Audit Of Kereru Brewing Company Limited (KBCL) For The Year Ending 30 June 2018, Essay.

Background

You are the audit manager responsible for the audit of Kereru Brewing Company Limited (KBCL) for the year ending 30 June 2018. KBCL is listed on the New Zealand Stock Exchange, and manufactures and distributes a range of premium craft beers and ciders. Its head office and its largest brewery are both located in Blenheim. It has warehouses in Auckland and Christchurch and it also has a sales office and a brewery in Sydney, which is run by its subsidiary company, Kea (Australia) Limited (KAL).

KBCL has been a client of yours for four years, and your audit firm has always had a good relationship with the group. Management and the accounting staff have always been cooperative, honest and positive about the audit and financial reporting. Your firm has monitored the relationship carefully, because when the audit was obtained Andrew Bigham, the CEO, had the reputation for being a 'high-flyer' and had been through bankruptcy at an earlier time in his career. The only material misstatements that were found in the prior year's audit were in respect of cut-off errors at year end.

Bigham runs the group in an autocratic way, primarily because of a somewhat controlling personality. He believes that it is his job to make all the tough decisions. He delegates responsibility to others but is not always willing to delegate a commensurate amount of authority.

The company has grown in size very rapidly as the industry in which KBCL participates has been in a favourable cycle the past few years. Industry profits are reasonably favourable, and there are no competitive or other apparent threats on the horizon, except for the rising New Zealand dollar and the recent discovery of the hop mosaic virus (HpMV) in a hop farm in Motueka that may affect future supplies of hops to be used in the manufacture of beer.

KBCL sells its craft beers and ciders to upmarket bars and restaurants in New Zealand, and Australia, and it started selling its products to supermarkets in New Zealand during the year. It also started exporting its beers and ciders to Japan at the beginning of December 2017 as part of an international expansion plan. It is likely to require additional funding to finance this expansion and is contemplating a share issue some time in 2019. All sales are on credit.

Internal controls for KBCL are evaluated as reasonably effective for all cycles but not unusually strong. Although Bigham supports the idea of internal control, you have been disappointed that management has continually rejected your recommendations to establish an internal audit function and an audit committee.

Company Operations

KBCL has a contract with its employees that if the group’s operating profit before tax, interest expense and superannuation costs exceed $9 million for the year an additional contribution must be made to the superannuation fund equal to 5% of the excess.

KBCL increased its efficiency during the year by installing a new computer system and as a result it laid-off two accounting staff in September 2017. You are also aware from the newspapers that the group is facing a legal case arising from employee health and safety issues at its Sydney brewery.

The group maintains a perpetual inventory system and carries out stocktakes at its breweries and warehouses at the end of each quarter. It is planning to carry out stocktakes at all of its locations on 29 June 2018.

Plant and equipment include leasehold property improvements, which includes $256,000 incurred in 2017 for a waste water disposal pipeline. Depreciation has not been charged in relation to this pipeline.

The bank loan is secured against plant and equipment.  The secured loan is also subject to a covenant agreement which specifies that the company maintain the following ratios:

• net tangible asset to total liabilities ratio which is positive
• a positive current ratio

The staff employed by KAL in Sydney are always under pressure to finalise their accounts in time to enable the consolidated group’s accounts to be prepared as soon as possible after the year end so that they are ready for the auditors. The audit reporting deadline for the coming audit is 15 September 2018.

