Cut-off Analysis and Risk Assessment for Crimson Enterprises Company

The provided content outlines the importance of planning for an audit, focusing on specific items that require attention due to their riskiness. These items include sales, cash at bank, motor vehicles, and accumulated depreciation. The auditor is recommended to conduct procedures such as physical inventory counts, verifying individual transactions, and sending confirmation letters to banks to ensure year-end financial balance. The purpose of this planning phase is to determine the extent of any potential misstatements and materiality, ultimately enhancing the accuracy and reliability of the company's financial statements.

Corporate Reporting - Crimson Enterprises 1
CORPORATE REPORTING - CRIMSON ENTERPRISES
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Corporate Reporting - Crimson Enterprises 2
Audit planning
Audit planning is considered to be a vital area in auditing primarily carried out at the
beginning of the audit to make sure that suitable attention is devoted to particular areas,
probable problems are quickly identified. This aspect means developing a common strategy
and a comprehensive approach to the projected timing, nature, and degree of the audit. The
auditor often plans to do the audit in a timely and effective manner (Arens, Elder, Beasley,
and Hogan, 2016). Generally, auditor’s design detailed procedures so as to obtain sufficient
appropriate audit evidence. This assignment incorporates planning of the audit and having
access to the preliminary trial balance sheet for Crimson Enterprises. The assignment extracts
data from the company trial balance and identifies the accounts that are likely to require
significant audit attention (Trotman, and Wright, 2012). According to the Crimson
Enterprises trial balance, the selected seven accounts for audit that basically require attention
are;
Items accounts Current year Prior year % Change
1 Inventories 185,000 174,000 6.32%
2 Cash at bank 70,000 73,000 4.1%
3 Motor vehicles 66,000 66,000 0%
4 Accumulated depreciation (MV 27,940 21,000 33%
5 Accounts receivables 120,750 122,750 2.2%
6 Bank loans 230,000 230,000 0%
7 Sales 181,454 187,450 3.2%
Illustration
Crimson Enterprises
30th May 2017 1st July 2016
Revenue 181,545 187,450
Cost of Sale 55,963 63,595
Gross Profit 125,582 123,855

Corporate Reporting - Crimson Enterprises 3
Other income - Interest 44 50
Other income - Fees 54,313 57,000
Total Income 179,939 180,905
Operating Expenses
Bank charges 319 350
Depreciation 15,185 15,738
Interest expense 10,542 11,500
Printing 339 375
Repairs & Maintenance 1,320 5,050
Wage 48,189 53,000
Superannuation 3,661 4,770
Total Expenses 79,555 90,783
Profit/(Loss) before tax 100,384 90,122
Ratio Formulae Current year Prior year Industry
average
1 Gross profit
margin
= Gross profit/Net
sales
69% 66% 67.5%
2 Quick ratio Cash + Accounts
receivables + Current
assets
investment/Current
liabilities
163% 160% 241.5%
3 Current ratio Total current
assets/Total current
liabilities
1.63 1.6 1.62
4 Debt equity
ratio
TL/Share equity 1.8 1.6 1.7
5 Inventory
turnover
COS/Inventory 30% 37% 33.5%
6 Assets turnover Sales/TA 34.8% 37% 35.9%
7 ROA Operating profits/Total
sales
69.2% 66.1% 67.7%

Corporate Reporting - Crimson Enterprises 4
Analytical reviews
The use of analytical reviews is considered to be one method of increasing the efficiency of
auditors (Balaniuk, Bessiere, Mazer, and Cobbe, 2012). Analytical procedures often consist
of evaluations of financial data made by the auditor of plausible and expected relationships
among both non-financial and financial information.
Accounts receivables
Accounts receivable is another item that needs much attention when planning for an audit.
This is because most of the companies may post some significant amounts of accounts
receivables that do not exist and therefore may result in the company making unreasonable
profits. The company Accounts receivables should be examined for existence and accuracy
assertions. This aspect is important because some debtors may be overstated or understated
and thus affects the company debtors. Debtor’s circularization will be done so as to determine
the existence of the debtors and to confirm the amount owed to the company. The 1.65%
increase from the FY2016 to FY2017 should be examined so as to ensure the accuracy of the
amount posted and the reason that enhanced its increase (Arens, Elder, and Mark, 2012).
Because of the riskiness involved, I recommend tracing receivables reports to general ledgers.
The auditors should ask for a period end accounts receivables aging details from which they
outline the total to the amount in the accounts receivables accounts in the general ledger. I
also recommend confirmation of the accounts receivables. A major auditor activity is often to
contact the company clients directly and request them to confirm the amounts of unpaid
accounts receivables as of the end of the reporting period being audited for possible
misstatements.
Bank loans

