Audit Planning and Related Issues for Alizarin Enterprises

This report provides assistance to the audit team for planning the audit of Alizarin Enterprises. It includes preliminary assessment of materiality, analytical review, risk of material misstatement, audit procedures, and indications of fraud.

University of …………………
BUSINESS REPORT – AUDIT PLANNING
BUS000, Tutor Name, Tutorial Time

EXECUTIVE SUMMARY
The purpose of the report is to assist the audit team members for the planning of audit in an
efficient manner for the small client – Alizarin Enterprises. Planning is required for every work
and in case of audit it is necessary to have the planning before the start of audit. For the effective
and efficient assistance in audit, method of preliminary assessment of materiality and the
analytical review have been used. These methods help in identification of the accounts which are
liable at the risk of having the material misstatement. Research for this report has been through
the articles and journals which describes the ways how to conduct the audit planning and the
books relating to the concept. The research has depicted that there is the strong requirement of
the planning of audit in the defined manner so as to ensure the reduction in the risk that have
been encountered in the planning stage. This will help the audit team to assess and value each
account in the true and fair manner and give the actual and true picture of the financial health and
condition of the company. On an overall basis, the planning of the audit has been identified as
the most important step in the auditing procedures because on that basis the procedures are
defined and accordingly the audit team members perform their audit. At the end it is
recommended that the methods adopted shall be done in the correct manner and the team
member shall at least stick to the findings in the planning stage and shall audit each and every
account in the thorough way utilizing their professional skills and knowledge.
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Contents
EXECUTIVE SUMMARY.................................................................................................................................2
INTRODUCTION...........................................................................................................................................4
Authorization...........................................................................................................................................4
Limitations...............................................................................................................................................4
Scope.......................................................................................................................................................4
PRELIMINARY ASSESSMENT OF MATERIALITY.............................................................................................5
ANALYTICAL REVIEW...................................................................................................................................5
RISK OF MATERIAL MISSTATEMENT............................................................................................................5
Cost of Sales............................................................................................................................................6
Service Fees.............................................................................................................................................6
Other Income..........................................................................................................................................6
Expenses..................................................................................................................................................6
AUDIT PROCEDURE......................................................................................................................................7
Cost of Sales............................................................................................................................................7
Service Fees.............................................................................................................................................7
Other Income..........................................................................................................................................8
Expenses..................................................................................................................................................8
INDICATIONS OF FRAUD..............................................................................................................................8
CONCLUSION...............................................................................................................................................9
RECEOMMENDATIONS................................................................................................................................9
LIST OF REFERENCES....................................................................................................................................9
APPENDICES..............................................................................................................................................10
Appendix 1, Trend Analysis....................................................................................................................10
Appendix 2- Calculation of materiality..................................................................................................11
Appendix 3- Analytical review...............................................................................................................11
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INTRODUCTION
Authorization
As the title of report is “Audit Planning and other Related Issues”, the report has focused on the
analysis that has been done before the start of the audit. Audit planning is the first process in the
audit and it shall be done with the utmost care. For the purpose of the report, the company that
has been made available to our team is Alizarin Enterprises and the trial balance for the last two
years ending 30th of June 2015 and 30th of June 2016 has been considered.
Limitations
The major limitation that has been encountered is that the trial balance for the last year is of
twelve months and for the current year is of 9 months and thus the total twelve months figure for
proper analysis has been obtained on proportionate basis. The report has then ended up with the
conclusion by stating the importance of the audit planning and the recommendation to have the
audit planning done in an efficient manner.
Scope
The report is being produced to enable the team of the audit to perform the audit in the pre-
defined manner by providing them with the audit plan ready with the detail of items having the
risk of material misstatement and the audit procedures which shall be undertaken so as to ensure
the completeness and the accuracy of the books of accounts.
PRELIMINARY ASSESSMENT OF MATERIALITY
Materiality has been defined as the information, which is either on alone basis or in group, which
in case misstated or gets omitted from the books of accounts then it will have the adverse effect
on the decision of the users of the financial statements of the company (Budescu, 2012). As per
the Auditing standards, the auditor shall define the materiality level for the accounts as whole
and for the particular types of transactions and accounts.
The overall materiality level that has been assumed amounting to $15000 is on the lower side. It
is inappropriate as per the financials of the company – Alizarin Enterprises.
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The first two items are stable and third item is relevant for the purpose of judging the materiality
level and as per the level it has been inferred that the overall materiality level is very less and it
shall be $20000 (Calculation in appendix-2) at least in order to commensurate with the nature
and size of the business of the company (Imoniana, 2012).
It will lead to the change in the audit budget because of the upward change in the overall level
materiality level as well as the separate account balances and transactions. Budget will need
revision with the amount as well as the time that it would take to complete the audit (Lo, 2011).
