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You are an intermediate member of your firm’s audit team and the audit partner has asked you to assist with the planning stage of the audit for a small client. You have access to the preliminary trial balance for the client and would like to use this to identify accounts that are likely to require significant audit attention. To access the trial balance for your client, open the document named ‘Trial balances for task 2’ and follow the directions to the appropriate worksheet.

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.

3. Use the trend analysis to identify 3 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; 3 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; 3 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.
 

Materiality Discussion

Preparation of an audit process requires a preliminary survey which helps the auditor to become familiar with the procedures and policies which might impact the areas being audited. A proper audit plan helps in identification of the critical accounts that need to be examined to disclose any fraud in the company financial statements. Bellof and Wehn (2018) argue that the audit plan involves a collaborative effort of the audit team with the client to develop an appropriate approach that will help the senior auditor in addressing the various issues raised from the findings of the report. The results of the story will be based on the financial information obtained from the client’s trial balance.

The planning of an audit process requires the auditor to consider the things which would make the financial report materially misstated.  The preliminary assessment of materiality is therefore conducted before the audit and acts as a critical guide to the planning of the review (Choudhary, Merkley & Schipper, 2018, p. 12). The auditor can, therefore, decide to set the level of materiality higher or lower depending on the audit risk factors to the client. There is, therefore, a relationship between the level of a client audit risk and materiality in that the higher the audit risk, the lower the materiality level while the lover the audit risk the more senior the materiality level. In this case, the materiality level suggested by the Audit partner of $ 15000 can be established by using the constant percentage method of materiality determination as provided below.

Using the company current assets, materiality should be based on a percentage level of 3 % to 8%. For the financial period ending June 30th, the materiality level would be set as follows;

            Cash at Bank             $ 73000 x 8 % (using upper limit) = $ 5840

            Accounts receivable $ 122750 x 8% = $ 9820

            Inventory                    $ 174000 x 8% = $ 13920    

           Taking the Average (29580/3 = $9, 860).

Therefore the amount suggested for $ 15000 as the materiality level is appropriate based on the above threshold where the client has low risk, and consequently, the auditor was to set a higher materiality level. The preliminary assessment is made with the aim of helping the auditors to forecast or plan for the audit plan. An initial changing evaluation would, therefore, affect the audit budget in that it can increase or decrease the auditing cost and thus affecting the management of the company. The change may also affect the risk identification process and procedures and thus increase the audit budget.

Item

 FY1 ended 30th June 2016 ($)

FY2 ended 30th November 2016 ($)

Amount of Change($)

Percentage Change (%)

Cash at bank

73000

70000

3000

4.12

Accounts receivable

122750

120750

2000

1.63

inventory

174000

185000

-11000

-6.62

machinery

64000

71000

-7000

-10.94

Accumulated depreciation on machinery

24000

27448

-3448

-14.37

Motor vehicle

66000

66000

0

0

Acc. Dep. On motor vehicle

21000

24155

-3155

-15.02

Furniture

7400

7400

0

0

Accumulated dep. On furniture

2220

2520

-300

-13.51

Bank loan

230000

230000

0

0

sales

187450

82479

104971

56.00

Consultancy services

57000

24680

32360

57.00

Interest income

50

20

30

60.00

Bank charge

350

145

205

58.57

Depreciation

15378

6902

8476

55.12

Interest expense

11500

4792

6708

58.33

Printing

375

154

22158.93

Repairs and maintainer

5050

600

4450

88.12

wages

53000

21904

31096

58.67

Superannuation

4770

1664

3106

65.11

Cost of sales

63595

25430

38165

60.01

Analytical review of Coral Enterprise Financial information

The risk of material misstatement arises when some financial statements of accounts belonging to an organization have faced the threat of been misstated to a material level (Lakis & Masiulevicius 2017, p. 31). The auditors during the audit process can, therefore, ascertain or assess the risk of material misstatement at the assertion level where they establish inherent risk as well as control risks and at the financial statement level. The following accounts were therefore found to be at risk of material misstatement.

The Inventory account – the inventory account shows a negative trend in the above trend analysis. It, therefore, appears to be at the risk of material misstatement. The material indifference identified in the account is therefore subject to significant auditing test. This is because of assertions made on such statements such as existence and valuation assertions. Assets, liabilities and equity balances exist at the end of a financial year period while valuation is believed to have been appropriately done.