The client has provided you with preliminary (draft) financial information in respect of the year ending 30 June 2018 for the consolidated group (i.e. KBCL and its subsidiary KAL), which is on the following page.KBCL group summary financial statements

	30 June 2018 (preliminary)	30 June 2017 (audited)
Cash and cash equivalents	$ 243,689	133,981
Trade and other receivables	3,544,009	2,224,921
Allowance for doubtful debts	(120,000)	(215,000)
Inventories	4,520,902	3,888,400
Prepaid expenses	29,500	24,700
Total current assets	8,218,100	6,057,002
Plant and equipment
At cost or fair value	12,625,255	9,602,534
Less accumulated depreciation	(4,382,990)	(3,775,911)
Total plant and equipment	8,242,265	5,826,623
Loan to previous CEO	320,000	320,000
Intangible assets
Brands	855,000	0
Goodwill	345,000	345,000
Total intangible assets	1,200,000	345,000
Total assets	$17,980,365	$12,548,625
Trade and other payables	2,141,552	2,526,789
Bank loan payable	150,000	0
Accrued liabilities	723,600	598,020
Income tax payable	1,200,000	1,759,000
Current portion of long-term bank loan	240,000	240,000
Total current liabilities	4,455,152	5,123,809
Long-term bank loan	960,000	1,200,000
Total Liabilities	5,415,152	6,323,809
Net Assets	$12,565,213	$6,224,816
Shareholders’ equity
Ordinary shares issued	3,000,000	3,000,000
Retained earnings	9,565,213	3,224,816
Total shareholders’ equity	$12,565,213	$6,224,816

	30 June 2018 (preliminary)		30 June 2017 (audited)
Sales	$46,963,338		$32,258,015
Less: Cost of sales	25,779,499		19,032,229
Gross profit	21,183,839		13,225,786
Distribution, administration, sales and marketing expenses	10,020,661		8,420,162
Lease expense	571,560		480,270
Superannuation expense	823,643		673,590
Loss on foreign exchange	294,202		191,440
Interest expense	83,376		104,220
Total operating expenses	11,793,442		9,869,682
Operating profit before tax	9,390,397		3,356,104
Income tax expense	1,800,000		1,141,000
Operating profit after tax	7,590,397		2,215,104
Add: Opening retained earnings	3,224,816		2,009,712
	10,815,213		4,224,816
Dividends paid	(1,250,000)		(1,000,000)
Closing retained earnings	$9,565,213		$3,224,816

REQUIRED:

In respect of the audit plan for the audit of the financial statements of the KBCL Group for the year ending 30 June 2018:

a. Explain what is meant by the acceptable overall audit risk, and describe the factors that influence this risk. Provide an assessment of the acceptable audit risk for the coming audit as high, medium or low. You need to support your answer with reasons.                            

b. Based on the information provided on pages 2 and 3 of the case study, identify the significant risks of material misstatement in the coming audit, and classify them as inherent or control risks.

Management and Internal Controls

c. Based on your risk assessments in question (b) above, carry out a preliminary assessment of the risk of material misstatement, and decide whether it is high, medium or low. You need to justify your assessment.

d. Perform an overall analytical review of the financial statements of KBCL. Your review should include:

i. A horizontal and a vertical analysis of the 2018 and 2017 financial statements. Prepare this analysis using an Excel spreadsheet.

ii. Calculation and analysis of relevant financial ratios for 2018 and 2017, including a comparison with industry averages. You may find the financial ratio formulae on page 8 of this case study useful.

iii. From the above overall analytical review, identify the financial statement accounts that will require special attention during the coming audit. You need to support your answer with reasons why these accounts will require special attention.

e. Materiality

i. Explain and differentiate between planning, performance and specific materiality levels.

ii. Calculate a planning materiality level and performance materiality level for the coming year audit. Round your answer up to the nearest $1,000.

iii. Calculate a specific materiality level and a specific performance materiality level for the brands (an intangible asset on the balance sheet). Round your answers up to the nearest $1,000. 

iv. Assume that you find suppliers’ invoices for $100,000 in relation to marketing and promotion of internally generated brands and you discover that this expenditure has been incorrectly capitalised as an intangible asset at 30 June 2018 instead of being expensed. If management of KBCL refuse to adjust the financial statements and given your materiality calculations above, explain the impact of this misstatement on the audit report (assuming that you do not find any other unadjusted errors during the audit). Justify your answer. 

