ACC621 Auditing And Professional Practice 8

Introduction

An audit planning financial analysis report has been prepared on the given entity through variance and trend analysis for the year 2017 and 2016 (Dichev, 2017). The income statement has been prepared basis this. All the significant accounts where the deviation is material have been analysed, the audit assertions and risks have been checked and finally the audit steps have been recommended for the same. Preliminary analytical review has not only helped in audit planning but also in determining the extent of materiality to be considered for the given client. Finally, the fraud risk analysis has also been done as per APES 110 to check the possibility of fraud in the entity.

Discussion and Analysis

The Trial balance for the entity Fulvous enterprises has been drawn for the year 2016 and 2017 and the difference in the debit and credit of the same has been considered to be pertaining to suspense account (Choy, 2018). The same has not been accounted for in the profit and loss account, as the nature of the item is not certain.

1. Materiality is considered one of the significant tools being used by the auditors during audit of an entity. Materiality may be defined as a measure of marking the given item as important and significant based on the amount involved. It can both be qualitative as well as quantitative. This is very important to be determined at the start of the audit of entity as it helps the auditor in understanding, what needs to be audited and focused upon and what not(Knechel & Salterio, 2016). There may be a few line items, which are below materiality level and hence can be left from auditor’s scope. In the given case, the original materiality level that has been fixed is $15000, which seems to be quite high. Institutions of accounting round the globe like those of IASB and AASB prescribe and have suggested few limits like percentage of sales, assets, profits or shareholder’s equity for calculating materiality. Applying that in the given case, we find that the materiality level should be somewhere in between $ 1519 and $ 1783, considering the best possible base. This limits would bring into audit scope few of the other critical accounts like Furniture account, interest expenses, depreciation and superannuation, which would have been ignored otherwise (Werner, 2017).

2. For the preliminary analytical review of the trial balance, a variance analysis of the given company has been done of the 2 years. Furthermore, the common size income statement has also been prepared to compare each of the given items of P&L as a percentage of the sales(Linden & Freeman, 2017).

3. Considering the above shown tables, a few of the accounts, which are at risk and need audit attention, have been discussed below with the relevant assertions.

4. For all the relevant audit assertions mentioned above with respect to critical accounts in profit and loss statement, the audit procedures which can be applied in the given circumstance are as follows:
5. Sales: For auditing the sales account, all the large ticket line items beyond the materiality limit needs to be vouched. The sales price and the quantity needs to be checked and analysed carefully to ascertain if the drop in sales is due to these factors. In addition, the revenue recognition policy of the company needs to be checked if they have complied with the relevant accounting standards(Trieu, 2017).
6. Depreciation: There is significant deviation in the depreciation account as the balance of the fixed assets has not increased but the depreciation on the assets has increased by more than double. IN terms of depreciation as a percentage of sales, it has increased from 6.4% to 14%, therefore all the management estimations and judgements w.r.t. the same needs to be verified. It needs to be checked if the management of the company has acquired or sold off any asset dueing the year or if there is any policy change introduced during the year(Sithole, et al., 2017).
7. Cost of sales: The cost of sales has declined by 15% as per variance analysis and as a percentage of sales as well, it has declined from 26% to 23.3%. Therefore, the auditor needs to be check if the raw material prices have dropped down, the efficiency of operations has increased, or it is due to shifting of current year expenses to the future years. All these aspects along with the accounting needs to be verified during the audit process(Goldmann, 2016).

Conclusion

5. Fraud risk analysis is one of the integral part of the audit plan and is done to check the existence of fraud in the books of accounts of an entity on an intentional purpose. In the given case, the audit manager has asked not to test the given client for fraud as the given company Fulvous Enterprises is a trustworthy client(Belton, 2017). However, this situation is against the principle of professional scepticism, which has been laid down in APES 110 as well (Jefferson, 2017). As per the principles, all the client’s needs to be checked for fraud analysis even though they have prepared and presented the accounts in the best possible manner as it is the auditor who is responsible for given a reasonable assurance to the users of the financial statements. There are few accounts which needs to be checked for fraud analysis like those of depreciation for reasons explained above, the superannuation account as the same has not decreased in percentage of sales, the interest expenses account to check if the business carries a loan as it cannot be seen in the trial balance (Saeidi, 2012).

References

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Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.

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