Financial Audit Report For Fulvous Enterprises

Materiality of Financial Statements

This report is prepared for the purpose of conducting an unbiased and independent audit report on trial balance prepared by Fulvous enterprises that is registered under proprietorship business structure. There are various factors in respect to external audit that will be considered in this report such as materiality of financial statements, analytical review of financial statements, risk of material misstatement, audit procedure and fraud risk. Main purpose of this report is to get an understanding of all the activities that are required to be conducted in independent evaluation of financial statements.

Materiality in financial statements can be defined as the level of acceptable material misstatement in financial statement of a company. It is true that auditor of a company cannot conduct an audit that covers 100% data presented in financial statements. All the financial transactions recorded by business organisations are conducted over 12 months of time, therefore it is not practically possible for an auditor of such business organisation to review these transactions in limited period of time. There are specific commonly acceptable rules and regulations in respect to giving a monetary value to materiality in financial statement (Lakes and Masiulevi?ius, 2018). One of these commonly acceptable formula to calculate 5% of total net profits (Calculation of net profit shown in appendix 1) earned by the company and consider such amount as materiality of financial statement.   

In the case of Fulvous Enterprises, total net profit of the company in financial year ending 2016 is $94407. Therefore materiality in this case would be $4720 which indicates that material statements up to $4720 will not be considered as material from the perspective of stakeholder’s decision making process. Materiality decided by the audit partner at the start of financial year is 15000 whereas it should be around $5000. It can be said that auditor of the company is required to increase the efforts toward the audit procedure in order to decrease audit risk (Christensen et.al, 2018).   

Particular	Last year Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Proportional Eleven month of last year	First Eleven months of current year	Analysis
Sales	244500.00	224125.00	232671.00	Increase in sales of the company is a positive sign for the company but it is important that other variables move in same direction (Scarborough, 2016).
Cost of sales	63595.00	58295.42	54129.00	The cost of sales has decreased substantially in this year as compared to last financial year which shows efficiency in business operations.
Total indirect expenses	90783.33	83218.05	97871.00	The increase in indirect expenses in a question of doubt in this scenario because the rate of increase is very substantial and direct expenses has decreased in similar period of time.
Net profit	86498.33	79290.14	80671.00	The rate of increase in net profit is not very impressive in this case due to substantial increase in indirect expenses (Grant, 2016).
Gross profit	180905.00	165829.58	178542.00	Gross profit earned by the company has improved in this financial year as the cost of sales has decreased and sales has increased.
Net profit ratio	35.38	35.38	34.67	There is a requirement of cost control methods as net profit ratio has decreased.
Gross profit Ratio	73.99	73.99	76.74	It can be said that company has power to bargain from its supplier as cost of sales has improved.

There are certainly some financial items in trial balance of the company that are at higher risk of material misstatement as compared to other financial items. In case of Fulvous Enterprises three financial item are identified with the help of trend analysis of trial comparing last year to current financial year (Louwers et.al, 2015). Following are these three financial items-

Particular	Last year	First 11 months of current year
Total Indirect expenses	90,783	97,871
Cash	83,000	89,750
Depreciation	15738.33	32582.91667

Total indirect expenses- in the first 11 months of operation total indirect expenditure has increased substantially. Total indirect expenses incurred by the company in last 12 month was higher as compared to the total expenditure in first 11 month of 2016. It clearly shows that internal control implemented by the organisation in order to control its cost are not very efficient and there is a requirement to revise the internal controls.

Analytical Review of Financial Statements

Cash- Cash is always considered as fraud prone area in financial statements of the company and it should be always considered at the risk of material misstatement (Griffiths, 2016).

Depreciation- There is a possibility of error in recording of depreciation accounting conducted by management of the company. It is general practice of sole proprietorship to record depreciation on the basis of straight line method. In this proprietorship business, amount of depreciation has increased substantially there as total amount of fixed asset in balance sheet of the company is same.   

Indirect expenses- Auditor of the company is required to assess the nature of indirect expenses and conduct vouching of all the expenses on sample basis. Vouching is an audit procedures that is conducted to verify the amount of indirect expenses in a particular financial year (Ganguly, Al-Faraj and Hancock, 2017).

Cash- discussion with management of the company should be conducted by Auditor in order to identify the cash management procedures used by management of the company. These procedure should be compared by auditor of the company with standard cash management procedures that should be used by an organisation working in similar industry as Fulvous Enterprises.

Depreciation- Auditor of the company should assess the methods used for recording of depreciation in account of the company. Audit procedure that should be used in this scenario is physical verification of any addition made in total Assets of the company (Knechel and Salterio, 2016).   

There is a characteristic that should be possessed by every auditor conducting external audit of a company i.e. scepticism. During the process of Audit and auditors should always evaluate every action taken by management from the perspective of scepticism. Audit partner in this scenario has suggested that there is no risk of audit fraud because management of company seems to be very helpful and friendly. Friendly and helpful nature of management cannot be considered as sufficient audit evidence in order to make a conclusion that there is no risk of fraud in the company (Eutsler, Nickell and Robb, 2016). Therefore it can be said that opinion suggested by audit partner is not appropriate and it is also not in line with duties of auditor. 

Conclusion

This report has identified various aspects of audit that should be considered by Auditor in conducting audit engagement of proprietorship business. It is concluded that material it is decided by auditor was not correct and it way higher as compared to what it should have been. This report is also identified three factors that are indirect expenses, cash and depreciation recorded by the company at high risk of material misstatement. Audit procedures are also suggested to collect appropriate audit evidence in relation to above 3 financial items.

References

Christensen, B.E., Eilifsen, A., Glover, S.M. and Messier, W.F., 2018. The Effect of Materiality Disclosures on Investors’ Decision Making.

Eutsler, J., Nickell, E.B. and Robb, S.W., 2016. Fraud risk awareness and the likelihood of audit enforcement action. Accounting Horizons, 30(3), pp.379-392.

Ganguly, R., Al-Faraj, M. and Hancock, G., 2017, March. Introducing Scenario Based Audit–A Risk Based Approach to Auditing. In SPE Middle East Oil & Gas Show and Conference. Society of Petroleum Engineers.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Griffiths, P., 2016. Risk-based auditing. Routledge.

Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.

Lakis, V. and Masiulevi?ius, A., 2017. Acceptable Audit Materiality for Users of Financial Statements. Journal of Management, 2(31).

Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.

Scarborough, N.M., 2016. Essentials of entrepreneurship and small business management. Pearson.