Analysis of Audit Planning and Financial Statements

This report provides a comprehensive analysis of audit planning, analytical review, and financial statement analysis for Chamoisee Enterprises. It begins with an overview of audit planning, emphasizing its importance in guiding the audit process, identifying key areas for detailed examination, and assessing the risk of distorted financial information. The report then delves into analytical review procedures, including ratio analysis and trend analysis, applied to selected accounts such as consultancy fees, bank charges, interest income, sales, depreciation, cost of sales, and superannuation. A preliminary judgment of materiality is established, with specific materiality percentages suggested for key items. Each selected account is examined, including rationale for selection, relevant assertions, and recommended audit procedures. The analysis highlights significant changes and potential risks, providing insights into the financial health of the company and guiding the auditor's approach. The report emphasizes the importance of accuracy, reliability, and the application of professional judgment throughout the audit process, offering a detailed framework for financial statement analysis.

Contents
PLANNING OF AUDIT...................................................................................................................................4
ANALYTICAL REVIEW...............................................................................................................................4
PRELIMINARY JUDGMENT OF MATERIALITY............................................................................................5
CONSULTANCY FEES....................................................................................................................................5
RATIONALE FOR SELECTION....................................................................................................................5
ASSERTION AND EXPLANATION...............................................................................................................6
RECOMMENDED AUDIT PROCEDURE......................................................................................................6
BANK CHARGES...........................................................................................................................................6
RATIONALE FOR SELECTION....................................................................................................................6
ASSERTION AND EXPLANATION...............................................................................................................6
RECOMMENDED AUDIT PROCEDURE......................................................................................................6
INTEREST INCOME.......................................................................................................................................7
RATIONALE FOR SELECTION....................................................................................................................7
ASSERTION AND EXPLANATION...............................................................................................................7
RECOMMENDED AUDIT PROCEDURE......................................................................................................7
SALES...........................................................................................................................................................7
RATIONALE FOR SELECTION....................................................................................................................7
ASSERTION AND EXPLANATION...............................................................................................................8
RECOMMENDED AUDIT PROCEDURE......................................................................................................8
DEPRECIATION.............................................................................................................................................8
RATIONALE FOR SELECTION....................................................................................................................8
ASSERTION AND EXPLANATION...............................................................................................................8
RECOMMENDED AUDIT PROCEDURE......................................................................................................8
COST OF SALES............................................................................................................................................8
RATIONALE FOR SELECTION....................................................................................................................8
ASSERTION AND EXPLANATION...............................................................................................................9
RECOMMENDED AUDIT PROCEDURE......................................................................................................9
SUPERANNUATION......................................................................................................................................9
RATIONALE FOR SELECTION....................................................................................................................9

ASSERTION AND EXPLANATION...............................................................................................................9
RECOMMENDED AUDIT PROCEDURE......................................................................................................9
REFERENCES................................................................................................................................................9
APPENDIX..................................................................................................................................................11

PLANNING OF AUDIT
Audit planning is the first stage of the process of the audit. It is regarded as the main part of the whole
process of the audit. It is because the whole process of the audit depends upon the planning only and
that shall be done with the due care and professional responsibilities. The first basic aim of the audit
planning is to equip the auditors with the understanding as to how to conduct the audit, what things are
required to be kept in mind and in the audit documentation while conducting the audit, which areas are
required to be checked in detail and which items as stated in the financial statements has the high
probability of providing the distorted information to the users of the financial statements and etc. In the
given case, company – Chamoisee Enterprises has been provided for analyzing. The second main aim of
the audit planning is to conduct the preliminary analytical review procedures and substantive tests
(Leung, Coram, Copper and Richardson, 2015). The aforesaid two tests are performed to have the
detailed analysis of the financial statements with regard to the accounting ratios and the trend analysis
over the past two years.
ANALYTICAL REVIEW
The analytical review is defined as having the analysis of the financial statements of the company in an
analytical manner. This analytical analysis consists of the two set of processes. First process is known as
the ratio analysis and the second process is known as the analysis through trend or movement in the
items of the financial statements for the last two or three years. The first process is the ratio analysis
and it informs the nature of relationship between two or more items of the financial statements and
describe as to why the figure of the ratio sometimes justifies that the auditor is required to undertake
the audit procedures which are in addition to the normal and defined audit procedures. These
procedures are normally undertaken to ensure that the items as stated in the financial statements of the
company is accurate, complete and authentic (Abidin and Baabbad, 2015).
The other process is the trend analysis. Trend describes the movement of the items of the financial
statements over the past two or three years. The trend may be positive one or negative one. In simple
words, the trend analysis may be upward or downward depending upon the results and the
circumstances. It helps the auditor in considering the reasons for having such an increasing or
decreasing trend during the planning of an audit and laid down the audit procedures which are required
to be followed by the audit team (Glover, Prawitt and Drake, 2014). In this report of the company