Your audit plan for the sales cycle places reliance on internal controls. Your testing of the internal controls for sales has found a significant number of instances where customer credit ratings have not been checked and abnormally large discounts have been given to new customers by sales staff without senior management approval. The sales manager states that these changes have been the result of difficulties reaching the very high sales targets set by Andrew Bigham.

REQUIRED:

a. Explain the relevance of a company’s internal controls to the company’s auditor. Include in your answer:

i. The auditor’s underlying objective in undertaking tests of controls.

ii. A distinction between tests of controls and substantive tests of details.

iii. The stage during the audit when tests of controls are usually performed by the auditor.

b. Describe how the above situation will affect your audit plan. Include reference to any potential risks in the sales cycle, and the nature and extent of substantive testing to be carried out in relation to sales and accounts receivable.

Ratio	Formula	Industry average for 2018
Current Ratio	Current Assets  Current Liabilities	1.91:1
Liquidity Ratio	CA – Inventory Current Liabilities	0.92:1
Debt to Total Assets Ratio	Total Liabilities Total Net Assets	1.11:1
Times Interest Earned	Net Operating Profit Interest Charges	3.00 times
Inventory Turnover	Cost of Goods Sold Av Inventory Held	5.85 times
Days Sales in Inventory (days)	365 Inventory turnover	62.39
Accounts Receivable Turnover	Credit Sales Accounts Receivable	10.43 times
Average Collection Period (days)	365 A/R Turnover	35
Total Assets Turnover	Sales Total Assets	2.83 times
Gross Profit Margin	Gross Profit  Sales	50.37%
Net Operating Margin	Net Operating Profit Sales	8.34%
Return on Total Assets	Net Profit before taxes Total Assets	6.44%

Relevant financial ratios

Note1: Net Operating Profit is earnings before interest and tax (EBIT).

Note 2: Use the closing inventory figure when calculating the 2017 inventory turnover ratio.

Auditor of the company plays the fiduciary relation in its working and reporting. Fiduciary position has been mentioned because of the fact that the auditor has to consider the interest of the stakeholders as well as the interest of the company. The auditor is required to present the report with all the material facts and figures which is necessary to the stakeholders and the shareholders of the company. As the title suggests, the whole report revolves around the auditing of the company – Kereru Brewing Company Limited.  The report has been bifurcated into two parts. First is Part A and second is Part B. The part A of the report has started with the assessment of the audit risk at different levels. It has included the meaning of the acceptable audit risk and performing the analysis through the accounting ratios, horizontal and vertical analysis of the financial statements of the company. Then the materiality levels for the year under audit has been finalized and identified as to how the same will have the impact on the audit of the company. Then in this the importance of the adjusting event has been mentioned as to how the same has been considered in the planning of the audit. The next section is Part B which has dealt with the analysis of the internal control and how the same is very useful for the auditor with the detailed analysis as to how the same will impact on the planning of the audit. The report has then ended up with the conclusion and the recommendation. The data has been obtained from the reasonable sources and the report has been presented for the benefit of the auditors of the company for having an effective and efficient planning of audit.           

1. Acceptable audit risk and Influencing Factors

The risk which the auditor can undertake or considers while issuing the audit report to the client with the opinion which is not qualified in any manner is known as the acceptable audit risk. Also the auditor takes this level of risk knowing of the fact that the financial statements so stated have the material misstatements (AASB, 2016).  The acceptable audit risk has the direct relationship with the detection risk and the inverse relationship with the findings of the audit evidence. If the level of the acceptable audit risk increases then the auditor will be less interested in collecting and obtaining the audit evidence. Thus, the acceptable audit risk has inverse relationship with the audit evidence. And if the level of the acceptable audit risk increases then the detection risk also increases as the auditor will be least interested in detecting the material misstatement if present in the financial statements. Thus, the acceptable audit risk will have such an effect of issuing the unqualified audit report. The acceptable audit risk is influenced by mainly three factors. These three factors have been described below:

• Reliance by External Users – This factors states that the level of acceptable audit risk shall be kept as low where the external users are highly interested in the financial statements of the company. These external users are found more in case of the three factors:
• If the company has the larger clients. In the given case the company has entered into the area of international expansion and starts sending the goods to Japan in the beginning of the December 2017 and has the largest shareholder.
• If the company is publicly held corporation- The KBC limited is not the publicly held company (Mock, 2015).
• If the company has the extensive use of liabilities – The Company has obtained the borrowing on the hypothecation of the plant and equipment amounting to 960000 New Zealand Dollar and hence there is the extensive use of the liabilities.  Also the company is planning to have the additional loan in the year of 2019 so as to expand the business.

