Audit Planning Report for Small Entity: Fallow Enterprises

This report highlights audit procedures, audit risks, and fraud risk analysis for Fallow Enterprises. It includes a preliminary analytical review, materiality level determination, and audit assertions for critical accounts. The report recommends fraud risk analysis despite the audit partner's suggestion against it.

Auditing and
Professional Practice
Assignment

1
By student name
Professor
University
Date: 25 April 2018.
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Executive Summary
The report has been prepared on the audit planning of one of the small entities. The audit
procedures and the audit risks have been highlighted for few of the critical accounts. Towards the
end, the fraud risk analysis has also been done which will help in identifying the frauds in the
company, if any. The report will be handed over to audit partner of audit firm.
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Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Discussion and Analysis...............................................................................................................................5
Conclusion and Recommendation...............................................................................................................9
References.................................................................................................................................................10
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Introduction
An audit planning (ASA 300) report has been prepared for one of the small companies. The trial
balance of the entity has been given and based on the same the preliminary analytical review has
been done. As a part of the audit procedures, the materiality level has been determined and also
the common size income statement and the trend analysis has been prepared for the 2 given years
to find out the major variations and find out the accounts to be audited. Fraud risk analysis has
been done for the given client and the necessary audit procedures have been mentioned in the
report (Marques, 2018). The report has to be handed over to the audit partner who has asked the
same from audit senior.
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Discussion and Analysis
The trial balance of the company “Fallow Enterprises” has been shown below and the difference
in the debit and credit side of the balance sheet has been assumed the suspense account, which
has, not be taken in any of the computations and analysis since the nature of account is not
known.
Fallow Enterprises
Trial Balance
Particulars Jul 1’16 - Nov 30’16 Jul 1’15 - June 30’16
Debit Credit Debit Credit
Cash at Bank 89,750 83,000
Accounts receivable 109,850 103,585
Inventory 164,500 174,000
Machinery 64,000 64,000
Accumulated Depreciation 27,448 24,000
Motor Vehicles 66,000 66,000
Accumulated Depreciation 32,063 21,000
Furniture 7,400 7,400
Accumulated Depreciation 2,520 2,220
Bank Loan 240,000 240,000
Sales 81,052 187,450
Cost of sales 24,604 63,595
Consultancy fees 24,688 57,000
Interest income 20 50
Bank charges 145 350
Depreciation 14,810 15,738
Interest expense 4,792 12,000
Printing 154 375
Miscellaneous 600 -
Wages 21,904 53,000
Superannuation 2,081 5,035
Total 570,591 407,791 648,078 531,720
1. The very first step in the audit planning discusses on the materiality for the company in
question. The audit partner has suggested the materiality level to be taken as $15000 but
the same is very high considering the trial balance and its number for the given client.
Any error, omission or misstatement is considered material, if the same in individual or in
aggregate has the ability or the capability to change the economic decision of the user
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(DeZoort & Harrison, 2016). This has been explained in ASA 320. It helps the auditor in
differentiating as to what is the extent to which the checking needs to be done and what
can be ignored. There are many international and in country accounting boards which
have suggested a way to determine the materiality of an entity. One of those ways is to
use a certain percentage of the total assets, gross profit, total sales, net profit and
shareholder’s equity. Using these percentages, the materiality has been determined to be
between the ranges of $690 to $810. Using this, many of the accounts, which would have
been ignored earlier, would now be under the audit scope like the depreciation account,
the interest account, the furniture account and the superannuation account (Mock, et al.,
2018).
(in $)
Fallow Enterprises
Quantitative estimate of materiality
Criterion Base Amount Materiality level/range
0.5% to 1% of gross revenue Gross Revenue 81,052 405.26 to 810.52
1% to 2% of the total assets Total Assets 439,468 4394.68 to 8789.37
1% to 2% of the gross profit Gross Profit 34,544 345.44 to 690.88
2% - 5% of the shareholders’ equity Equity NA NA
5% to 10% of the net profit Net profit 36,669 1833.43 to 3666.87
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2. The preliminary analytical review has been done using the trial balance of the entity and
based on the same two variance and trend analysis statements have been prepared which
will help in identifying the critical and significant accounts, which needs audit attention.
The two statements are:
a. Common Size Income statement, and
b. Trend Analysis
Fallow Enterprises
Income Statement
Particulars 2017 % of sales 2016 % of sales
Sales 81,052 76.6% 187,450 76.7%
Consultancy
fees 24,688 23.3% 57,000 23.3%
Interest income 20 0.0% 50 0.0%
Total Revenue 105,760 100.0% 244,500 100.0%
Less: Expenses
Cost of sales 24,604 23.3% 63,595 26.0%
Bank charges 145 0.1% 350 0.1%
Depreciation 14,810 14.0% 15,738 6.4%
Interest expense 4,792 4.5% 12,000 4.9%
Printing 154 0.1% 375 0.2%
Miscellaneous 600 0.6% - 0.0%
Wages 21,904 20.7% 53,000 21.7%
Superannuation 2,081 2.0% 5,035 2.1%
Total Expenses 69,091 65.3% 150,093 61.4%
Net Profit 36,669 34.7% 94,407 38.6%
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Fallow Enterprises
Income Statement
Particulars 2017 2016 Variance
Sales 81,052 187,450 - 106,398
Consultancy fees 24,688 57,000 - 32,313
Interest income 20 50 - 30
Total Revenue 105,760 244,500 - 138,740
Less: Expenses
Cost of sales 24,604 63,595 - 38,991
