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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 staffs 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.

Audit Procedure and Trend Analysis

ASA 315 “Identifying and Assessing the Risk of Material Misstatement through understanding the entity and its environment” specifies the responsibilities of Auditor regarding determining and evaluation of risk of material misstatement in the financial statement by comprehending the environment of any individual including individual’s internal control (ASA 315. Understanding the Entity and Its Environment and assessing the risk of material misstatement, 2017.).  Present report revolves around audit procedure which has been applied to assess the trial balance of Azure Enterprises. Further, trend analysis has been applied in order to ascertain the accounts which require detail assessment. The report ends up with discussion relating to variants which should be analyzed in order to ascertain an indication of fraud in financial statements.

1. Assessment of materiality set for Azure Enterprises

At the time of planning and reporting, the auditor takes a wide view of the client as a whole and the diligence in which it functions. Further, information related to the client is achieved in the early stages of every audit, and that information impels the planning of the audit. The concept of materiality is applied by an auditor as planning as well as performing audit in order to analyze the impact of ascertained misstatement if any in financial statement so that appropriate opinion can be formed  in auditor’s report. (Griffiths, 2016).  According to Beasley, et al. (2018) concept of materiality recognizes that transactions or accounts which individually or in aggregate have significant impact on the true and fair opinion relating to books of account of an organization.

It can be accessed from the Trial Balance that the total sales for the year ending 2016 of Azure Enterprise of the year are 162499.99 which means that transactions which are important or material will be done in expressions of thousands only. Hence, the figure which is taken as a base by the auditor that is 15000 is correct since all the significant, as well as crucial transaction, will be amounting to around 15000 or more than that. Moreover, if the budget is modified than in that case the new base will ascertain the accounts and transactions which involve deep inspection.

Year

2016

2015

Revenue

Sales

162500.00

187450.00

Increase / Decrease in percentage

-13%

Cost of Sales

43577.00

63595.00

Increase / Decrease in percentage

-31%

Gross Profit

118923.00

123855.00

Increase / Decrease in percentage

-4%

Other Income

800.00

25000.00

Increase / Decrease in percentage

-97%

Service Fees

39167.00

58000.00

Increase / Decrease in percentage

-32%

Interest Income

32.00

50.00

Increase / Decrease in percentage

-36%

Expenses

Bank Charges

232.00

350.00

Increase / Decrease in percentage

-34%

Depreciation

23213.00

15590.00

Increase / Decrease in percentage

49%

Interest Expenses

7200.00

10800.00

Increase / Decrease in percentage

-33%

Printing Expenses

168.00

250.00

Increase / Decrease in percentage

-33%

Miscellaneous

1600.00

0.00

Increase / Decrease in percentage

NA

Wages

37453.00

53000.00

Increase / Decrease in percentage

-29%

Superannuation

3558.00

4770.00

Increase / Decrease in percentage

-25%

Total Expenses

73424.00

84760.00

Increase / Decrease in percentage

-13%

Net Profit

85498.00

122145.00

Increase / Decrease in percentage

-30%

  • Cost of Sales: The sales have been declined to the significant level through the decline in sales is not at the extreme level. The same can be evaluated form the trend analysis of the cost of sales. Since these both accounts have an interrelated connection, it is essential to evaluate that whether the cost of goods has been declined because of the quantum of goods sold or because of decline in the cost of material utilized in same. It is necessary to evaluate the cost of goods in order to asses’ appropriate financial position of an organization (Albrecht, 2016).

  • Other Income: The assertion due to which the specified account is likely to be at risk as an organization might use this account in order to account fake income for elevating profits. A significant variance exists in comparison to the previous year. Thus the account is subject to significant auditing testing.

  • Depreciation: Depreciation account affects P& L and Balance Sheet as well. As depreciation has an increasing trend which specifies that asset has been acquired in the present year. Thus, assertions are required to access whether appropriate accounting treatment, as well as disclosure, have been provided relating to same or not.

Cost of sales:

  • The first step in auditing process of the cost of sales is operating an analytical test of the cost of sale through the product line, division or other business section by reference to details of units’ transmitted and average unit costs.

  • Subsequently, investigation of vital variations between the predicted and posted amounts should be performed.

