Acc621 Issues In Auditing Practice: Assessment Answers

Answer:

Introduction

In the given assignment, a report has been prepared on the topic of audit planning for one of the small entities Feldgrau enterprises for which the audit firm needs to set up and frame an audit planning procedure based on the trial balance given in question. Based on the same the preliminary analytical review has been done and the variance analysis and common size income statement has been prepared for both the years 2016 and 2017 to identify the critical accounts to be checked and analysed with respect to material misstatement errors and omissions (Jefferson, 2017). The audit procedures, which needs to be undertaken by the auditor for each of these accounts, has also been stated clearly. Lastly, the fraud risk analysis has also been conducted for the said client to check on the possibility of the fraud (Knechel & Salterio, 2016).

Discussion and Analysis

The Trial balance of Felfgrau Enterprises for both the year 2016 and 2017 has been studied and based on the same the below table has been drawn. The difference for both the years can be assumed the suspense account and has not been considered in any of the analysis since the nature of the same is not predictable (Bizfluent, 2017).

1. Based on the Trial Balance of the company the materiality level is to be determined. Materiality may be defined as a level of misstatement, error or omission in the financial statements, which either individually or in aggregate has the ability to influence or change the overall economic and financial decisions of the end user. Materiality serves a very integral purpose in the audit of the financial statements as it helps the auditor to determine what are the important, significant and critical accounts which needs to be focused upon and what can be ignored for its ambit based on materiality. It helps auditor in planning the audit well(Dichev, 2017). In the given case, the materiality as per question has been mentioned to be $1500, which can be said to be too high looking at the trial balance of company. As per the limits and methods prescribed by accounting bodies over the glob including IASB and the other consulting firms including the bug 4’s, materiality can be determined as a percentage of the sales, total assets, total fixed assets, gross profit, net profit or shareholder’s equity. In the given case, the amount, which can be fixed for materiality purposes, can be in the range of $ 1105 to $ 1296. This would also bring few of critical accounts like Superannuation, interest expense, depreciation and furniture account which would have been missed out had the earlier limits been considered (Trieu, 2017).

1. The variance analysis and the common size income statement has also been prepared for the given entity Feldgrau Enterprises for the year 2017 and 2016. This will be used for preliminary analytical reviews and audit planning purposes and to decide the future course of action(Belton, 2017).

1. Based on the above variance analysis and the common size income statement, few of the accounts in the profit and loss account have been earmarked for audit attention, as there is significant movement as compared to the last year. The audit assertion and the risk in the respective accounts has been shown below:

1. Based on the above audit risks and audit assertions being pointed out for the relevant set of accounts, below mentioned are the set of audit steps or procedures which the auditors need to employ in order to do the audit:
2. Sales: The sales as well as the consultancy revenue has declined drastically by 31% as compared to the last year and it needs to be checked if it due to the lowering of sales or selling prices or is it due to competition in the market. It also needs to be checked if the company is also offering any discounts or rebates to the clients, and whether the accounting has been done in accordance with the revenue recognition standards for which vouching needs to be employed in audit planning(Goldmann, 2016).
3. Cost of Sales: the cost of sales as a percentage of sales has declined from 26% in 2016 to 23.3% in 2017, which is indicative of the fact that either the cost of war materials has decreased, the raw material input has declined, or efficiency has increased. All of this needs to be carefully analysed. Also, the cost bookings and the cost accruals also needs to be analysed so as to determine that all the costs pertaining to the current period has been accounted in current year only(Werner, 2017).
4. Depreciation: With respect to depreciation, the trend is opposite as compared to the rest of the accounts, the expense has increased by more than double and is one of the main reasons for the decline in the profitability. Since the company has not made any significant acquisition or disposal during the year, it needs to be checked if the company made any change in the rates or method of depreciation or the useful lives of the assets has been decreased. All the management assertions, the estimations and judgements needs to be carefully evaluated(Sithole, et al., 2017).

Conclusion & Recommendation

5. Fraud risk analysis forms an integral part of the auditor’s planning but in the given case, the audit partner of the auditing firm has asked the junior not to do fraud risk analysis for Feldgrau enterprises, as the client is trustworthy. This action and suggestion cannot be taken as it is against the principle of professional scepticism and is talked about in APES 110 as one of the auditor’s responsibility(Saeidi, 2012). Auditor gives the reasonable assurance to the users of the financial statements that it is free of error and frauds and in case the FRA is not being conducted, it cannot be validated. There are a number of accounts which shows a huge irregularly and deviation and thus needs to be checked thoroughly. Some of these include the suspense’s account considering the huge value, the depreciation expenses account considering the reasons stated above, the decrease of interest expenses as the debt liability cannot be seen in the trial balance, the superannuation expenses as well (Raiborn, et al., 2016).

References

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online] Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html[Accessed 07 december 2017].

Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.

Defond, M. & Lennox, C., 2017. Do PCAOB Inspections Improve the Quality of Internal Control Audits?. Journal of Accounting Research, 55(3), pp. 591-627.

Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4(3), pp. 103-112.

Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.

Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.

Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.

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.

Saeidi, F., 2012. Audit expectations gap and corporate fraud: Empirical evidence from Iran. African Journal of Business Management, 6(23), pp. 7031-41.

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.

Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, Volume 93, pp. 111-124.

Werner, M., 2017. Financial process mining - Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.