Audit Planning:637562

Question:

  1. Define the concept of materiality and its relationship with audit evidence.
  2. Describe alternative audit strategies.
  3. Indicate the factors that affect the sufficiency and appropriateness of audit evidence.
  4. Describe the types and classifications of auditing procedures that may be used in an audit.

1.Appreciate the importance of audit risk assessment and why it is linked to financial statement assertions.

2.Explain the importance of business risks in audit planning.

3.Describe the procedures performed by an auditor to assess risk.

4.Appreciate the importance of internal control to an entity and to its independent auditors.

5.Indicate the procedures for obtaining and documenting an understanding of the entity’s internal control.

6.Explain why and how a preliminary assessment of control risk is made.

7.Explain the importance of the concept of audit risk and its three components.

1.Describe the steps involved in client acceptance and continuance.

2.State the purpose and content of an engagement letter.

3.Explain the steps in planning an audit.

4.Identify the risks of misstatement through understanding the entity and its environment.

5.Explain the role of analytical procedures in audit planning.

6.Describe the requirements to consider the risk of fraud in the audit planning process.

7.Explain the purpose and function of audit working papers.

Answer:

Audit Planning

 

Audit planning is the beginning of the procedure of auditing. It is an auditor’s responsibility to plan audit properly. As the planning include forming the strategies to develop an audit plan which takes in particular planning the risk assessing procedures and plan the resultants to the risks associated with the material misstatement (Hayes, 2014). Audit planning is the continuous process starts after the previous audit ends. The whole plan includes nature, time and extent of the procedures to be followed for the assessment of risk and various tests are to be done on these procedures and its controls. Auditor makes sure to plan in alignment of the business standards (Knechel, 2016).

Analytical Review

As it is clear from the name analytical review is a review of extensive ratios and trends in the income statement and balance sheet. It basically investigates any unusual activity or fluctuation of the items in the said income statement and balance sheet. The dependency an auditor places on the results of the analytical review based on the facts which includes materiality, control risks and assessment. This review assist auditor in planning the nature and extent of the audit procedures to improve the effectiveness and reduces the detection risk for some specific financial statement. The main purpose of analytical review is the review of financial statement in the final stage overall (Frost, 2017).

Preliminary Judgement of materiality

It is one of the major step in applying materiality where judgements are required to be made to the clients in regard to the materiality. At first auditor establish a preliminary judgement that what base can be chosen and multiplied by the percentage factor in order to determine quantitative judgement which can be further adjusted for qualitative factors about materiality. Secondly the preliminary judgement of materiality is allocated to the classes of transactions and make possible for auditor to plan the scope of procedures. Lastly the estimation are made for misstatements and being compared to the judgement about materiality (Bahr, 2014).

Inventory

  1. Inventory has been selected from the given trial balance as the inventory account can be seen at-risk of material misstatement.

Rationale for selection

The audit of inventory carries significant risks along with it as inventories represent a major portion in the current assets and inventory is known to be the base from where all the valuation methods are used and it directly impact the cost of goods sold. There is an inherent complexity in determining the quality and value of inventory (Krishnan, 2014).

Assertion and explanation

For inventory there are five management assertions while an audit takes place. The occurrence tests taken by having the samples of purchase vouchers and vouch them to requisitions it is basically tracing of vouchers to support the document. Then completeness is being evaluated as completeness in inventory process is of higher risk as it may lead to the occurrence of poor inventory controls. The third is authorization which addresses whether proper internal control is followed and by selecting a sample of inventory the authorization can be checked. Fourth is accuracy, it addresses whether the purchase transactions are containing any error or not. Last is cutoff which involves the reporting of transactions that they are being correctly recorded or not (Lenz, 2014).

Recommended audit procedure

Here as per the study of trial balance the audit procedure which can be followed would be reconciling the inventory count with the general ledger it helps in observing the physical count of inventory (Cannon, 2016).

Accounts Receivables

  1. Account receivables is been selected from the given trial balance as it represents audit risk and other problems.

Rationale for selection

There are several potential problems exist while auditing, it could create material misstatement. The material misstatement may have some errors and few would indicate frauds.  There can be many errors involved while auditing account receivables as it consists of all amounts which could have been manipulated and result into frauds (Arens et al., 2016).

