Auditing and Professional Practice Assignment

This is an auditing and professional practice assignment prepared for the audit senior of the firm. The preliminary trial balance of the client has been analysed to know what are the critical accounts and areas that are likely to catch audit attention and which are significant from perspective of audit. The report includes quantitative estimate of materiality, analytical review, key audit procedures, fraud risk analysis and recommendations. The subject is auditing and professional practice and the course code and college/university are not mentioned.

A ditin andu g
Pro e ional Practicef ss
A i nmentss g

1
By student name
Professor
University
Date: 25 April 2018.
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Contents
ntrod ctionI u .................................................................................................................................................3
i c ion and Anal iD s uss ys s...............................................................................................................................4
oncl ion ecommendationC us & R ..................................................................................................................9
e erenceR f s.................................................................................................................................................10
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Introduction
In the given case, a report has been prepared for the audit senior of the firm. The firm is auditing
one of the small clients and for the same, planning is being done. The preliminary trial balance of
the client has been analysed to know what are the critical accounts and areas that are likely to
catch audit attention and which are significant from perspective of audit.
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Discussion and Analysis
The trail balance of the client, Feldspar Enterprises has been shown below:
eld par nterpri eF s E s s
Trial alanceB
l MarJu 1, 2016 - 31,
2017
l neJu 1, 2015 - Ju 30,
2016
e itD b reditC e itD b reditC
a at anC sh B k 89,750 83,000
Acco nt recei a leu s v b 109,850 103,585
n entorI v y 164,500 174,000
Mac inerh y 64,000 64,000
Acc m latedu u
epreciationD 30,207 24,000
Motor e icleV h s 66,000 66,000
Acc m latedu u
epreciationD 40,913 21,000
rnit reFu u 7,400 7,400
Acc m latedu u
epreciationD 2,760 2,220
an oanB k L 240,000 240,000
aleS s 145,894 187,450
o t o aleC s f s s 44,288 63,595
on ltanc eeC su y f s 44,438 57,000
ntere t incomeI s 36 50
an c ar eB k h g s 261 350
epreciationD 26,659 15,738
ntere t e pen eI s x s 8,625 12,000
Printing 278 375
Mi cellaneos us 1,080 -
a eW g s 39,428 53,000
perann ationSu u 3,746 5,035
Total 625,864 504,247 648,078 531,720
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1. Materiality is one of most critical things in audit planning and is probably the first step in
planning. Any misstatement, error or omission in the financial statements is considered
material if it individually or in aggregate has the capability of influencing the economic
decision taken by the stakeholders (Chron, 2017). It helps to assess which area of audit is
material and which not therefore; the focus should be on material areas. The preliminary
assessment of materiality, which has been set, now is $ 15000, which seems to be quite
high. The accounting bodies active over the world like those of AASB and those of IASB
have prescribed certain limits for determining materiality like a percentage of sales,
profit, assets and other parameters like shareholder’s equity. As per the computation
shown below, the materiality should fall in the level of $ 729 to $ 1458, which will help
the auditor to form a reasonable opinion on the financial statements, or else many
accounts would be missed from the ambit of audit. The accounts, which would now be
checked, are Furniture and other expenses like interest expenses account, miscellaneous
expenses account and superannuation account (Jones, 2017).
eld par nterpri eF s E s s
antitati e e timate o materialitQu v s f y
riterionC a eB s Amo ntu Materialit le el ran ey v / g
to o ro re en e0.5% 1% f g ss v u ro e en eG ss R v u 145,894 to729.47 1458.94
to o t e total a et1% 2% f h ss s Total A etss s 427,620 to4276.2 8552.4
to o t e ro pro it1% 2% f h g ss f ro Pro itG ss f 62,179 to621.79 1243.58
o t e are older e it2% - 5% f h sh h s’ qu y itEqu y AN AN
to o t e net pro it5% 10% f h f et pro itN f 66,004 to330.02 660.04
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2. The analytical review has been performed through trend analysis. The common size
income statement has been prepared for both the given years 2016 and 2017 and each and
every line item has been computed as a % of the total revenue.
eld par nterpri eF s E s s
ncome tatementI S
Partic laru s 2017 o ale% f s s 2016 o ale% f s s
aleS s 145894 76.6% 187450 76.7%
on ltanc eeC su y f s 44438 23.3% 57000 23.3%
ntere t incomeI s 36 0.0% 50 0.0%
Total e en eR v u 190367 100.0% 244500 100.0%
e pen eL ss: Ex s s
