Audit Planning Report for Cerise Enterprises

This report includes audit risks, assertions, and procedures for Cerise Enterprises. It also highlights materiality limits and fraud risk analysis.

University of XXXXXXXXXXXXX
Issues in Auditing Practice Assignment
BUS000, Tutor Name, Tutorial Time
Student Name, SID: XXXXXXXXXX
7-7-2017

Executive Summary
An audit planning report has been prepared for one of the small entities named “Cerise
Enterprises”. The report incorporates the audit risks and the audit assertions in the critical
accounts and the audit procedures to be employed in order to check and verify the same.
Several analysis have been done to identify the critical accounts and the also the fraud risk
analysis has been done towards the end to find the possibility of fraud in accounts, if any.
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Table of Contents
Executive Summary................................................................................................................................i
Table of Contents...................................................................................................................................ii
1. Introduction...................................................................................................................................1
1.1. Authorisation.........................................................................................................................1
1.2. Limitations.............................................................................................................................1
1.3. Scope.....................................................................................................................................1
2. Inputs to the report - Analysis.......................................................................................................2
2.1. Trial balance input.................................................................................................................2
2.2. Determination of Materiality.................................................................................................2
2.3. Preliminary Analytical Review................................................................................................2
3. Discussion on the report................................................................................................................3
3.1. Income statement accounts to be analysed..........................................................................3
3.2. Audit procedures to be undertaken.......................................................................................4
4. Conclusion – Fraud Risk Analysis...................................................................................................6
5. Recommendations.........................................................................................................................6
References.............................................................................................................................................7
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1.Introduction
1.1. Authorisation
This report is being prepared as per the directions of the audit partner of the firm to whom
the report will be handed over at the end (Bromwich & Scapens, 2016). Several
recommendations and suggestions have been given by the senior audit partner which has
also been discussed.
1.2. Limitations
The entire report has been prepared on the basis of the trial balance of the entity, however
the debit and the credit totals of the same is not matching and therefore the same can be
assumed to be suspense account but it has not been considered in any of the analysis as the
nature of the account is not known (Bumgarner & Vasarhelyi, 2018).
1.3. Scope
The report will include selection and identification of the key risk account where audit
attention is required, the audit assertions and procedures on the basis of preliminary
analytical procedures. The report will also highlight the selection of materiality limit and
possibility of frauds in any of the accounts mentioned in trial balance.
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2.Inputs to the report - Analysis
2.1. Trial balance input
The trial balance of the entity “Cerise Enterprises” lists the full year figures for the last
financial year but for the current year, it mentions figures only for a few months and
therefore the data has been annualised for the purpose of better analysis.
2.2. Determination of Materiality
The first step in the audit planning of an entity is the determination of the extent of
materiality. It is very critical and important from the perspective of the auditor as it helps
the auditor to understand which all areas needs to be focused and what all can be ignored
considering the immateriality (Axelsen, et al., 2017). Materiality is something which is
significant and can change the decision of the user of financial statements. In the given
case, the audit partner of the company has suggested the materiality to be taken as $15000
but in case the same is being considered, many of the critical accounts like superannuation,
repair and maintenance, furniture account, interest and depreciation would be ignored and
therefore materiality could be in between the range of $1732 to $2125 based on below
working. These percentages of sales, profitability, assets and equity have been suggested by
accounting bodies like IASB and AASB and even some of the consulting firms like Big 4’s.
(Amt in $)
Cerise Enterprises
Quantitative estimate of materiality
Criterion Base Amount Materiality level/range
0.5% to 1% of gross revenue Gross Revenue 173,250 866.25 to 1732.5
1% to 2% of the total assets Total Assets 472,803 4728.03 to 9456.06
1% to 2% of the gross profit Gross Profit 106,278 1062.78 to 2125.57
2% - 5% of the shareholders’ equity Equity NA NA
5% to 10% of the net profit Net profit 89,382 4469.12 to 8938.23
2.3. Preliminary Analytical Review
The preliminary analytical review has been done based on the trial balance of the entity and
the common size income statement and the variance analysis has been prepared for the
purpose of selecting critical accounts (Choy, 2018).
Cerise Enterprises
Income Statement
Particulars 2017
% of
sales 2016
% of
sales
Sales 173,250 76.1% 187,450 76.7%
Service fees 54,313 23.9% 57,000 23.3%
Other Income + Interest 44 0.0% 50 0.0%
Total Revenue 227,607 100.0% 244,500 100.0%
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Less: Expenses
Cost of sales 63,708 28.0% 63,595 26.0%
Bank charges 319 0.1% 350 0.1%
Depreciation 14,841 6.5% 15,863 6.5%
Interest expense 10,542 4.6% 11,500 4.7%
Printing 231 0.1% 250 0.1%
Repairs and
Maintenance 1,320 0.6% 5,050 2.1%
Wages 44,000 19.3% 53,000 21.7%
Superannuation 3,263 1.4% 4,770 2.0%
Total Expenses 138,224 60.7% 154,378 63.1%
Net Profit 89,382 39.3% 90,122 36.9%
Cerise Enterprises
