Financial Analysis Report on Audit Planning for Small Company

A financial analysis report has been prepared on the audit planning of one of the small companies given in the report. The audit planning report will be handed over to the audit partner once it is prepared and completed by the audit senior. The report highlights how to determine materiality for an enterprise and what are the factors to be considered while doing fraud risk analysis. The preliminary analytical review of the company has also been done and based on the same, the critical accounts have been identified and audit assertions and audit procedures to be implemented have also been stated.

Accounting
Financial Analysis
Report
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Executive summary
A financial analysis report has been prepared on the audit planning of one of the small companies
given in the report. The audit planning report will be handed over to the audit partner once it is
prepared and completed by the audit senior.
The report highlights how to determine materiality for an enterprise and what are the factors to be
considered while doing fraud risk analysis. The preliminary analytical review of the company has also
been done and based on the same, the critical accounts have been identified and audit assertions
and audit procedures to be implemented have also been stated.

Table of contents
Executive summary.................................................................................................................................i
Table of contents...................................................................................................................................ii
1. Introduction...................................................................................................................................2
1.1 Authorisation.........................................................................................................................2
1.2 Limitations.............................................................................................................................2
1.3 Scope.....................................................................................................................................2
2. Question 1: Materiality..................................................................................................................3
Preliminary assessment of materiality for the financial report on total asset...................................3
A discussion of appropriateness of this figure for client....................................................................3
Possible impact of the changing the preliminary assessment on the audit budget...........................3
3. Question 2: Preliminary Analytical review - Trend analysis...........................................................4
4. Question 3: Income statement accounts having risk of material misstatement............................5
5. Question 4: Audit procedures to be employed..............................................................................5
6. Question 5: Fraud Risk Analysis.....................................................................................................6
7. Conclusion.....................................................................................................................................6
Reference:.............................................................................................................................................7
Appendix...............................................................................................................................................8

1.Introduction
1.1 Authorisation
The audit partner of the company has authorised audit senior to prepare the audit planning
report and post completion it will be handed over to him.
1.2 Limitations
The trial balance of the company has been given for 2 years, 2016 and 2017. For both the years,
the debit and the credit totals is not matching and thus has been assumed to be suspense
account or equity account. The same not being an income statement account, has not been
considered in the trend and variance analysis (Boccia & Leonardi, 2016).
1.3 Scope
The report has been prepared using the trial balance of the company and doing preliminary
analytical review through the same. Significant accounts have been identified using variance and
trend analysis and audit procedures to be employed by auditor has been stated. All this will help
the auditor in gathering audit evidences and thereby giving an opinion on the financial
statements.
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2.Question 1: Materiality
Preliminary assessment of materiality for the financial report on total
asset
Materiality may be defined as something which can change the economic or financial decision of the
user. It is one of the most important tools of audit planning as it helps the auditor in determining
what all accounts and areas are critical and therefore needs to be checked in details and what all
things can be ignored. Based on the input given in the question the trial balance of the entity has
been shown in appendix. On this basis the materiality would be determined (Bailey, et al., 2017).
A discussion of appropriateness of this figure for client
The audit partner has suggested the materiality to be taken as $ 15000 for the given client but the
same seems to be very high considering the trial balance of Cyan Enterprises. There are accounting
boards and bodies over the world and consulting and auditing firms like those of Big 4’s which have
suggested materiality based on percentage of sales, assets, profits or shareholder’s equity. Based on
the same, the materiality for given entity should be in range of $ 1484 and $1993 (Werner, 2017).
