Issues in Audit Practice

This report discusses the issues in audit practice, including analytical review, preliminary judgement for materiality, accounts considered for material misstatement, audit procedures, and fraud. It also provides a rational for selection and assertion and explanation for each account. The report is relevant to auditing and accounting courses in universities and colleges.

Running head: ISSUES IN AUDIT PRACTICE
Issues in audit practice
Name of the student
Name of the university
Author note

ISSUES IN AUDIT PRACTICE 1
Table of Contents
1.0 Introduction.....................................................................................................................3
1.1 Analytical review.............................................................................................................3
1.2 Preliminary judgement for materiality.............................................................................4
2.0 Analytical review through trend analysis........................................................................5
3.0 Accounts considered for material misstatement..................................................................5
3.1.1 First account selected – Sales........................................................................................5
3.1.2 Rational for selection....................................................................................................5
3.1.3 Assertion and explanation.............................................................................................5
3.2 Second account selected – Consultancy Fees..............................................................6
3.2.1 Rational for selection....................................................................................................6
3.2.2 Assertion and explanation.............................................................................................6
3.3 Third account selected – Depreciation.............................................................................6
3.3.1 Rational for selection....................................................................................................6
3.3.2 Assertion and explanation.............................................................................................7
3.4 Fourth account selected – Wages.....................................................................................7
3.4.1 Rational for selection....................................................................................................7
3.4.2 Assertion and explanation.............................................................................................7
4.0 Audit procedure....................................................................................................................8
4.1 Audit procedure for sales.................................................................................................8
4.2 Audit procedure for consultancy fees..............................................................................8

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4.3 Audit procedure for depreciation.....................................................................................8
4.4 Audit procedure for wages...............................................................................................8
5.0 Fraud....................................................................................................................................9
Reference..................................................................................................................................10

ISSUES IN AUDIT PRACTICE 3
1.0 Introduction
Audit planning is the process under which strategies are designed for conducting the
estimated outcome those are also considered as the audit scope within the entity. The time,
nature and extent of the plan may vary with the nature of the company and the industry in
which it conducts its operation. For instance, if the business is operated on large scale, the
strategies and its implementation will take longer times and the accordingly the overall audit
scope will be increased. The audit plan is the step by step methods under which the audit
controls are reviewed for the internal environment and financial process in addition to
preparation of engagements (Louwers et al. 2015). The report will highlight the basis on
which the preliminary judgements with regard to materiality will be established. Further, on
the basis of materiality level few material items will be selected from the income statement.
Further, the report will focus on the fraud that may involve in the financial statements of
Fawn Enterprise.
1.1 Analytical review
Analytical review is the procedure through which the entity or auditor analyse the
financial statement or accounting procedure of the company for identifying the irregularities,
if any. The procedure involves comparison of the non-financial as well as financial
information of the entity through trend analysis or ratio computation (Glover and Prawitt
2014). Generally, the analytical review leads to the audit if any irregularities or odd
information, if any, found. The analytical procedures includes the following processes –
 Reading the important documents and analysing the financial as well as accounting
impacts
 Reviewing the accounting activity among the period of interim period and year end
period.

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 Comparing the account balance of current period with the balance of previous period
(Arens et al. 2013).
1.2 Preliminary judgement for materiality
Owing to the relative nature of materiality, it must have a base for establishing the
material misstatement. Base is the crucial item that is used by the users while making critical
decisions. Bases vary with the nature of the business carried out by the entity. In accordance
with AASB 108 material misstatement or omission of the items will be considered as material
if individually or in combination with any other item it influences the user’s economic
decisions. As per ISA 320 various factors can be considered while establishing the
benchmark for materiality (Icaew.com 2018). These involve the entity’s nature and industry’s
nature under which the client company operates. Further, the materiality level shall be related
to the material misstatement prepared under the concerned reporting period. If revenue is
taken as a base for establishing the materiality level it will be 1% to 5% of sales (Icaew.com
2018). Therefore, for Fawn enterprise materiality will be amounted to ($ 194,925 * 1%) = $
1,945.25 to ($ 194,925 * 5%) = $ 9,726.25. However, the audit partner assessed the
materiality level at $ 15,000. Hence, it can be stated that the actual material level of the entity
is ranged from $ 1,945.25 to $ 9,726.25. Based on the financial information it can be assumed
that the materiality level shall be established at around $ 7,500. The preliminary assessment
regarding materiality is established to determine the level of reliance can be put on the works
of the internal auditor. Based on the materiality level the audit budget shall be determined.
Hence, if the level of materiality is changed to $ 10,000 from $ 15,000, the audit budget that
is the number of items to be checked under audit procedure shall be increased (Legoria,
Melendrez and Reynolds 2013).

