Analyzing Financial Accounts for Fraud Risks

The assignment focuses on identifying and assessing potential fraud risks within a company's financial statements by examining two key accounts: Accounts Receivable and Inventory. It delves into the rationale behind scrutinizing these accounts, outlines specific assertions susceptible to fraud, and proposes detailed auditing procedures for verifying their accuracy and reliability.

Running head: AUDITING THEORY AND PRACTICE
Auditing theory and practice
Name of the student
Name of the university
Author note

1AUDITING THEORY AND PRACTICE
Table of Contents
Income statement of Alizarin enterprises for two years.............................................................2
Balance sheet of Alizarin Enterprises........................................................................................3
Analysis......................................................................................................................................4
Reference....................................................................................................................................7

2AUDITING THEORY AND PRACTICE
Income statement of Alizarin enterprises for two years
Income statement of Alizarin Enterprises
Particulars 31st March
2016
30th June
2016 (b)
30th June
2015 (a)
Percentage
change
from (a-b)
Amount Amount
Sales 182,812 243,749 187,450 30.03%
Less: cost of sales 49,024 65,365 63,595 2.78%
Sales revenue 133,788 178,384 123,855 44.03%
Service fees 44,063 58,751 58,000 1.29%
Other income 900 1,200 25,000 -95.20%
Interest income 36 48 50 -4.00%
Total revenue 178,787 238,383 206,905 15.21%
Less: Expenses
Bank charges 261 348 350 -0.57%
Depreciation 26,114 34,819 15,590 123.34%
Printing 189 252 250 0.80%
Miscellaneous 1,800 2,400 -
Wages 42,134 56,179 53,000 6.00%
Superannuation 4,002 5,336 4,770 11.87%
Total expenses 74,500 99,333 73,960 34.31%
Net profit before interest and tax 104,287 139,049 132,945 4.59%
Less: Interest expenses 8,100 10,800 10,800 0.00%
Net profit 96,187 128,249 122,145 5.00%

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Balance sheet of Alizarin Enterprises
Balance sheet of Alizarin Enterprises
Particulars
31st March
2016
30th June
2015
Amount Amount
Assets
Current assets
Cash at bank 99,251 1,02,503
Accounts receivable 1,21,820 1,12,000
Inventory 1,89,000 1,75,000
Total current assets 4,10,071 3,89,503
Non-current assets
Machinery 65,000 65,000
Less: Depreciation 43,964 24,375
Net value of machinery 21,036 40,625
Motor vehicles 65,000 65,000
Less: Depreciation 26,000 20,150
Net value of motor vehicles 39,000 44,850
Furniture 7,500 7,500
Less: Depreciation 2,925 2,250
Net value of furniture 4,575 5,250
Total non-current assets 64,611 90,725
Total assets 4,74,682 4,80,228
Liabilities
Bank Loan 2,16,000 2,16,000
Total liabilities 2,16,000 2,16,000
Shareholder's equity
Equity 1,62,495 1,42,083
Retained profit 96,187 1,22,145
Shareholder's equity 2,58,682 2,64,228
Total liabilities and equity 4,74,682 4,80,228

4AUDITING THEORY AND PRACTICE
Analysis
1.0 Audit planning
Audit planning is an integral part of the audit procedure to identify the risk associated
segments and efficiently perform the audit. Planning of the audit involves establishment of
the overall strategies for audit to develop and engage the audit plan that specifically includes
the assessment procedure for planned risk and the planned responses for the risks associated
with the material misstatement (Titera 2013). Audit plan is not the distinct phase of the audit
rather it is the iterative and continuous procedure that immediately starts after completion of
the previous audit and it continues till the current audit’s completion.
1.1 Analytical review
This is the procedure for auditing financial statement and it helps the auditor to
identify the changes in the client’s business. It is compulsory for the auditor to perform the
procedure of risk assessment to assess and identify the material misstatement risk at assertion
and financial statement level and the procedure of risk assessment involves the analytical
procedure. It is compulsory on the part of the auditor that they shall perform the analytical
procedure towards the end of the audit process that will analyse whether financial statement
of the client is in consistent with the understanding of the audit (Moroney and Trotman
2016).
1.2 preliminary judgement for materiality
It is forecasted and identified at the financial statement level and is knows as planning
for materiality. The supervision and planning requires the auditor under the audit planning to
consider his preliminary judgement regarding the materiality levels for the purpose of audit.
While planning the audit, auditor must use her or his preliminary judgement with regard to

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materiality in such a way that can be forecasted to be delivered under the inherent limitation
of auditing procedure (Anugerah, Sari and Frostiana 2014). The preliminary judgement of the
auditor with regard to the materiality may be drawn on the basis of annualized interim of the
financial statement of company for one or more prior period.
2.0 1st account – Other income
2.1 Rational – the income became significantly lower and it is identified that the income from
other sources has been reduced by 95.20%. It was further recognized that that the total
revenue of the company during 2015 involves a significant amount from other income.
2.2 Assertion – there may be likelihood of fraud to suppress the income from various sources
to record the income at lower amount than actual (Moeller 2013).
2.3 Recommended procedure – the auditor shall go through the records regarding the other
income for the previous year and match it with the other income sources for the current year
documents related to other income shall be verified. It must be analysed that from which
sources income has been reduced or stopped and the justification behind that. Moreover, the
auditor may carry on the analytical procedure to check it there was any opportunity for
earning from other sources that may have been lost or not availed by the company and the
reason behind that.
3.0 2nd account – Depreciation
3.1 Rational – amount of depreciation significantly went up by 123.34% in 2016 as compared
to 2015, through there were no new purchases found from the balance sheet of the company.
3.2 Assertion – chances are there that the depreciation are overcharged to show less profit in
the current year or with a motive to show more profit in the future years (Boritz, Kochetova-
Kozloski and Robinson 2014).

