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ACC621 Audit Planning

Prepare a report for the audit senior, which addresses the 5 issues below.
1. The audit partner has suggested that the preliminary assessment of materiality for the financial report as a whole be set at $15,000. Comment on the appropriateness of this figure for your client. Provide evidence to support your view. Include a brief discussion of the effect that changing the preliminary assessment would have on the audit budget.
2. Prepare an analytical review (in the form of a trend analysis) using the income statement items from the trial balance. Note: Present your analysis in table format;comments on the results are not required for requirement 2.
 
Use the trend analysis to identify 4 income statement accounts that appear to be atrisk of material misstatement. Provide justification for why these accounts should be subjected to significant audit testing. In your explanations, identify an assertion that is likely to be at-risk for each account (i.e. identify 1 assertion per account; 4 in total).
4. For each account and assertion identified in requirement 3, design and describe an audit procedure that would provide relevant evidence for this (i.e. describe 1 procedure for each account; 4 procedures in total). Note: you need to explain the procedures in your own words with as much detail as possible (for example, if applicable, identify the sampling frame and specific documents required for your procedure).

5. The audit partner has suggested that fraud risk should not be considered for this client, as he feels that the client’s staff are all very trustworthy. Comment on the appropriateness of the audit partner’s suggestion. Identify whether there are any indications of fraud evident in the analytical review.

Answer:

Audit planning is the process under which strategies are designed for conducting the estimated outcome those are also considered as the audit scope within the entity.  The time, nature and extent of the plan may vary with the nature of the company and the industry in which it conducts its operation. For instance, if the business is operated on large scale, the strategies and its implementation will take longer times and the accordingly the overall audit scope will be increased.

The audit plan is the step by step methods under which the audit controls are reviewed for the internal environment and financial process in addition to preparation of engagements (Louwers et al. 2015). The report will highlight the basis on which the preliminary judgements with regard to materiality will be established. Further, on the basis of materiality level few material items will be selected from the income statement. Further, the report will focus on the fraud that may involve in the financial statements of Fawn Enterprise.

1.1 Analytical review

Analytical review is the procedure through which the entity or auditor analyse the financial statement or accounting procedure of the company for identifying the irregularities, if any. The procedure inv


olves comparison of the non-financial as well as financial information of the entity through trend analysis or ratio computation (Glover and Prawitt 2014). Generally, the analytical review leads to the audit if any irregularities or odd information, if any, found. The analytical procedures includes the following processes –

  • Reading the important documents and analysing the financial as well as accounting impacts
  • Reviewing the accounting activity among the period of interim period and year end period.
  • Comparing the account balance of current period with the balance of previous period (Arens et al. 2013).

1.2 Preliminary judgement for materiality

Owing to the relative nature of materiality, it must have a base for establishing the material misstatement. Base is the crucial item that is used by the users while making critical decisions. Bases vary with the nature of the business carried out by the entity. In accordance with AASB 108 material misstatement or omission of the items will be considered as material if individually or in combination with any other item it influences the user’s economic decisions. As per ISA 320 various factors can be considered while establishing the benchmark for materiality (Icaew.com 2018).

These involve the entity’s nature and industry’s nature under which the client company operates. Further, the materiality level shall be related to the material misstatement prepared under the concerned reporting period. If revenue is taken as a base for establishing the materiality level it will be 1% to 5% of sales (Icaew.com 2018). Therefore, for Fawn enterprise materiality will be amounted to ($ 194,925 * 1%) = $ 1,945.25 to ($ 194,925 * 5%) = $ 9,726.25. However, the audit partner assessed the materiality level at $ 15,000. Hence, it can be stated that the actual material level of the entity is ranged from $ 1,945.25 to $ 9,726.25.

Based on the financial information it can be assumed that the materiality level shall be established at around $ 7,500. The preliminary assessment regarding materiality is established to determine the level of reliance can be put on the works of the internal auditor. Based on the materiality level the audit budget shall be determined. Hence, if the level of materiality is changed to $ 10,000 from $ 15,000, the audit budget that is the number of items to be checked under audit procedure shall be increased (Legoria, Melendrez and Reynolds 2013).

3.1.1 First account selected – Sales 

3.1.2 Rational for selection

Being the major source of income sales revenue will be considered as material by its nature. Though the increase in sales revenue over the past 1 year is only 3.77%, as the sales revenue is a major item in the financial statement of the company it will be considered as material item. Further, as in most of the entities the remuneration and bonuses of the managements are based on the revenue, the revenues are always exposed to misstatement.

3.1.3 Assertion and explanation

Sales are made on credit basis as well as cash basis. Hence, the 1st assertion involves with the revenue is accuracy that is the sales revenue has been recorded in the income statement accurately that is without any error. Another assertion involved with revenue is completeness that is the recognition basis for revenue has been disclosed properly along with the footnotes (Mock, Ragothaman and Srivastava 2018).

