Developing an Audit Program

This presentation discusses the process of developing an audit program and its importance in ensuring accurate financial statements. It provides an overview of Vmoto Ltd, a leading electric vehicle manufacturing company, and explores the key business risks and material accounts. The presentation also includes a comprehensive set of audit work steps for each material account balance.

Developing an
Audit Program

Table of Content
 Introduction
 Overview of company
 Key business risks
 Four key ratios and brief explanation
 Material Accounts
 Ten different material account balances
 Explanation of selected assertion relevant to material account balance
 Comprehensive set of audit work steps for each material account
balance.
 Assets
 Sampling plan for each material account
 Conclusion
 References

Introduction
In the present era, the concept of auditing is increasing as each and every firm
wants to detect the error and frauds at the right time lowering their impact
on the overall performance of business
This help an organisation to get more advance loan from bank because the
audited statement is more faithful and reliable. In order to conduct an audit
program there is need of proper and accurate plan which gives detailed
information regarding conducting an audit and it guide the auditor to
maintain an ethics within company. The audit program might be determined
as the plan of action of the auditor specifying the tasks to be performed, the
audit tests to be performed and the processes to be accompanied, the
persons responsible for performing the work as well as the time under which
the work to be performed. In this assignment Vmoto Ltd has been selected
that support to better understand the concept of audit program.

Overview of company.
The company Vmoto Ltd is one of the leading electric vehicle manufacturing
and distributing company all over the world. The company was established
in 29 October 2001 and have its operation in Australia, America and New
Zealand and the middle east. The company have a mission to become the
largest electric vehicle product distributor and also to deliver EV solution to
its user at international level. Vmoto Limited manufactures, markets and
distributes motorcycles, scooters and all-terrain vehicles. The company is
dealing in consumer discretionary sector within leisure product industry and
recreational vehicles sub industry.

Key business risks
In the present there can be number of business risk that can be faced by the
electric vehicle manufacture company such as the introduction of rapidly
developing digital technologies, increased regulatory stress and worldwide
financial instability are important considerations. It is observed that the key
business risk to Vmoto Ltd is related with cost because battery innovation is
costly and the use of batteries in electric vehicles must be sufficient to
enable them to carry the vehicles practical for most driver, they must be
constructed using costly equipment, most of which are difficult to procure.
Audit risk
The likelihood of an auditor expressing an inaccurate view on financial
statements is called as audit risk. Audit risk is a risk of auditor providing on
financial statements an inaccurate or insufficient opinion. Following are
cases of erroneous audit opinions, as follows:

Four key ratios and brief
explanation
Profitability Ratios 2016 2017 2018
Gross Margin % 17.6 10.3 13.1
Return on Equity % -50.1 -48.46 -6.51
Interpretation: The profitability ratios are the financial measure that are
used to figure out the actual earning ability of company and also
ascertain the financial position and strength by comparing the revenue
with several expenses and make sure the optimum utilisation of
different resources.

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Efficiency ratio 2016 2017 2018
Asset Turnover Ratio 1.05 0.62 0.94
Interpretation: Efficiency ratios are being used by evaluating how well a
company uses its funds to produce income to evaluate business
efficiency. These proportions work with the business's functional
element like how many moments the firm transforms its receivable
amount into money, the capacity of the business to produce profit
through the use of resources, and how well the business manages
inventory size. From the above table it has been observed that assets
turnover ratio which was 1.05 in year 2016 which shows that company
is able to generate enough sales from their assets.
Liquidity/Financial Health 2016 2017 2018
Current Ratio 1.96 1.79 1.85

Material Accounts
In the accounting world, the material accounts are considering to be important as
in case if the information are missing to these material and it have a greater
impact on the decision making of the user of financial statements. All those
items are considered to be material in case if they have a major influence
upon the described profit of company. For example, raw materials, parts,
sub-components and equipment of manufacturing. In principle, everything
absorbed can be categorized as material during the manufacturing phase.
In the preparing and submission of a financial document, financial accounting
methodologies often address the conception of materiality. While financial
reporting structures can address materiality in distinct ways. According to ISA
320 materiality in performing and planning an audit programme it helps to
Addresses the problem of the strategy to determining materiality by
explaining that materiality relies on the magnitude and type of an object or on
a mixture of both regarded in the context of the specific conditions in which it
occurs.

