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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 2.

3. Usethetrendanalysistoidentify3incomestatementaccountsthatappeartobeat- 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.

Materiality of a Financial Statement and Trial Balance

The concept of materiality of a financial statement requires that as per ISA 200 , as a whole objectives of an independent auditor is to conduct audit in accordance with the requirements of International Standards on Auditing. The ISA 200 defines that the intention of a fair audit is to improve the degree of confidence of intended users of a financial statements being published by a business organization. This can be achieved by an auditor by giving an opinion regarding whether the financial statements is being  prepared in all material respects in accordance with an applicable financial reporting framework or not(Mock et al.,2012).

In the present case scenario after thoroughly studying the given trail balance it can be seen that the trial balance for the period “July-1, 2016-March-31-2017” is holding a debit balance of $148448 and that of the period of July-1, 2015-June-30-2017 is holding a debit balance of $129808.

Thus the materiality for the financial report as a whole is much more than $15000 and the trial balance is violating the basic requirement of the framework of a trail balance that is describing that a trial balance is not balanced.

The figures of the trial balance especially the debit balance is not appropriate as there is every possibility that the debit balances of the trial balance has been over reported. More over the trail balance is missing the common items  of “Accounts payable”, “Common stock”, “Long term liabilities”, “Income tax payable”, “Retained earnings”  that supposed to appear in the trial balance as credit balance(Gay and Simnett,  2005).

So there is every possibility of material misstatement and the cause of risk arises due to the reason that the financial statements of the organization have been misstated to a material degree. It can also be suggested that the detected risk of material misstatement arises at the ascertain level due to the inherent risk of error related to misreporting of the financial accounts mentioned in the trial balance (Gay and Simnett, 2018)

The most possible impact of changing the preliminary assessment is that  big changes will take place in the three financial statements of income statement, balance sheet and cash flow statement which may force the management decision makers to bring some changes in their business targets(Arens et al.,2007)

The other possible impact is that the skill of the auditor will also be in question.

Year

2016-2017

2015-2016

Total Current asset

375750

359750

Total Non -current asset

144400

137400

Total

520150

497150

Percentage

28%

28%

Percentage

72%

72%

Bank Loan

230000

230000

Sales

148463

187450

Cost of sales

45788

63595

Total of Expenses

65092

90783

The above review reveals (as reflected by the two consecutive year trends) that the business is having a strong base of liquidity as 72% of the total asset is current asset. The current asset and the non-current assets has registered rising trend while moving from 2015-2016 to 2016-2017.

Risks of Material Misstatement in Accounts Receivable, Inventory, and Sales

The bank loan has remained unchanged over the years(Leung et al.,2007)

The sales as well as cost of sales and total expenses have registered a declining trend over the years

As the debit balance of the represented trail balance is quite high, therefore the following three accounts appear to be at-risk of material misstatement

The accounts receivable account must be audited in order to check that whether all the accounting figures that are being reported are really receivable for the accounting period under consideration or not

It is very much required to check the reported figure of that account as there is every possibility that the closing inventory has been over stated which has again added to the huge debit balance as represented by the given trial balance.

Finally the figures reported in the sales accounts must be checked as if there appears any change in the account receivable figures then the credit sales portion of the figure will change which will bring change to the overall sales figure.

On the other hand if the if the reported inventory figures are being altered after auditing then automatically the accounted number of units being sold will altered and the reported sales figure will change automatically (Gay and Simnett, 2018).

Accounts receivable auditing procedure of “Investigate reconciling items”  should applied where the journal entries in the accounts receivable account of the general ledger is  being reviewed by the auditor for  drawing  justification for the reported amounts of accounts receivable. This indicates that these journal entries should be fully documented during this audit

Inventory auditing procedure of  “Reconcile the inventory count to the general ledger” should be applied where the auditor will trace the valuation that relates to the physical inventory count to the company's general ledger in order to  verify that the correct counted balance from general ledger  were being  carried forward into the company's accounting records.

Transactional Testing should be applied where the auditor check the accuracy of the financial statement amounts of sales and accounts receivable by verifying individual transactions. The Accounts receivable balances are being checked by sending confirmation letters to customers order to obtain objective assurance that the revenue receipt balance being recorded  is correct. The auditor also checks the sales transactions from the sales ledger in order verify that there are legitimate sales receipts that supports the identified the transaction. To test the accuracy of the reported sales figure the auditor reviews the sales transactions that are being reported in the ledger that are close to the financial statement date to make sure that the company only included sales prior to the date of reporting(Simnett et al.,2009).

From the discussion of the type of possible material misstatement with respect to the identified accounts of “Accounts receivable ”, “inventory ” and “sales” it can be suggested that possible cause of this misstatement is error or carelessness and not  due to a possible fraud attempt.

The suggestions can be backed by the fact that the trial balance is not balanced which is easily detectable and some of the major and most common accounts that generally appear as credit balances in the trial  balance are missing and can be identified as one of the cause of the non balanced trial balance. So no attempt has been taken for a makeup or fraud and carelessness and unintentional omission is the possible cause of material misstatement.

Reference:

Arens, A.A., Best, P., Shailer, G., Fiedler, B., Elder, R.J. and Beasley, M., 2007. Auditing and assurance services in Australia: an integrated approach. Pearson Education Australia.

Gay, G. and Simnett, R. (2018). Auditing and assurance services in Australia. 7th ed. North Ryde, N.S.W: McGraw-Hill Education (Australia).

Gay, G.E. and Simnett, R., 2005. Auditing and assurance services in Australia. Mcgraw-hill.

Leung, P., Coram, P. and Cooper, B., 2007. Modern auditing & assurance services. John Wiley & Sons Australia.

Mock, T.J., Bédard, J., Coram, P.J., Davis, S.M., Espahbodi, R. and Warne, R.C., 2012. The audit reporting model: Current research synthesis and implications. Auditing: A Journal of Practice & Theory, 32(sp1), pp.323-351.

Simnett, R., Vanstraelen, A. and Chua, W.F., 2009. Assurance on sustainability reports: An international comparison. The accounting review, 84(3), pp.937-967.

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