Audit Report On Small Entity Financial Statements - Essay.

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 4 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; 4 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; 4 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. 

A report has been prepared on one of the small entity for which the audit planning is to be done. The trial balance of the company has been given from which the materiality of the entity needs to be determined. Besides this, the preliminary analytical review of the company has been done and variance analysis and the common size income statement has been prepared based on the input for both the given year 2016 and 2017 (Dichev, 2017). The report highlights the critical accounts where major anomalies can be seen and the audit procedures to be employed for each of these accounts has been shown. At the end, the fraud risk analysis has also been done for the entity to check the possibility of fraud, material misstatements, errors and other omissions, if any, in the entity.

The trial balance of the given company has been shown below for the years 2016 and 2017 and since the debit and credit is not reconciling, the balance can be considered to be the suspense account and the same has not been considered in rest of the calculations as the nature of the same is not certain (whether income / expense / asset / liability).

1. In the first place, the materiality level is to be determined for the given entity as it will help in ascertaining  which is the extent to which the checking needs to be done and what can be ignored. Anything is said to be material if it has the ability to change the economic or financial decision of the end user or the relevant stakeholder. It gives the auditor an idea as to what is the value limit until which the audit is to be restrained. It is one of the essential tools in the audit planning(Belton, 2017). In the given case, the materiality level, which has been determined by the head auditor of the consulting firm, is $ 15000 but the same is too high considering the values in the trial balance. There has been various iterations and the limits, which have been suggested by the accounting boards over the globe like those including IASB and several other top consulting and auditing companies. Some of these limits are 0.5%-1% of the gross sales or the total assets, 1-2% of the gross profit or the fixed assets or the shareholder’s equity or 5-10% of the net profit. Based on these percentages, the materiality limit for the given company can be worked out to $ 1686.6 to $ 1979.5 (Jefferson, 2017). The benefit of choosing this limit is some accounts like Interest expenses, superannuation and depreciation and furniture account would also be covered by audit, which would have been ignored as per earlier limits.

2. The preliminary analytical review has been done based on the above given trial balance and the common size income statement and the variance analysis has been prepared to get idea of the critical accounts to be audited(Werner, 2017).

3. Based on the above analysis and common size income statement, there are many accounts which need immediate audit attention and the key risks and assertions for the same has been listed below:

4. The audit risk and the relevant audit assertions for the accounts that need audit attention has been stated above. Now in this section the steps to be employed by the auditor in checking of the books of accounts has been shown below:
5. Sales: For auditing the sales account, the vouching of the invoices and the bills needs to be done and the same needs to be compared with the invoices of the last year as to whether the prices have increased or the increased sales is due to the quantitative impact. It also needs to be checked and ascertained that if the company has followed the revenue recognition policy and the completeness in recording the transactions has been ensured(Saeidi, 2012).
6. Cost of Sales: Where the sales has increased for 2017, we can see that the cost of sales has been on the decreasing side and in case if it is calculated as a percentage of the sales, it has dropped by 2.3%. It needs to be critically analysed by the auditors that if the raw materials prices have fallen down or is it that the efficiency of operations has improved and the company is using less input. (Raiborn, et al., 2016).
7. Superannuation expenses: In the superannuation expenses, there has been the major decrease of 16% as compared to the last year and it needs to be checked from the employee register if the employees have left or the wages and salaries have been lowered. Besides checking the completeness in the recording of all the expenses, the auditor also needs to check the statutory requirements(Knechel & Salterio, 2016).
8. Depreciation: The auditor needs to check All the management estimates and judgements needs to be taken into account and it also needs to be checked if the company has recorded all the costs and not shifted them to the future years. The useful lives, the depreciation rates and the asset class used by the company also needs to be checked by the auditor.

Conclusion

5. In the given case, the audit partner has suggested that the fraud risk analysis need not be done for the client as it is trustworthy and it can be assumed that there would be no fraud. However, as per the principles laid down in APES 110 and the other statutes of professional scepticism this is not acceptable and the auditor needs to check every given client for fraud risk factors as mentioned in the auditing standards. The auditors are one who give reasonable assurance on the financial statements being produced by the entities and therefore it needs be verified(Linden & Freeman, 2017). Few of the accounts, which hint that there can be fraud, are those of cost of sales and superannuation for reasons stated above, and depreciation since the same has increased but the gross block of the assets has remained the same. Also, it should be checked why the entity is keeping such a high stock balance, the receivables balance and the cash balance as it is leading to blockage of funds (Defond & Lennox, 2017).

References

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Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.

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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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