Audit Analysis of Company Financial Statements

This assignment delves into an audit analysis of a company's financial statements for 2017. Key areas of focus include assessing the company's ability to meet short-term obligations based on current assets and liabilities, analyzing borrowing details (bank name, credit terms, interest rate), and examining receivables and inventory data. The assignment also explores the audit risk model, outlining its components (control risk, detection risk, inherent risk) and how it influences the auditor's opinion. The use of sampling techniques, particularly random sampling, is discussed for assessing control risk and determining materiality.

Running head: BACHELOR IN ACCOUNTING
Bachelor in accounting
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Table of Contents
Inherent steps in audit planning and designing..........................................................................2
Examining the performance ratios.............................................................................................3
Analytical procedure..................................................................................................................4
Analysis of income statement and balance sheet.......................................................................4
Audit risk model and the sampling or non-sampling approach.................................................5
Preliminary responsibilities if the end result is unqualified report............................................5
Reference....................................................................................................................................7

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Walmart Stores Inc.
The audit plan delivers the specific guidelines to the auditors that they are required to
follow while conducting the external audit. The audit external public accounting needs to
assure the outside stakeholders that the financial statement of the company has been prepared
as per the IFRS and GAAP.
Inherent steps in audit planning and designing
Critical inherent steps in planning and designing the audit programme for auditing
Walmart stores are as follows –
 Consider the duties and responsibilities defined under the engagement terms among
the Walmart stores and audit firm (Arens et al., 2016).
 Obtain preliminary understanding of Walmart Store’s internal control procedure and
the system of accounting.
 Auditor shall be familiarised with business of the company and the overview of the
industry.
 If detailed evaluation of the the company’s internal control is required for analysing
the level of reliance that can be placed on such internal control, then the audit firm is
required to carry out the substantive tests and analytical procedures (Hayes, Wallage
& Gortemaker, 2014).
 Auditor shall determine and record the audit strategy to be adopted under the audit
engagement.
Further, the audit planning of Walmart Stores requires that the audit firm shall obtain
proper knowledge regarding the company’s business, its external control strategies and its
environment. Planning for audit involves assessment of risks for the material misstatement

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with regard to the financial statement. Therefore, the audit also involves designing the audit
procedure commensurate as per the risk level assessment (Contessotto & Moroney, 2014).
Examining the performance ratios
Analysis of ratios is used to analyse financial performance of the company as
compared to the past year’s performance or the competitor’s performance. The financial
ratios reveal the ability of a company for utilizing its resources that will assist in comparing
and assessing the financial performance over the time period. For audit plan of Walmart, 2
performance ratios like efficiency ratio and profitability ratios are selected for finding out the
efficiency of the company’s internal control system. The profitability and efficiency of the
company for the year 2016 and 2017 is mentioned in the below presented table –
Ratio 2016 2017
Profitability ratios
Net profit margin 3.05 2.81
Return on equity 18.15 17.23
Efficiency ratios
Receivable turnover 77.75 84.80
Payables period 38.88 40.37
The profitability ratios indicate the company’s profitability position for the year 2016
as well as 2017. It is identified that the profitability of the company is in decreasing trend as
the net profit margin of the company has been reduced to 2.81 in 2017 from 3.05 in 2016.
Further, the return on equity of the company has been reduced from 18.15 in 2016 to 17.23 in
2017. It represent that the the profitability trend will also reduce the shareholders value that

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will have an impact on the capital resources of the company as the investors will not be
willing to invest in Walmart (Walmart.com, 2017).
Efficiency ratios reveal the company’s efficiency with regard to the management and
business of the company. Looking at the account receivable ratios of the company it is
identified that the receivable turnover of the company has been increased from 77.75 in 2016
to 84.80 in 2017. This indicates that the efficiency of the company with regard to collection
of receivable has been reduced. Further, payables period of the company has been increased
from to 40.37 in 2017 as compared to 38.88 in 2016. The decline in efficiency will indicate
the management’s inefficiency and the inefficiency with regard to utilization of the resources
(Walmart.com, 2017).
Analytical procedure
Analytical procedure is the essential part for the audit procedure and includes the
assessment of the financial information through financial as well as non-financial
information. The analytical procedures required for the audit of Walmart Stores is the ratio
analysis, review of internal control and analysis of financial statement (Sawyer & Bright,
2014).
Analysis of income statement and balance sheet
Looking at the income statement of Walmart, it can be identified that the total revenue
of the company has been increased to $ 485,873 from $ 482,130 over the period of 2016 to
2017. However, the net income of the company reduced to $ 13, 643 in 2017 from $ 14,694
in 2016. Therefore, the receipts documents related to expenses of the company like vouchers,
authorization shall be checked and the sales related documents like sales vouchers, list of
purchaser shall be analysed (Kritzinger & Barac, 2017).

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Looking at the balance sheet of the company, it is identified that the current assets of
the company for 2017 amounted to $ 57,689 as against the current liabilities of $ 66,928.
Therefore, the company will not be efficient is paying-off their short term obligations with
the available current assets. Thus, the borrowing of the company along with the details of
bank name, credit term and rate of interest shall be analysed. Further, the receivables and
inventory related documents like physical count of the inventory, debtors list; credit terms
allowed to them shall be checked (Knechel & Salterio, 2016).
Audit risk model and the sampling or non-sampling approach
Audit risk model includes audit risk = control risk (risk that will be failed to be
prevented by the client’s system) * detection risk (risk that the procedures of auditors will not
be able to detect) * inherent risk (risk that the error will take place). It will render the
unqualified opinion when it is not known to the auditor and the financial statements are
misstated materially. The sampling technique will be used for the preliminary judgement for
materiality and random sampling for performing the test. Random sampling will be used as it
will allow each of the items an equal chance of getting selected. It will also enable the auditor
to have an idea regarding the assessment of control risk whether it is too high or too low
(Collins, Xie and Zhu, 2015).
Preliminary responsibilities if the end result is unqualified report
Primary responsibility is adding the explanatory language with the report for
indicating the segregation of responsibility with any other audit firm, indicating the
inconsistency with regard to application of the accounting principles, justifying the departure
from the officially recognized principles of accounting and emphasizing the matter to refer
the uncertainty that may have material impact on financial statement (Plumlee, Rixom &
Rosman, 2014).

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Reference
Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2016). Auditing and assurance
services. Pearson.
Collins, D.W., Xie, H. and Zhu, K. (2015). Do Auditors Perceive Non-articulation between
Financial Statements as a Source of Audit Risk?.
Contessotto, C. & Moroney, R. (2014). The association between audit committee
effectiveness and audit risk. Accounting & Finance, 54(2), pp.393-418.
Hayes, R., Wallage, P. & Gortemaker, H. (2014). Principles of auditing: an introduction to
international standards on auditing. Pearson Higher Ed.
Knechel, W.R. & Salterio, S.E. (2016). Auditing: Assurance and risk. Taylor & Francis.
Kritzinger, J., & Barac, K. (2017). The application of analytical procedures in the audit
process: A South African perspective. Southern African Business Review, 21(1), 243-
273.
Plumlee, R. D., Rixom, B. A., & Rosman, A. J. (2014). Training auditors to perform
analytical procedures using metacognitive skills. The Accounting Review, 90(1), 351-
369.
Sawyer, A. & Bright, K. (2014). The access manual: Designing, auditing and managing
inclusive built environments. John Wiley & Sons.
Walmart.com. (2017). https://www.walmart.com/. Retrieved 22 November 2017, from
https://www.walmart.com/