Assertions and explanations

The company can place a system to record the related transactions and make proper shipment, control and collect the receivables which helps in preventing errors and frauds. All the entries are to be mount up and forwarded to the general accounts department (Moroney et al., 2014).

Recommend audit procedure

By performing analytical procedure auditor can identify the client figures and auditor’s expectations and they help in assessing the inherent risks associated with the account receivables. The completeness should be tested in the procedure adopted (Johnstone, 2013).

Sales

  1. There is always a chance that sales could be false. The income shown reduced in order to show the report of income down.

      Rationale for selection

Sales is one of the most fraudulent account occurred in many companies. As sales affect most the financial statement of the business which directly impact the profits of the company, salaries of the workers and creates a market share which attract stakeholders to invest more.

      Assertions and explanation

It needs a basic internal control strategy where customer invoice is compare and send to the sales department to keep the record properly and cross check whenever required. If balance still doesn’t match up with the actual records then both collection and receivable department are filed and actions planned for the same (Arena, 2016).

      Recommended audit procedure

By looking at the overall balance of sales, the returns and the debts and being compare it to the past years to check the accuracy and the completeness which later on verify the actual transactions.

Cash at bank

  1. The said account is chosen from the trial balance as cash and cash equivalents are known to be an important aspect in financial statement and they are the riskier in audit procedure.

      Rationale for selection

Cash is to be known as the pivotal part of the financial statement which indicates the flow of liquidity in the account balances of bank and the organizations. It is also one of the major element where frauds and errors are detected and result into inaccurate cash position of a company.

      Assertions and explanations

The existence needs to be checked by proofing the cash receipts which have been deposited into the bank. Secondly determining the checks whether there are any missing or outstanding checks left which can affect the cash balance understated or over stated.

      Recommended audit procedure

The audit procedure for cash account can be obtaining, reviewing and preparing a bank reconciliation statement for the year end where cash balances and the bank balances as per cash book and pass book are reconciled.

Motor vehicles

  1. Motor vehicles do consider various inherent risks of misstatements and materiality. The management of fixed asset process helps in identifying risks and provide control.

Rationale for selection

Fixed assets generally create difficulty while audit takes place because of the complexity presented in the accounting transactions. Every organization has different aspect of calculating costs of their fixed assets which creates problems for auditor on how to measure the accuracy.

Assertions and explanations

By recording the purchase cost on the cost basis it is to be checked that any repairs or maintenance are added up in the account under the fixed assets. The complexities of knowing what major repairs are needed to add under the head fixed assets. Most of the fixed asset calculations are easier and straightforward and can be recorded on the cost basis directly but there are lease accounting which are not purchased they carry complex accounting issues and creates inherent risks while auditing.

Recommended audit procedure

In order to avoid such complexities and inherent risks while auditing fixed assets there is an audit procedure which is required to be followed is verifying the ownership of the asset whether it is the machinery, furniture, motor vehicles as mentioned in the given trial balance. The ownership is being examined and confirmed by the title of documents of the said property as mentioned above gives the proper proof which helps in verifying the costs attached to it.

Interest expense

  1. Interest expense is one of the unique expense who involve such inherent risks while taking up the auditing.

Rationale for selection

Interest expense involve few risks which are quite unique in nature. The inherent and control risk associated with such expense relates to the material misstatement as there are few expense who are less riskier than others it shows a complexity while auditing the interest expense.

Assertions and explanations

The identification of some specific but known misstatements are being carried on and concluded that if any such misstatement exists or not. Then if required the substantive analytical procedures are followed which indicates the errors in the class of transactions and balances of accounts. The expenses are compared their intensity of risks associated are compared and on the basis of the intensity the auditor verify the expenses.

Recommended audit procedure

The recommended audit procedure for the audit of interest expense account is a detailed observation into the account details to check the level of intensity an expense is having as it shows the cash outflow so it is important to not to ignore the fact.

Superannuation

  1. Superannuation are the direct investments to gain a control of the portfolio. It is a cash outflow which needs to be shown in the balance sheet accurately to maintain fair records of the company.

