Audit Planning Report for Cadmium Enterprises

This report is an audit planning report for Cadmium Enterprises. It includes the identification of critical accounts, risks, key assertions, and audit procedures for the entity. The report also highlights the fraud risk analysis and recommendations for the given client. The report has been prepared using preliminary analytical review and includes a determination of materiality for the entity.

Issues in Auditing
Practice Assignment
1
2018
BUS000, Tutor Name, Tutorial Time
Student Name, SID: XXXXXXXXXX
University of XXXXXXXXXXXXX | [Company address]

Executive Summary
A report has been prepared on the topic of audit planning. The report will be submitted to
the audit partner of the firm. The report incorporates the identification of the critical
accounts to be audited, the risks and the key assertions with respect to the same and the
audit procedures to be taken up by the auditors in this regard. The report also highlights the
fraud risk analysis for the given entity and why the same is critical. All these analysis have
been done using preliminary analytical review.
i

Table of Contents
Executive Summary................................................................................................................................i
Table of Contents...................................................................................................................................ii
1. Introduction...................................................................................................................................1
1.1. Authorisation.........................................................................................................................1
1.2. Limitations.............................................................................................................................1
1.3. Scope.....................................................................................................................................1
2. Inputs to the report - Analysis.......................................................................................................2
2.1. Trial balance input.................................................................................................................2
2.2. Determination of Materiality.................................................................................................2
2.3. Preliminary Analytical Review................................................................................................3
3. Discussion on the report................................................................................................................4
3.1. Income statement accounts to be analysed..........................................................................4
3.2. Audit procedures to be undertaken.......................................................................................5
4. Conclusion – Fraud Risk Analysis...................................................................................................6
5. Recommendations.........................................................................................................................6
References.............................................................................................................................................7
ii

1.Introduction
1.1. Authorisation
The given report has been prepared for the audit partner of the firm and will be handed over
with the details on the audit planning of one of the small entities “Cadmium Enterprises”.
The report also has conclusion and the recommendation at the end.
1.2. Limitations
The given report has only one of the limitations in the form of the trial balances which is not
balanced. The debit and the credit totals are not matching for both the periods and
therefore the same has been assumed to be suspense account. Since the nature of the same
is not known, it has not been considered in any of the analytics (Bumgarner & Vasarhelyi,
2018).
1.3. Scope
The report starts with the determination of the materiality limit for the entity. It also enlists
the critical accounts to be audited and the audit procedures to be undertaken to audit them.
It encloses the common size income statement and the variance analysis in respect of the
entity. Towards the end, the fraud risk analysis has been done for the given entity to check
on the possibility of fraud (Willcocks, 2017).
1

2.Inputs to the report - Analysis
2.1. Trial balance input
The trial balance of “Cadmium Enterprises” has been enclosed below for the year 2015-16.
For the year 2016-17, the balance is only for first 5 months so better analysis purpose, the
same has been annualised to enable comparability and uniformity
Cadmium Enterprises
Trial Balance
Particulars Jul 1,'16 - Nov 30,'16 Jul 1,'15 - June 30,'16
Debit Credit Debit Credit
Cash at Bank 85,000 80,000
Accounts receivable 118,340 111,000
Inventory 187,500 174,000
Machinery 71,000 65,000
Accumulated
Depreciation 27,667 24,375
Motor Vehicles 66,000 66,000
Accumulated
Depreciation 24,155 21,000
Furniture 7,400 7,400
Accumulated
Depreciation 2,520 2,220
Bank Loan 230,000 230,000
Sales 78,750 187,450
Cost of sales 28,958 63,595
Consultancy fees 24,688 57,000
Interest income 20 50
Bank charges 145 350
Depreciation 6,746 15,863
Interest expense 4,792 11,500
Printing 105 250
Repairs and Maintenance 600 5,050
Wages 20,000 53,000
Superannuation 1,483 4,770
Total 598,069 387,800 657,778 522,095
2

