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Misstatement Report

REPORT

Introduction

Any information or the item is said to be material, if misstatement by that material information will influence the user decision. Misstatement includes omissions will also considered as material if they are in individually or in aggregate reasonably expected to influence the users economic decisions which are taken on the basis of financial statements.

In preliminary assessment of materiality, there is as guide for the auditor for determining the timing, nature and the extent of the audit procedures. This judgement described the amount of materiality will be either lower or higher depends on the needs and risk of the process.Auditor preliminary assessment of the materiality is the process of gathering the audit evidence. Audit evidence may be of internal audit evidence and the external audit evidence.

As preliminary assessment of materiality for the financial report set as $ 15000 by taking a Example on it, Preliminary assessment of materiality during the period of the audit will change due to additional information gathered or gained during the process of the audit , For example preliminary assessment of materiality will be lower if in fiscal year net income will be significantly lower as compared to the forecasted at interim date when the planning of audit was done.Auditor set preliminary assessment at lower level, because of likelihood of detecting material misstatements and this will reduce the audit risk overall. The auditor do this because for extra margin of safety for the litigation possibility of the audit.

Abstract

Misstatements trends effect such as trend on profitability, Reliability and accuracy of the accounting system, Misstatement found in segment information, Risk of the misstatements that are undetected, Indicators of the fraud and fraud detection that are done in the prior period, Risk which relates to the earning manipulation for example motivation by the management for smooth and to manage the earnings, effects of the merger acquisition and the sale, Monitoring by the government agency on the work of the auditor this may lead litigation threats and the externals review, Imminent offerings of the public stock.

Business Structure

Increase or decrease

Jul 1, 2016 - Apr 30, 2017

Jul 1, 2015 - June 30, 2016

Amount

Percent

Sales

164958

187450

22492

11.99%

Cost of goods sold

50875

63595

12720

20%

Gross Profit

114083

123855

9772

7.88%

Bank charges

290

350

60

17.14%

Depreciation

13804

15738

1934

12.28%

Interest Expense

9583

11500

1917

16.66%

Printing

308

375

67

17.86%

Repairs and Maintenance

1200

5050

3850

76.23%

Total Operating Expenses

25185

33013

7828

23.71%

Consultancy income

49375

57000

7625

13.37%

Interest Income

40

50

10

20%

49415

57050

7635

13.38%

Wages

43808

53000

9192

17.34%

Superannuation

3328

4770

1442

30.23%

Net Income

2279

-720

1559

-46.18%

Comments: Balance sheet items will not be included in the Requirement part 2.

Business Issues

1. Sales Assertion:

Existence-Examine the invoices of sales with their suppporting bill of customer order and the lading.

Completeness-Accounts maintained for the sequence of the shipping documents

Accuracy-Examine the price list which is approved for the proper authorisation and the accuracy.

Classification-Examine package document for the sake for duplicate verification.

Summarization-Account for documents of shipping in the sequence.

2. Depreciation Assertion:

Occurence- Occurence should be checked whether the transactions of fixed assets actually took place or not. sample of addition of the assets and then vouch them with the documents which are supporting to the assets such as agreement of purchase,title.

Completeness- Fixed assets tracing to the plant property and the ledger of the subsidiary to determine whether the assets are recorded or not.

Accuracy- Review rental from the rental property and the expense on property tax it will help to check the accuracy of this clients accounts real property evaluation.

Rights and obligation- verification of the ownership of the assets of the client by examining the fixed assets titles of the client.

Valuation and allocation- Reconcile the subsidiary ledger of the equipment, property and the plant with general ledger to check that their accounting are consistent.

3. Consultancy fee Assertions:

Existence- Fictitious revenue or the recording of the revenue but the services are not performed.

Completeness- services are performed but the revenue are not recorded.

Accuracy- recording of the transaction of the revenue at incorrect amount, transactions are not correctly posted.

Cut off- transaction recorded in the wrong period.

4. Wages and superannuation Assertions:

Occurence-Incurred during the period, not include Unauthorised personnel payroll cost.

Completeness- wages and superannuation cost fully accounted.

Accuracy- Tax deduction at source reconciled correctly and properly accounted.

Classification-properly allocated between operating expenses, general and administrative expenses and cost of personnel

Key Findings

Audit procedures on sales

Journal entry for sales should be trace to the document of shipping and if the sales are recorded for more than one time then check whether documents of shipping is cancelled or not. check whether the person who are recording sales will not be authorize to make the payments, trace the documents of the shipping with the sales invoice and entry in the sales journal, compare the selected transactions total with the accounts receivable entries and with the duplicate invoices of the sales, when there are credit and cash sales, then for cash sale transaction accounts receivable will not be debited and, operating assets will not classify as sales. common procedure will be followed for the examination of the invoices of duplicate sales for classification of proper account, billing of sales should be made when transfer of ownership to the customer, compare sales recording date in sales journal with date of invoices of duplicate sales and bill of lading. Audit software is used for the comparison of the sales journal and total would be trace for the general ledger.