  • After this, the intensifying the vouching test of expense transaction to test linked cost of sales transaction by tracing units costs employed to assuage inventory to costs records tested in the inspection of stock.

  • Thus, as per assertions of Knechel, and Salterio, (2016) the audit procedure should be followed rigorously from time to time so that the assessment can be done that is whether the cost of sales has augmented or declined.
  • The first step in auditing procedure of other income is to comprehend the internal controls and transaction cycle of income. The same will comprises meeting with administration and learning about the accounting of other income procedure, process and controls which the organization has implemented to guard against loss. As per the study of Bailey, Collins and Abbott (2017), this procedure is frequently known as design and implementation testing.

  • Further, along with execution of investigation of administration, auditors must also review flowcharts related to invoice flow, ask for duplicates of vital contracts as well as document any alteration to the income process that has to arise as the last audit.

  • The procedure will get finish by mapping the internal control activities that were recognized when learning about the internal control system to specific administration assertion of incomes.
  • For auditing the depreciation expense, the auditor must evaluate the rationality of depreciation which individual offers to group or class of assets. The rate must be consistency to the ability which fixed assets can provide to the inflow of economic. Further, the inspection should evaluate the depreciation rate also which is offered by tax authority and their comprehending.

  • Subsequently, the auditor should review the depreciation expenses which are calculated by accountants in their depreciation program. After reviewing the depreciation rate, auditors must contrast their outcomes with their client’s outcomes. The difference must be inspected accurately.

Misstatements in the financial statement can occur from either deception or fault (Guénin et al., 2014.). The distinctive factor among deception as well as the fault is whether the underlying action that results in the misstatement of the financial statement is deliberated or accidental. Professional skepticism can be referred as an attitude which comprises questioning mind, being alert in scenarios which provide hint of possible misstatement due to fraud or error as well as critical assessment of audit evidence. An auditor requires application of skepticism in order to evaluate evidence and risk throughout the audit procedure. assessing administration’s procedure for recognizing and reacting to the risks of deception in the individual, comprising any particular risks of deception that administration has recognized or that have been brought to its concentration, or classes of transactions, account balances or revelations for which a risk of deception is expected to exist (McKee, 2014).

The suggestion of an audit partner is not appropriate as the decision is to take after considering the above specified enquiries. Moreover, mere trustworthy of client staff cannot be treated as adequate audit evidence for an opinion, as application of professional skepticism is necessary for auditor to attain appropriate evidence.

Conclusion

It can be concluded from the above study that the auditor is required to make enquiries of administration concerning prior to making a decision whether fraud risk shall be taken into consideration or not. Further, administration evaluation of the risk that the financial statement might be materially misstated because of deception, comprising the nature, level and rate of such evaluations can be specified as base taken by the auditor in order to provide opinion on financial statements of an organization.

References

Albrecht, C., Holland, D.V., Sanders, M.L. and Albrecht, C.C., 2016. The debilitating effects of fraud in organizations. In Crime and Corruption in Organizations .Pp. 183-206. Routledge.

Allen, R.D., Hermanson, D.R., Kozloski, T.M. and Ramsay, R.J., 2006. Auditor risk assessment: Insights from the academic literature. Accounting Horizons, 20(2), pp.157-177.

ASA 315. Understanding the Entity and Its Environment and assessing risk of material misstatement. 2017. [PDF]. Available through < https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_28-04-06.pdf>. [Accessed on 14th September 2018]

Bailey, C., Collins, D.L. and Abbott, L.J., 2017. The Impact of Enterprise Risk Management on the Audit Process: Evidence from Audit Fees and Audit Delay. Auditing: A Journal of Practice & Theory, 37(3), pp.25-46.

Beasley, M.S., Blay, A.D., Lewellen, C. and McAllister, M., 2018. The Association Between Board Risk Oversight and the Risk of Material Misstatement.

Griffiths, P., 2016. Risk-based auditing. Routledge.

Guénin-Paracini, H., Malsch, B. and Paillé, A.M., 2014. Fear and risk in the audit process. Accounting, Organizations and Society, 39(4), pp.264-288.

McKee, T.E., 2014. Evaluating financial fraud risk during audit planning. The CPA Journal, 84(10), p.28.

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