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3.3 Recommended procedure – the documents related to fixed assets, their useful life,
existence and method of depreciation shall be verified. The auditor shall also verify the
impairment and revaluation to assess the value of the assets for the purpose of depreciation. If
there is change in the method of depreciation, the related documents for that shall also be
verified to analyse the appropriateness. Moreover the rate of depreciation on each asset and
each asset’s useful life shall be verified.
4.0 3rd Account – Miscellaneous expenses
4.1 Rational – the miscellaneous expenditure taken place during 2016 whereas during 2015
there were no such expenses
4.2 Assertion – there is the likelihood of frauds as the expenses may be fictitious and the
management may have shown the fictitious expenses to reduce the profit level.
4.3 Recommended procedure – the receipts and vouchers related to miscellaneous expenses
shall be verified properly. The appropriateness of the expenses shall also be verified. Further,
it shall also be verified that whether the payment for the expenses were properly authorized
by the appropriate authority or not.
5.0 4th Account – Wages
5.1 Rational – wages paid for the year ended 2016 were almost 6% higher as compared to
2015.
5.2 Assertion – fraud may be involved there as payments may be charged against revenue for
fictitious employees (Brown-Liburd, Issa and Lombardi 2015)
5.3 Recommended procedure – Employee details and payment must be verified with
employee register and payment register. The auditor shall also verify whether there is any

7AUDITING THEORY AND PRACTICE
arrears of wages that were paid during the year and whether the wages paid to the number of
employees matches with the number of employees under the employee registrar.
6.0 5th Account – Cash at bank
6.1 Rational – Cash is susceptible to fraud, error, misstatement and embezzlement
6.2 Assertion – cash may be recorded at lower amount or all the cash may not be transferred
to bank account
6.3 Recommended procedure – all the transactions related to cash and bank reconciliation
statement must be verified. The payment of cash made along with the voucher shall be
verified. The auditor shall also investigate whether the payment is recorded at time of making
the payment or on accrued basis. With regard to the receipt of cash, the auditor shall verify
whether the cash is transferred to the bank immediately or it is transferred on periodic basis.
If the cash is transferred on periodic basis then the method of keeping the cash and its
authorization shall be verified.
7.0 6th Account – account receivable
7.1 Rational – It represents whether the company is efficient in collecting its dues as the
inefficiency will increase the risk of bad-debts.
7.2 Assertion – there is a likelihood of fraud regarding revealing the amount of receivables.
7.3 Recommended procedure – All the sales related transactions, debtor’s information; credit
period allowed shall be verified. The auditor shall prepare a list of the debtors whose payment
is due even after the credit period got over and the reasons of failure to make payment by the
defaulters must be found out. As the amount of receivable is increased in 2016 as compared

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to 2015, the auditor shall find out the reason as increase in the credit sales or increase in the
dues.
8.0 7th Account – Inventory
8.1 Rational – Inventory is an important item that is included under the asset of the company
and it is susceptible to fraud, error, misstatement and theft (Jans, Alles and Vasarhelyi 2014)
8.2 Assertion – inventory valuation may not be made on the basis of cost or fair value,
whichever lower (Arens et al. 2016).
8.3 Recommended procedure – valuation of inventory and physical stock count must be
carried out. The method of inventory valuation and whether the company is using the method
consistently throughout the year shall be verified. Further, if there is any change in the
valuation method the justification and appropriateness for that must be identified. The
physical stock of the inventory shall be matched with the inventory registrar.

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Reference
Anugerah, R., Sari, R.N. and Frostiana, R.M., 2014. The relationship between ethics,
expertise, audit experience, fraud risk assessment and audit situational factors on auditor
professional scepticism.
Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016. Auditing and assurance
services. Pearson.
Boritz, J.E., Kochetova-Kozloski, N. and Robinson, L., 2014. Are fraud specialists relatively
more effective than auditors at modifying audit programs in the presence of fraud risk?. The
Accounting Review, 90(3), pp.881-915.
Brown-Liburd, H., Issa, H. and Lombardi, D., 2015. Behavioral implications of Big Data's
impact on audit judgment and decision making and future research directions. Accounting
Horizons, 29(2), pp.451-468.
Jans, M., Alles, M.G. and Vasarhelyi, M.A., 2014. A field study on the use of process mining
of event logs as an analytical procedure in auditing. The Accounting Review, 89(5), pp.1751-
1773.
Moeller, R.R., 2013. Role of Internal Audit in Enterprise Risk Management. COSO
Enterprise Risk Management: Establishing Effective Governance, Risk, and Compliance
Processes, Second Edition, pp.247-266.
Moroney, R. and Trotman, K.T., 2016. Differences in Auditors' Materiality Assessments
When Auditing Financial Statements and Sustainability Reports. Contemporary Accounting
Research, 33(2), pp.551-575.

10AUDITING THEORY AND PRACTICE
Titera, W.R., 2013. Updating audit standard—Enabling audit data analysis. Journal of
Information Systems, 27(1), pp.325-331.