Audit & Material Misstatement

This article discusses preliminary assessment of materiality, appropriateness of the figure for the client, impact of changing preliminary assessment on audit budget, analytical review in the form of trend analysis, income statement accounts at risk of material misstatement, and appropriate audit procedures to be followed. The article also comments on audit partners' suggestion.

Audit & Material Misstatement

Table of Contents
Preliminary assessment of materiality for the financial report based on trial balance....................3
A discussion of appropriateness of this figure for your client.........................................................3
Possible impact of the changing the preliminary assessment on the audit budget..........................4
2.......................................................................................................................................................4
Analytical review in the form of Trend analysis for the items of income statements.....................4
3.......................................................................................................................................................5
Three income statement accounts that appear to be at-risk of material misstatement.....................5
4.......................................................................................................................................................6
Appropriate Audit procedures to be followed for the identified accounts:.....................................6
5.......................................................................................................................................................7
Comment on audit partners’ suggestion:.........................................................................................7
Reference:........................................................................................................................................8
Appendix:........................................................................................................................................9

1.
Preliminary assessment of materiality for the financial report based on
trial balance
The concept of materiality of a financial statement requires that as per ISA 200 , as a whole
objectives of an independent auditor is to conduct audit in accordance with the requirements of
International Standards on Auditing. The ISA 200 defines that the intention of a fair audit is to
improve the degree of confidence of intended users of a financial statements being published by
a business organization. This can be achieved by an auditor by giving an opinion regarding
whether the financial statements is being prepared in all material respects in accordance with an
applicable financial reporting framework or not(Mock et al.,2012).
In the present case scenario after thoroughly studying the given trail balance it can be seen that
the trial balance for the period “July-1, 2016-March-31-2017” is holding a debit balance of
$148448 and that of the period of July-1, 2015-June-30-2017 is holding a debit balance of
$129808.
Thus the materiality for the financial report as a whole is much more than $15000 and the trial
balance is violating the basic requirement of the framework of a trail balance that is describing
that a trial balance is not balanced.
A discussion of appropriateness of this figure for your client
The figures of the trial balance especially the debit balance is not appropriate as there is every
possibility that the debit balances of the trial balance has been over reported. More over the trail
balance is missing the common items of “Accounts payable”, “Common stock”, “Long term
liabilities”, “Income tax payable”, “Retained earnings” that supposed to appear in the trial
balance as credit balance(Gay and Simnett, 2005).
So there is every possibility of material misstatement and the cause of risk arises due to the
reason that the financial statements of the organization have been misstated to a material degree.

It can also be suggested that the detected risk of material misstatement arises at the ascertain
level due to the inherent risk of error related to misreporting of the financial accounts mentioned
in the trial balance (Gay and Simnett, 2018)
Possible impact of the changing the preliminary assessment on the audit
budget
The most possible impact of changing the preliminary assessment is that big changes will take
place in the three financial statements of income statement, balance sheet and cash flow
statement which may force the management decision makers to bring some changes in their
business targets(Arens et al.,2007)
The other possible impact is that the skill of the auditor will also be in question.
2.
Analytical review in the form of Trend analysis for the items of income
statements
Year
2016-
2017
2015-
2016
Total Current asset 375750 359750
Total Non -current
asset 144400 137400
Total 520150 497150
Percentage 28% 28%
Percentage 72% 72%
Bank Loan 230000 230000
Sales 148463 187450
Cost of sales 45788 63595
Total of Expenses 65092 90783

2016-2017 2015-2016
0
50000
100000
150000
200000
250000
300000
350000
400000
Trend analysis
Total Current asset
Total Non -curent asset
Bank Loan
Sales
Cost of sales
Total of Expenses
The above review reveals (as reflected by the two consecutive year trends) that the business is
having a strong base of liquidity as 72% of the total asset is current asset. The current asset and
the non-current assets has registered rising trend while moving from 2015-2016 to 2016-2017.
The bank loan has remained unchanged over the years(Leung et al.,2007)
The sales as well as cost of sales and total expenses have registered a declining trend over the
years
3.
Three income statement accounts that appear to be at-risk of material
misstatement
As the debit balance of the represented trail balance is quite high, therefore the following three
accounts appear to be at-risk of material misstatement
Accounts receivable Account:

The accounts receivable account must be audited in order to check that whether all the
accounting figures that are being reported are really receivable for the accounting period under
consideration or not
Inventory account:
It is very much required to check the reported figure of that account as there is every possibility
that the closing inventory has been over stated which has again added to the huge debit balance
as represented by the given trial balance.
Sales account:
Finally the figures reported in the sales accounts must be checked as if there appears any change
in the account receivable figures then the credit sales portion of the figure will change which will
bring change to the overall sales figure.
On the other hand if the if the reported inventory figures are being altered after auditing then
automatically the accounted number of units being sold will altered and the reported sales figure
will change automatically (Gay and Simnett, 2018).
4.
Appropriate Audit procedures to be followed for the identified accounts:
Accounts receivable auditing procedure of
“Investigate reconciling items” should applied where the journal entries in the accounts
receivable account of the general ledger is being reviewed by the auditor for drawing
justification for the reported amounts of accounts receivable. This indicates that these journal
entries should be fully documented during this audit
Inventory auditing procedure of “Reconcile the inventory count to the general ledger” should
be applied where the auditor will trace the valuation that relates to the physical inventory count

to the company's general ledger in order to verify that the correct counted balance from general
ledger were being carried forward into the company's accounting records.
The sales audit procedure of
Transactional Testing should be applied where the auditor check the accuracy of the financial
statement amounts of sales and accounts receivable by verifying individual transactions. The
Accounts receivable balances are being checked by sending confirmation letters to customers
order to obtain objective assurance that the revenue receipt balance being recorded is correct.
The auditor also checks the sales transactions from the sales ledger in order verify that there are
legitimate sales receipts that supports the identified the transaction. To test the accuracy of the
reported sales figure the auditor reviews the sales transactions that are being reported in the
ledger that are close to the financial statement date to make sure that the company only included
sales prior to the date of reporting(Simnett et al.,2009).
5.
Comment on audit partners’ suggestion:
From the discussion of the type of possible material misstatement with respect to the identified
accounts of “Accounts receivable ”, “inventory ” and “sales” it can be suggested that possible
cause of this misstatement is error or carelessness and not due to a possible fraud attempt.
The suggestions can be backed by the fact that the trial balance is not balanced which is easily
detectable and some of the major and most common accounts that generally appear as credit
balances in the trial balance are missing and can be identified as one of the cause of the non
balanced trial balance. So no attempt has been taken for a makeup or fraud and carelessness and
unintentional omission is the possible cause of material misstatement.

Reference:
Arens, A.A., Best, P., Shailer, G., Fiedler, B., Elder, R.J. and Beasley, M., 2007. Auditing and
assurance services in Australia: an integrated approach. Pearson Education Australia.
Gay, G. and Simnett, R. (2018). Auditing and assurance services in Australia. 7th ed. North
Ryde, N.S.W: McGraw-Hill Education (Australia).
Gay, G.E. and Simnett, R., 2005. Auditing and assurance services in Australia. Mcgraw-hill.
Leung, P., Coram, P. and Cooper, B., 2007. Modern auditing & assurance services. John Wiley
& Sons Australia.
Mock, T.J., Bédard, J., Coram, P.J., Davis, S.M., Espahbodi, R. and Warne, R.C., 2012. The
audit reporting model: Current research synthesis and implications. Auditing: A Journal of
Practice & Theory, 32(sp1), pp.323-351.
Simnett, R., Vanstraelen, A. and Chua, W.F., 2009. Assurance on sustainability reports: An
international comparison. The accounting review, 84(3), pp.937-967.

Appendix:
July-1, 2016-March-31-2017 July-1,2015-June-30-2017
Dr Cr Dr Cr
cash at bank 70000 73000
Accounts receivable
12075
0 112750
inventory
18500
0 174000
Machinery 71000 64000
Accumulated Depreciation 30207 24000
Motor Vehicles 66000 66000
Accumulated Depreciation 26678 21000
Furniture 7400 7400
Accumulated Depreciation 2760 2220
Bank Loan
23000
0 230000
Sales
14846
3 187450
Cost of sales 45788 63595
Consultancy fees 44438 57000
Interest income 36 50
Bank Charges 261 350
Depreciation 12424 15738
Interest expense 8625 11500
Printing 278 375
Repair and maintenance 1080 5050
Wages 39428 53000
Superannuation 2996 4770
Total
63103
0
48258
2 651528 521720
Difference
14844
8 129808