Income Statement
Particulars 2017 2016 Variance Variance %
Sales 173,250 187,450 1,550 1%
Consultancy fees 54,313 57,000 2,250 4%
Interest income 44 50 - 2 -4%
Total Revenue 227,607 244,500 3,798 2%
Less: Expenses
Cost of sales 63,708 63,595 5,905 9%
Bank charges 319 350 - 2 -1%
Depreciation 14,841 15,863 327 2%
Interest expense 10,542 11,500 - 0%
Printing 231 250 2 1%
Repairs and
Maintenance 1,320 5,050 - 3,610 -71%
Wages 44,000 53,000 - 5,000 -9%
Superannuation 3,263 4,770 - 1,210 -25%
Total Expenses 138,224 154,378 - 3,588 -2%
Net Profit 89,382 90,122 7,386 8%
Net Profit % 39.27% 36.86%
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3.Discussion on the report
3.1. Income statement accounts to be analysed
Some of the critical income statement accounts chosen for analysis have been mentioned
below. The relevant audit assertions and the risk in accounts have been mentioned below.
Sl. No. Account Name Audit Assertion and risk
1. Sales The Sales has increased by only 1% as compared to
the last year whereas as percentage of the total
receipts, the same has decreased by 0.6%. This
shows the company has shown decline and it needs
to be checked if management assertion with regards
to rights to book revenue as per the accounting
standards has been taken care off (Willcocks, 2017).
2 Cost of Sales The cost of sales has increased by 9% over last year
and even as a percentage of the total receipts, it has
increased from 26% to 28% and it needs to be
examined if the costs have been booked correctly
and matching concept has been adhered to by the
management. The assertion w.r.t. accuracy, cut off
and occurrence needs to be examined here (Vieira,
et al., 2017).
3 Repair and
maintenance
The repair and maintenance expenses has decreased
by a massive 71% as compared to the last year and
as a percentage of the total receipts as well, it has
declined by 1.5% and it needs to be checked if the
management has met the assertions of
completeness and existence of these expenses (Fay
& Negangard, 2017).
4 Wages The wages has declined by 9% as compared to the
last year and as a percentage of sales as well, it has
declined by 2.5%. This is in sharp contrast to the
increase in sales and the cost of sales and therefore
it needs to be checked on the accuracy and
completeness of recording these expenses and
whether adequate provision has been taken at the
time of cut off (Dichev, 2017).
3.2. Audit procedures to be undertaken
For the accounts identified above in the analysis, some of the audit procedures to
be undertaken by the auditor in this regards are mentioned below:
a. Sales: The sales invoices needs to be checked and vouched for accuracy and
whether the same is matching with the sales ledger records. Also the revenue
recognition policy needs to be checked by the auditors if the policy has been
followed and the right to recognise the revenue has been established.
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b. Cost of Sales: Since the cost of sales has increased by huge amount, it needs to
be vouched if all the expenses incurred in the accounting period has been
recorded with accuracy or the future expenses have also been considered. Also,
cut off accounting entries at the month and year end also needs to be checked if
the same has been taken appropriately and extra cost is not accounted in the
current year (Raiborn, et al., 2016).
c. Repair and Maintenance: The repair expenses has come down drastically and
hence it needs to be checked if the management has ensured that all the
expenses pertaining to the accounting year has been recorded in the books and
if the requisite provision has also been taken. All the management estimates as
well as the judgements in this regards also needs to be verified (Meroño-Cerdán,
et al., 2017).
d. Wages: The wages has decreased by 9% and hence it needs to check if the
efficiency of operations has improved or the wage rates have been lowered. The
employee register needs to be checked and also it needs to be checked if the
company has complied with all the labour laws and the appropriate disclosures
have been given in this regard (Kachelmeier, et al., 2018).
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4.Conclusion – Fraud Risk Analysis
Fraud risk analysis is analysing the possibility of the fraud in the organization. It is one of the
key steps in auditing and therefore needs to be conducted compulsorily. The same has been
stated in a number of places like APES 110 on ethics of auditing. Besides this, the concept of
professional scepticism also advocates that the fraud risk analysis should be conducted for
all the clients irrespective of anything (Grenier, 2017). In the given case the audit partner
has recommended and suggested that the given client should not be subjected to fraud risk
analysis considering the trustworthiness but his contention is wrong as per the points
already explained above.
Some of the accounts in the given entity do hint towards the possibility of the fraud in the
organization, which are wages account and cost of sales account, for the reasons explained
above. Furthermore, superannuation account also needs to be reviewed as the same has
gone down considerably as compared to the last year and depreciation account which has
increased despite no changes in the asset balances as compared to the last year.
5.Recommendations
Few of the recommendations for the given client’s audit is:
 Apart from the income statement analysis, opening balance confirmation also needs
to be done.
 Balance sheet analysis can also be considered in case the auditor is not able to
establish sufficient and appropriate audit evidences.
References
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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.
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management
Accounting Research, Volume 31, pp. 1-9.
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.
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), pp. 617-632.
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud.
Journal of Accounting Education, Volume 38, pp. 37-49.
Grenier, J., 2017. Encouraging Professional Skepticism in the Industry Specialization Era. Journal of
Business Ethics, 142(2), pp. 241-256.
Kachelmeier, S., Schmidt, J. & Valentine, K., 2018. The disclaimer effect of disclosing critical audit
matters in the auditor’s report. SSRN, 2(1), pp. 1-39.
Meroño-Cerdán, A., Lopez-Nicolas, C. & Molina-Castillo, F., 2017. Risk aversion, innovation and
performance in family firms. Economics of Innovation and new technology, pp. 1-15.
Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good
Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.
Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management
Systems. SAGE Journals, 30(1).
Willcocks, L. P. L. M. C. &. S. C., 2017. Introduction. In Outsourcing and Offshoring Business Services.
Cham: Palgrave Macmillan,.
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