The revision will lead to change in the effort and time that the audit team members will put into
it and also the sample size that the auditor will take into account. As per the materiality level, the
auditor is required to increase the sample size and ascertain what changes have been occurred
during the period which has led to the requirement of the increased materiality level.
ANALYTICAL REVIEW
As the trial balance is available for only two years and hence the trend analysis has been done
through the percentage change (appendix 3).
RISK OF MATERIAL MISSTATEMENT
Following four accounts have been identified which carries the risk of having the material
misstatements:
Cost of Sales
The revenue of the company has been increased by 30% as compared to the previous year and
related cost of sales has been increased by 3% only leading to increase of Gross Profit by 30%. It
places the assertion of accuracy on the figure of the sales and cost of sales. The difference
between the two is gross profit. There are the chances of having the sales overstated and cost of
sales as understated. It is because the figure of cost of sales is inaccurate due to which the gross
profit percentage is higher. Therefore, it needs the audit testing in significant way (Gay, 2012).
Service Fees
It is included in the other income and has been increased by $750 only which has led the
decrease in the figure of net profit. The figure is understated and thus provides the assertion of
completeness on the amount of the service fees and requires significant testing.
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Other Income
The head of the other income has been decreased by $23800 leading to the decrease by 95% and
has immediate effect on the net profit percentage. Thus, like the service fees, the amount of other
income is understated. It places the assertion of the completeness as there are positive chances
that the amount of other income has not been recorded.
Expenses
Expenses have been increased by 29.94 percent which is equivalent in relation to the sales
revenue. As the percentage increase in on the higher side, there is an assertion of the cut off this
shall be considered while conducting the audit of the books of accounts. The expenses have been
overstated as 30% increase is there in expenses in total with the 30% increase in the sales.
- Bank charges – Understated
- Depreciation – Overstated
- Interest expense – Understated
- Printing – Understated
- Miscellaneous – Overstated
- Wages – Overstated
- Superannuation- Overstated
AUDIT PROCEDURE
Sample frame- It is decided in the materiality planning stage of audit that materiality limit
decided by the management was not as per the financial statement of the company and it should
be increased. Sample decided for conducting the process should be decreased if materiality
limited is increased. Therefore it is suggested to the auditor of the company that a sample of
around 40-60% should be selected for conducting the process. This sample size means that for all
the transactions undertaken by management in the current year, auditor should conduct the audit
procedure on at least 40-60% of transactions.
Following are the audit procedure for each of the accounts-
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Cost of Sales
The audit procedure of inspection of documents shall be adopted while verifying the cost of sales
figure. It includes not only the verification of the book entries but also the evidences which
support each book entries shall be verified like sales and purchase invoice with challan, etc. It
includes the invoices of the direct expenses, stock register showing the opening and closing
stock, good received note and goods dispatch note (Glover, 2014). As there is doubt on the
completeness and the correctness of the cost of sales, the sample frame taken is 10%.
Specific documents to be checked- invoice issues by vendors and raw material suppliers and
transaction recorded by the management with respect to such invoices.
Service Fees
The audit procedure of inspecting and verifying the time of recognition of service shall be
adopted so as to confirm whether the whole service revenue has been accounted for or not or
depends upon the percentage completion method. It includes the confirmation from the debtors
and the persons to whom the service has been provided and the same shall be tallied with the
returns filed under the Goods and Service Tax. If there are no debtors at 30th June then the
balances shall be reconciled with the ledger of the company.
Specific documents to be checked- invoice raised by manager with respect to such services and
service tax return filed during the year.
Other Income
The audit procedure of verifying the statement from party shall be adopted so as to confirm
whether the whole other has been accounted for or not. It includes the confirmation from the
debtors and the persons to whom the service has been provided and the same shall be tallied with
the returns filed under the Goods and Service Tax (Lusk, 2016).
Specific documents to be checked- bank statement to verify the credit of such income.
Expenses
The audit procedure of the inspection shall be undertaken and each and every item of expenses
shall be vouched and verified with the invoices of the vendors.
- Bank charges – Should be verified with bank statement and banker certificate stating the
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amount of charges deducted.
- Depreciation – Shall be verified with the fixed assets register
- Interest expense – Shall be verified with bank statement
- Printing – Shall be verified with expense invoices
- Miscellaneous – Shall be verified with expense invoices
- Wages – Shall be verified with salary and wages register.
- Superannuation- Shall be verified with salary and wages register.
In all the above four accounts, it needs to be checked whether the entries have been made in the
books of accounts or not and whether the expenses or the incomes relates to the particular current
year or any other year (Knechel, 2016).
Specific documents to be checked- bank statement, fixed assets register, expense invoices and
salary and wages register
INDICATIONS OF FRAUD
As per the analytical review made in the form of the trend statement it is very clear that there is
the proper indication of the fraud. It has been evident from the fact of decrease in the percentage
of the cost of sales with the increase in the percentage of sales revenue. There are high chances
of having the fraud in the heads of the sales revenue, stock – opening and closing and direct
expenses. The major motivation of the frauds is to achieve the target of sales in order to have the
high percentage of incentive.