Audit evidence on sales

Obtain confirmation of the sample of the selected accounts receivable and review confirmation of the bank, obtain aged trial balance and examination of documents before and after year end and evaluate the confirmations results.

Audit procedures on Depreciation

Depreciation rate should be reviewed, then assess the reasonableness of the depreciation, rate are consistent with the fixed asset capacity, recalculate the expenses on the depreciation, Accumulated depreciation should be reviewed amount are compared with the fixed assets net book value, reconciliation of the depreciation expenses , if they will not reconcile then the proper explanation should be obtained from the committee of management, test the depreciation reasonableness by the procedure of the recalculation.

Audit evidence on Depreciation

If we verifying ownership and existence of building ,then the report of the expert valuation is irrelevant but the approved map and the land registry of the building of the owner will be relevant.

Audit procedure on Consultancy fee

Request and examine bank confirmations and undertake test of bank reconciliation.

Audit evidence On consulting fee

Bank confirmation certificate from the bank and obtain copies of client bank reconciliation transaction.

Audit procedure on interest Income

Follow up reconcile items.

Audit evidence on interest Income

Enquiry and notes of oral reconciling item.

Suggestion and Recommendation

International mistake to get the undue advantage are commonly known as Fraud. There are two types of risk related to the fraud first is Fradulent financial reporting and the misappropriation of assets.:

Identifying and Assessing risk of material misstatement which are occured due to the fraud-In the planning stage analytical procedure is adopted by the auditor i,e trend analysis and the ratio analysis, Auditor evaluate result of this procedures and identified that whether unusual transactions occured in performing the analytical procedure.

Auditor rely on analytical procedure depends on the following Factors:

Materiality of the items involved example- If balances of inventory are material auditor will not rely on this Analytical procedures in their conclusions forming, If income or expense which are not material individually then auditor can solely rely on that procedure.

Other audit procedure directed towards the same objective for example-reviewing of accounts receivable collectability such as subsequent cash receipts that raised question on analytical procedures of customer accounts ageing schedule.

Accuracy by which analytical procedures expected results predicted for example auditor expects consistency to be greater in comparing margins of gross profit from one period to another then in comparing expenses of discretionary such as advertising and research.

Assessment of inherent and control risk for example- if internal control which is weak over the sales control then the control risk is high and the auditor will more reliance on the transactions of the test of details and balances than on the analytical procedures in drawing conclusions on receivables may be required.

If Auditor has identified some kind of fraud and had obtain the information which indicates that the particular kind of fraud may exist then the auditor may immediately communicate this matters to the appropriate level of the authority in the management and the auditor will communicate this type of matters to those charges with governance on the timely basis so that efficiency and effectiveness of the organization audit procedures will be maintained, Auditor may review accounting estimates involved and checked whether this estimates are appropriate or not biased.

Summary

The auditor should apply analytical procedures at or near the end of the audit when forming an overall conclusion as to whether the financial statements as a whole are consistent with the auditor knowledge of the business, apply the analytical procedures at planning stage in identifying and understanding the areas of the potential risk, Auditor apply substantive procedures to reduce the detection risk which are related to the financial statement assertions which may be find out from the test of details and analytical procedures or the combination of the both. The decision about which procedure will achieve particular audit objective it will depends on the auditor judgement about the efficiency and effectiveness of the procedures available in reduction of the detection risk for financial statement assertions.

References:

Mock, T. J., & Wright, A. (1993). An exploratory study of auditors' evidential planning judgments. Auditing, 12(2), 39.

Zuber, G. R., Elliott, R. K., Kinney Jr, W. R., & Leisenring, J. J. (1983). Using materiality in audit planning. A practical way to relate the auditor's materiality estimate to the design of audit procedures. Journal of Accountancy (pre-1986), 155(000003), 42.

DeZoort, T., Harrison, P., & Taylor, M. (2006). Accountability and auditors’ materiality judgments: The effects of differential pressure strength on conservatism, variability, and effort. Accounting, Organizations and Society, 31(4-5), 373-390.

Lea, R. B., Adams, S. J., Boykin, R. F., & Smieliauskas, W. (1992). Modeling of the audit risk assessment process at the assertion level within an account balance; Discussions; Reply. Auditing, 11, 152.

Harrison, K. E., Srivastava, R. P., & Plumlee, R. D. (2002). Auditors’ evaluations of uncertain audit evidence: Belief functions versus probabilities. In Belief Functions in Business Decisions (pp. 161-183). Physica, Heidelberg.

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