Audit Plan for Azure Enterprises: Evaluating Risk of Fraud

This report evaluates the trial balance of Azure Enterprises and discusses areas that require emphasis and their audit process. It emphasizes the need for sufficient, appropriate, and adequate audit evidence to form an opinion on financial reports. The report also highlights the importance of recognizing and evaluating the risks of material misstatement of financial statements due to fraud.

ASSIGNMENT

To,
Respected Sir,
Audit Senior
The current report is related to the evaluation of the trial balance of Azure Enterprise
as asked by you. The report comprises the areas which need to be emphasized, and the
same are discussed in detail and with their audit process. It can be concluded that
sufficient appropriate and adequate audit evidence is essential so that opinion can be
formed on the financial reports by the auditor. Further, the mere trustworthiness of
management cannot be applied as the base of opinion that whether fraud element exists
in transactions of the organization or not.
Yours Sincerely,
Audit team

AUDIT PLAN FOR AZURE ENTERPRISES

Executive Summary
Materiality can be referred to as the main variant which is applied as a base by an auditor in
order to ascertain whether risk relating to fraud exists in books of account of an organization.
Auditing assertions can be specified as explicit claims or representations which are made by
management and are responsible for the development of financial statements regarding the
appropriateness of several elements of financial statement and disclosure. Present study
revolves around the analysis of accounts of Azure Enterprises in order to assess the variant of
risk relating to fraud in same. In order to assess the same significant account which requires
detail assessment have been ascertained which are: Cost of sales, service fees and interest
expense. The audit procedure which is applied to same is: re-considering the entire data on
the summary reports in order to ascertain the exactness. Run transaction-level reports for the
accounts so that the details can be analyzed for the verification of the figures which are
posted in summary report are correct. It can be concluded that to enquire whether fraud
variant exists or not, an auditor requires to attain sufficient adequate and appropriate audit
evidence.

Table of Contents
INTRODUCTION......................................................................................................................7
DISCUSSIONS..........................................................................................................................7
(a) Evaluation of materiality limit set for Azure Enterprises.................................................7
(b) Trend Analysis of Income Statement of Azure Enterprises.............................................7
(c) Assertions related to significant audit testing...................................................................9
(d) Audit process of accounts entailing significant audit testing.........................................10
(e) Criticizing Suggestions by audit partner.........................................................................11
CONCLUSION........................................................................................................................12
References................................................................................................................................13

INTRODUCTION
ASA 240 deals with the duty of the auditor regarding fraud in the inspection of the financial
statement. Moreover, the standard expands to the manner in which ASA 315, as well as ASA
330, is to be applied to determine the risk of material misstatement because of deception
(Auditing Standard ASA 240.The Auditor's Responsibilities Relating to Fraud in an Audit of
a Financial Report, 2017). The first aim of this standard is to identify the risk of material
misstatement of the financial report due to fraud. Apart from this, the second objective of this
standard is to obtain suitable audit evidence regarding the estimated risk of material
misstatement due to fraud, through designing and implementing appropriate responses. As
per assertions of Tassadaq and Malik (2015), the last objective on which the standard aims at
is to respond suitably to deception or alleged fraud which is recognized at the time of the
audit.
DISCUSSIONS
(a) Evaluation of materiality limit set for Azure Enterprises
From the assessment of Trial Balance of Azure Enterprises, it can be assessed that the total
sales for the year are 162499.99 for the year ending on 2016, i.e. the significant transaction
will be in terms of thousand only. Thus, the base which has been taken by the auditor, i.e.
15000 is appropriate as all the important and critical transaction will be amounting to
approximately 15000 or above. In case the budget is amended than the new figure will
determine the accounts and transactions which require deep auditing. The concept of
materially is applied to assess significant and qualitative transactions of an organization so
that the percentage of inherent risk can be reduced to a significant extent (Soliman and
Ragab, 2014).
(b) Trend Analysis of Income Statement of Azure Enterprises
Horizontal analysis, also known as trend analysis refers to financial statement analysis
method which illustrates alterations in the amounts of parallel financial statement items over
a period of time. Further, it is considered as a useful instrument for assessing the situations of
the trend of a specified period of time. The same method is applied by the auditor of the
Azure Enterprises in order to assess income statement for two years. The year 2015 is utilized
as the base period and the items on the statements for all later periods are compared with the
items on the statement on the statement of the base period. The changes are presented in
percentage form to ascertain the significant change over period.