Company Operations

Thus, in this manner, the reliance level will be low or medium and the acceptable audit risk will be medium to high.       

• Chances of the failure of Finance – The company has the current ratio and liquidity ratio with the increased figure in the year of 2018 as compared to the year of 2017. The current ratio has been increased from 1.18 to 1.84 and the liquidity ratio has been increased from the 0.42 to 0.83. These figures details that with the addition of the loan of 150000 New Zealand dollar, the current and the liquidity ratio has been improved through which the risk level will be medium to high.   
• Management Integrity -    In the given case of the company, there has been many noticed integrity issues which entails that higher the issues noticed and confirmed on the management of the company more will be the chances of having the acceptable audit risk as low. Following are the reasons for the above statement:
• At first the Chief Executive Officer of the company has been known by the name of high flyer and had undergone through the stage of the bankruptcy.
• Secondly he operates the company where he rules all the employees and takes the tough decisions.
• Thirdly he has been in the process of having the delegation of the responsibility done but not the authority.
• Lastly, during his tenure, auditors have identified the material misstatement which can affect the presentation of the financial statements. 

Thus, the level of the risk will high.

b. Significant Risk of Material Misstatement

The material misstatement is the figure or the fact which is presented in the financial statements of the company and has the power to have the decision changed of the users of the financial statements of the company. It includes the shareholders as well as the stakeholders of the company. Following are the significant risk of the material misstatement which requires the attention of the management and have been divided into two parts. One is the inherent risk and other one is the Control risk:

Inherent Risk –

• The chief executive officer of the company has been the high flyer in the earlier years due to which has faced the bankruptcy also.
• The chief executive officer of the company has been ruling over the company matters in the dictatorship and autocratic manner.
• He only thinks that his job is only to take the important and meaningful decision and big ones. 
• The material misstatement has occurred in the earlier periods during his tenure (Gary, 2017).
• He only remains in the manner where he delegates the appropriate responsibility but does not delegate the authority. The delegated responsibility will not work until the appropriate authority will not be given.
• The company is making all the sales on the credit basis. No time has been defined and no component of cash sales is there due to which the liquidity of the company may gets affected.
• The rising amount of the New Zealand dollar will lead to the loss in the foreign exchange difference and the company has not complied with any of the hedging instruments for the cash flows that will be required to be made in the near future. 
• The new virus has arisen which is known as the Hop Mosaic virus and will lead to the lesser supplies in the future as the raw material is used for the manufacture of the beer.

Control Risk –

• The company has not charged any depreciation on the plant and equipment and that too including the leasehold property improvements.
• The company is required to maintain two ratios as per the banks so as to keep the loan active as obtained from the banks. These two ratios are the net tangible assets to the total liabilities and current ratio and as per the requirement the both the ratios shall be positive.
• The employees are under pressure to finalize the financial statement at the earliest so as to provide to the auditors for issuing the audit opinion thereon.  The deadline as mentioned is 15-09-2018.
• The company is facing the legal case regarding the health and the safety of the employees working under the organization and accordingly there may be the risk of the liability creation in the near future (AASB, 2013).

Thus, the above are the significant risk of material misstatements.

c. Preliminary Assessment of Risk

After the identification of the significant risk of material misstatement, it is very necessary to assess the level of the risk in order to plan the audit accordingly.

Under the head of the inherent risk, the level of risk that has been assessed is Medium to High. It is because the major impact has been due to the chief executive officer of the company which has all the bad images and due to which the functioning of the company will be affected badly and there might be the high chances of having the material misstatement in the financial statements of the company (Anastasia, 2015).   