Rationale for selection

Investment are considered to be one of the most malicious audit risk component. The inherent risk involve in investment cannot be easily avoided while carrying audit. The cash outflow directly affects balance sheet so to maintain a fair picture of financial records it needs a special attention (Barndt et al., 2016).

Assertions and explanations

A proper audit training is provided and create controls in the process of audit. The control risks are realized when a financial misstatement occurs in it. It requires a proper accounting control to save it from errors and frauds.

Recommended audit procedure

As explained above cash carries higher degree of risk involve in it so the audit procedure for the same is proper training in audit and forming and engagement strategy to keep a regular check on self-investments or superannuation.

Balance Sheet

 

BALANCE SHEET            
             
Assets            
      Jul 1, 2016-Apr 30, 2017   Jul 1, 2015- June 30, 2016  
Current Assets:            
Cash     $89,750   $83,000  
Accounts Receivable     $109,850   $103,585  
Less: Reserve for Bad Debts          
             
Merchandise Inventory     $164,500   $174,000  
Interest Expense     $9,583   $12,000  
Notes Receivable            
  Total Current Assets   $373,683   $372,585  
             
Fixed Assets:            
Vehicles     $66,000   $66,000  
Less: Accumulated Depreciation   $43,125   $21,000  
      $109,125   $87,000  
Furniture and Fixtures     $7,400   $7,400  
Less: Accumulated Depreciation   $2,820   $2,220  
      $10,220   $9,620  
Machinery     $64,000   $64,000  
Less: Accumulated Depreciation   $30,896   $24,000  
      $94,896   $88,000  
  Total Fixed Assets   $214,241   $184,620  
             
Other Assets:            
Depreciation     $0   $15,738  
  Total Other Assets   $0   $0  
             
Total Assets     $587,924   $557,205  
             
             
Liabilities and Capital            
             
Current Liabilities:            
Accounts Payable            
Sales Taxes Payable            
Payroll Taxes Payable            
Income Taxes Payable            
Accrued Wages Payable            
Unearned Revenues            
  Total Current Liabilities   $0   $0  
             
Long term Liabilities            
Bank loan     $240,000   $240,000  
             
             
             
Total Liabilities     $0   $0  
             
             
Capital:            
Owner’s Equity     $111,321   $116,358  
Investment     $4,163   $5,035  
Total Capital     $115,484   $116,358  
             
Total Liabilities and Capital     $115,484   ($116,358)  
NET WORTH     $472,440   $673,563  

 

 

 

 

References

Arena, M. and Jeppesen, K.K., 2016. Practice variation in public sector internal auditing: an institutional analysis. European Accounting Review, 25(2), pp.319-345.

Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016. Auditing and assurance services. Pearson.

Bahr, N.J., 2014. System safety engineering and risk assessment: a practical approach. CRC Press.

Barndt, R.J., Fuller, L.R. and Flynn, K.E., 2016. Teaching Inherent Risk and Tolerable Misstatement in Auditing: A Modified Delphi Method as a Teaching Tool. In Advances in Accounting Education: Teaching and Curriculum Innovations (pp. 125-140). Emerald Group Publishing Limited.

Cannon, N.H. and Bedard, J.C., 2016. Auditing challenging fair value measurements: Evidence from the field. The Accounting Review, 92(4), pp.81-114.

Frost, R.B. and Choo, C.W., 2017. Revisiting the information audit: A systematic literature review and synthesis. International Journal of Information Management, 37(1), pp.1380-1390.

Hayes, R., Wallage, P. and Gortemaker, H., 2014. Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.

Johnstone, K., Gramling, A. and Rittenberg, L.E., 2013. Auditing: a risk-based approach to conducting a quality audit. Cengage learning.

Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.

Krishnan, G.V. and Wang, C., 2014. The relation between managerial ability and audit fees and going concern opinions. Auditing: A Journal of Practice & Theory, 34(3), pp.139-160.

Lenz, R., Sarens, G. and D’Silva, K., 2014. Probing the discriminatory power of characteristics of internal audit functions: sorting the wheat from the chaff. International Journal of Auditing, 18(2), pp.126-138.

Moroney, R., Campbell, F., Hamilton, J. and Warren, V., 2014. Auditing: A Practical Approach. Wiley Global Education.