(Amt in $)
Cyan Enterprises
Quantitative estimate of materiality
Criterion Base Amount Materiality level/range
0.5% to 1% of gross revenue Gross Revenue 148,463 742.31 to 1484.63
1% to 2% of the total assets Total Assets 460,505 4605.05 to 9210.1
1% to 2% of the gross profit Gross Profit 99,679 996.79 to 1993.59
2% - 5% of the shareholders’ equity Equity NA NA
5% to 10% of the net profit Net profit 82,058 4102.91 to 8205.81
Possible impact of the changing the preliminary assessment on the
audit budget
The most possible impact of choosing the above mentioned range as materiality would be that many
accounts like those of superannuation, repair and maintenance, depreciation and interest expenses
account which would have been ignored as per the previous materiality limit would now fall in the
scope of audit (Visinescu, et al., 2017).
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3.Question 2: Preliminary Analytical review - Trend
analysis
The preliminary analytical review has been done in the form of trend analysis through common size
income statement and the variance analysis. Since the data for 2017 is only for 9 months, it has been
annualised for the purpose of variance analysis.
Cyan Enterprises
Income Statement
Particulars 2017 % of sales 2016 % of sales
Sales 148,463 76.9% 187,450 76.7%
Service fees 44,438 23.0% 57,000 23.3%
Other Income + Interest 36 0.0% 50 0.0%
Total Revenue 192,936 100.0% 244,500 100.0%
Less: Expenses
Cost of sales 45,788 23.7% 63,595 26.0%
Bank charges 261 0.1% 350 0.1%
Depreciation 12,424 6.4% 15,738 6.4%
Interest expense 8,625 4.5% 11,500 4.7%
Printing 278 0.1% 375 0.2%
Repairs and Maintenance 1,080 0.6% 5,050 2.1%
Wages 39,428 20.4% 53,000 21.7%
Superannuation 2,996 1.6% 4,770 2.0%
Total Expenses 110,878 57.5% 154,378 63.1%
Net Profit 82,058 42.5% 90,122 36.9%
Cyan Enterprises
Income Statement
Particulars 2017 2016 Variance Variance %
Sales 148,463 187,450 10,500 6%
Consultancy fees 44,438 57,000 2,250 4%
Interest income 36 50 - 2 -4%
Total Revenue 192,936 244,500 12,748 5%
Less: Expenses
Cost of sales 45,788 63,595 - 2,545 -4%
Bank charges 261 350 - 2 -1%
Depreciation 12,424 15,738 827 5%
Interest expense 8,625 11,500 - 0%
Printing 278 375 - 5 -1%
Repairs and
Maintenance 1,080 5,050 - 3,610 -71%
Wages 39,428 53,000 - 430 -1%
Superannuation 2,996 4,770 - 776 -16%
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Total Expenses 110,878 154,378 - 6,541 -4%
Net Profit 82,058 90,122 19,289 21%
Net Profit % 42.53% 36.86%
4.Question 3: Income statement accounts having
risk of material misstatement
Based on the analysis above, 3 key risks income statement accounts have been chosen and the risk
and the associated assertions have been stated.
Sl. No. Account Name Audit Assertion and risk
1. Sales The sales of the company Cyan Enterprises has increased
by 6% as compared to the last year even though the
proportion of the same as a percentage of total receipts
has been same. The management assertion of
completeness in recording of revenue and the right to
recognise the revenue in the books needs to be checked
here (Meroño-Cerdán, et al., 2017).
2 Cost of Sales The cost of sales has decreased by 4% as compared to the
last year when the sales has increased. In terms of the
common size income statement, the same has declined
by ~2.3%. It should therefore be checked if the
management assertion of accuracy in recording of costs
and the cut off entries at the period end has been
correctly done (Bumgarner & Vasarhelyi, 2018).
3 Repair and
maintenance
The repair and maintenance expenses have declined by
71% as compared to the last year and as a percentage of
the total receipts the same has fallen by 1.5%. Therefore,
it needs to be checked if all the expenses has been
completely recorded by management and necessary
disclosure in regard to change in any policy has been
shown in financials.
5.Question 4: Audit procedures to be employed
Based on the above critical accounts, the audit procedure to be employed are as follows:
1. Sales: For this account, vouching of all the sales invoices should be done and it should be
reconciled with the sales ledger. Furthermore it should be checked if the company is
following the revenue recognition policy as per the accounting standards and recorded all
the sales in line with the same (Kuhn & Morris, 2016).
