Audit Planning Report for Amazonite Enterprises

This report discusses the audit planning for Amazonite Enterprises, including the determination of materiality level, preliminary analytical review, audit assertions and risks, and audit procedures. The report also highlights the importance of maintaining professional skepticism and conducting fraud risk analysis for all clients.

Auditing and
Professional Practice
Assignment

1
By student name
Professor
University
Date: 25 April 2018.
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Contents
Introduction.................................................................................................................................................3
Discussion and Analysis...............................................................................................................................4
Conclusion & Recommendation..................................................................................................................8
References.................................................................................................................................................10
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Introduction
In the given assignment, the audit planning report has been constructed highlighting the audit
risks in the critical accounts, the audit assertions of the clients and the steps to be taken in the is
regard to arrange for sufficient and appropriate audit evidences in order to express an opinion on
the financial statements (Buchanan, et al., 2017). The audit partner has given some suggestions
to the audit senior based on which the working has been done, materiality has been determined,
and the preliminary analytical procedures have been performed by the audit senior. At the very
end, the given entity has been checked with respect to the fraud risk analysis in order to find out
the accounts, which show an indication of the fraud.
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Discussion and Analysis
The company for which the audit planning is to be done is Amazonite Enterprises and it is a
small company. The preliminary trial balance for the company has been shown below for the 2
years ending 2016 and 2015 (Chron, 2017). The difference in the debit and credit side, being
unknown quantity can be taken as suspense account but the same has not been considered in any
of the calculations further as the nature of the same (whether asset, liability, income or expense)
is not known.
Amazonite Enterprises
Trial Balance
Particulars Jul 1, 2015 - May 31, 2016 Jul 1, 2014 - June 30, 2015
Debit Credit Debit Credit
Cash at Bank 99,251 102,503
Accounts receivable 121,820 112,000
Inventory 189,000 175,000
Machinery 65,000 65,000
Accumulated Depreciation 48,318 24,375
Motor Vehicles 65,000 65,000
Accumulated Depreciation 27,300 20,150
Furniture 7,500 7,500
Accumulated Depreciation 3,075 2,250
Bank Loan 216,000 216,000
Sales 223,437 187,450
Cost of sales 59,918 63,595
Service fees (revenue) 53,855 58,000
Other income 1,100 25,000
Interest income 44 50
Bank charges 319 350
Depreciation 31,918 15,590
Interest expense 9,900 10,800
Printing 231 250
Miscellaneous 2,200 -
Wages 51,498 53,000
Superannuation 4,892 4,770
Total 609,195 573,129 572,855 533,275
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1. The first question in the audit planning of the entity deals with the determination of the
materiality level for the entity. Materiality is a level or amount for the company, which
makes a particular account to be substantial from the perspective of the results of the
financial statements. Any misstatement, error or omission can be termed as material in
case the same has the ability to change the decision of the decision makers, either
individually or in aggregate with other accounts. It is one of the useful tool used by
auditors and helps them to plan the audit well as to which accounts needs to be audited
and what can be ignored from overall perspective (Linden & Freeman, 2017). In the
given case, the audit partner of the firm has suggested for the materiality limit of $ 15000
for the entity but it is too high considering the trial balance and financials of Amazonite
enterprises. There are several limits, which have been prescribed by the international
accounting boards and the reputed audit and consulting firms for determining materiality
of entity. Some of these limits are 0.5-1% of the gross receipts, 1-2% of the gross profit
or total assets or fixed assets, 2-5% of shareholders equity balance or 5-10% of the net
profit of the entity. Basis these limits, the materiality limit for the given entity can be
taken in the range of $ 2234 to $ 2250. In case these limits are being considered then few
of the critical accounts like Interest expenses account, superannuation account, other
incomes account and the furniture account would not be missed out from the audit scope
(Jefferson, 2017).
