• AUDITING PLANNING AND ANALYTICAL REVIEW

Audit planning is considered to be an effective way in which the information that is presented in the financial statement can be clearly assessed. In audit planning, the focus is on performing procedures that highlight the continuity of the client and engaging in the audit activity. The auditor performs compliance test evaluation with the focus being on the integrity of the auditing team and the independence level as this provides a fair view of the overall financial statement of the company. The initial activity of the auditing process is also essential in determining the going concern of the organization and assessing the overall reliability of the various elements of audit and this is critical in enhancing engagement process with the client.

The audit strategy that is undertaken is often aligned to the audit objectives that are performed with the intention of determining the effective internal control systems (ICS) and this can be essential in improving the engagement process. The main responsibility of the auditing team is on detecting fraud, and it includes planning of the effective ways in managing audit risks and determining substantive tests. The analytical review that should be conducted provides an opportunity to meet the unexpected change in events, changing trend in the scope of the prevailing conditions, and audit evidence. The analytical review provides an assessment of the auditing situation and the misstatement in the substantive procedures and the risk assessment procedures that are conducted.

  • Analytical review

The analytical review is one of the auditing procedures that provide an assessment of the accounts and ratios with the intention of determining the financial data and the service review towards ascertaining the trends in the financial information. The horizontal analysis for the income statement is given as:

 

Increase (Decrease)
  2017 2016 Amount Percentage
Sales 162,104 187,450 (25,346) -13.52%
Cost of Sales 49,208 63,595 (14,387) -22.62%
Gross profit 112,896 123,855 (10,959) -8.85%
Add:
Consultancy fees 49,375 57,000 (7,625) -13.38%
Interest Income 40 50 (10) -20.00%
Bank Charges 290 350 (60) -17.14%
Depreciation (29,620.83) (15,738) (13,882.83) 88.21%
Interest Expense (9,583) (12,000) 2,417 -20.14%
Printing (308) (375) 67 -17.87%
Miscellaneous (1,200) (1,200)
Wages (43,808) (53,000) 9,192 -17.34%
Superannuation (4,163) (5,035) 872 -17.32%
Net Profit 73,918 95,107 (21,189) -22.28%

From the income statement analysis provided above, the trend analysis shows that the company has reported a massive decline in the reported entries on the income statement of the operations. The reported sales revenue for the company has decreased by 13.52 percent, but this can be attributed to the financial information being given as at April 2017 (two months less).

The horizontal analysis for the balance sheet is given as:

Increase (Decrease)
  2017 2016 Amount Percentage
Current Assets:
Cash at Bank 89,750 83,000 6,750 8.13%
Accounts Receivables 109,850 103,585 6,265 6.05%
Inventory 164,500 174,000 (9,500) -5.46%
    Total Current Assets 364,100 360,585 3,515 0.97%
Machinery 64,000 64,000 0 0.00%
Acc. Depreciation -30,896 -24,000 (6,896) 28.73%
Motor Vehicles 66,000 66,000 0 0.00%
Acc. Depreciation -43,125 -21,000 (22,125) 105.36%
Furniture 7,400 7,400 0 0.00%
Acc. Depreciation -2,820 -2,220 (600) 27.03%
     Total Assets 424,659 450,765 (26,106) -5.79%
Non-Current Liabilities:
Bank Loan 240,000 240,000 0 0.00%
Owner’s Equity 111,321 116,358 (5,037) -4.33%
Net profit 73,338 94,407 (21,069) -22.32%
     Total Liabilities + Equity 424,659 450,765 (26,106) -5.79%

The trend analysis shows an increase in cash at the bank by 8.13%. However, the total assets and the total liabilities and equity reduced by 5.79%.

  • Preliminary judgment of materiality

Materiality is an important aspect when conducting auditing of a firm and it is important in determining the nature of elements that can influence the judgment of the auditor. The preliminary judgment of materiality determines the amount that the auditor believes that the financial statement of the company could have been misstated; however, it has little impact on the decision-making process of the financial statement users. The factors that can influence the preliminary judgment on materiality include: 1) materiality being considered to be a relative concept; 2) Bases are used in evaluating materiality concept; and 3) qualitative factors including the expected distribution and the level in which the audit risk is accepted.

Based on the above analytical review and preliminary judgment of materiality, the following six accounts have been selected for auditing from the financial report of Parwinder Kaur Company for the year ending 2017.

  • SIX ACCOUNTS—ASSERTIONS, EVIDENCE AND PROCEDURES
    • Sales

The sales account determines the growth of the company as misstatement of the information can lead to users of the financial statement being misled on the financial health of the entity. The materiality calculation of sales account (with 2016 being base year) is given as:

Base Amount from the base year Percentage range Base X Percentage
Sales 187,450 1-3% 1,875 – 5,624

 

The assertion that characterizes this account is the existence. The auditor should seek evidence of the transaction outside the recorded books, and this can include credits and debits from the original entry or the customers. Substantive testing should be undertaken where confirmation of random receipt from the customer conducted. For instance, the cash account should be assessed with the information and data from the clients.