Chamoisee Enterprises, seven accounts has been selected for the purpose of the analysis and which
includes consultancy fees, bank charges, interest income, sales, depreciation, cost of sales and
superannuation has been listed and described and has been accordingly analysed. (ACCA, 2016).
PRELIMINARY JUDGMENT OF MATERIALITY
Materiality concept is the key concept in the management subject as well as in the area of
financial accounting and financial auditing. In the latter case, materiality concept focuses on the
items which have material or significant effect on the financial results and operations of the
company. Preliminary judgment means judgment before start of the audit which is during the
planning of audit. During planning, the auditor through the analytical review identifies the
material items and their likely effect on the financial position and the financial performance of
the company (Chen and Tsay, 2017).
The auditor is required to apply his professional skills and due care while judging for the
materiality. It is required because every head in the financial statements has its own significance
and therefore, the materiality of each head shall be considered. In the given case of the company,
the cost of sales has been considerably increased from 33.93% to 36.77%. Three items are
included in cost of sales- opening inventory, purchases and the closing inventory. If there is the
significant variation then the auditor is required to set the materiality percentage. It is because the
company has not provided any materiality level for each of the item stated in the financial report.
In this case the materiality percentage may be set as 35% and auditor is required to perform the
audit procedures accordingly (Mao, 2014; Langevoort, 2015 and Ullah, 2014). Similarly, for
other items also the auditor is required to set the materiality level and is required to work
accordingly.
CONSULTANCY FEES
RATIONALE FOR SELECTION
First account that has been selected is the consultancy fees. Consultancy fees have undergone
sudden increase in the six months ending 31st of December 2016 and which will result to 38.56%
increase in the coming financial ending 30th of June 2017. The increase in the consultancy fees
will increase the retained earnings of the company and thus will have the effect on the equity.
Particular 30th June 2016 31st December 2016 Projection Change Change %age

Consultancy
fees
57000 39500 79000 22000 38.56
ASSERTION AND EXPLANATION
Accuracy and reliability are the most important assertions that have been placed on the increase
in the amount of the consultancy fees. Accuracy is related to the recording of the income in
accordance with the invoices and the bank statement and reliability is related to the genuineness
of the figure stated in the financial statements. As the percentage increase is higher, there might
be the possibility that the figures may have accuracy and thus are also not reliable.
RECOMMENDED AUDIT PROCEDURE
Verification of the figures of the consultancy fees shall be done with the sales invoices issued
and the transactions shown in the bank statement. These are checked as to whether the correct
entries have been made in the books of accounts or not from which the financial statements have
been prepared.
BANK CHARGES
RATIONALE FOR SELECTION
It represents the amount which is charged by the bank in lieu of providing the various types of
services. The basis for selecting the account for the study is the increase in percentage of the
expenses which has been reached at the level of 32.58%. The percentage has been identified by
projecting the actual figure for the full year. The reason for sudden increase in the bank charges
is required to be checked and verified (PCAOB, 2017).
Particular 30th June 2016 31st December 2016 Projection Change Change %age
Bank
Charges
350 232 464 114 32.58%
ASSERTION AND EXPLANATION
Reliability is one of the assertions that have been placed in the bank charges. It is because the
amount shall be increase when the company has obtained the amount from the bank as loan or
has taken some other facility. But no such facility is prima facie available in the balance sheet
and the statement of income.
RECOMMENDED AUDIT PROCEDURE
Bank statement shall be closely scrutinized with the entries made in the books of accounts of the
company from which the financial statements and the projections have been prepared. In addition
to this, the auditor is required to perform substantive procedures to take the confirmation letter