Ten different material account
balances
In accounting term, material account balance is defined as the size of recorded
account balance in the financial statement of the company during a financial
year. From the balance sheet of Vmoto Ltd for the consecutive three years
some of the material accounts in the assets and liabilities are as follows:
Assets: These are the resources that are controlled and owned by the
companies with the intention that it helps to generate required cash flow in
nearby future. There are the possibilities of misstatement in these account
which may impact the entire financial performance of Vmoto Ltd.
Particular 2016 ($) 2017 ($) 2018 ($)
Cash and cash equivalents 43,61,855 31,72,792 41,93,790
Trade and other receivables 28,77,295 13,85,118 20,98,447
Inventories 69,87,827 27,80,782 56,38,169
Property, plant and equipment 76,26,947 78,14,943 85,56,335
Intangible Assets 40,92,773 5,95,533 4,46,650

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Liabilities: It is defined as the legal obligation or any financial debts that
occurs during the entire functioning of different business operation.
Particular 2016 ($) 2017 ($) 2018 ($)
Trade and other payables 56,87,070 38,67,726 61,49,449
Loans and borrowings 21,07,943 19,66,878 12,35,890
Current tax liabilities 11,529 0 0
Deferred tax liabilities 4,89,860 0 0
Other liabilities 10,00,000 0 0

Explanation of selected
assertion
In accounting, the financial statement assertions are defined as the claims
which are created by the management of company and are related with
annual reports. These assertions develop a theoretical ground which
support the external auditors to form an accurate audit procedure. In
general, management makes implicit or specific allegations in the
preparation of financial statements concerning the identification, evaluation
and submission of investments, liabilities, earnings, equity, expenditures
and disclosures in accordance with the relevant financial reporting structure.
From the annual report of Vmoto number of material accounts balance have
been determined that might impact the financial report. There relevant
assertion are as follows:

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Items Relevant Assertion Explanation
Cash and cash equivalents Accuracy Transactions were correctly registered at their corresponding
quantities and there were no issues with their closing balances.
Trade and other receivables Completeness This latterly means that each trade transaction which are needed to
be recorded have been completely recognised with the financial
statement of Vmoto Ltd.
Inventories Classification Transactions were categorized and reasonably submitted in the
financial accounts. As each and every stock that was part of raw
material, goods in transit and finished goods was reported correctly.
Property, plant and equipment Occurrence This defines that each transaction recognised in the annual report
have happen and is already a part of Vmoto Ltd.
Intangible Assets Cut-off All the transaction related to the intangible assets has been
recognised

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Items Relevant Assertion Explanation
Trade and other payables Valuation The entire balance of trade and other payables for Vmoto have been
appropriately valued and balanced.
Loans and borrowings Rights & Obligations This assertion simply defines that liabilities identified in the accounts
constitute Vmoto Ltd obligation that are needed to be transfer within
future period.
Current tax liabilities Existence It shows that the liability balance exit at the end of year such as in year
2016 the balance was $11,529 which write off in the consecutive year.
Deferred tax liabilities Existence This assertion helps to define that the balance of liability was recorded at
the end of period. From the annual report the balance in year 2016 was
$4,89,860.
Other liabilities Existence It indicates that at the closure of accounting year, the liability balance
departure, such as in year 2016, the balance was $10,00,000.

