Issues in Auditing Practice: Materiality, Analytical Review, Misstatements, Audit Procedures, and Fraud Risk

ISSUES IN AUDITING PRACTICE 1
ISSUES IN AUDITING PRACTICE
By (Name)
Name of the Course
Professor
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Date

ISSUES IN AUDITING PRACTICE 2
Introduction
Being an immediate member of the audit team of a firm, it has been requested that an
audit planning for a small client has to be done. The client has provided the preliminary trial
balance and this would be used for identifying accounts which are likely to require significant
attention in the audit. The main aim of this paper therefore is to prepare a report for an audit
senior, addressing the five issues as discussed below.
1. Appropriateness of the Figure for the Preliminary Assessment of Materiality
It has been suggested by the audit partner that the preliminary assessment of materiality
for the financial report as a whole be set at $15,000. However, this figure is not appropriate for
this client. This is because this amount will exceed 5% of total revenues as required by the
general rule of materiality level assessment. Setting materiality at $15,000 would result into a
materiality percentage level of 18% ($15,000 / $82, 479), which is considered unacceptable for
the financial statements taken as a whole. The preliminary assessment of materiality level in the
financial reports is the maximum amount by which misstatements due to error and fraud should
not be exceeded. For determining the level of materiality for the financial reports taken as a
whole, the auditor must use a single base. For instance, he can use the higher of total assets or
total revenues of the company. After determining the base, the auditor should multiply the dollar
amount of the base by a certain percentage factor (Louwers, Ramsay, Sinason, Strawser and
Thibodeau 2015, pp. 68).
Changing the preliminary assessment of materiality would have significant effect on the
budget of the audit. For instance, more audit procedures and tests would have to be performed.
These require additional audit resources in terms of human resources, time and money. The audit

ISSUES IN AUDITING PRACTICE 3
firm may incur extra costs since there may be a need to engage experts in making valuation of
fixed assets and other items which require specific professional expertise. These additional costs
have an adverse impact on the audit budget (Singleton and Singleton 2010, pp. 46).
2. Analytical Review in Form of a Trend Analysis
An analytical review involves comparing the detail balances from one financial period to
another, with a view to substantiating reasonableness of the items without performing a
systematic examination of the individual transactions that comprise the account balances
(Singleton and Singleton 2010, pp. 46). However, an analytical review is based on the primary
assumption that comparability of account balances and balances from period to period is able to
give and show a true reflection of the company’s performance in a manner that is free from
significant errors or misstatements (Louwers, Ramsay, Sinason, Strawser and Thibodeau 2015,
pp. 68). The table below shows the analytical review of the income statement items from the trial
balance of Coral Enterprises.
Analytical Review of Income Statement Items (Trend Analysis)
Item 30-Nov-16 30-Jun-16
Change
(Amount)
Percentage
Change
Sales
$
82,479
$
187,450 $ (104,971) -56%
Cost of sales
$
25,438
$
63,595 $ (38,157) -60%
consultancy fees
$
24,688
$
57,000 $ (32,312) -57%

ISSUES IN AUDITING PRACTICE 4
Interest income
$
20
$
50 $ (30) -60%
bank charges
$
145
$
350 $ (205) -59%
Depreciation
$
6,902
$
15,738 $ (8,836) -56%
Interest expense
$
4,792
$
11,500 $ (6,708) -58%
Printing
$
154
$
375 $ (221) -59%
Repairs and
maintenance
$
600
$
5,050 $ (4,450) -88%
Wages
$
21,904
$
53,000 $ (31,096) -59%
Superannuation
$
1,664
$
4,770 $ (3,106) -65%
3. Four Income Statement Accounts That Appear To Be At Risk of Material
Misstatement
From the above trend analysis of the income statement items of Coral Enterprises, there
are four accounts which have been identified to have been possibly misstated materially. These
are sales, interest income, cost of sales and repairs and maintenance. All these items have been
discussed below.