  • Gross Profit

The gross profit account provides the financial health of the company. A slight misstatement of the revenue outlay can impact the profitability level of the company (Bennett & Hatfield, 2017). The materiality calculation of gross profit account (with 2016 being base year) is given as:

Base Amount from the base year Percentage range Base X Percentage
Gross profit 123,855 1-3% 1,239 – 3,716

 

From the materiality analysis given above, there is a clear disparity in the reported financial information that can impact the financial position of the company. The assertion that is utilized is the valuation assertion. It provides an assessment on whether the revenue reported have been fully integrated and realized in the financial statements of the company. The auditor should review the different accounts that are presented in the company in addressing the materiality concept.

  • Cost of Sales

The cost of sales account demonstrates the company’s ability to manage the overall cost of production, and this can be managed through reducing the cost of supplies of raw materials. The materiality calculation of cost of sales account (with 2016 being base year) is given as:

Base Amount from the base year Percentage range Base X Percentage
Cost of Sales 63,595 1-3% 634 – 1,908

 

The assertion that is assessed in this account is the existence assertion in which the cost of production should be ascertained and determined whether they exist. It is important for the auditor to determine the link between the customers receipt and the entry provided in the books of the company.

  • Total Assets

The total assets account demonstrates the ability of the company’s net assets in showcasing the percentage of the profit outlay that is reported. It is important for the client to consider implementing measures that will integrate the efficiency of the operations in determining the overall going concern within the organization. The materiality calculation of total assets account (with 2016 being base year) is given as:

Base Amount from the base year Percentage range Base X Percentage
Total Assets 450,765 3-5% 13,523 – 22,538

 

The assertion that is assessed in this account is the completeness, and it aims at providing the auditor with the information on the way transactions are conducted in determining the transactions that are conducted in the organization. The analytical procedures should be the basis for determining the recorded transactions and this can be influential in determining the material misstatement. The receivables that affect the assets account should be confirmed and it should ascertain the trends in the financial operations of the company.

 

  • Net Profit

The net profit account ascertains the implication of the profitability of the company and it determines measures that the company can undertake in managing the overall expenses in the long-run. The materiality calculation of net profit account (with 2016 being base year) is given as:

Base Amount from the base year Percentage range Base X Percentage
Net Profit 95,107 1-3% 951 – 2,853

 

The assertion that can be used in the assessment of this account is the valuation assertion. Based on the information provided on the analytical review, there is a decrease in the reported value based on the prevailing baseline. It is evident that the net profit misstatement can be attributed to the increase in the expenses that the company reported. In rectifying such an issue, the auditor should compare the expenses reported in the financial statements and those of the original entry.

  • Owner’s Equity

The owner’s equity provides an assessment of the financial stability and improves the effectiveness of the operations in the long-run. The materiality calculation of owner’s equity account (with 2016 being base year) is given as:

Base Amount from the base year Percentage range Base X Percentage
Owner’s Equity 116,358 3-5% 3,491 – 5,818

 

The assertion that can be used in analyzing the owner’s equity is the valuation. The information that is provided in the financial statements should be correctly valued and ascertained in determining the trends in the way operations are conducted. The cut-off assertion implies that the transactions that are recognized in a given period should be correctly accounted for in that period (Ji et al., 2017). The classification assertion ensures that the expenses that are incurred by the organization should be aligned to the production activities, and they should be fairly presented.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

António Dias, Lúcia Lima Rodrigues, & Russell Craig. (June 01, 2017). Corporate Governance Effects on Social Responsibility Disclosures. Australasian Accounting, Business and Finance Journal, 11, 2, 3-22.

Bennett, G. B., & Hatfield, R. C. (November 01, 2017). Do Approaching Deadlines Influence Auditors’ Materiality Assessments?. Auditing: a Journal of Practice & Theory, 36, 4, 29-48.

Chen, S., & Tsay, B.-Y. (January 01, 2017). Refer to Materiality as a Legal Concept. Journal of Corporate Accounting & Finance, 28, 2, 55-61.

Fasan, M., & Mio, C. (March 01, 2017). Fostering Stakeholder Engagement: The Role of Materiality Disclosure in Integrated Reporting. Business Strategy and the Environment, 26, 3, 288-305.

Filip, A. (February 01, 2016). Discussion of “Do Reviews by External Auditors Improve the Information Content of Interim Financial Statements”. The International Journal of Accounting, 1.)

Ji, X., Lu, W., & Qu, W. (March 01, 2017). Voluntary Disclosure of Internal Control Weakness and Earnings Quality: Evidence From China. The International Journal of Accounting, 52, 1, 27-44.

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