Audit of Fixed Asset Valuation

This audit assignment addresses the issue of discrepancies in fixed asset valuations within a company. The primary focus is on examining the historical cost recording of assets and the accumulated depreciation method employed by the company. The auditor's task involves investigating the valuation accuracy of assets and the chosen depreciation method, comparing them to industry standards and best practices. Specific audit procedures are recommended for verifying asset values and ensuring the appropriate application of depreciation methods.

Running head: AUDITING ISSUES
AUDITING ISSUES
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
1.0. Audit Planning......................................................................................................................3
1.1. Analytical Review.............................................................................................................3
1.2. Preliminary Judgement on Materiality..............................................................................4
2.0. First Account Selected- Gross Profit Margin.......................................................................4
2.1. Rationale for Selection......................................................................................................4
2.2. Assertion and Explanation................................................................................................4
2.3. Recommended Audit Procedures......................................................................................5
3.0. Second Account Selected – Net Profit..................................................................................5
3.1. Rationale for Selection......................................................................................................5
3.2. Assertion and Explanation................................................................................................5
3.3. Recommended Audit Procedures......................................................................................6
4.0. Third Account Selected – Account Receivable....................................................................6
4.1. Rationale for Selection......................................................................................................6
4.2. Assertion and Explanation................................................................................................6
4.3. Recommended Audit Procedures......................................................................................7
5.0. Fourth Account Selected – Inventory...................................................................................7
5.1. Rationale for Selection......................................................................................................7
5.2. Assertion and Explanation................................................................................................7
5.3. Recommended Audit Procedures......................................................................................8

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6.0. Fifth Account Selected – Repairs and Maintenance.............................................................8
6.1. Rationale for Selection......................................................................................................8
6.2. Assertion and Explanation................................................................................................8
6.3. Recommended Audit Procedures......................................................................................8
7.0. Sixth Account Selected – Fixed Assets................................................................................8
7.1. Rationale for Selection......................................................................................................8
7.2. Assertion and Explanation................................................................................................9
7.3. Recommended Audit Procedures......................................................................................9
Reference.......................................................................................................................................10

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1.0. Audit Planning
Audit planning refers to the process of how the audit procedures are carried out during the
whole process of audit. In other word audit plan helps the auditor to plan ahead of the audit
process which is to be carried out by the auditor and also stick to the schedule of the plan on the
basis of which the whole audit process is to be carried out. The auditor is required to prepare a
detailed audit plan which the auditor must follow in order to satisfy the objectivity of the audit
and also avoid any misunderstanding which might arise with the client(Arens, Elder and Mark
2012). An effective audit plan also ensures that the risks of audit are kept at minimum and also
keep a track of the audit process in a systematic manner. The core benefits of audit planning for
the auditor is to help the auditor in identifying the sources of sufficient audit evidences, keeps a
budget of the audit costs and also maintains the same at a reasonable level and also ensures that
there are no misunderstanding between the client and the auditor(Christensenet al. 2014).
1.1. Analytical Review
Analytical Review is a technique which is used by the auditor in order to analyze the
financial ratio of the company and also checks the if there are any significant changes. The
purpose of using analytical review as an audit procedure is to help the auditor to have an
understanding of the business environment(Messier Jr, Simon and Smith 2012). Analytical
review analyzes the various risks which are associated with the business and are determined on
the basis of nature, timing and extent of the audit procedures(Abbott, Parker and Peters 2012).
The application of audit procedures in an audit program helps in the overall audit planning
process.

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1.2. Preliminary Judgement on Materiality
The concept of materiality is very important term in audit. The materiality concept of
audit states if any transaction or item is significant or if it is complex or of significant amount,
which can affect the decisions of the investors than the auditor must focus on such items and
apply audit procedures on it(Stewart and Kinney Jr 2012). Preliminary judgement on
Materiality is on the basis of the auditor’s judgement on the materiality of an item when
conducting an audit either to ensure that the financial statements are represented fairly or not.
The identification of materiality on the part of the auditor is solely based on the professional
judgement of the auditor. The various factors which are affect the judgement of the auditor on
the materiality of the items are the complexity of the item, consistency of the item, nature of the
business in relation to the item and other minor factors as well (Emby and Pecchiari 2013).
2.0. First Account Selected- Gross Profit Margin
2.1. Rationale for Selection
Gross profit margin of the company depends on the total sales figure which the company
has achieved during a year. The sales figure of the company as per the trial balance of the MJC
company shows a figure of 147000 in 2017 which has reduced from the previous year figure of
sales of 187450 in 2016. The decrease in the sales figure as compared to previous year figure
has gone down by 21.58%. This will naturally be affecting the gross profit margin of the
company as shown in the income statement of the company. The gross profit as shown in the
income statement is 92944 which has significantly decreased from the previous year gross
profit figure.

