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Questions:

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 3 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; 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.
 
 

Answers:

Introduction:

Question 1

The trial balance of the Amazonite Enterprises is given below.

Amazonite Enterprises

 

 

 

 

Trial Balance

 

 

 

 

 

Jul 1, 2015 - May 31, 2016

 

Jul 1, 2014 - June 30, 2015

 

 

Debit

Credit

Debit

Credit

Cash at Bank

99251

 

102503

 

Accounts receivable

121820

 

112000

 

Inventory

189000

 

175000

 

Machinery

65000

 

65000

 

Accumulated Depreciation

 

48317.9963

 

24375

Motor Vehicles

65000

 

65000

 

Accumulated Depreciation

 

27300

 

20150

Furniture

7500

 

7500

 

Accumulated Depreciation

 

3075

 

2250

Bank Loan

 

216000

 

216000

Sales

 

223437.496

 

187450

Cost of sales

59918.0982

 

63595

 

Service fees (revenue)

 

53854.5333

 

58000

Other income

 

1100

 

25000

Interest income

 

44

 

50

Bank charges

319

 

350

 

Depreciation

31917.5963

 

15590

 

Interest expense

9899.637

 

10800

 

Printing

231

 

250

 

Miscellaneous

2200

 

0

 

Wages

51497.5963

 

53000

 

Superannuation

4891.78765

 

4770

 

Total

708445.715

573129.026

675358

533275


The concept of the materiality is prevailing both in the auditing as well as the accounting and it relates to the significant and the important amount of the transaction or discrepancy. Any kind of the misstatement, error or omission in the financial statement, in the form of the individual or in cumulative manner has the possibility to change the mind-set of the stakeholders. The major assessment is on the basis of the material and the non-material transactions (Simnett, Carson and Vanstraelen, 2016). The assement of the materiality is given a range of the $15000 which is more than as determined by the IASB. There are certain guidelines which are prescribed by the board of the IASB to determine the range of the materiality. The benchmarks are set in the different manner as per the rule and regulations of the IASB. The range have been decided as follows. For the purpose of the gross profit the IASB has sent the range from 0.6 to 1.1%. The gross sales come under the bracket of the 1-3%. The net profit and the shareholder’s equity are in range 6 to 10% and 3 to 7 % respectively. In order to determine the auditor’s opinion on the financial statements there are few accounts that are not looked after by the auditor and therefore some of the accounts are missed by the auditor (Griffiths, 2016). The accounts which are left with the auditor to scrutinise are the assets account, liabilities account, miscellaneous accounts and the super annuation account.

Base

Range

Level of materiality

Gross revenue

0.6-1.1%

1340.6 to 2457.81

Total Assets

1-3%

4688.78 to 14066.3

Gross Profit

1-3%

1635.19 to 4905.57

Equity

3-7%

Not Available

Net Profit

6-11%

7053.67 to 12931.7

Question 2

The analytical review is again presented in the tabular format and depicts  the trend analysis of the Income Statement.

Particulars

2016

2015

Base year 2015

Trend Analysis

Sales

223437.5

187450

35987.50

19%

Service fees

53854.53

58000

-4145.47

-7%

Interest income

44

50

-6.00

-12%

Total Revenue

277336.03

245500

31836.03

13%

Less: Expenses

 

 

 

 

Cost of sales

59918.09

63595

-3676.91

-6%

Bank charges

261

350

-89.00

-25%

Depreciation

31917.59

15590

16327.59

105%

Interest expense

9899.637

10800

-900.36

-8%

Printing

231

250

-19.00

-8%

Miscellaneous

2200

0

2200.00

 

Wages

51497.59633

53000

-1502.40

-3%

Superannuation

4891.787652

4770

121.79

3%

Total Expenses

160816.701

148355

12461.70

8%

Net Profit

116519.329

97145

19374.33

20%

Net Profit %

52.15%

51.82%

 

 

Question 3

On the basis of the trend analysis there are numerous accounts that can be still possessing the factor of the materiality and it requires the assessment by the auditor in order to find out the variances and are prone to certain risks which needs testing, Some of the assertions are outlined below.

Sales have been increased from the year 2015 in comparison to the 2016 which recorded the sales at 223437.5. The auditor shall observe the change and verify whether the increase in sales was due to the more number of units produced or due to the existing units added back in the sales instead of the closing stock (Knechel and Salterio, 2016).

