaluation. It is found from the income statement of the entity that though the wages expenses have been reduced by only 9.43% over the concern period.
Assertion and explanation
As it involves payment to large number of employees it leaves a scope to the management for misstating the account balance. Various assertions involved with wage payment are – (i) cut – off – transaction related to wage payments have been listed under proper accounting period (ii) occurrence – tractions recorded under wage payment have actually taken place under the concerned period. In other words, payments made to those employees who are actually engaged with the entity during the concern period.
Audit procedure
Sales transaction shall be matched with the unit price listed in the authorised price list of the company. Further, the auditor shall verify that the sales revenue has been recorded only after the risk and rewards associated with the services or goods transferred to the purchaser (Byrnes et al. 2015). Further, the sales register shall be verified to confirm that the recorded amount matched with the amount for which bill raised.
Cost of sales
Cost of sales shall be verified with the expenses under particular head of material expenses, labour expenses and overhead expenses. Further, in case of any mismatch or doubt the amount shall be confirmed from the 3rd party. For instance, amount of purchases can be confirmed from the creditors or suppliers.
Repairs and maintenance
Amount spent for repairs and maintenance shall be verified with the payment transaction and vouchers for evaluation the items those were repaired. Further, where large amount has been paid towards repair or maintenance authorization for the same shall be verified (Arens et al. 2016).
Wages
Wages shall be verified with the employee register to confirm that the payments made only to those who were in engagement with the company during the period taken under consideration. In case of new engagement their contract shall be verified to confirm that they are getting the same amount that is mentioned in the engagement contract letter.
Conclusions
It can be concluded from the above that some of the accounts of the company that is sales, wages, repairs and maintenance and COGS shall be verified for material misstatement. However, in fraud aspect the auditor is responsible for carrying out the audit to detect the misstatement due to fraud. It is assumed that the employees or management involved in fraud if they get chance. Therefore, even if the audit partner is in the view that the employees are honest they shall be carried out the audit for detecting the fraud misstatement.
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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