Income statement is one of the most important aspects of the financial performance of any company, be it retail, manufacturing, or any other kind of business like telecomm or real estate. It is also one of the most vulnerable areas of financial mishaps, which must be checked and controlled by the external auditors of the company. On analysis of the income statement of the Cerise Enterprise, it could be seen that in the case of the net income of the company, has increases in spite of decrease in sales as compared to the previous year. The audit firm decided to plan the stages at which audit are to be done for Cerise Enterprise. The report is constructed for the analytical review of those accounts which is needed to bring under the significant audit attention.
Discussion:
Preliminary Assessment of Materiality for the Financial Report:
Preliminary assessment is a procedure which is conducted for assessing the effectiveness of the accounting system and the in-house control of the business. This procedure is followed in order to find and correct the material misstatements. For processing of assessment certain amount is being fixed as audit budget. According to the rule the quantitative factors that used to calculate planning material is 5 percent to 1 percent of Sales revenue for Cerise Enterprise. So, accordingly preliminary assessment of materiality budget of audit should be ($189000*5%) = $9450. The suggested budget of audit team is higher than the actual budget by ($15000-$9450) =$5550. This indicates that the auditor has to audit other aspects of the statements, disclosures and application of proper accounting standards is met by the company or not.
An Analytical Review:
Analytical procedures comprises of the financial data that are evaluated by analysing credible connections with financial and non- financial data. These procedures are important as to acknowledge the accounts with fluctuations and to identify the reason for the inconsistent of the account that is not relevant with the supportive information being provided for it. The review consist of analysis of the ratios and trend analysis of balance sheet and income statement. While planning the analytical review auditors needs to recognize the areas that are in the zone of potential risk so that he can plan his audit procedure in those area. To obtain relevant evidences auditor must conduct several test as he thinks fits. The substantive tests would help the auditor to conclude his audit and to reach the result based on complete efficiency and reliable. (Biggs Mock and Watkins 2014).
Risk Assessment and Audit Procedure:
Audit procedure are the procedure and the methods used by an auditor that he or she must proceed on to obtain reliable evidences on audit that helps to conclude the procedure or programme. The risks are identified during the procedure. Before proceeding on the audit procedure audit plan is needed to be approved. This is done to ensure that all the risks identified are properly addressed in the procedure for auditing. The procedure vary from company to company being under review as the internal control of every company differs according to time. There are different types of audit procedure. The procedures that have been constructed is to authorise the assertion of transactions shown in the financial statement. There are sub divisions under the financial assertion for different items that are in the balance sheet and income statement. (Gauntt and Glezen 2014).
After analysing the trend analysis of the income statement of Cerise Enterprise following transaction are identified appear to be at risk of material misstatement. For each account and assertion is identified and an audit procedure that would provide relevant evidence for this.
- Wages: The auditor identified wages to be at risk of material misstatement as a significant fall of 9 percent is seen in the year 2017as compared to the year 2016.
Wages is mentioned under the classes of transaction. Assertion identified for this transaction is Classification.
Auditor shall inspect the process of wage payment to the workers as the wage payment as per income statement has reduced to 9 percent. Auditor should inspect the guidelines mentioned for the wage payment as per the nature of the company. Auditor shall conduct a substantive tests to identify actual misstatements at the level of assertion.
- Superannuation: Auditor identifies second account to be at risk of material misstatement as25 percent decrease in the amount is being notice. Superannuation is a fund that the company pays as a regular fund for future pension.
It is also mentioned under the class of transaction. Assertion identified is cut-off. Auditor should inspect the period of recording the transaction and shall perform the subsequent payment test. Auditor shall inspect the salary slips recorded and shall also check the payments that are made within one and half month after the financial period ends.
- Repair and Maintaince: Auditor identifies as the third account to be at risk of material misstatement as major change in the figure is noticed in the income statement.
It is mentioned under the class of transaction. Assertions identified for this transaction is accuracy. Auditor shall check the amount recorded under repair and maintaince is appropriately recorded and is it reconciled correctly or not. The auditor shall inspect the policy and procedures for the reasonable assurance that the transactions are reasonably recorded.
- Cost of Goods Sold: is the fourth account identified to be at risk of material misstatement by the auditor as 9% increase in the amount is being recorded.
It is identified under accuracy assertion of transaction class. Auditor must review that the amount recorded in the income statement is appropriate. Cost of selling the goods have calculated correctly. Auditor should undergo the required test to attain the reasonable conclusion on the transaction.
Fraud Risk
Fraud is a comprehensive legal perception and it does not fall in the part of an auditor to make decisions that fraud has been there or not. However, an auditor`s major concern is to identify the materiality misstatement. Intention or unintentionally action that conclude the occurrence of material misstatement is the primary factor that distinct fraud from errors. Rather, fraud is known as the intentional action that conclude in a material misstatement in the monetary statement that is the focus to audit. ( Biggs Mock and Watkins 2014).
One of the auditor`s team partner has suggested that as the employees of Cerise Enterprise are very trustworthy fraud risk shall not be considered. Fraud can occur if the employees or management are under pressure due to work load. Secondly, if there is lack of inefficient control. Lastly, employees who has intentions of conducting fraud. Even trustworthy employees are likely to conduct fraud activities.
Auditor`s suggestion is inappropriate as there are significant changes in the figure in the income statement and after appropriate evidences too it is not supportable. Therefore, there is detection of fraud in part of client`s staff.
Conclusion
In today’s uncertain business world, the advent of risk factors are increasing day by day, which needs to be addressed. On careful analysis, it has been seen that Cerise Enterprise The management must take all the necessary steps in order to secure the proper working of the company. Through this project, it has been analysed how successfully the implementation of audit procedure and critical review for attaining the true and fair view about the management of the company is done. Along with this, the risk assessment of the company has been overseen and the financial downturns and problems have been duly pointed out.( Becker 2013).
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