Under the head of the Control risk, the level of risk that has been assessed is high.  It is because all the risks that have been identified will affect the financial statements in any manner. On one hand the depreciation will be charged on the assets of the company and on other hand the ratios are required to be maintained as per the stipulation made by the bank.

Thus, the overall risk that has been assessed from the above identified risks and their impact is high.   

d. Overall Analytical Review

i. Horizontal and Vertical Analysis 

HORIZONTAL AND VERTICAL ANALYSIS OF THE BALANCE SHEET
	Horizontal 2018		Vertical 2018	Vertical 2017
	(On 2017 Figures)
Cash and Cash Equivalents	182%		1%	1%
Trade and other Receivables	159%		20%	18%
Allowance for doubtful debts	56%		-1%	-2%
Inventories	116%		25%	31%
Prepaid Expenses	119%		0.16%	0.20%
Total Current Assets	136%		46%	48%
Plant and Equipment  at cost	131%		70%	77%
Less Accumulated depreciation	116%		-24%	-30%
Total plant and equipment	141%		46%	46%
Loan to previous CEO	100%		2%	3%
Intangible Assets	348%		7%	3%
Total Non Current Assets	150%		54%	52%
Total Assets	143%		100%	100%
Trade and Other payables	85%		12%	20%
Bank Loan Payable	0%		1%	0%
Accrued Liabilities	121%		4%	5%
income Tax Payable	68%		7%	14%
Current portion of long term bank loan	100%		1%	2%
Total Current Liabilities	87%		25%	41%
Long Term bank Loan	80%		5%	10%
Total Non Current Liabilities	80%		5%	10%
Net Assets	202%		70%	50%
Shareholder's Equity	202%		70%	50%
Total Liabilities			100%	100%

HORIZONTAL AND VERTICAL ANALYSIS OF THE INCOME STATEMENT
	Horizontal 2018		Vertical 2018	Vertical 2017
	(On 2017 Figures)
Sales	146%		100%	100%
Less Cost of Sales	-135%		55%	59%
Gross Profit	160%		45%	41%
Distribution, Administration, Sales and Marketing	119%		21%	26%
Lease Expense	119%		1%	1%
Superannuation Expense	122%		2%	2%
Loss on Foreign Exchange	154%		1%	1%
Interest Expense	80%		0%	0%
Total Operating Expense	119%		25%	31%
Operating profit	280%		20%	10%
Income Tax	158%		4%	4%
Operating Profit After Tax	343%		16%	6.87%

 
ii. Relevant Financial Ratios

RELEVANT FINANCIAL RATIOS
S. No.	Ratio	Formula	Company Ratio 2018		Company Ratio 2017		Industry Average 2018
1	Current Ratio	Current Assets / Current Liabilities	1.84	1.84:1	1.18	1.18:1	1.91:1
2	Liquidity Ratio	CA- Inventory / Current Liabilities	0.83	0.83:1	0.42	0.42:1	0.92:1
3	Debt To Total Assets Ratio	Total Liabilities / Total Net Assets	0.43	0.43:1	1.02	1.02:1	1.11:1
4	Time Interest Earned	Net Operating profit / Interest Charges	91.04	91 times	21.25	21.25 times	3.00 times
5	Inventory Turnover	Cost of Goods Sold / An Inventory held	6.13	6.13 times	4.89	4.89 times	5.85 times
6	Day Sales in Inventory	365 / Inventory Turnover	59.53	59.53	74.57	74.57	62.39
7	Account Receivable Turnover	Credit Sales / Accounts Receivable	13.25	13.25 times	14.50	14.50 times	10.43 times
8	Average Collection period (days)	365 / Accounts Receivable Turnover	27.54	27.54	25.18	25.18	35
9	Total Assets Turnover	Sales / Total Assets	2.61	2.61 times	2.57	2.57 times	2.83 times
10	Gross Profit Margin	Gross Profit / Sales	45.11	45.11%	41.00	41.00%	50.37%
11	Net Operating Margin	Net Operating Profit / Sales	16.16	16.16%	6.87	6.87%	8.34%
12	Return On Total Assets	Net Profit Before Taxes / Total Assets	0.52	0.52%	0.27	0.27%	6.44%