Year Increase / Decrease in financial items percentage %
Sales -13%
Cost of sales -31%
Gross Profit -4%
Other Income -97%
Service fees -32%
Interest Income -36%
Bank charges -34%
Depreciation 49%
Interest expenses -33%
Printing expenses -33%
Miscellaneous expense NA
Wages -29%
Superannuation -25%
Total Expenses -13%
Net profit -30%
(c) Assertions related to significant audit testing
Knechel and Salterio (2016) specified the five variants which are required to be asserted
while auditing accounts which require detail checking are existence, completeness, valuation,
rights and obligations and presentation and disclosure. In the present case, as significant
variance have been assessed in various accounts such as; the cost of sales, gross profit,
service fees, other income, depreciation, interest expense and wages. However, a few of them
have been discussed below in detail:
Cost of Sales: It can be accessed from the trend analysis that the cost of sales has been
decreased to a significant extent; however sales have not been decreased to that major extent.
As these both accounts have an interconnected relation, it is required to be assessed that
whether the cost of goods has been decreased due to the quantum of goods sold or due to a
decrease in prices of material used in same. Appropriate valuation of the cost of goods is
necessarily required in order to present the true financial position of the company (Rendon
and Rendon, 2015.). Thus, due to the same reason, the cost of sales account is subject to
significant auditing testing.
Interest Expenses: In order to assess whether interest expenses are deductible or not it is
required to analyze whether the same has been paid or not. Moreover, it is also required to be
checked that whether same relates to the current year or not. Further, the account will also
have a significant impact on liability. The assertion which is required in order to provide that

adequate amount has been provided in P& L is that calculation of interest has been done in an
appropriate manner in order to analyze presentation and disclosure relating to same.
Service Fees: Service fees are a significant part of the income of Azure Ltd. A variance of 32
% can be analyzed from an analytical review of the income statement. Thus, assertion
relating to the nature of service fees relating to accounting treatment is required to be attained
from management. Moreover, appropriate notes to accounts have been provided or not in
books of account in order to specify the reason behind significant downfall in service income.
In case appropriate accounting has not been applied than same might lead to the inappropriate
and inaccurate presentation of financial statement (Robert, 2017).
(d) Audit process of accounts entailing significant audit testing
Cost of Sales: The procedure of auditing cost of sales can be initiated by carrying out a
prognostic test of the cost of sale by product line, division or another business segment
through reference to information of units dispatched and average unit costs. After this,
exploration of important differences among the forecasted and recorded amounts should be
done. The next step will be expanding the vouching test of purchase transactions to test
associated cost of sales transactions through tracing the units costs utilized to alleviate stock
in order to costs records tested in the audit of stock.
Hence, the audit process is to be followed strictly on a regular basis in order to determine
whether the cost of sales have decreased or increased (Audit Procedures, 2017). In addition to
this, proper recording of goods that have been vetted but not dispatched have been
characterized as sales in the financial statements rather than inventory will also be checked.
Service Fees: The first step to be taken for an audit of service fees is authenticating the
summary calculations. The auditing has to start with income segment, confirming that the
total income is equivalent to the total of the income lines. Subsequently, estimate the variance
between income and expenditure numbers in order to verify the equity section, since the
owner’s equity is merely the difference between income and expenditure. Once it is verified
that the estimations which are done in the income statement are correct, then re-examine the
detail which contributes to the figures (Revenue Audit Procedures, 2017). Draw summary
transaction reports from the general ledger for every income account. Moreover, the every-
transactional level report demonstrates the figure that has been recorded in the statement.
After doing so, contrast the transactions in the ledger to the hard copy files for example
invoice or check stubs the journal entries to verify that they were recorded accurately. When

the audit of the income statement is done then select, some transactions form every relevant
account, for example, some credits posted to service fees.
Interest Expense: The auditing process of interest expense can be initiated with the expense
section, verifying that the total interest expense amount is equivalent to the total of expense
lines. Drag ledger accounts of the transactions into the account of expense. Reconsider the
transaction detail reports for interest expense account in order to verify that the total of
expenses on the income statement report is appropriately contrasted to the ledger activity
(Nuijten, Twist and Steen, 2015). The next step is analysing the detail level in the ledger for
the entity transaction recorded in the period to confirm that they were posted accurately.
After doing so, check the dates on the interest expenses to be confirmed that they apply in the
period accurately and authenticate physically through adding them up, to make sure that the
totals of interest expenses which are recorded in the statement are accurate.
(e) Criticizing Suggestions by the audit partner
AUDITING STANDARD ASA 240 deals with the auditor’s responsibilities relating to fraud
in an audit of a financial report. Further, it also provides explanation relating to the manner
in which ASA 315[1] and ASA 330[2] are to be applied relating to the risk of material
misstatement due to fraud (Mohanaprakash and Andrews, 2018). Para 11 of ASA 240
specifies objectives of an auditor in relation with fraud and same are as follows:
 Firstly to recognize and evaluate the risks of material misstatement of the financial
statement because of deception.
 Further, to acquire adequate, appropriate audit proof related to the evaluated risks of
material misstatement because of deception by designing and executing suitable
reactions.
 Lastly, to react suitably to deception or alleged deception recognized during the
inspection.
Thus, in the present case, it can be commented that auditor partner suggestion for not
considering fraud risk is not appropriate. The reason behind the same is that as significant
variance in trend is available in the analytical review which requires detail assessment. Mere
trustworthiness of staff cannot be applied as adequate, appropriate audit evidence for audit
opinion purpose.