2.2. Determination of Materiality
Materiality may be defined as one of the key criteria’s in determining what to be focused
upon and what not during the conduction of audit. It is one of the key tools being used in
auditing. Anything can be said to be material, if the same has ability to change or vary the
decision of the user (Kuhn & Morris, 2016). In the given case, the audit partner has
suggested the materiality to be taken as $15000 but the same is too large for the given
entity and if the same is being considered many of the critical accounts would be left from
the ambit of audit. There are many international accounting bodies round the world like
those of IASB and AASB which have suggested as to how to calculate materiality. Some of
these are as a percentage of sales, assets, profits or owner’s equity as per which the
materiality has been calculated. For the given organization, materiality should fall within
the range of $787 to $ 966 as then the accounts like depreciation, interest, superannuation,
repair and maintenance and furniture would also be checked and audited (Alexander,
2016).
(Amt in $)
Cadmium Enterprises
Quantitative estimate of materiality
Criterion Base Amount Materiality level/range
0.5% to 1% of gross revenue Gross Revenue 78,750 393.75 to 787.5
1% to 2% of the total assets Total Assets 480,898 4808.98 to 9617.96
1% to 2% of the gross profit Gross Profit 48,308 483.08 to 966.17
2% - 5% of the shareholders’ equity Equity NA NA
5% to 10% of the net profit Net profit 40,628 2031.42 to 4062.83
2.3. Preliminary Analytical Review
As a part of the preliminary analytical review, the common size income statement and the
variance analysis has been prepared for the given entity. For variance analysis to be
effective and comparable, the numbers have been annualised.
Cadmium Enterprises
Income Statement
Particulars 2017 % of sales 2016 % of sales
Sales 78,750 76.1% 187,450 76.7%
Consultancy fees 24,688 23.9% 57,000 23.3%
Other Income + Interest 20 0.0% 50 0.0%
Total Revenue 103,458 100.0% 244,500 100.0%
Less: Expenses
Cost of sales 28,958 28.0% 63,595 26.0%
Bank charges 145 0.1% 350 0.1%
Depreciation 6,746 6.5% 15,863 6.5%
Interest expense 4,792 4.6% 11,500 4.7%
Printing 105 0.1% 250 0.1%
Repairs and Maintenance 600 0.6% 5,050 2.1%
Wages 20,000 19.3% 53,000 21.7%
Superannuation 1,483 1.4% 4,770 2.0%
Total Expenses 62,829 60.7% 154,378 63.1%
3

Net Profit 40,628 39.3% 90,122 36.9%
Cadmium Enterprises
Income Statement
Particulars 2017 2016 Variance
Variance
%
Sales 78,750 187,450
1,55
0 1%
Consultancy fees 24,688 57,000
2,25
0 4%
Interest income 20 50 - 2 -4%
Total Revenue 103,458 244,500
3,79
8 2%
Less: Expenses
Cost of sales 28,958 63,595
5,90
5 9%
Bank charges 145 350 - 2 -1%
Depreciation 6,746 15,863 327 2%
Interest expense 4,792 11,500 - 0%
Printing 105 250 2 1%
Repairs and
Maintenance 600 5,050
-
3,610 -71%
Wages 20,000 53,000
-
5,000 -9%
Superannuation 1,483 4,770
-
1,210 -25%
Total Expenses 62,829 154,378 - 3,588 -2%
Net Profit 40,628 90,122 7,386 8%
Net Profit % 39.27% 36.86%
3.Discussion on the report
3.1. Income statement accounts to be analysed
Based on the analysis above, several critical accounts have been chosen for analysis which
have been enlisted below along with the assertions and the relevant risks.
Sl. No. Account Name Audit Assertion and risk
1. Sales The sales has increased by just 1% as compared to
the last year on annualised basis, whereas the profit
of entity has increased by 8% and therefore it needs
4