• The current ratio and the liquidity ratio has been increased from the year of 2017 to 2018 which shows that there is no liquidity crunch in the company  and is very near to the industry average but requires the attention of the auditor (Abidin, 2015).
• The ratio of the time interest earned has been increased 400 times from 21.25 times in the year of 2017 to 91 times in the year of 2018. It shows that the company has been paying the amount regularly and now it can pay more and on the other hand is the doubtful situation for the auditor and shall be check by the auditors (ACCA, 2016).
• Debt to total assets ratio for the last two years has been below the industry average of 1.11:1 which is the alarming situation for the company as it should at least meet the industry criteria.
• Net Operating margin has been increased two and a half times and is double of the industry average although the gross profit margin is below the industry average. The auditor is required to check the accounts in detail.

iii. Accounts requiring Special Attention

Following are the accounts which require the special attention:

• Cash and Cash equivalents have been increased by 182% which shows that the company is cash rich company. On one hand it’s the cash rich company and on the other hand it is applying for obtaining the loan.
• The loss on foreign exchange has been increased by 154% as compared to the last year.  It depicts that the company is not focusing on the ways as to how to hedge the loss that is being incurred from the foreign currency fluctuations.
• The intangible assets have been increased by 348% as with the figure of the last year. The major change has been due to the inclusion of the brands of NZ855000 dollars. The auditor is required to check the detail of the acquisition of the brands (Kharisova, 2014).
• Sales have been increased by 146% whereas the corresponding expenditure has been increased by 119%. The attention is required regarding the correctness of the amount mentioned in the income statement and the corroborative evidences.
• The amount of distribution, selling and administration expenses has been reduced by 5% from 26% in the year of 2017 to 21% in the year of 2016. It requires the special attention as to ascertain with the increase in the sales of the company, the corresponding expenses have not been increased rather reduced.   
• Loan to previous CEO has been decreased by 2% in 2017 to 1% in 2018 which requires attention as to first ascertain why the loan has been given and whether the same is being paid as per the terms of the contract.
• Depreciation has not been charged on the plant and equipment and it has to be considered while finalizing the statement of the profit and loss account and consolidated financial statements.
• The physical verification of inventory as mentioned will be taken on 29^th June 2018 and accordingly the same will be considered in the final financial statements.

Thus, these are the accounts which require the attention of the auditor.

e. Materiality

Materiality is defined as the level of significance which can influence the decision of the users of the financial statements (Chen, 2017).

Management and Internal Controls

i. Different Levels

Planning materiality is purely formed on the premise of the requirements and the expectations of the users of the financial information of the company.

Performance Materiality is related with the errors and the omission if any committed by the personnel employed.  It does not affect the objectivity of the financial information contained in the financial statements of the company (Leung, 2015).

Specific Materiality deals with the areas which are of the utmost importance. It basically links with the various areas like with the notes to accounts of the financial statements or meeting the stipulation as made by the bank agreement.  For instance, like the bank has required that the net assets to the total liabilities ratio and current ratio shall be positive. It comes under specific materiality to check whether it is complying or not (Mao, 2014).

ii. Calculating Materiality levels

Planning Materiality range is NZ 105919 to NZ 1359029.

