Tips for Preliminary Audit Planning and Analyzing Accounting Issues

Preliminary Audit Planning

Tip 2: Preliminary Audit Planning Some cases may ask students to conduct preliminary audit planning. For example, in Unit 6, “YU CPA student, I could really use your help in preparing a preliminary audit plan.”. While there are a few different approaches for creating the audit memo, the most common approach is to use RAM (Risk, Approach and Materiality). You should have a separate heading for each of these sections of the audit memo. Let’s discuss each of these components in turn: Risk: Your first sentence should be to state what audit risk is classified as (high/medium/low). Audit risk, according to your textbook, is the risk that the financial statements are materially misstated after a clean audit opinion is given. It is calculated as Audit Risk = Inherent Risk * Control Risk * Detection Risk. Once you make a classification, students need to support their conclusion with evidence from the case. For example: Audit risk is high in this case as a result of: This is a new client to the firm There are complex accounting issues which may be prone to error Accounting errors or fraud were identified New management may have a bias to misstate The company has made the declaration to go public Weak controls were discovered or problems were reported by employees with financial information Approach: There are three options you have to choose here: substantive approach (you will be reviewing transactions), control reliance (you are relying on controls) or a combined approach (for some areas you will rely on controls). Overall if you identify weak controls all around in the organization, the best approach is a substantive approach and to support it with information from the case. However, if all controls are functioning adequately, a combined approach may be best with a substantive approach in the weak areas. Materiality: Materiality is a number which you must calculate and state why you are calculating it a certain way. Your textbook outlines the different rates for materiality such as 5% of net income from continuing operations or 0.5-2% of revenues/expenses for Non-for-profit entities. However, before you make the calculation, it is important to remove any accounting errors, accounting fraud or one time transactions from net income. In addition, students must also identify the users who will be relying on the financial statements as part of the materiality discussion. Identifying users is important because materiality is related to users and not to risk so be clear why you’re setting materiality. Tip 3: Analyzing Accounting Issues When asked to analyze accounting issues, such as during the Unit 6 case, “Can you please prepare a memo analyzing any new accounting issues that resulted from 2019 events that we should be keeping an eye for during our audit?”, the following framework is a good approach for dealing with each accounting issue. Identify the issue. Consider whether the accounting treatment was correct. Here you can use case facts and accounting rules you have learned through each of the accounting courses at YU. Identify if there are valid alternative treatments. If there are, discuss the alternatives. If not, discuss the appropriate treatment with reference to the correct technical rules. Recommend and conclude. Choose the best alternative, considering user needs and reporting objectives, and provide your recommendation. Evaluation Unit 6 Integration Case will be marked in its entirety out of 100. The following rubric indicates the criteria students are to adhere to, and their relative weights to the assignment overall.