Comprehensive set of audit
workItems
Cash and cash equivalents  At first step while auditing cash and cash equivalents auditor should list out the in or out
sources of cash within entity like cash sales, cash expenses, contra entries in bank
statements.
 Then check each authorization level which is established by entity to control and manage
cash transactions.
 Analyze any cash receipt or payment which is illegal in statute eyes.
 Auditor should emphasize on small but highly frequent cash transactions since most of the
auditors ignores such kind of transactions.
Trade and other receivables  At first step list out company's major debtors or trade receivables.
 Then assess their payment cycle and credit period.
 Analyses year end transactions in respect of trade receivables to find out any trade debtor
which may be bankrupt or lead to an bed debt amount.
Inventories  Here at first step auditor should conduct physical verification of inventories.
 Auditor can also conduct any sudden check to ensure proper recording of inventories.
 Thoroughly check inventory register.
Property, plant and equipment  Examine valid documents of purchase of property, plant and equipment.
 Conduct physical verification of company's property, plant and equipment.
 Examine that such items are properly recorded.
Intangible Assets  Examine legal and valid documents related to intangible assets like copyright, patent,
trademark etc. thereafter check amortization entry in account.
 In case of goodwill evaluate figure reported by company to ensure that amount stated in
balance sheet is valid.

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Items
Trade and other payables  Summaries all the trade-payable of company.
 Analyze year-end changes in trade-payable accounts.
 Any inter-company trade-payable should be focused more.
Loans and borrowings  Check whether paper work done by company at the time of taking loan is proper
and complete.
 Ensure that secured assets against any loan is properly valued.
 Ensure that not interest amount on loans are overdue.
Current tax liabilities  Analyze whether any major tax liabilities which are not reported by company.
 Ensure proper recording of tax liabilities.
Deferred tax liabilities  Examine that tax liabilities are properly deferred or not.
 Ensure compliance of taxes regarding deferred tax.
Other liabilities  Analyze the main source of any other major liabilities.
 Evaluate whether liabilities are properly reported.

Sampling plan for each
material account
Items
Cash and cash equivalents Here for sampling auditor should take sample of cash transaction
which are large in value or frequent in nature (Tang and Liu, 2015).
Trade and other receivables While taking sample of trade receivables auditor should consider only
yearend transaction in trade receivable account and trade-receivable
showing large balance.
Inventories In inventories only those inventory items are considered which are
frequently moving.
Property, plant and equipment Here generally sample plan is not required due to limited number.
Intangible Assets In this area also no sampling plan is required as these are also limited
in number.

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Items
Trade and other payables At the time of taking sample of trade payable
auditor should consider only yearend transaction in
trade-payable account and trade-payable showing
large balance.
Loans and borrowings Only major amount of loans and borrowings should
be taken while preparing sampling plan.
Current tax liabilities Here normally auditor not adopt sampling plan,
however current tax-liabilities with high amount
could be taken as sample.
Deferred tax liabilities In this area no sampling plan is required.
Other liabilities Other major amount of liabilities should be
considered for sampling plan.

CONCLUSION
Form the entire report, it has been founded that, internal auditor and his related
audit team must begin by explaining the goals, objectives and
responsibilities of the audit when designing an audit system. The main aim
for preparing the audit for determining general materiality is to use it to
define efficiency of materiality which is required, for instance, to assist
accountants plan their audit processes and an obviously insignificant limit
for accumulating mistakes. Accounting ratios are essential as they enable
the administrators in their day-to-day financial decision. They also assist
them in assessing the company's performance and making any
modifications considered necessary.

REFERENCES
Austin, A. A. and Carpenter, T., 2018. Game On: Making Audit Firm
Communication More Engaging to Improve Auditors’ Fraud Actions during
Evidence Evaluation. Available at SSRN 2951396.
Cantore, N., 2017. Factors affecting the adoption of energy efficiency in the
manufacturing sector of developing countries. Energy Efficiency. 10(3).
pp.743-752.
Gaol, L. and Berliana, M., 2019. Time Budget Pressure, Auditor Locus Of
Control And Audit Quality Reduction Behavior. Auditor Locus Of Control
And Audit Quality Reduction Behavior (August 20, 2019).