(Amt in $)
Amazonite Enterprises
Quantitative estimate of materiality
Criterion Base Amount Materiality level/range
0.5% to 1% of gross revenue Gross Revenue 223,437 1117.19 to 2234.37
1% to 2% of the total assets Total Assets 468,878 4688.78 to 9377.56
1% to 2% of the gross profit Gross Profit 112,022 1120.22 to 2240.44
2% - 5% of the shareholders’
equity Equity NA NA
5% to 10% of the net profit Net profit 117,561 5878.07 to 11756.13
2. Based on the trial balance shown above, the preliminary analytical review has been done
and the trend analysis has been prepared. The same has two parts, which has been shown
below namely common size income statement and the variance analysis over 2 years.
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Amazonite Enterprises
Income Statement
Particulars 2016
% of
sales 2015
% of
sales
Sales 223,437 80.2% 187,450 69.3%
Service fees 53,855 19.3% 58,000 21.4%
Other Income +
Interest 1,144 0.4% 25,050 9.3%
Total Revenue 278,436 100.0% 270,500 100.0%
Less: Expenses
Cost of sales 59,918 21.5% 63,595 23.5%
Superannuation 4,892 1.8% 4,770 1.8%
Bank charges 319 0.1% 350 0.1%
Depreciation 31,918 11.5% 15,590 5.8%
Interest expense 9,900 3.6% 10,800 4.0%
Printing 231 0.1% 250 0.1%
Miscellaneous 2,200 0.8% - 0.0%
Wages 51,498 18.5% 53,000 19.6%
Total Expenses 160,875 57.8% 148,355 54.8%
Net Profit 117,561 42.2% 122,145 45.2%
Amazonite Enterprises
Income Statement
Particulars 2016 2015 Variance Variance %
Sales 223,437 187,450 35,987 19%
Service fees (revenue) 53,855 58,000 - 4,145 -7%
Other income 1,144 25,050 - 23,906 -95%
Total Revenue 278,436 270,500 7,936 3%
Less: Expenses
Cost of sales 59,918 63,595 - 3,677 -6%
Superannuation 4,892 4,770 122 3%
Bank charges 319 350 - 31 -9%
Depreciation 31,918 15,590 16,328 105%
Interest expense 9,900 10,800 - 900 -8%
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Printing 231 250 - 19 -8%
Miscellaneous 2,200 - 2,200 NA
Wages 51,498 53,000 - 1,502 -3%
Total Expenses 160,875 148,355 12,520 8%
Net Profit 117,561 122,145 - 4,584 -4%
Net Profit % 42.22% 45.16%
3. Based on the analytical review above, few significant and critical accounts of income
statement has been chosen for review and the audit risks and the audit assertions have
been explained in details for 3 accounts.
Sl. No. Account Name Audit Assertion and risk
1. Sales In the given case, the sales has increased by 19% as
compared to the last year but still the profitability has
fallen big time to the tune of 4%. Furthermore as
percentage of the overall receipts, the sales has
increased from 69% in 2015 to 80% in 2016 (Trieu,
2017). The auditor needs to check if the completeness in
booking of actual sales has been ensured. The same
needs to be checked if the quantitative sales has
increased or the selling prices of the goods of the
company have been increased in the market.
2. Other income The other income has fallen drastically from $25050 in
2015 (constituting 9.3% of the overall receipts) to $1144
in 2016 (constituting 0.4% of the sales). This is
reflective of the fact that either some segment of
business has been closed or there is some change in the
business model which needs to be examined from the
management and also the management assertion of
accuracy in calculation needs to be verified. (Bizfluent,
2017).
3 Depreciation Where all the other expenses of the company has been
falling, there is one expense namely depreciation
expenses which has increased from 5.8% of sales to
11.5% of sales and is a major cause of worry as it is one
of the reasons for the drop in the profit of the company.
Here the rights and obligations with respect to the assets
needs to be verified and the accuracy of depreciation
calculation needs to be checked.
4 Interest Expenses The balance of the bank loan is still the same as
compared to the last year but the interest has decline.