Corporate Reporting - Crimson Enterprises 5
When planning for an audit, bank loans should have much concern because of its riskiness in
misappropriation. The amount of bank loans should be examined during audit. This aspect
makes this item to require much attention so as to ensure that there are reasonableness and
accuracy in the amount posted in the company trial balance. Phone calls should be made to
the associated banks so as to determine the percentage used as interest rates and the existence
of this loan in the company accounting records (Crowther, 2016). According to the Crimson
Enterprises Company, FY2016 indicated that the company had bank loans worth 230,000 and
the same amount in the FY2017. This amount should be examined to determine the accuracy
of calculations and repayments as the major assertion. Basing on the riskiness of this item, I
recommend the auditors to perform a walkthrough of the area to establish various roles in
loan operations as this activity helps both new and existing auditors to update in future years
(Cohen, Holder, Nath, and Wood, 2012). I also recommend reviewing and testing the process
for detailing the origination fees and also reviewing and testing how loan documentations
exemptions are reviewed and cleared by the company. I also recommend reviews and tests on
reconciliation process for possible misstatements.
Inventories
Inventory is one of the areas that require more attention. This is because inventories often
form a critical part of the company operations. Companies usually purchase more inventories
then convert them into finished goods that are sold to customers for a profit. According to the
Crimson Enterprises Company trial balance, the trial balance indicates that during the
FY2016 the amount of inventories was 174,000 and during the FY2016, the inventory was
185,000. This aspect indicates that the company has a vast amount of unmovable stocks
which is usually liability to the company. Reviewing the inventory, there was a significant
increase in the amount of inventories by 5.9% which means that the firm did not make huge
sales during the FY2016 (Chan, and Vasarhelyi, 2011). Basically, the degree of the analytical

Corporate Reporting - Crimson Enterprises 6
review needed often depends on the materiality of the items. After extensive observations,
existence is one of the assertions in this area will require additional attention so as to attempt
to determine the major reasons that resulted in the variations of the amount available in the
bank. This item basically contains more questionable activities on the existence of the
remaining stocks because I was able to carry out physically check on its availability. The
company financial managers should provide the supporting data, and the quality of internal
control systems in the company should also provide assurance, accuracy, and reliability of the
accounts. When planning for inventories audit, I recommend that the auditor should perform
a cut-off analysis where he or she will examine the company procedures for receiving new
inventories into the warehouses. I also recommend that the auditor should observe the
physical inventory count to determine existence.
Sales
Company sales are another item that needs much attention when planning for the audit. This
item is selected because of the riskiness that may be involved when a corporation is in
operations. This requires much attention because the company often convert its sales to either
cash or credit (Gurov, and Milgunova, 2016). This is vital, and thus it requires proper
analytical procedures to be done to determine its existence in the sales records. The company
should also provide with supporting documents that show the movement of sales during the
two fiscal periods. According to the Crimson Enterprises Company, FY2016 indicated that
the company made sales worth 187,450 and 181,454 in the FY2017. The variations should be
examined to check the reasonableness of the differences. Since this is one of the risky items
when planning for an audit, I recommend the auditor to test the controls of the company set
up for sales cycle so as to determine how reliable and strong they are (Knechel, Krishnan,
Pevzner, Shefchik, and Velury, 2012). The auditor should determine if the financial

Corporate Reporting - Crimson Enterprises 7
statements amounts of sales and accounts receivables are accurate by verifying individual
transactions for possible misstatements.
Cash at bank
Cash at the bank is another area in the company trial balance that requires attention. This
aspect is because it is more at risk of misappropriation by the management. The managers can
misuse the amount in the bank because of their easy accessibility. According to the company
financial reports, the amount of Cash at bank at the FY2016 was 73,000 and 70,000 in the
FY2017. This item also requires attention because according to the analysis, there is an
indication that there was a 4.3% decrease in the amount available in the bank (Hammersley,
2011). This should be examined to determine if the company may have spent a lot of money
that was available or there could be a possibility of misuse of the company resources.
Carrying out substantial procedures of making several comparisons to prior periods should be
done to ensure the accuracy of the amounts posted on the financial statements. This aspect is
vital because it will enhance its materiality (Knechel, and Salterio, 2016). Basing on the
riskiness of this item, I recommend that the auditor should send the confirmation letters to
banks to ensure year-end financial balance from third parties and also requests the company
client’s to provide their bank details for existence and confirmation.
Motor vehicles
Motor vehicles are another item that needs much concern during the audit. Motor vehicles
item is at risk because most of the company management often use the company resources
such as the cars for private purposes. Planning for this particular audit requires that the
company provide the purchasing agreements and log books of the company motor vehicles so
as to evaluate the amount it cost during purchase and attempts to compare the amount with
the market value (Hellman, 2011). According to the company trial balance, there is an
indication that the company machinery is valued at 64,000 as at 2016 and 71,000 at 2017.

Corporate Reporting - Crimson Enterprises 8
The 10.9% variations should be evaluated and determined so as to provide the actual amount
it cost during the initial procurement. In this case, I recommend that the auditors should
basically check at the motor vehicles log books to substantiate the amount indicated and
perform a physical check for existence for possible misappropriation (Titera, 2013).
Accumulated depreciation
The actual depreciation of the company is another item that basically needs much attention
because of its sensitivity (Messier, Simon, and Smith, 2012). This item is also selected
because of its riskiness during company existence. The method used to determine the amount
of depreciation should be examined to ensure that it is free from any manipulations. Planning
for this audit will also require that the amount of accumulated depreciation should be
calculated again so as to ensure accuracy. The 31.6% increase in accumulated depreciation
should be determined and supported with reasonable evidence by the company (Hammersley,
Johnstone, and Kadous, 2011). Basing on the riskiness of this particular aspect, I recommend
that the auditor should verify the manufacturing, motor vehicles, and equipment different
from the current assets for depreciation expenses verifications. The auditor should also
compare depreciation expenses to determine possible misstatements.

Corporate Reporting - Crimson Enterprises 9
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