Planning an Audit for Financial Statements - Accounting

This report provides a critical preliminary assessment that will be very useful with the planning stage of the audit process by the senior auditor. The story has pointed out the key accounts which need to be audited to establish the reliability and validity of the information provided.

Accounting 1
ACCOUNTING: PLANNING AN AUDIT FOR FINANCIAL STATEMENTS
Name
Course
Tutor
University
City/State
Date

Accounting 2
Executive Summary
For any business, whether large, medium-sized or small sized enterprises, preparation of
an audit report is very significant in providing an overview of the entire audit process. The audit
process involves a critical analysis of an enterprise performance from its financial statements to
ascertain whether the records or the reports present an accurate and fair reflection of the business
performance in accordance to accounting and auditing standards. It is, therefore, the
responsibility of the enterprise management to prepare the financial statements while on the
other hand, it is the responsibility of the auditor to express his or her opinion which should be
unbiased on the financial statements and issue an audit report. This report, therefore, presents the
findings of an audit process. The story will be limited to the understanding of materiality,
analytical review, selection and justification of accounts and assertions, design and description of
audit procedures as well as the presentation of an audit discussion in preparation for an audit
process for our client the Coral Enterprise.
Introduction
Preparation of an audit process requires a preliminary survey which helps the auditor to
become familiar with the procedures and policies which might impact the areas being audited. A
proper audit plan helps in identification of the critical accounts that need to be examined to
disclose any fraud in the company financial statements. Bellof and Wehn (2018) argue that the
audit plan involves a collaborative effort of the audit team with the client to develop an
appropriate approach that will help the senior auditor in addressing the various issues raised from
the findings of the report. The results of the story will be based on the financial information
obtained from the client’s trial balance.

Accounting 3
Materiality Discussion
The planning of an audit process requires the auditor to consider the things which would
make the financial report materially misstated. The preliminary assessment of materiality is
therefore conducted before the audit and acts as a critical guide to the planning of the review
(Choudhary, Merkley & Schipper, 2018, p. 12). The auditor can, therefore, decide to set the level
of materiality higher or lower depending on the audit risk factors to the client. There is,
therefore, a relationship between the level of a client audit risk and materiality in that the higher
the audit risk, the lower the materiality level while the lover the audit risk the more senior the
materiality level. In this case, the materiality level suggested by the Audit partner of $ 15000 can
be established by using the constant percentage method of materiality determination as provided
below.
Using the company current assets, materiality should be based on a percentage level of 3
% to 8%. For the financial period ending June 30th, the materiality level would be set as follows;
Cash at Bank $ 73000 x 8 % (using upper limit) = $ 5840
Accounts receivable $ 122750 x 8% = $ 9820
Inventory $ 174000 x 8% = $ 13920
Taking the Average (29580/3 = $9, 860).
Therefore the amount suggested for $ 15000 as the materiality level is appropriate based
on the above threshold where the client has low risk, and consequently, the auditor was to set a
higher materiality level. The preliminary assessment is made with the aim of helping the auditors

Accounting 4
to forecast or plan for the audit plan. An initial changing evaluation would, therefore, affect the
audit budget in that it can increase or decrease the auditing cost and thus affecting the
management of the company. The change may also affect the risk identification process and
procedures and thus increase the audit budget.
Analytical review of Coral Enterprise Financial information
Item FY1 ended 30th
June 2016 ($)
FY2 ended 30th
November 2016
($)
Amount of
Change($)
Percentage
Change (%)
Cash at bank 73000 70000 3000 4.12
Accounts
receivable
122750 120750 2000 1.63
inventory 174000 185000 -11000 -6.62
machinery 64000 71000 -7000 -10.94
Accumulated
depreciation on
machinery
24000 27448 -3448 -14.37
Motor vehicle 66000 66000 0 0
Acc. Dep. On
motor vehicle
21000 24155 -3155 -15.02
Furniture 7400 7400 0 0
Accumulated
dep. On furniture
2220 2520 -300 -13.51

Accounting 5
Bank loan 230000 230000 0 0
sales 187450 82479 104971 56.00
Consultancy
services
57000 24680 32360 57.00
Interest income 50 20 30 60.00
Bank charge 350 145 205 58.57
Depreciation 15378 6902 8476 55.12
Interest expense 11500 4792 6708 58.33
Printing 375 154 22158.93
Repairs and
maintainer
5050 600 4450 88.12
wages 53000 21904 31096 58.67
Superannuation 4770 1664 3106 65.11
Cost of sales 63595 25430 38165 60.01
Income statement accounts that appear to be at-risk of material misstatement from above
trend Analysis
The risk of material misstatement arises when some financial statements of accounts
belonging to an organization have faced the threat of been misstated to a material level (Lakis &
Masiulevicius 2017, p. 31). The auditors during the audit process can, therefore, ascertain or
assess the risk of material misstatement at the assertion level where they establish inherent risk

