This audit planning report highlights the key and critical accounts of Carmine Enterprises that need assessment by auditors. It also mentions how to determine materiality and examines the possibility of fraud in the organization through fraud risk analysis.
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Auditing and Professional Practice Assignment
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1 By student name Professor University Date: 25 April 2018. 1|P a g e
2 Contents Introduction.................................................................................................................................................3 Discussion and Analysis...............................................................................................................................4 Conclusion and Recommendation...............................................................................................................8 References...................................................................................................................................................9 2|P a g e
3 Introduction An audit planning report has been prepared on the given entity named “Carmine Enterprises”. The report highlights the key and the critical accounts, which need assessment by the auditors. The same has been selected using the preliminary audit analytical procedures like the trend analysis and the common size income statement. The report also mentions how to determine materiality in the case of the client using the various percentages as it is one of the important measures of audit planning(Bromwich & Scapens, 2016).The report will be handed over by the audit senior to the audit partner of the firm post preparation. The audit assertions and the requisite risks have also been highlighted against each of the critical accounts. Towards the end, the possibility of fraud in the organization has also been examined through fraud risk analysis. 3|P a g e
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4 Discussion and Analysis The trial balance of the given company “Carmine Enterprises” has been shown below and the difference in between the debit and the credit side can be assumed the suspense account. This amount has not been considered in any of the calculations as the nature of the same is not known as to if it is asset or liability or expense or income, etc.(Choy, 2018). Carmine Enterprises Trial Balance ParticularsJul 1, 16 - Mar 31, 17Jul 1, 15 - June 30, 16 DebitCreditDebitCredit Cash at Bank85,00080,000 Accounts receivable118,340111,000 Inventory187,500174,000 Machinery71,00065,000 Accumulated Depreciation30,30024,375 Motor Vehicles66,00066,000 Accumulated Depreciation26,67821,000 Furniture7,4007,400 Accumulated Depreciation2,7602,220 Bank Loan230,000230,000 Sales141,750187,450 Cost of sales52,12563,595 Consultancy fees44,43857,000 Interest income3650 Bank charges261350 Depreciation12,14315,863 Interest expense8,62511,500 Printing189250 Repairs and Maintenance1,0805,050 Wages36,00053,000 Superannuation2,6704,770 Total648,333475,962657,778522,095 4|P a g e
5 1.The very first step in the audit planning procedure is the determination of the materiality limit. As it helps, the auditor in determining which all accounts needs to be checked and what can be ignored. It helps in directing the efforts in right directions. In simple words, materiality is something, which can change the economic or financial decision of the user of financial statements(Félix, 2017). The same has been suggested by the audit partner to be $15000 for Carmine Enterprises but it is too high and many of the critical accounts would be left if the same were considered. There are accounting bodies over the world like the AASB and IASB and the consulting and auditing firms, which have suggested many limits for determining the materiality limit. Some of them are percentages of sales, assets, gross profit, net profit or the shareholder’s equity. Using these limits the materiality for the given company can be taken in between the limits of $1417 and $1739. This would ensure that many of the critical and important accounts, which were being left using $ 15000 as materiality level, would now be falling under the scope of audit. Some of these accounts are Depreciation, Interest expenses, Superannuation expenses and lastly furniture account(Das, 2017). (Amt in $) Carmine Enterprises Quantitative estimate of materiality CriterionBaseAmountMateriality level/range 0.5% to 1% of gross revenueGross Revenue141,750708.75 to 1417.5 1% to 2% of the total assetsTotal Assets475,5014755.01 to 9510.03 1% to 2% of the gross profitGross Profit86,955869.55 to 1739.1 2% - 5% of the shareholders’ equityEquityNANA 5% to 10% of the net profitNet profit73,1313656.55 to 7313.1 2.The preliminary analytical review has been done for the given entity using two measures of comparability and the variance analysis. The two analysis, which would help in establishing the course of action, are common size income statement and the trend analysis for the two given years 2016 and 2017(Dichev, 2017). 5|P a g e
6 Carmine Enterprises Income Statement Particulars2017% of sales2016% of sales Sales141,75076.1%187,45076.7% Service fees44,43823.9%57,00023.3% Other Income + Interest360.0%500.0% Total Revenue186,224100.0%244,500100.0% Less: Expenses Cost of sales52,12528.0%63,59526.0% Bank charges2610.1%3500.1% Depreciation12,1436.5%15,8636.5% Interest expense8,6254.6%11,5004.7% Printing1890.1%2500.1% Repairs and Maintenance1,0800.6%5,0502.1% Wages36,00019.3%53,00021.7% Superannuation2,6701.4%4,7702.0% Total Expenses113,09360.7%154,37863.1% Net Profit73,13139.3%90,12236.9% Carmine Enterprises Income Statement Particulars20172016Variance Variance % Sales141,750187,450-45,700-24% Consultancy fees44,43857,000-12,563-22% Interest income3650 - 14-28% Total Revenue186,224244,500-58,277-24% Less: Expenses Cost of sales52,12563,595-11,470-18% Bank charges261350 - 89-25% Depreciation12,14315,863 - 3,721-23% Interest expense8,62511,500 - 2,875-25% Printing189250 - 61-24% 6|P a g e