ISSUES IN AUDIT PRACTICE 5
2.0 Analytical review through trend analysis
3.0 Accounts considered for material misstatement
3.1.1 First account selected – Sales
3.1.2 Rational for selection
Being the major source of income sales revenue will be considered as material by its
nature. Though the increase in sales revenue over the past 1 year is only 3.77%, as the sales
revenue is a major item in the financial statement of the company it will be considered as
material item. Further, as in most of the entities the remuneration and bonuses of the
managements are based on the revenue, the revenues are always exposed to misstatement.
3.1.3 Assertion and explanation
Sales are made on credit basis as well as cash basis. Hence, the 1st assertion involves
with the revenue is accuracy that is the sales revenue has been recorded in the income
statement accurately that is without any error. Another assertion involved with revenue is

ISSUES IN AUDIT PRACTICE 6
completeness that is the recognition basis for revenue has been disclosed properly along with
the footnotes (Mock, Ragothaman and Srivastava 2018).
3.2 Second account selected – Consultancy Fees
3.2.1 Rational for selection
It can be identified from the income statement of Fawn Enterprise that the amount
received from consultancy fees was a major source of income after sales revenues and
therefore the item is material by nature. It can be found that the consultancy fees have been
increased from $ 57,000 to $ 59,251. As there is an increase by 3.95% likelihood is there that
the number of client for the entity or the amount of fees has been increased. Therefore, the
assertion involved with consultancy fees is accuracy that is the amount of receipt recorded is
free from misstatement.
3.2.2 Assertion and explanation
As there is an increase by 3.95% likelihood is there that the number of client for the
entity or the amount of fees has been increased. Therefore, the assertion involved with
consultancy fees is accuracy that is the amount of receipt recorded is free from misstatement.
Apart from that, another assertion involved with consultancy fees is understandability that is
the information included in the financial report has been presented clearly with the details of
the client’s name to which service provided and services for which fees charged (Bowlin,
Hobson and Piercey 2015).
3.3 Third account selected – Depreciation
3.3.1 Rational for selection
Depreciation is an important item related to fixed asset of the entity. As various
methods can be used for providing depreciation on fixed assets based on the useful life

ISSUES IN AUDIT PRACTICE 7
likelihood is there that the depreciation has not been provided on consistent basis. Further, it
is found that the depreciation has been increased by 125.86% whereas no additional fixed
asset is found from the fixed asset presented in the trial balance of the company.
3.3.2 Assertion and explanation
Different companies use different methods for providing depreciation on it fixed
asset. Under straight line method the amount of depreciation remains same if there are no
new purchases made during the year. However, the amount of depreciation may increase if
the entity changes the method of providing depreciation (Wali 2015). As from the trial
balance it is evidential that the entity did not purchase any new asset during the period under
concern. The major assertion associated with depreciation expenses is cut-off. This assertion
states that all the depreciation expenses may not have been recorded under the accounting
period in which it should have been.
3.4 Fourth account selected – Wages
3.4.1 Rational for selection
Wages are one of the major operating expenses of any entity. Though the reduction in
wages over the past 1 year is only 0.81%, as the wage expense is a major item in the financial
statement of the company it will be considered as material item by its nature.
3.4.2 Assertion and explanation
Wages shall be considered for auditing as a material item as it leaves wide space for
misstatement for the management. Major assertions associated with wage expenses in cut-off.
This assertion states that all the wage expenses may not have been recorded under appropriate
accounting period (Coetzee and Lubbe 2014). Another assertion involved is accuracy that is
the likelihood that the transactions may not have been recorded under the accounting period
in which it should have been.