Accounting 6
as well as control risks and at the financial statement level. The following accounts were
therefore found to be at risk of material misstatement.
The Inventory account – the inventory account shows a negative trend in the above
trend analysis. It, therefore, appears to be at the risk of material misstatement. The material
indifference identified in the account is therefore subject to significant auditing test. This is
because of assertions made on such statements such as existence and valuation assertions.
Assets, liabilities and equity balances exist at the end of a financial year period while valuation is
believed to have been appropriately done.
The wages account - also appears to have been at risk of material misstatement due to
the increased percentage change in the given financial period. At the end of a fiscal period wages
are expected to reduce since some salaries are prepaid while other personnel experience delay in
their payments with companies recording arrears in wage costs. The account is therefore subject
to audit test by the auditors due to the many assertions made by managers when preparing the
financial statements. Such assertions include accuracy and completeness assertion. The accuracy
assertion has that wages at the end of the financial period have been appropriately calculated
with adjustments having been done correctly and accounted for. While completeness assertion
holds that the wages have in respect to all company personnel have been fully accounted for.
The sales account - also at risk of material misstatement and may not reflect an accurate
and fair view of the total sales due to various sales assertions such as cut-off assertion which
provides that all the sales transactions have been recorded at the right time. In most cases, the
sales are not registered at the right time, and therefore the account should be subjected to further
audit test.

Accounting 7
Relevant audit procedures based on the above account assertions
Audit procedure for Inventory account existence assertion
 The first procedure would involve making a random test count of the inventory to
ascertain that the number produced by the clients is accurate and reflect the information
in the inventory sheets.
 The second procedure would involve conducting a real investigation to establish the
physical count and ensure that the auditor is satisfied with the effectiveness of the
counting methods used.
 It is also essential to validate the permanent records and inventory sheets which give
information on the inventory in that they agree with the physical count. This is helpful in
the determination of the fact that the items in the record made by the client exist and at
the right quantities.
Audit Procedure for Wages Accuracy assertion
 The first audit procedure would involve a process of recomputing the company payroll
register to establish its accuracy with the record provided by the client.
 The auditor will then investigate the accuracy and validity of the payroll expenses by
comparing the costs with prior periods.
 Lastly, it is also essential for the auditor to examine the payroll cut off which in this case
will play a critical role in determining the appropriateness of the time recorded for the
wages.

Accounting 8
Audit Procedure for Sales Cut-off assertion
 The first procedure would involve critical examinations of the sales ledger and
comparison with the general ledger to establish whether the sales transactions and
receipts were recorded at the right time.
 Then the auditor will review the sales cut-off to ascertain that the ending inventory filed
by the client is appropriately valued.
 Conduct a review to establish whether double entry accounting standards were adhered to
and represent an accurate reflection of all the sales transactions.
Fraud Risk consideration versus Staff Trustworthy
The partner’s suggestion of not considering fraud risk assessment due to his feeling that
the client’s staffs are trustworthy is a huge mistake that should not be supported. Trust is an
essential virtue of employer to develop on his employees; however, it is a myth to assume that
there are no individuals incapable of committing fraud. Employees or staffs are exposed to many
works and life-related pressure such as financial constraints while other may be presented with
an opportunity to access various assets and materials which can increase the risk of fraud
(Lessambo 2018, p.135). Therefore, his suggestion is not appropriate, and fraud risk should be
considered in any auditing process. For instance, there are different depreciation accounts
provided about the company fixed assets. However, there is another depreciation account that its
activities are not identifiable, and it may be an indication of a fraud evident in the financial
statements but covered by expertise experience in unnoticeable fraud activities.

Accounting 9
Conclusion
This report, therefore, provides a critical preliminary assessment that will be very useful
with the planning stage of the audit process by the senior auditor. The story has pointed out the
key accounts which need to be audited to establish the reliability and validity of the information
provided. It also provides a forecast of the audit budget through the preliminary assessment of
materiality that puts the audit team at a state of preparedness to deal with potential fraud risk and
help in the disclosure of any financial misstatements represented in the financial statements.

Accounting 10
List of References
Bellof, T. and Wehn, C.S., 2018. On the Treatment of Model Risk in the Internal Capital
Adequacy Assessment Process. Journal of Applied Finance & Banking, 8(4), pp.1-15. Accessed
on Sep, 5 2018.
Choudhary, P., Merkley, K.J. and Schipper, K., 2018. Auditors’ Quantitative Materiality
Judgments: Properties and Implications for Financial Reporting Reliability.pp.12. Accessed on
Sep, 5 2018.
Lakis, V. and Masiulevičius, A., 2017. Acceptable Audit Materiality For Users Of Financial
Statements. Journal of Management, 2(31). Accessed on Sep, 5 2018.
Lessambo, F.I., 2018. Audit Planning, Testing, and Materiality. In Auditing, Assurance Services,
and Forensics (pp. 127-151). Palgrave Macmillan, Cham.