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7 Repairs and Maintenance1,0805,050 - 3,970-79% Wages36,00053,000-17,000-32% Superannuation2,6704,770 - 2,100-44% Total Expenses113,093154,378-41,286-27% Net Profit73,13190,122-16,991-19% Net Profit %39.27%36.86% 3.Audit assertions may be defined as the implicit claims and representation that are being made by the management in terms of preparation of financial statements and the judgement and accounting treatment given by them. It refers to the appropriateness of those accounting element and the disclosures given by them(Andiola, et al., 2018). Some of the critical accounts to be checked and audited are mentioned below with assertions: Sl. No.Account NameAudit Assertion and risk 1.SalesIn the given company, the sales revenue has decreased by 24% as compared to last year whereas impact on profitability has been 19%. As a percentage of overall receipts as well, the same has declined by 0.6% and all this decrease needs to be seen and ascertained if the management assertions in regard to the revenue recognition and completeness in recording the same has been ensured(Appelbaum, et al., 2018). 2Cost of SalesThe cost of sales has decreased by just 18% as compared to last year in comparison with the 24% decrease in sales. As a % of total receipts, it has increased from 26% to 28%. Thus, the management assertion with respect to the period accounting and existence of expenses needs to be checked. 3Repairand maintenance The repair and maintenance expenses has come down drastically as compared to the last year by 79% and in common size income statement, it has gone down by 1.5%. This variance may be due to allocation by management which needs to be checked along with the disclosure which the management has given in this respect(Saeidi, 2012). 4WagesThe wages is a direct expense and so it should have dropped in the ratio of the sales but instead it has dropped by whopping 32% as compared to the last 7|P a g e
8 year. In terms of the common size income statement again, it has dropped by more than 2.5% and thus it needs to be checked if management has completely recorded the expenses and considered appropriate provision in the books(Solicitors, 2016). 4.Based on the above assertions, there are few audit procedures which have been suggested for each of these accounts, the same has been mentioned below: a.Sales: Vouching of the invoices must be done and the total of the sales invoices must be cross verified with the sales ledger balance. In addition, the revenue recognition policy of the company needs to be checked if the proper accounting rules are being followed for revenue recognition and the adequate disclosures are being given in regards to the same(Sirois, et al., 2018). b.Cost of Sales: The cost of sales has increased comparatively in spite of the decrease in sales and it needs to be checked though vouching of purchase invoices that whether the raw material input prices have increased or is it due to decrease in efficiency of operations. The auditor also needs to compare the market prices and verifythepurchasecontractstoverifyifthecompletenessinrecordingof transactions are true value is being ensured(Erik & Jan, 2017). c.Repair and Maintenance: The drastic decrease in repair expenses hint that either the present year costs have been shifted to the next year or the last year expenses were inflated. In both the cases, the auditor needs to check the supporting evidences of repairandmaintenanceexpensesandwhohasapprovedthesame.The management estimates and judgements in this regard also needs to be verified and it needs to be checked if management is following accrual basis of accounting. d.Wages: Finally, the wages being a direct expense is expected to decrease in proportion of the sales but in the given case, since the same has fallen by 32%, the auditors needs to check the labour register to ascertain if the no. of labourers working have decreased or it is due to the decrease in the wages per head. The statutory rule of minimum wages act needs to be followed by the company (Lessambo, 2018). 8|P a g e
9 Conclusion and Recommendation 5.The fraud risk analysis is one of the important and necessary steps of the audit of an entity.Itinvolvescheckingagivenentityforpossibilityoffraudusingvarious parameters. The audit partner has suggested that the given company should not be subject to fraud risk analysis since the client is trustworthy but the same is not justified as per the concept of professional scepticism and as per the standards laid down in professional ethics in APES 110 which states that all the entities should be subject to fraud risk analysis irrespective of the status and the past history of the client(Vieira, et al., 2017). There are few accounts which do hint towards the possibility of the fraud in the organization like that of repair and maintenance expense account and the wages account for the reasons explained above and the superannuation account which is also expected to be the fixed expense but which has decreased by a massive 44% as compared to the last year. The main reason behind the increase in profitability also needs to be studied as it indicates that the cost shifting might have taken place(Li, 2018). References Andiola, L., Lambert, T. & Lynch, E., 2018. Sprandel, Inc.: Electronic Workpapers, Audit Documentation, and Closing Review Notes in the Audit of Accounts Receivable.Issues in Accounting Education,33(2), pp. 43-55. Appelbaum, D., Kogan, A. & Vasarhelyi, M., 2018. Analytical procedures in external auditing: A comprehensive literature survey and framework for external audit analytics..Journal of Accounting Literature,40(1), pp. 83-101. Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on.Management Accounting Research,31(1), pp. 1-9. Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics,p. 145. 9|P a g e
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10 Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study.Asian Journal of Social Science Studies,2(2), pp. 10-17. Dichev, I., 2017. On the conceptual foundations of financial reporting.Accounting and Business Research,47(6), pp. 617-632. 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. Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of insurance companies.MASTER THESIS,pp. 1-69. Lessambo, F., 2018. Audit Risks: Identification and Procedures.Auditing, Assurance Services, and Forensics,3(1), pp. 183-202. Li, L. M. A. X. J. L. Z. a. S. M., 2018. Industry-wide corporate fraud: The truth behind the Volkswagen scandal.Journal of Cleaner Production,pp. 3167-3175. Saeidi, F., 2012. Audit expectations gap and corporate fraud: Empirical evidence from Iran.African Journal of Business Management,6(23), pp. 7031-41. 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. Solicitors, S., 2016. The Principles of Contract.Contract,p. 13. Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems. SAGE Journals,30(1). 10|P a g e