Bank charges 145 350 - 205
Depreciation 14,810 15,738 - 928
Interest expense 4,792 12,000 - 7,208
Printing 154 375 - 221
Miscellaneous 600 - 600
Wages 21,904 53,000 - 31,096
Superannuation 2,081 5,035 - 2,954
Total Expenses 69,091 150,093 - 81,002
Net Profit 36,669 94,407 - 57,738
Net Profit % 34.67% 38.61%
3. Based on the statements above, several accounts have been earmarked for audit. Some of
these accounts and the audit risk and assertions with respect to these accounts have been
mentioned below:
Sl. No. Account Name Audit Assertion and risk
1. Sales The sales has dropped by 57% as compared to the last
completed year but as a percentage of the total receipts,
it is still at 77%. It needs to be scrutinized if the sales
prices have changed or if the quantity sold has
decreased or the fall in revenue is due to the competitive
pressure in the market. Thus, there might be issue in
relation to right to recognise revenue towards the period
end. (Deegan & Shelly, 2014).
2 Cost of sales The cost of sales has also declined by a massive 61%.
Though the sales has declined and the proportionate
amount is expected to decline in cost of sales as well bit
if cost of sales is calculated as a percentage of the total
receipts, we can see that the percentage of costs has
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gone down from 26% to 23.3%. There might be an issue
in the recording of complete transactions and therefore
the reason for the same needs to be found as it has effect
on profitability as well. Thus, there might be an issue
relating to completeness in recording and incorporating
the cut off balance in the costs (Axelsen, et al., 2017).
3 Interest Expenses The interest expenses is something which is expected to
be fixed across years but in the given case the same has
declined drastically by 60% even though the loan
balance is same. This poses one of the major audit risks
as the management might have faultered in using the
accrual basis and might not have taken requisite
provision in books.Thus, this might be an issue relating
completeness and accuracy in recording of transaction
(Sithole, et al., 2017).
4. Few of the audit procedures and the steps which needs to be taken by the auditors in this
regards have been mentioned below for all the above 3 accounts:
a. Sales: The sales needs to be verified from the sales register and the auditor should go
for vouching of few of the invoices for tax and other scrutiny. Also, the revenue
recognition criteria of the company needs to be checked if the company is following
the requisite accounting standards and the guidance notes. The change in the prices of
goods, if any, should be supported by evidences and calculation (Erik & Jan, 2017).
b. Cost of Sales: The cost of sales has declined more than the drop in sales so it needs to
be checked if the accounting is done properly. Again, the vouching of purchase orders
and purchase invoices is required and the auditor should check the management
estimates and judgements, if any, in this regards (Choy, 2018).
c. Interest Expenses: The interest expenses have declined even when the loan balance of
the entity is same as compared to the last year. Therefore, it needs to be checked if the
company is taking proper provision in the books and is following the accrual basis of
accounting. The auditor can also look at the bank loan repayment interest and check
the interest records as well (Timothy, 2004).
Conclusion and Recommendation
5. The last step, which has been mentioned in the audit planning procedure for the given
entity is fraud risk analysis but the audit partner has suggested that the fraud risk analysis
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need not be carried out for the entity as the client, is a trustworthy one. Here, the audit
partner is wrong in his contention for the reason that the auditor should always maintain
the professional scepticism while auditing the accounts and should exercise his
professional judgement all throughout (Fukukawa & Mock, 2011). In addition, it has
been mentioned in APES 110 that the auditors should subject all the clients to fraud risk
analysis irrespective of what is the situation. Here also in the given case, there have been
certain cases and accounts where there can be a possibility of the fraud. Some of these
accounts are interest expenses account and cost of sales account for which the reasons
have already been explained above. In addition to this, the depreciation account also
needs to be checked as the balances of assets is same as per last year but the expenses
have gone down. Furthermore, the drop in superannuation expenses show that the
employees have left the company and the current head count should be less as compared
to the last year. The same should be checked and verified (Bumgarner & Vasarhelyi,
2018).
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.
Bumgarner, N. & Vasarhelyi, M., 2018. Continuous auditing—a new view..
Continuous Auditing: Theory
and Application, 20(1), pp. 7-51.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.Ecological Economics, p. 145.
Deegan, C. & Shelly, M., 2014. Corporate Social Responsibilities: Alternative Perspectives About the
Need to Legislate.
Springer, 121(1), pp. 499-526.
DeZoort, F. & Harrison, P., 2016. Understanding Auditors sense of Responsibility for detecting fraud
within organization.
Journal of Business Ethics, pp. 1-18.
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.
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Fukukawa, H. & Mock, T., 2011. Audit risk assessments using belief versus probability.
Auditing: A
Journal of Practice & Theory, 30(1), pp. 75-99.
Marques, R. P. F., 2018. Continuous Assurance and the Use of Technology for Business Compliance.Encyclopedia of Information Science and Technology, pp. 820-830.
Mock, T. J., Ragothaman, S. C. & Srivastava, R. P., 2018. Using Evidential Reasoning Technology to
Enhance the Audit Quality Assurance Inspection Process.
Journal of Emerging Technologies in
Accounting, 15(1), pp. 29-43.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention
on learning accounting.
Journal of Educational Psychology, 109(2), p. 220.
Timothy, G., 2004. Managing interest rate risk in a rising rate environment.
RMA Journal, Risk
Management Association (RMA), November.
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