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2.2. Assertion and Explanation
The gross profit of the company depends on the sales of the company. In the case of
MJC Company the sales have decreased sharply, due to which the gross profit of the
company has also fallen. As the sales of the company decreases, the cost of sales will also
decrease. In the case of MJC Company, the decrease in sale and decrease in cost of sales are
not in proportion with each other and thus it suggests that a material discrepancy might
have occurred (Kumar and Sharma 2015). Thus the audit procedure has to be applied to this
to confirm or deny the presence of any discrepancy.
2.3. Recommended Audit Procedures
The auditor needs to verify the income statement of MJC Company in order to get an
understanding of the items which are deducted from the sales in order to get the gross profit of
the company. The auditor has to check the nature of the expenses and ensure that there is no
miscomputation or any item is not missed in the income statement. The auditor also needs to
check the accuracy of the stated figure of the income statement.
3.0. Second Account Selected – Net Profit
3.1. Rationale for Selection
The net profit of the MJC Company for the year 2017 is 75840. The net profit figure of
the company has decreased from the previous year which was 90122 in 2016. The net profit of
the company is calculated by deducting the expenses which are incurred by the company from
the gross profit figure. There has been a decrease in the net profit rate in comparison with the
previous net profit figure by 15.85%

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3.2. Assertion and Explanation
The net profit of the company is a key indicator of the performance of any company. The
net profit of the company depends on the total sales of the company and also on the total
expenses which is incurred by the company. As per the income statement of MJC company,
both the sales and gross profit of the company has fallen from the previous year figures. The
decrease in the net profit of the company by 15.85% is evidence enough that the sales of the
company is on a declining trend. The total expenses of the company has also decreased from
the previous year figure.
3.3. Recommended Audit Procedures
The auditor of the company will be applying audit procedures in estimating the accuracy
of the items which are present in the financial statements. The auditor will be examining the
expenses and determine the nature of the expenses and if they are relevant to the
company(Eilifsen and Messier Jr 2014). The auditor needs to verify the income and expenses of
the company as shown in the income statement with every record which the company
maintains.
4.0. Third Account Selected –Account Receivable
4.1. Rationale for Selection
The account receivable figure of any company signifies a key part of the current assets of
the company. This represents the credit sales which the company has and also forms a part of
the total sales figure as shown in the balance sheet. This an important area where most of
companies have tried to manipulate in order to make a suitable financial report. Therefore the
auditor has to check the accuracy and appropriateness of the item(Hermanson, Smith and
Stephens 2012).

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4.2. Assertion and Explanation
As per the income statement of the Company, there has been an increase in the account
receivables of the company from the previous year figure. The Account receivable of the
business has increased from 111000 in 2016 to 118340 in 2017. The increase percentage is
around 6.61% which signifies that the company’s credit sales has increased over the year. The
sales figure of the company has decreased and the credit sales of the company has increased
which means the cash sales of the company has certainly fallen assuming that the majority of
the figure of account receivable consist of credit sales. Thus the auditor need to check the item
in order to confirm or deny the presence of any manipulations.
4.3. Recommended Audit Procedures
The auditor needs to check the records of sales to determine and verify the transaction
which are related to credit sales. The audit then needs to check the accuracy of the figures as
shown in the balance sheet of the company. The auditor needs to verify the sales records,
ledgers, invoices and also relate the same with cash collected and still outstanding from the
account receivable figures(Fukukawa and Mock 2012). The auditor can also ask for external
confirmation with the debtors to confirm the figures.
5.0. Fourth Account Selected – Inventory
5.1. Rationale for Selection
The balance sheet of MJC company shows the inventory figure of the company from last
year has increased. The inventory of the company was 174000 in 2016 which has risen to
187500 in 2017. The increase in the inventory in contrast with the previous year figure is by
7.76%.