stating the amount of bank charges from the bank of the company. Reconciliation statement shall
also require to be verified.
INTEREST INCOME
RATIONALE FOR SELECTION
The main reason for selection of the head of the interest incomes is that the income has been
suddenly increased by 28% if it taken on projection basis for the period of twelve months. The
bank charges have been increased by 32.58% and interest income has been increased by 28%.
Therefore the company is having the net loss from the banking facilities approximately 5% and
thus has been chosen for the purpose of the analysis (Anastasia, 2015).
Particular 30th June 2016 31st December 2016 Projection Change Change %age
Interest
Income
50 32 64 14 28.00
ASSERTION AND EXPLANATION
Correctness is the assertion considered in the head of the bank charges. It is because the
company has neither advanced any amount to any other person nor has the business of financing.
Thus, there might be the chances of passing the wrong accounting entry in the books of accounts.
RECOMMENDED AUDIT PROCEDURE
First procedure that the auditor is required is to verify the books of accounts with the bank
statement and secondly shall obtain the confirmation from the bank. Thirdly, if the interest
income is not from the bank then the auditor shall be required to know the source of the income
and shall proceed accordingly.
SALES
RATIONALE FOR SELECTION
The reason for selection is the sudden increase in the figure of the sales over the past two years.
The increase has reached the level of 34.44%. The change is material enough which can distort
the actual picture of the financial results of the company in case it contains some material
misstatements or the risk which can hamper the company.
Particular 30th June 2016 31st December 2016 Projection Change Change %age
Sales 187450 126000 252000 64550 34.44

ASSERTION AND EXPLANATION
Reliability is major assertion concerned with the sales. It is because the increase made over the
year is material and there might be the chances that the company has inflated the turnover by
following the manipulating practices (Kharisova, 2014).
RECOMMENDED AUDIT PROCEDURE
Verify each and every sale invoices with the books of accounts and shall obtain the ledger
account of the debtors including the balance confirmation as on date.
DEPRECIATION
RATIONALE FOR SELECTION
The company has only purchased the machinery amounting to 6000 dollar and on that the
company cannot charge the depreciation to the level which can increase the total depreciation by
36.07%. Due to sudden increase in the depreciation expense without the corresponding increase
in the asset have formed the rationale for selection.
Particular 30th June 2016 31st December 2016 Projection Change Change %age
Depreciation 15863 10793 21586 5723 36.07
ASSERTION AND EXPLANATION
The assertion placed is with reference to the method adopted by the company for the purpose of
calculation of the depreciation. It is because the depreciation expense has been increased for all
of the assets over the year (Vasarhelyi, 2014).
RECOMMENDED AUDIT PROCEDURE
The calculation of the depreciation with the old method as well as the new method is required to
be checked by the auditor along with the effect of the additional depreciation or reduced
depreciation shall be checked in the books of accounts.
COST OF SALES
RATIONALE FOR SELECTION
The cost of sales has been increased by 45.71% with the 34.44% in the sales if the projection
based figure has been considered for the whole year of twelve months. The sudden increase in
the value of the cost of sales is the basis for the selection of the head of account (Mock, 2015).