CONCLUSION
After considering all the facts and figures, it can be concluded that it is necessary to
recognize and evaluate the risks of material misstatement of the financial statement due to
fraud. Furthermore, in order to react suitably to deception or supposed deception recognized
during the audit an auditor requires to assess internal control of management as well as audit
evidence attained during the audit.

REFERENCES
Audit Procedures. 2017. [Online]. Available through
<https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-
study-resources/f8/technical-articles/audit-procedures.html>. [Accessed on 13th September
2019]
Auditing Standard ASA 240. The Auditor's Responsibilities Relating to Fraud in an Audit of
a Financial Report. 2017. [Online]. Available through
<https://www.legislation.gov.au/Details/F2017C00910>. [Accessed on 13th September 2019]
Knechel, W.R. and Salterio, S.E., 2016. Auditing: assurance and risk. Routledge.
Mohanaprakash, T.A. and Andrews, J., 2018. An examination on data integrity auditing
patterns in cloud computing. International Journal of Engineering & Technology, 7(1.9),
Pp.254-259.
Nuijten, A., Twist, M. and Steen, M., 2015. Auditing interactive complexity: Challenges for
the internal audit profession. International Journal of Auditing, 19(3), pp.195-205.
Rendon, R.G. and Rendon, J.M., 2015. Auditability in public procurement: An analysis of
internal controls and fraud vulnerability. International Journal of Procurement
Management, 8(6), Pp.710-730.
Revenue Audit Procedures. 2017. [Online]. Available through
<https://smallbusiness.chron.com/revenue-audit-procedures-58936.html>. [Accessed on 13th
September 2019]
Robert, R. The five assertions of Auditing. 2017. [Online]. Available through
<http://archives.cpajournal.com/old/14038934.htm>. [Accessed on 13th September 2019]
Soliman, M.M. and Ragab, A.A., 2014. Audit committee effectiveness, audit quality and
earnings management: an empirical study of the listed companies in Egypt. Research Journal
of Finance and Accounting. 5(2).Pp.155-166.
Tassadaq, F. and Malik, Q.A., 2015. Creative Accounting & Financial Reporting: Model
Development & Empirical Testing. International Journal of Economics and Financial Issues,
5(2).

APPENDICES
Year 2016 2015
Revenue
Sales 162500.00 187450.00
Increase / Decrease in percentage of sales -13%
Cost of Sales 43577.00 63595.00
Increase / Decrease in the percentage of the cost of sales -31%
Gross Profit 118923.00 123855.00
Increase / Decrease in percentage of Gross Profit -4%
Other Income 800.00 25000.00
Increase / Decrease in percentage if Other Income -97%
Service Fees 39167.00 58000.00
Increase / Decrease in percentage of service fees -32%
Interest Income 32.00 50.00
Increase / Decrease in percentage of Interest Income -36%
Expenses
Bank Charges 232.00 350.00
Increase / Decrease in percentage of bank charges -34%
Depreciation 23213.00 15590.00
Increase / Decrease in percentage of depriciation 49%
Interest Expenses 7200.00 10800.00
Increase / Decrease in percentage of interest expenses -33%
Printing Expenses 168.00 250.00

Increase / Decrease in the percentage of printing expenses -33%
Miscellaneous 1600.00 0.00
Increase / Decrease in percentage of miscellaneous expense NA
Wages 37453.00 53000.00
Increase / Decrease in percentage of wages -29%
Superannuation 3558.00 4770.00
Increase / Decrease in percentage of Superannuation -25%
Total Expenses 73424.00 84760.00
Increase / Decrease in the percentage of Total Expenses -13%
Net Profit 85498.00 122145.00
Increase / Decrease in the percentage of net profit -30%