2. Cost of Sales: Here, the vouching of the purchase invoices should be employed and it needs
to be checked if the prices of the raw material has come down or it is due to increase in
efficiency. The cut off entries during month and year end also needs to be verified. The
prices of the raw material can be compared with the market prices (Goldmann, 2016).
3. Repair and Maintenance: Since this expense head has shown a drastic decline in the
expenses, it needs to be checked if the company has recorded all the expenses in the books
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and what the estimates and judgements of the management in this regard and whether the
same has been disclosed in the notes and disclosures in financial statements.
6.Question 5: Fraud Risk Analysis
Fraud risk analysis may be defined as one of the audit procedures which is being employed to check
the possibility of fraud in the given company. In the given case, the audit partner has suggested that
the client Cyan Enterprises should not be subjected to fraud risk analysis as it is trustworthy but this
is against the concept of professional scepticism and what has been mentioned in the standards as
per APES 110 (Guragai, et al., 2017). Some of the accounts which hint towards the possibility of fraud
are cost of sales account and the repair and maintenance account for reasons shown above. In
addition, depreciation and superannuation account should also be checked as the balances of assets
have neither increased nor decreased but the depreciation has increased (Marques, 2018).
7.Conclusion
As per above discussion and analysis, key risk accounts have been highlighted along with the
assertions as well as the audit procedures to be undertaken. Also, it was discussed that irrespective
of any factor, all the clients should be subject to fraud risk analysis.
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Reference:
Bailey, C., Collins, D. & Abbott, L., 2017. The Impact of Enterprise Risk Management on the Audit
Process: Evidence from Audit Fees and Audit Delay. Auditing: A Journal of Practice & Theory, 37(3),
pp. 25-46.
Boccia, F. & Leonardi, R., 2016. The Challenge of the Digital Economy. Markets, Taxation and
Appropriate Economic Models, pp. 1-16.
Bumgarner, N. & Vasarhelyi, M., 2018. Continuous auditing—a new view.. Continuous Auditing:
Theory and Application, 20(1), pp. 7-51.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4(3), pp. 103-112.
Guragai, B., Hunt, N., Neri, M. & Taylor, E., 2017. Accounting Information Systems and Ethics
Research: Review, Synthesis, and the Future. Journal of Information Systems: Summer 2017, 31(2),
pp. 65-81.
Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of
Enterprise Information Management, 30(6).
Marques, R. P. F., 2018. Continuous Assurance and the Use of Technology for Business Compliance.
Encyclopedia of Information Science and Technology, pp. 820-830.
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.
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business
Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.
Werner, M., 2017. Financial process mining - Accounting data structure dependent control flow
inference. International Journal of Accounting Information Systems, 25(1), pp. 57-80.
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Appendix
Cyan Enterprises
Trial Balance
Particulars Jul 1, 16 - Mar 31, 17 Jul 1, 15 - June 30, 16
Debit Credit Debit Credit
Cash at Bank 70,000 73,000
Accounts receivable 120,750 122,750
Inventory 185,000 174,000
Machinery 71,000 64,000
Accumulated Depreciation 30,207 24,000
Motor Vehicles 66,000 66,000
Accumulated Depreciation 26,678 21,000
Furniture 7,400 7,400
Accumulated Depreciation 2,760 2,220
Bank Loan 230,000 230,000
Sales 148,463 187,450
Cost of sales 45,788 63,595
Consultancy fees 44,438 57,000
Interest income 36 50
Bank charges 261 350
Depreciation 12,424 15,738
Interest expense 8,625 11,500
Printing 278 375
Repairs and Maintenance 1,080 5,050
Wages 39,428 53,000
Superannuation 2,996 4,770
Total 631,028 482,581 661,528 521,720
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