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4.0 Audit procedure
4.1 Audit procedure for sales
White auditing the sales revenue the auditor must verify the sales register and match it
with the sales bill along with the names of the customer, quantity purchased and amount
charged per unit. Further, the auditor must analyse the recognition method as per which the
entity recognizes its revenues. Further, the auditor shall verify that the recognition method is
consistently applied by the entity (Stewart 2013).
4.2 Audit procedure for consultancy fees
The documents associated with the consultancy services shall be verified to confirm
the charges billed for the services provided, name of the clients to whom the services
provided and the serviced for which the bills raised. If services provided to any new client the
agreement regarding that shall be checked properly.
4.3 Audit procedure for depreciation
The fixed depreciable asset of the entity shall be verified physically. The auditor shall
verify the method of depreciation used by the company and shall confirm that the method is
consistently used. Further, the auditor shall evaluate the capitalisation method of the assets
(Griffin 2014).
4.4 Audit procedure for wages
Wages paid to the employees shall be checked with the employee register to confirm
the name of the employees, wages paid to each employee, advance payments and arrear
payments, if any. Further, in case of employees who draws large amount of payments proper
authorization shall be verified.

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5.0 Fraud
The auditor shall learn regarding the conditions under which the fraud risks under the
financial statement in order to develop more efficient audit plan. Assessment of the audit risk
is the integral part of audit procedure. Risk factors recommends the auditor that for assuming
that if the opportunity is given, the management will attempt in fraud for recognizing the
revenues or expenses and will override the internal controls (Petraşcu and Tieanu 2014).
Therefore, even if the audit partner feels that the employees of the entity are trustworthy the
auditor shall carry out the audit for detecting fraud.

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Reference
Arens, A.A., Best, P., Shailer, G. and Fiedler, B., 2013. Auditing, Assurance Services and
Ethics in Australia. Pearson Higher Education AU.
Bowlin, K.O., Hobson, J.L. and Piercey, M.D., 2015. The effects of auditor rotation,
professional skepticism, and interactions with managers on audit quality. The Accounting
Review, 90(4), pp.1363-1393.
Coetzee, P. and Lubbe, D., 2014. Improving the efficiency and effectiveness of risk‐based
internal audit engagements. International Journal of Auditing, 18(2), pp.115-125.
Glover, S.M. and Prawitt, D.F., 2014. Enhancing auditor professional skepticism: The
professional skepticism continuum. Current Issues in Auditing, 8(2), pp.P1-P10.
Griffin, J.B., 2014. The effects of uncertainty and disclosure on auditors' fair value
materiality decisions. Journal of Accounting Research, 52(5), pp.1165-1193.
Icaew.com., 2018. [online] Available at:
https://www.icaew.com/-/media/corporate/files/technical/iaa/materiality-in-the-audit-of-
financial-statements.ashx [Accessed 5 Oct. 2018].
Legoria, J., Melendrez, K.D. and Reynolds, J.K., 2013. Qualitative audit materiality and
earnings management. Review of Accounting Studies, 18(2), pp.414-442.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C.,
2015. Auditing & assurance services. McGraw-Hill Education.

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Mock, T.J., Ragothaman, S.C. and Srivastava, R.P., 2018. Using Evidential Reasoning
Technology to Enhance the Audit Quality Assurance Inspection Process. Journal of
Emerging Technologies in Accounting, 15(1), pp.29-43.
Petraşcu, D. and Tieanu, A., 2014. The role of internal audit in fraud prevention and
detection. Procedia Economics and Finance, 16, pp.489-497.
Stewart, T.R., 2013. A Bayesian audit assurance model with application to the component
materiality problem in group audits.
Wali, S., 2015. Mechanisms of corporate governance and fixed asset
revaluation. International Journal of Accounting and Finance, 5(1), pp.82-97.