The management assertion of completeness in booking
and whether or not they are following accrual basis
needs to be checked. It also needs to be checked if the
terms of the loans have been shown in financials
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through proper disclosure and presentation
4. Based on the audit assertions and the audit risk highlighted above with respect to the
critical and most important accounts, which are showing significant variation, few of the
audit procedures have been mentioned below which will help the auditor in finding the
sufficient and appropriate audit evidence to give an opinion thereon.
a. Sales: Despite the substantial increase in sales, it can be seen that the overall
profitability of the company has decreased. The same needs to be examined and the
vouching of the sales invoices should be done and checked if the total is matching
with the sales ledger balances. Furthermore, the accounting policies employed by the
company for revenue recognition purposes and realizing the same in current year
needs to be checked if the same is genuinely reported (Axelsen, et al., 2017).
b. Other income: The other income is one of the loss that the company has suffered
during the year. The same has declined by 95% as compared to the previous year and
it needs to be checked from management of company that what were the major
constituents of the other income last year and what were the major reasons for not
earning the same in current year. The auditor should also be checking the contracts, if
any entered by company during the year (Fukukawa & Mock, 2011).
c. Depreciation: Depreciation expenses have shoot up by 105% as compared to the last
year and is one of the major reasons why the company has incurred the losses during
the year and thus, it needs to be checked what were the acquisitions and disposals
during the year and what the rate of depreciation and method of depreciation being
used by the entity. Whether the review of the assets’ useful lives and impairment is
being done on yearly basis and how long it has been since the last physical
verification was being done. The balances of all the assets have remained same as
compared to the last year and that increase the risk of incorrect accounting by the
company and therefore the same should also be checked for (Fay & Negangard,
2017).
d. Interest expenses: Here, the auditor needs to check the interest and the bank loan
statement of the company to ascertain if any interest has been missed out or requisite
provision has not been taken in the books of accounts.
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Conclusion & Recommendation
5. As per the standards of auditing, professional ethics and the rules laid down in APES 110
for the auditors it has been stated that the auditor should always maintain the professional
scepticism and should apply professional judgement while conducting the audit of an
entity. In the given case, the audit partner has suggested the audit senior to exclude the
given company Amazonite Enterprises from the ambit of fraud risk assessment as the
client has been trustworthy and there are no chances of fraud but this is against the
principles of professional scepticism (Sirois, et al., 2018). All the clients, even if the
reporting has been correct and unbiased should be tested for fraud risk analysis. In the
given case, there are few accounts which shows the possibility of fraud, some of which
are:
a. Other income account: reasons mentioned in part 4.
b. Deprecation Account: reasons mentioned in part 4
c. Cost of sales: The overall sales has decreased by 19% whereas the cost of sales
decreased by only 6%, which needs to be checked if the prices escalation was there,
period accounting has been done correctly or the cost has increased during to lack of
efficiency in operations (Werner, 2017).
d. Superannuation expenses: These have also increased as compared to the last year
despite the decrease in all the other expenses heads and therefore it needs to be
checked if the headcount has increased or it is due to something else.
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References
Axelsen, M., Green, P. & Ridley, G., 2017. Explaining the information systems auditor role in the public
sector financial audit. International Journal of Accounting Information Systems, 24(1), pp. 15-31.
Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].
Buchanan, B., Cao, C., Liljeblom, E. & Weihrich, S., 2017. Taxation and Dividend Policy: The Muting Effect
of Agency Issues and Shareholder Conflicts. Journal of Corporate Finance, Volume 42, pp. 179-197.
Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: http://smallbusiness.chron.com/five-common-features-internal-control-system-business-
430.html
[Accessed 07 december 2017].
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
Studies, 2(2), pp. 10-17.
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Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal
of Accounting Education, Volume 38, pp. 37-49.
Fukukawa, H. & Mock, T., 2011. Audit risk assessments using belief versus probability. Auditing: A
Journal of Practice & Theory, 30(1), pp. 75-99.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland.
Technological Forecasting and Social Change, pp. 353-354.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), pp. 353-379.
Sirois, L., Bédard, J. & Bera, P., 2018. The informational value of key audit matters in the auditor's report:
evidence from an Eye-tracking study.. Accounting Horizons., 32(2), pp. 141-162.
Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda.
Decision Support Systems, Volume 93, pp. 111-124.
Werner, M., 2017. Financial process mining - Accounting data structure dependent control flow
inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.
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