	(In NZ Dollar)
Planning Materiality	2018
Single Rule	Materiality
5% of pre-tax income	$2,348,167
0.5% of total assets	$89,902
1% of equity	$125,652
0.5% of total revenue	$234,817
Variable Size Rule
0.5% to	$ 105919 to
1% Gross Profit	$211,838
Average Method
Average of Single Rule	$699,634
KPMG Formula
1.84   x (total revenue)2/3	$1,359,029
Total Assets	$17,980,365
Total Revenue	$46,963,338
Pre-tax Income	$9,390,397
Equity	$12,565,213
Gross Profit	$21,183,839

In case of the high overall risk, the performance materiality level will be 60% of the planning materiality level and therefore, the performance materiality comes out as 60% of 0.5% of 17980365 = NZ 53941 dollar.

iii. Calculating Materiality levels for Brands

Specific Materiality level for the brand will be Development cost / (Total Assets + Total Liabilities)* 53941

= NZ855000 / (17980365+ 5415152) *53941 = 3.66% *   53941 = $32365

If the expenditure of $100000 based on the supplier invoice is not adjusted towards the marketing and promotion then the auditor shall issue the qualified report stating the wrong capitalization of the marketing and promotion expense of the brand which otherwise should be charged to the income statement.

a. Relevance of Internal Controls

The internal controls plays a very important role in the planning of the audit as it specifies the policies which are being undertaken by the company for the purpose of running of the smooth functions of the company.

i. Underlying Objective

The main objective of the auditor to adopt the test of controls while verifying the sales is to ensure that whether the internal control system as employed by the company for the purpose of the issuing of the sales and booking the revenue in the accounting books have been correct and in accordance with the law. The second objective is to ascertain whether the company is following the procedure for issuing the sales as mentioned in the written policies and whether any discrepancy has been found or not (Ullah, 2014). 

Financial Situation

ii. Test of Controls and Substantive Controls

Test of controls are conducted in order to check that whether the internal controls so adopted and applied by the company is effective or not.

Substantive controls are the tests conducted to check the reasonableness of the heads or the items that are mentioned in the financial statements.

In the given case both the tests shall be performed.

iii. Stage during the audit

As test of controls are performed to check the effectiveness of the internal control system and it shall be applied mainly at the stage when the discounts are being given to the customer and reconciles them with the basis of discount as mentioned in the policies. Second stage is when the cash is collected from the customer or when the credit is extended.

b. Situation affecting Audit Plan

The above situation will affect the audit plan in the following manner:

1. Due to the high targets as set by Andrew Bigham, there may be the high chances of having the manipulation in the amount of the revenue earned and the discount received by the company.
2. The plan will first include the test of controls and the substantive testing will be done.
3. There might be the possibilities of having the risk of overstatement of the accounts receivable of the company as the company sells the good on credit basis only and with the manipulation the balances of accounts receivable go on increasing.
4. The substantive testing shall include three accounts – Sales, Accounts receivable and debtors. These all three accounts shall be checked with the invoices and the bank statement.
   
   

Every company is required to get his accounts audited at the end of the every year and it is very necessary to get the accounting books audited to ensure about the correctness of the results and to provide the true picture of the workings of the company. To conclude the report, it has covered all the aspects and matters as relevant for the audit of the company.

It is recommended to follow the accounting policies and procedures in the letter and spirit so as to avoid the situation of having the qualified opinion. 

AASB, (2016), “ASA 300 – Planning and Audit of a Financial Report” available athttps://www.auasb.gov.au/admin/file/content102/c3/ASA_300_28-04-16.pdf accessed on 02-06-2018.

AASB, (2013), “ASA 315 – Identifying and Assessing the Material Misstatements through understanding the entity and its Environment” available at https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standar d_ASA_315.pdfaccessed on 02-06-2018.

Abidin, S., (2015), “The use of analytical procedures by yemeniauditors”,Corporate Ownership & Control, 12(2), 17-25.

ACCA, (2016), “Analytical Procedures”, available on https://www.accaglobal.com/vn/en/student/exam-support-resources/professional-exams -study-resources/p7/technical-articles/analytical-procedures.html  accessed on 02-06 -2018..

Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on https://www.cleverism.com/financial-statement-analysis-introduction/   accessed on 02 -06-2018..

Chen, S., (2017), “Refer to Materiality as a Legal Concept”. Journal of Corporate Accounting & Finance, 28(2), 55-61.

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