The wages account - also appears to have been at risk of material misstatement due to the increased percentage change in the given financial period. At the end of a fiscal period wages are expected to reduce since some salaries are prepaid while other personnel experience delay in their payments with companies recording arrears in wage costs. The account is therefore subject to audit test by the auditors due to the many assertions made by managers when preparing the financial statements. Such assertions include accuracy and completeness assertion. The accuracy assertion has that wages at the end of the financial period have been appropriately calculated with adjustments having been done correctly and accounted for. While completeness assertion holds that the wages have in respect to all company personnel have been fully accounted for.

The sales account - also at risk of material misstatement and may not reflect an accurate and fair view of the total sales due to various sales assertions such as cut-off assertion which provides that all the sales transactions have been recorded at the right time. In most cases, the sales are not registered at the right time, and therefore the account should be subjected to further audit test.

Audit procedure for Inventory account existence assertion

  • The first procedure would involve making a random test count of the inventory to ascertain that the number produced by the clients is accurate and reflect the information in the inventory sheets.
  • The second procedure would involve conducting a real investigation to establish the physical count and ensure that the auditor is satisfied with the effectiveness of the counting methods used.
  • It is also essential to validate the permanent records and inventory sheets which give information on the inventory in that they agree with the physical count. This is helpful in the determination of the fact that the items in the record made by the client exist and at the right quantities.

Audit Procedure for Wages Accuracy assertion

  • The first audit procedure would involve a process of recomputing the company payroll register to establish its accuracy with the record provided by the client.
  • The auditor will then investigate the accuracy and validity of the payroll expenses by comparing the costs with prior periods.
  • Lastly, it is also essential for the auditor to examine the payroll cut off which in this case will play a critical role in determining the appropriateness of the time recorded for the wages. 

Audit Procedure for Sales Cut-off assertion

  • The first procedure would involve critical examinations of the sales ledger and comparison with the general ledger to establish whether the sales transactions and receipts were recorded at the right time.
  • Then the auditor will review the sales cut-off to ascertain that the ending inventory filed by the client is appropriately valued.
  • Conduct a review to establish whether double entry accounting standards were adhered to and represent an accurate reflection of all the sales transactions.

Fraud Risk consideration versus Staff Trustworthy

The partner’s suggestion of not considering fraud risk assessment due to his feeling that the client’s staffs are trustworthy is a huge mistake that should not be supported. Trust is an essential virtue of employer to develop on his employees; however, it is a myth to assume that there are no individuals incapable of committing fraud. Employees or staffs are exposed to many works and life-related pressure such as financial constraints while other may be presented with an opportunity to access various assets and materials which can increase the risk of fraud (Lessambo 2018, p.135). Therefore, his suggestion is not appropriate, and fraud risk should be considered in any auditing process. For instance, there are different depreciation accounts provided about the company fixed assets. However, there is another depreciation account that its activities are not identifiable, and it may be an indication of a fraud evident in the financial statements but covered by expertise experience in unnoticeable fraud activities.

Conclusion

This report, therefore, provides a critical preliminary assessment that will be very useful with the planning stage of the audit process by the senior auditor. The story has pointed out the key accounts which need to be audited to establish the reliability and validity of the information provided. It also provides a forecast of the audit budget through the preliminary assessment of materiality that puts the audit team at a state of preparedness to deal with potential fraud risk and help in the disclosure of any financial misstatements represented in the financial statements. 

List of References

Bellof, T. and Wehn, C.S., 2018. On the Treatment of Model Risk in the Internal Capital Adequacy Assessment Process. Journal of Applied Finance & Banking, 8(4), pp.1-15. Accessed on Sep, 5 2018.

Choudhary, P., Merkley, K.J. and Schipper, K., 2018. Auditors’ Quantitative Materiality Judgments: Properties and Implications for Financial Reporting Reliability.pp.12. Accessed on Sep, 5 2018.

Lakis, V. and Masiulevi?ius, A., 2017. Acceptable Audit Materiality For Users Of Financial Statements. Journal of Management, 2(31). Accessed on Sep, 5 2018.

Lessambo, F.I., 2018. Audit Planning, Testing, and Materiality. In Auditing, Assurance Services, and Forensics (pp. 127-151). Palgrave Macmillan, Cham.

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[Accessed 30 May 2024].

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My Assignment Help. Audit Planning And Risk Analysis Essay For Audit Senior. [Internet]. My Assignment Help. 2020 [cited 30 May 2024]. Available from: https://myassignmenthelp.com/free-samples/acc321-accounting-planning-an-audit-for-financial-statements.

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