Second indication is of the decrease in other income by 96% and there are the high chances of
manipulation with the entries relating to the other income leading to the decrease in the net profit
and thus providing the wrong figures to the users of the financial statements.
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CONCLUSION
The report has been framed with the purpose of assisting the audit team in preparing the audit
plant and to conduct the audit of the company – Alizarin Enterprises. The report has concluded
that the set materiality level is very low in relation to the figures as shown in the trial balance of
the company. There are accounts which have the probable risk of material misstatements and the
related assertions and the audit procedures to reduce the risk have been detailed in the report.
The major finding is that there are the high chances of having the frauds present in the financial
statements of the company.
RECEOMMENDATIONS
It is recommended that the following steps shall be undertaken for start of the every audit:
1. Preliminary assessment of the Materiality levels on overall basis as well as on individual
basis.
2. Analytical review consisting of either ratio analysis or the trend analysis depending upon
the need and requirements of the case.
3. Identifying the accounts having risk of material misstatements and presence of frauds.
4. Prescribing the necessary audit procedures.
5. Reporting to the management and taking necessary action.
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LIST OF REFERENCES
Budescu, D.V., (2012), the joint influence of the extent and nature of audit evidence, materiality
thresholds, and misstatement type on achieved audit risk. Auditing: A Journal of Practice &
Theory, 31(2), pp.19-41.
Gay, G.E., (2015), “Auditing and assurance services in Australia” Mcgraw-hill, pg 3-54
Glover, S.M., (2014). Between a rock and a hard place: A path forward for using substantive
analytical procedures in auditing large P&L accounts: Commentary and analysis. Auditing: A
Journal of Practice & Theory, 34(3), pp.161-179.
Imoniana, J.O., (2012). The analytical review procedures in audit: an exploratory
study, Advances in Scientific and Applied Accounting, 5(2), pp.282-303.
Knechel, W.R., (2016), “Auditing: Assurance and risk” Routledge, pg 5-27.
Lo, K., (2011), Materiality and voluntary disclosures. Journal of Accounting and
Economics, 49(1-2), pp.133-135
Lusk, E.J., (2016), Client risk calibration in PCAOB audits: an analytical procedures panel risk
assignment protocol. International Journal of Auditing Technology, 3(1), pp.1-21
Todea, N., (2013), Considerations Regarding Materiality Calculation and Audit Risk in the
Context of the Guidelines for Audit Quality. Anale. Seria Stiinte Economice. Timisoara, 19,
p.728
APPENDICES
Appendix 1, Trend Analysis
ANALYTICAL REVIEW - TREND ANALYSIS (INCOME STATEMENT)
S. NO. PARTICULARS 2015 2016 Percentage Change
1 Sales 187450 243750 130%
2 Service fees (revenue) 58000 58750 101%
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3 Less Cost of Sales 63595 65365 103%
4 Gross Profit 181855 237135 130%
5 Add Other Income 25000 1200 5%
6 Add Interest 50 48 96%
7 Total Income 206905 238383 115%
8 Less Expenses
9 Bank charges 350 348 99%
10 Depreciation 15590 34819 223%
11 Interest expense 10800 10800 100%
12 Printing 250 252 101%
13 Miscellaneous 0 2400 0%
14 Wages 53000 56179 106%
15 Superannuation 4770 5336 112%
16 Total Expenses 84760 110134 130%
17 Net Profit 122145 128249 105%
Appendix 2- Calculation of materiality
Financial items Amount Percentage Calculation Materiality
Revenue $302500 1% 30250*1% $3025
Total assets $200000 1% 200000*1% $2000
Net profit $128249 10% 128249*10% $12825
Appendix 3- Analytical review
ANALYTICAL REVIEW - TREND ANALYSIS (INCOME STATEMENT)
S. NO. PARTICULARS 2015 (PY) 2016 (CY)
Increase /
decrease
Percentage
Change
1 Sales 187450 243750 56300 30.03
2 Service fees (revenue) 58000 58750 750 1.29
3 Less Cost of Sales 63595 65365 1770 2.78
4 Gross Profit 181855 237135 55280 30.39
5 Add Other Income 25000 1200 -23800 -95.2
6 Add Interest 50 48 -2 -4
7 Total Income 206905 238383 31478 15.21
8 Less Expenses
9 Bank charges 350 348 -2 -0.57
10 Depreciation 15590 34819 19229 123.34
11 Interest expense 10800 10800 0 0
12 Printing 250 252 2 0.8
13 Miscellaneous 0 2400 2400 0
14 Wages 53000 56179 3179 5.99
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15 Superannuation 4770 5336 566 11.86
16 Total Expenses 84760 110134 25374 29.93
17 Net Profit 122145 128249 6104 4.99
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