Acc621 Auditing And Professional Practice Assessment Answers

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.

3. Use the trend analysis to identify 4 income statement accounts that appear to be at-risk 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.

Introduction

An audit planning financial analysis report has been prepared on the given entity through variance and trend analysis for the year 2017 and 2016 (Dichev, 2017). The income statement has been prepared basis this. All the significant accounts where the deviation is material have been analysed, the audit assertions and risks have been checked and finally the audit steps have been recommended for the same. Preliminary analytical review has not only helped in audit planning but also in determining the extent of materiality to be considered for the given client. Finally, the fraud risk analysis has also been done as per APES 110 to check the possibility of fraud in the entity.

Discussion and Analysis

The Trial balance for the entity Fulvous enterprises has been drawn for the year 2016 and 2017 and the difference in the debit and credit of the same has been considered to be pertaining to suspense account (Choy, 2018). The same has not been accounted for in the profit and loss account, as the nature of the item is not certain.

Fulvous Enterprises
Trial Balance
Jul 1, 2016 - May 31, 2017		Jul 1, 2015 - June 30, 2016
Debit	Credit	Debit	Credit
89,750		83,000
109,850		103,585
164,500		174,000
64,000		64,000
	31,586		24,000
66,000		66,000
	45,338		21,000
7,400		7,400
	2,880		2,220
	240,000		240,000
	178,315		187,450
54,129		63,595
	54,313		57,000
	44		50
319		350
32,583		15,738
10,542		12,000
339		375
1,320		-
48,189		53,000
4,579		5,035
653,500	552,475	648,078	531,720

1. Materiality is considered one of the significant tools being used by the auditors during audit of an entity. Materiality may be defined as a measure of marking the given item as important and significant based on the amount involved. It can both be qualitative as well as quantitative. This is very important to be determined at the start of the audit of entity as it helps the auditor in understanding, what needs to be audited and focused upon and what not(Knechel & Salterio, 2016). There may be a few line items, which are below materiality level and hence can be left from auditor’s scope. In the given case, the original materiality level that has been fixed is $15000, which seems to be quite high. Institutions of accounting round the globe like those of IASB and AASB prescribe and have suggested few limits like percentage of sales, assets, profits or shareholder’s equity for calculating materiality. Applying that in the given case, we find that the materiality level should be somewhere in between $ 1519 and $ 1783, considering the best possible base. This limits would bring into audit scope few of the other critical accounts like Furniture account, interest expenses, depreciation and superannuation, which would have been ignored otherwise (Werner, 2017).

(in $)
Fulvous Enterprises
Quantitative estimate of materiality
Criterion	Base	Amount	Materiality level/range
0.5% to 1% of gross revenue	Gross Revenue	178,315	891.57 to 1783.15
1% to 2% of the total assets	Total Assets	421,696	4216.96 to 8433.92
1% to 2% of the gross profit	Gross Profit	75,996	759.96 to 1519.93
2% - 5% of the shareholders’ equity	Equity	NA	NA
5% to 10% of the net profit	Net profit	80,671	403.36 to 806.71

2. For the preliminary analytical review of the trial balance, a variance analysis of the given company has been done of the 2 years. Furthermore, the common size income statement has also been prepared to compare each of the given items of P&L as a percentage of the sales(Linden & Freeman, 2017).

Fulvous Enterprises
Income Statement
Particulars	2017	% of sales	2016	% of sales
Sales	178,315	76.6%	187,450	76.7%
Consultancy fees	54,313	23.3%	57,000	23.3%
Interest income	44	0.0%	50	0.0%
Total Revenue	232,671	100.0%	244,500	100.0%
Less: Expenses
Cost of sales	54,129	23.3%	63,595	26.0%
Bank charges	319	0.1%	350	0.1%
Depreciation	32,583	14.0%	15,738	6.4%
Interest expense	10,542	4.5%	12,000	4.9%
Printing	339	0.1%	375	0.2%
Repairs and Maintenance	1,320	0.6%	-	0.0%
Wages	48,189	20.7%	53,000	21.7%
Superannuation	4,579	2.0%	5,035	2.1%
Total Expenses	152,000	65.3%	150,093	61.4%
Net Profit	80,671	34.7%	94,407	38.6%