to be checked if the management assertion of
revenue recognition criteria has been met and the
right to recognise the revenue in books was
established (Erik & Jan, 2017).
2 Cost of Sales The cost of sales has increased by a massive 9% for
the sales increase of 1%. As a % of total receipts as
well, the same has increased from 26% to 28% and
therefore management assertion of accuracy in
recording the cost and appropriateness of the cut off
entries w.r.t. the cost needs to be checked (Belton,
2017).
3 Repair and
maintenance
The repair expenses has shown a sharp decline of
71% as compared to last year and even as
percentage of total receipts, it has fallen by 1.5%
and therefore it needs to be checked if the expenses
have been recorded completely and accrual and
matching concept has been taken into consideration
(Meroño-Cerdán, et al., 2017).
4 Superannuation These have had a decline of 25% as compared to last
year despite having the same sales. Therefore it
needs to be checked if employees has left or
resigned and if management assertion of
completeness in recording of expenses has been
met (Chron, 2017).
3.2. Audit procedures to be undertaken
For the accounts identified above in the analysis, some of the audit procedures to
be undertaken by the auditor in this regards are mentioned below:
a. Sales: For checking on the sales revenue of the entity, the vouching of the sales
invoices needs to be done and it needs to be checked if the same is matching
with the sales ledger and books of accounts. The revenue recognition policy of
the company needs to be compared with the accounting standard and the
appropriateness of the same needs to be validated to check if the right to accrue
revenue has been established (Kangarluie & Aalizadeh, 2017).
b. Cost of Sales: The cost of sales has increased by a massive 9% on the sales base
increase of 1%. It needs to be checked if the management has recorded all the
expenses correctly and what is the accounting treatment of the cut off entries
being done in the books of accounts. Vouching of bills needs to be employed for
this.
c. Repair and Maintenance: The decline in repair and maintenance expenditure is
substantial and it needs to be checked if the management has taken the
provision entries in the books and has ensured completeness in recording of all
the period expenses. It also needs to be checked if the expenses has not been
capitalised in the balance sheet (Truong, et al., 2008).
d. Superannuation: The superannuation expenses have declined and therefore the
employee register needs to be checked to verify if the employee head count has
5

gone down or the company has changed the policy in respect of the
superannuation expenses. The auditor also needs to check if the company has
followed all the laws and regulations in place (Vieira, et al., 2017).
6

4.Conclusion – Fraud Risk Analysis
The last section in the audit of the entity is the fraud risk analysis which is generally done to
check the possibility of fraud in the organization but in the given case, the partner of the
firm has suggested that the fraud risk analysis need not be done for the given client as the
client is trustworthy. But this is completely against the concept of professional scepticism
and the ethics for auditors as stated in APES 110 as per which the auditor should apply
professional judgement in such circumstances and check the client for FRF irrespective of
anything else (Fay & Negangard, 2017).
There are few accounts of the entity which hint towards the possibility of the fraud in the
organization. Some of such accounts are cost of sales and the repair and expenditure
account for the reasons which have already been explained above. Furthermore the wages
account and the superannuation account needs to be verified as there is a substantial
decline with decrease in the sales.
5.Recommendations
Few of the recommendations for the given client’s audit is:
 The auditors should not only be emphasizing on the income statement accounts but
also be checking the balance sheet for further evidences.
 The opening balance verification also needs to be done in case the auditor is new.
7

References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London:
Macat International ltd.
Bumgarner, N. & Vasarhelyi, M., 2018. Continuous auditing—a new view.. Continuous Auditing:
Theory and Application, 20(1), pp. 7-51.
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].
Erik, H. & Jan, B., 2017. Supply chain management and activity-based costing: Current status and
directions for the future. International Journal of Physical Distribution & Logistics Management,
47(8), pp. 712-735.
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.
Kangarluie, S. & Aalizadeh, A., 2017. 'The expectation gap in auditing. Accounting, 3(1), pp. 19-22.
Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of
Enterprise Information Management, 30(6).
Meroño-Cerdán, A., Lopez-Nicolas, C. & Molina-Castillo, F., 2017. Risk aversion, innovation and
performance in family firms. Economics of Innovation and new technology, pp. 1-15.
Truong, G., Partington, G. & M, P., 2008. Cost of Capital Estimation and Capital Budgeting Practice in
Australia. Australian Journal of Management, 33(1), pp. 95-121.
Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management
Systems. SAGE Journals, 30(1).
Willcocks, L. P. L. M. C. &. S. C., 2017. Introduction. In Outsourcing and Offshoring Business Services.
Cham: Palgrave Macmillan,.
8