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5.2. Assertion and Explanation
In any business, the relevance of inventory and the verification of the inventory.
Inventory is an item which the business must strictly control, as in many cases frauds and
manipulations takes place in this item in the balance sheet. Moreover different methods of
valuation of inventory are used by different business as per the requirement of the business and
thus the auditor needs to check this.
5.3. Recommended Audit Procedures
The auditor needs to verify the inventory records and even physically verify the store to
determine the opening and closing stock of the inventory of the company(Mersereau 2013). In
addition to this the auditor needs to check all the requisitions slips of inventory will be issued
out of stores and also ensure that a proper internal control exists for the purpose of inventory
control.
6.0. Fifth Account Selected – Repairs and Maintenance
6.1. Rationale for Selection
The repairs and maintenance expenses of the company is shown at 1120 in 2017 which is
much more than the previous year figure. There has been decrease in the expenses from
previous year, however some manipulations still might exist.
6.2. Assertion and Explanation
The repair and maintenance expenses of the company forms apart of expenditure which
are not incurred on a regular basis and thus as the expenses in incurred in both the years and
more or less of significant amount, the auditor must check for any discrepancies.

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6.3. Recommended Audit Procedures
The auditor needs to ensure that the expenses which the company has incurred in respect
to repair and maintenance are appropriate or not. The auditor also needs to identify the asset on
which such an expense was incurred.
7.0. Sixth Account Selected – Fixed Assets
7.1. Rationale for Selection
The fixed assets of the company represent the backbone of the company. These are the
used for generating revenues for the company over the useful life of such assets. In most cases
the value of these fixed assets are overstated and misrepresented. In the case of MJC company,
the fixed assets of the company are recorded at historical costs and the depreciation is
accumulated on these.
7.2. Assertion and Explanation
The company records the fixed assets of the company at historical costs and the
accumulated depreciation is shown in the balance sheet. Most of the discrepancies arises in the
valuation and method of charging depreciation by the company.
7.3. Recommended Audit Procedures
The auditor must check the valuation of the assets of the company and also check the
method of depreciation which is adopted by the company(Kausar, Shroff and White 2016).
Different companies follow different methods like straight line method and diminishing balance
method depending on the nature of the business.

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Reference
Abbott, L.J., Parker, S. and Peters, G.F., 2012. Internal audit assistance and external audit
timeliness. Auditing: A Journal of Practice & Theory, 31(4), pp.3-20.
Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated
approach. Boston: Prentice Hall.
Christensen, B.E., Glover, S.M., Omer, T.C. and Shelley, M.K., 2016. Understanding audit
quality: Insights from audit professionals and investors. Contemporary Accounting
Research, 33(4), pp.1648-1684.
Eilifsen, A. and Messier Jr, W.F., 2014. Materiality guidance of the major public accounting
firms. Auditing: A Journal of Practice & Theory, 34(2), pp.3-26.
Emby, C. and Pecchiari, N., 2013. An Empirical Investigation of the Influence of Qualitative
Risk Factors on Canadian Auditors’ Determination of Performance Materiality. Accounting
Perspectives, 12(4), pp.281-299.
Fukukawa, H. and Mock, T.J., 2012. Auditors’ evidence evaluation and aggregation using beliefs
and probabilities. International Journal of Approximate Reasoning, 53(2), pp.190-199.
Hermanson, D.R., Smith, J.L. and Stephens, N.M., 2012. How effective are organizations'
internal controls? Insights into specific internal control elements. Current Issues in
Auditing, 6(1), pp.A31-A50.
Kausar, A., Shroff, N. and White, H., 2016. Real effects of the audit choice. Journal of
Accounting and Economics, 62(1), pp.157-181.
Kumar, R. and Sharma, V., 2015. Auditing: Principles and practice. PHI Learning Pvt. Ltd..

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Mersereau, A.J., 2013. Information‐Sensitive Replenishment when Inventory Records Are
Inaccurate. Production and Operations Management, 22(4), pp.792-810.
Messier Jr, W.F., Simon, C.A. and Smith, J.L., 2012. Two decades of behavioral research on
analytical procedures: What have we learned?. Auditing: A Journal of Practice & Theory, 32(1),
pp.139-181.
Stewart, T.R. and Kinney Jr, W.R., 2012. Group audits, group-level controls, and component
materiality: How much auditing is enough?. The Accounting Review, 88(2), pp.707-737.