3.2  Second account selected – Consultancy Fees

It can be identified from the income statement of Fawn Enterprise that the amount received from consultancy fees was a major source of income after sales revenues and therefore the item is material by nature. It can be found that the consultancy fees have been increased from $ 57,000 to $ 59,251. As there is an increase by 3.95% likelihood is there that the number of client for the entity or the amount of fees has been increased. Therefore, the assertion involved with consultancy fees is accuracy that is the amount of receipt recorded is free from misstatement.

3.2.2 Assertion and explanation

As there is an increase by 3.95% likelihood is there that the number of client for the entity or the amount of fees has been increased. Therefore, the assertion involved with consultancy fees is accuracy that is the amount of receipt recorded is free from misstatement. Apart from that, another assertion involved with consultancy fees is understandability that is the information included in the financial report has been presented clearly with the details of the client’s name to which service provided and services for which fees charged (Bowlin, Hobson and Piercey 2015).

3.3 Third account selected – Depreciation 

3.3.1 Rational for selection

Depreciation is an important item related to fixed asset of the entity. As various methods can be used for providing depreciation on fixed assets based on the useful life likelihood is there that the depreciation has not been provided on consistent basis. Further, it is found that the depreciation has been increased by 125.86% whereas no additional fixed asset is found from the fixed asset presented in the trial balance of the company.

3.3.2 Assertion and explanation

Different companies use different methods for providing depreciation on it fixed asset. Under straight line method the amount of depreciation remains same if there are no new purchases made during the year. However, the amount of depreciation may increase if the entity changes the method of providing depreciation (Wali 2015). As from the trial balance it is evidential that the entity did not purchase any new asset during the period under concern. The major assertion associated with depreciation expenses is cut-off. This assertion states that all the depreciation expenses may not have been recorded under the accounting period in which it should have been.

3.4.1 Rational for selection

Wages are one of the major operating expenses of any entity. Though the reduction in wages over the past 1 year is only 0.81%, as the wage expense is a major item in the financial statement of the company it will be considered as material item by its nature.

3.4.2 Assertion and explanation

Wages shall be considered for auditing as a material item as it leaves wide space for misstatement for the management. Major assertions associated with wage expenses in cut-off. This assertion states that all the wage expenses may not have been recorded under appropriate accounting period (Coetzee and Lubbe 2014). Another assertion involved is accuracy that is the likelihood that the transactions may not have been recorded under the accounting period in which it should have been.

4.0 Audit procedure 

4.1 Audit procedure for sales

White auditing the sales revenue the auditor must verify the sales register and match it with the sales bill along with the names of the customer, quantity purchased and amount charged per unit. Further, the auditor must analyse the recognition method as per which the entity recognizes its revenues. Further, the auditor shall verify that the recognition method is consistently applied by the entity (Stewart 2013).

4.2 Audit procedure for consultancy fees

The documents associated with the consultancy services shall be verified to confirm the charges billed for the services provided, name of the clients to whom the services provided and the serviced for which the bills raised. If services provided to any new client the agreement regarding that shall be checked properly.

4.3 Audit procedure for depreciation

The fixed depreciable asset of the entity shall be verified physically. The auditor shall verify the method of depreciation used by the company and shall confirm that the method is consistently used. Further, the auditor shall evaluate the capitalisation method of the assets (Griffin 2014).

4.4 Audit procedure for wages

Wages paid to the employees shall be checked with the employee register to confirm the name of the employees, wages paid to each employee, advance payments and arrear payments, if any. Further, in case of employees who draws large amount of payments proper authorization shall be verified.

5.0 Fraud

The auditor shall learn regarding the conditions under which the fraud risks under the financial statement in order to develop more efficient audit plan. Assessment of the audit risk is the integral part of audit procedure. Risk factors recommends the auditor that for assuming that if the opportunity is given, the management will attempt in fraud for recognizing the revenues or expenses and will override the internal controls (Petra?cu and Tieanu 2014). Therefore, even if the audit partner feels that the employees of the entity are trustworthy the auditor shall carry out the audit for detecting fraud.

Reference

Arens, A.A., Best, P., Shailer, G. and Fiedler, B., 2013. Auditing, Assurance Services and Ethics in Australia. Pearson Higher Education AU.

Bowlin, K.O., Hobson, J.L. and Piercey, M.D., 2015. The effects of auditor rotation, professional skepticism, and interactions with managers on audit quality. The Accounting Review, 90(4), pp.1363-1393.

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.

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.

Griffin, J.B., 2014. The effects of uncertainty and disclosure on auditors' fair value materiality decisions. Journal of Accounting Research, 52(5), pp.1165-1193.

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.

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

Mock, T.J., Ragothaman, S.C. and Srivastava, R.P., 2018. Using Evidential Reasoning Technology to Enhance the Audit Quality Assurance Inspection Process. Journal of Emerging Technologies in Accounting, 15(1), pp.29-43.

Petra?cu, D. and Tieanu, A., 2014. The role of internal audit in fraud prevention and detection. Procedia Economics and Finance, 16, pp.489-497.

Stewart, T.R., 2013. A Bayesian audit assurance model with application to the component materiality problem in group audits.

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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