o t o aleC s f s s 44288 23.3% 63595 26.0%
an c ar eB k h g s 261 0.1% 350 0.1%
epreciationD 26659 14.0% 15738 6.4%
ntere t e pen eI s x s 8625 4.5% 12000 4.9%
Printing 278 0.1% 375 0.2%
Mi cellaneos us 1080 0.6% 0 0.0%
a eW g s 39428 20.7% 53000 21.7%
perann ationSu u 3746 2.0% 5035 2.1%
Total pen eEx s s 124364 65.3% 150093 61.4%
et Pro itN f 66004 34.7% 94407 38.6%
et Pro itN f % 34.67% 38.61%
3. Based on trend analysis above, certain key and high risks accounts have been identified.
The audit assertions and the risks w.r.t. to same has been captured in the below
mentioned table.
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Sl. No. Account Name Audit Assertion and risk
1 Sales The sales has dropped by 22.17% whereas the profit has
declined by 30% over the last year and a careful
scrutiny should be done as to where the firm went
wrong, whether there was a fall in price or a fall in
quantity or whether it was due to competitive pressure
in market (Kewell & Linsley, 2017).
2 Depreciation Here the depreciation expenses have increased by a
whopping 70%, so the method of depreciation, the
useful lives and the estimations taken by the
management needs to be considered. It also needs to be
checked if the new assets have been acquired during the
year and what is the rate of depreciation being
considered (Alexander, 2016).
3 Wages The wages have decreased by 25.61% as compared to
the last year so it needs to be checked whether the
labour count has been decreased or the business was not
in operation for some time. It also needs to be checked
if the outstanding liability has been booked in the
current year (Bae, 2017).
4. For the above mentioned accounts, some of key audit procedures have been listed below:
i. Sales: The quantitative sales and the price of the goods sold needs to be checked
and compared with the last year extensively. For this, top 30-50 part nos., or
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products can be taken which contribute to the maximum extent to revenue and
then the analysis can be conducted (Bennuona, et al., 2010).
ii. Wages: Since the wages has decreased by almost ¼ th of the last year expenses,
the employee register needs to be checked if the number of labourers have been
reduced in the company over the year or the rate of payment has been decreased.
The auditor should also be checking the rate complies with the minimum wages
Act rules and regulations and whether the company is giving and making
available minimum safety to the employee (Raghupathi & Wu, 2018).
iii. Depreciation: Where all the expenses in the company have decreased, we have
seem that the depreciation expenses have increased. Careful scrutiny needs to be
done by auditor if company has added the new assets, and what is the rate of
depreciation being charged and what is the method of depreciation being used. In
addition, the physical verification of the fixed assets needs to be conducted to
check the actual status of the assets (Li, et al., 2018).
Conclusion & Recommendation
5. In the given report, the audit partner has asked that the given client should not be subject
to fraud risk analysis as the client is very trustworthy. This is not appropriate as per the
concept of professional scepticism. Even though the client has maintained all the books
of accounts in the best manner possible or even if he is a trustworthy person, still the
accounts needs to be checked and audited properly. Furthermore, from the preliminary
analytical review, it can be seen that there are many points and issues, which throw
ambiguity in the course of business like the substantial decrease in profit and sales and
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the consultancy fees and the sharp rise in the depreciation costs. In the light of above
factors, it would be wrong not to have a fraud risk analysis for the given client (Knechel
& Salterio, 2016). The other frauds which are evident from the income statement of the
company include
i. The superannuation expenses have decreased by 25%, which indicates the
deletion or attrition of the employees. The same needs to be checked from the
employee register.
ii. Furthermore, there was no miscellaneous expenses last year and it has come up
altogether in 2017 amounting to $ 1080, the bills and viability of the same needs
to be checked (Farmer, 2018).
iii. The interest expenses have lowered by 28% which means that there should have
been repayment of debt capital during the year or there has been less use of debt
as compared to the last year, the same needs to be verified.
iv. The consultancy fees has again dropped by 22%, so it needs to be checked if the
clients served has been on the lowers side or the consultancy fees has been
dropped altogether.
v. The cost of sales dropped by 30% in comparison to 22% drop in sales, it needs to
be checked if the raw materials are being procured at correct prices from the
approved list of vendors.
Above mentioned are some of the fraud risk factors for which the auditors need to take
relevant steps.
References
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