The cost of sales dropped by 7% as compared to the previous year and shall be scrutinised by the auditor to check if there is any fluctuation in the prices while purchasing the materials from the vendors or there is any change of the vendors (Arena and Jeppesen, 2016).

The service income has decreased form the year 2015 to 2016 so that the clients shall be checked and also the auditor shall vouch for the rates of the services (Bumgarner and Vasarhelyi, 2018).

The depreciation on the contrary have increased from the last year despite any change in the list of the assets and this can be achieved when there is any change in the calculation method of the depreciation and henceforth, the auditor shall verify for any change in the depreciation method.

The interest expense and the printing expenses have decreased by 8% each and the main probable reasons could be due to the utilisation of the more digital media and that the debt has been paid off in the year due to which the interest expenses have lowered down (AICPA, 2017).

The sudden increase in the miscellaneous expenses accounts for the proper scrutiny by the auditor as there might be any expense of the 2200 which have been clubbed under the head if the miscellaneous expenses that are actually of material nature.

The wages have been decreased by 3% and the super annuation funds have been increased by the same percentage which may be due to the decrease in the labour count and the auditor shall check if there is any labour that has left the organisation and apart from this the super annuation increased for which the auditor needs to look after the employee register.

 

Question 4

 The audit assertion shave been discussed in the detail and therefore there is an audit procedure which can be adopted by the organisation to eventually find a way out to solve the problem. Below are some of the solutions that can be employed in order to rectify the assertion stated above.

In case of the sales and the cost of sales a complete list of the customers and the vendors needs to be checked in order to find out the reasons of the variance. For this the same category of the customers and the vendors are clubbed together to see the variance according to the group. The products which are providing the maximum contribution can be placed under one head and the non-potential customers and the suppliers shall be kept under one group in order to cater their problems only. This will save the time and energy of the organisation (Chan and Vasarhelyi, 2018).

The expenses such as the wages and miscellaneous expenses shall be observed first because these small transactions are hidden under these heads. The rate at which the wages are distributed to the labours and the salaries that are given to the employees shall be taken into the consideration to avoid any mixing of the transactions (Kumar and Sharma, 2015).

The value of depreciation increased and the auditor needs to vouch the same in order to find out the variances. The major cause of the variances is the change if the straight line method to written down value method and because of the change in the policy in the middle of the year there is unbooked profit and losses arising. The physical verification of the assets is necessary (Shu, Rosenberg, Upadhyay and Rao, 2018).

Conclusion

From the above analysis it can be concluded that the audit partner is not in the alignment with what the concept has been described in association with the auditors. The above analysis also helps in understanding the fact that the professional attitude will be the criteria of the judgement if the frauds are not taken into the consideration. There are several different criteria that can solve the problem yet it is necessary to make the book of accounts to get a good comparison of the company. The audit of the accounts is the mandatory practice and the furthermore, when the analytical review was done it was found that there are certain discrepancies which needs to be taken into consideration and shall be rectified. Due to the above factors and the increase and decrease in the expenses without any note and it would be typically unethical to not to have an analysis. Hence it is recommended that the analysis is necessary and mandatory.

 

References

AICPA, (2017) Audit guide: Audit sampling. United States: John Wiley & Sons.

Arena, M. and Jeppesen, K.K., (2016) Practice variation in public sector internal auditing: an institutional analysis. European Accounting Review, 25(2), pp.319-345.

Bumgarner, N. and Vasarhelyi, M.A., (2018) Continuous auditing—a new view. In Continuous Auditing: Theory and Application (pp. 7-51). Emerald Publishing Limited.

Chan, D.Y. and Vasarhelyi, M.A., (2018) Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.

Griffiths, P., (2016) Risk-based auditing. California: Routledge.

Knechel, W.R. and Salterio, S.E., (2016) Auditing: Assurance and risk. Routledge.

Kumar, R. and Sharma, V., (2015) Auditing: Principles and practice. Phillipines: PHI Learning Pvt. Ltd..

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

Shu, J., M. Rosenberg, J., Upadhyaya, S. and Rao, H.R., (2018) The Internet of Things and IT Auditing. Internet of Things A to Z: Technologies and Applications, pp.275-292.

Simnett, R., Carson, E. and Vanstraelen, A., (2016) International archival auditing and assurance research: Trends, methodological issues, and opportunities. Auditing: A Journal of Practice & Theory, 35(3), pp.1-32.

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