Fulvous Enterprises
Income Statement
Particulars	2017	2016	Variance
Sales	178,315	187,450	- 9,135
Consultancy fees	54,313	57,000	- 2,688
Interest income	44	50	- 6
Total Revenue	232,671	244,500	- 11,829
Less: Expenses
Cost of sales	54,129	63,595	- 9,466
Bank charges	319	350	- 31
Depreciation	32,583	15,738	16,845
Interest expense	10,542	12,000	- 1,458
Printing	339	375	- 36
Miscellaneous	1,320	-	1,320
Wages	48,189	53,000	- 4,811
Superannuation	4,579	5,035	- 456
Total Expenses	152,000	150,093	1,907
Net Profit	80,671	94,407	- 13,736
Net Profit %	34.67%	38.61%

3. Considering the above shown tables, a few of the accounts, which are at risk and need audit attention, have been discussed below with the relevant assertions.

Sl. No.	Account Name	Audit Assertion and risk
1.	Sales	In terms of variance, it has declined by more than 5% as compared to the last year. In case the profitability is analysed, the same has fallen by more than 15% which is a cause of worry and poses significant audit risk and it needs to be checked if the sales prices has gone down or the quantitative sales has gone down or the same is due to competition in the market (Defond & Lennox, 2017).
2	Depreciation	Where all the other expenses have been on the decreasing side, there is one expense head of depreciation which has been on the increasing side and that too by whopping 107%. The gross value of the fixed assets has not increased but the depreciation on them has still increased so it needs to be checked as to if the rates or method of deprecation has been changed or it is due to something else (Bizfluent, 2017).
3	Cost of sales	The cost of sales has decreased by 15% where the revenue has decreased by just 5%. Ideally, in such a scenario, the overall profitability should have increased but instead the profitability has decreased by 15%. It needs to be carefully checked by the auditor if there is really a savings in cost due to less quantity or lower input prices or is it due to wrong accounting practices (Raiborn, et al., 2016).

4. For all the relevant audit assertions mentioned above with respect to critical accounts in profit and loss statement, the audit procedures which can be applied in the given circumstance are as follows:
5. Sales: For auditing the sales account, all the large ticket line items beyond the materiality limit needs to be vouched. The sales price and the quantity needs to be checked and analysed carefully to ascertain if the drop in sales is due to these factors. In addition, the revenue recognition policy of the company needs to be checked if they have complied with the relevant accounting standards(Trieu, 2017).
6. Depreciation: There is significant deviation in the depreciation account as the balance of the fixed assets has not increased but the depreciation on the assets has increased by more than double. IN terms of depreciation as a percentage of sales, it has increased from 6.4% to 14%, therefore all the management estimations and judgements w.r.t. the same needs to be verified. It needs to be checked if the management of the company has acquired or sold off any asset dueing the year or if there is any policy change introduced during the year(Sithole, et al., 2017).
7. Cost of sales: The cost of sales has declined by 15% as per variance analysis and as a percentage of sales as well, it has declined from 26% to 23.3%. Therefore, the auditor needs to be check if the raw material prices have dropped down, the efficiency of operations has increased, or it is due to shifting of current year expenses to the future years. All these aspects along with the accounting needs to be verified during the audit process(Goldmann, 2016).

Conclusion

5. Fraud risk analysis is one of the integral part of the audit plan and is done to check the existence of fraud in the books of accounts of an entity on an intentional purpose. In the given case, the audit manager has asked not to test the given client for fraud as the given company Fulvous Enterprises is a trustworthy client(Belton, 2017). However, this situation is against the principle of professional scepticism, which has been laid down in APES 110 as well (Jefferson, 2017). As per the principles, all the client’s needs to be checked for fraud analysis even though they have prepared and presented the accounts in the best possible manner as it is the auditor who is responsible for given a reasonable assurance to the users of the financial statements. There are few accounts which needs to be checked for fraud analysis like those of depreciation for reasons explained above, the superannuation account as the same has not decreased in percentage of sales, the interest expenses account to check if the business carries a loan as it cannot be seen in the trial balance (Saeidi, 2012).

References

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online] Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html [Accessed 07 december 2017].

Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.

Defond, M. & Lennox, C., 2017. Do PCAOB Inspections Improve the Quality of Internal Control Audits?. Journal of Accounting Research, 55(3), pp. 591-627.

Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4(3), pp. 103-112.

Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.

Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.

Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.

Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.

Saeidi, F., 2012. Audit expectations gap and corporate fraud: Empirical evidence from Iran. African Journal of Business Management, 6(23), pp. 7031-41.

Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.

Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, Volume 93, pp. 111-124.

Werner, M., 2017. Financial process mining - Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.