Particular 30th June 2016 31st December 2016 Projection Change Change %age
Cost of Sales 63595 46333 92666 29071 45.71
ASSERTION AND EXPLANATION
Two assertions are involved in the given head of account. One is the valuation of the inventory
and the second is the accuracy of the amount of the purchases mentioned in the books of
accounts.
RECOMMENDED AUDIT PROCEDURE
Purchase shall be verified with the all the purchase bills along with the GST Returns and the
inventory valuation shall be verified in accordance with the adopted method.
SUPERANNUATION
RATIONALE FOR SELECTION
Although the change in the superannuation expense is very less but the reason for selection is
that the expenditure incurred under this account does not substantiate the increase in the amount
of wages and salaries.
Particular 30th June 2016 31st December 2016 Projection Change Change %age
Superannuation 4770 2373 4746 -24 -0.51
Wages and Salaries 53000 32000 64000 11000 20.76
ASSERTION AND EXPLANATION
Completeness and the reliability are the two assertions involved in the given head of account. It
is because the superannuation expense has been decreased despite of the fact that the wages and
salaries have been increased.
RECOMMENDED AUDIT PROCEDURE
The actuarial valuation report for the superannuation expense is required to be checked with the
accounting entries made in the books of accounts and accordingly wages and salaries amount is
also required to be checked.

REFERENCES
ACCA, (2016), “Analytical Procedures”, available on
http://www.accaglobal.com/vn/en/student/exam-support-resources/professional-exams-study-
resources/p7/technical-articles/analytical-procedures.html accessed on 08-10-2017.
Abidin, S., & Baabbad, M. A. (2015), “The use of analytical procedures by yemeni
auditors”,Corporate Ownership & Control, 12(2), 17-25.
Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on
https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 08-10-2017
Chen, S., & Tsay, B. Y. (2017), “Refer to Materiality as a Legal Concept”. Journal of
Corporate Accounting & Finance, 28(2), 55-61.
Glover, S. M., Prawitt, D. F., & Drake, M. S. (2014), “Between a Rock and a Hard Place: A Path
Forward for Using Substantive Analytical Procedures in Auditing Large P&L
Accounts:Commentary and Analysis”. Auditing: A Journal of Practice & Theory, 34(3), 161-
179.
Kharisova, F. I., (2014), “Applying the category of Assertions (or preconditions)» in audit of
financial statement”. Mediterranean Journal of Social Sciences, 5(24), 180
Langevoort, D. C. (2015), “Judgment Day for Fraud-on-the-Market: Reflections on Amgen and
the Second Coming of Halliburton”. Ariz. L. Rev., 57, 37.
Leung P, Coram P, Copper B and Richardson P, (2015), “Modern Auditing and Assurance
Services”, Wiley John and Sons, Ed. 6, Pp 425-463, 582-684.
Mao, M., (2014), “Experimental Methods of Materiality Judgment on Auditor’s Experience
and Performance” In 3rd International Conference on Science and Social Research
(ICSSR 2014) Atlantis Press.
Mock, T. J, (2015). “Auditors' Risk Assessments: The Effects of Elicitation Approach and
Assertion Framing” Behavioral Research in Accounting, 28(2), 75-84.

PCAOB, (2017), “Analytical Procedures” available at
https://pcaobus.org/Standards/Archived/Pages/AU329A.aspx accessed on 08-10-2017
Ullah A, (2014), “Planning and Audit of Financial Statements” available on
http://leaccountant.com/2014/12/08/asa-300-summary-planning-an-audit-of-financial -
statements/ accessed on 08-10-2017
Vasarhelyi, M. A., (2014), “Embracing the Automated Audit: How the Audit Data Standards and
Audit Tools Can Enhance Auditor Judgment and Assurance” Journal of
accountancy, 217(4), 34.
APPENDIX
Chamoisee Enterprises
Ratio Analysis
Jul 1, 2016 - Dec 31, 2016 Jul 1, 2015 - June 30, 2016
Current Assets 390,840 365,000
Current Liability 0 0
Working Capital 390,840 365,000
Cost of Sales 46,333 63,595
Sales 126,000 187,450
Costs % of Sales 36.77% 33.93%
Gross Profit 79,667 123,855
Gross Profit Margin 63.23% 66.07%
Net Profit 65,005 90,122
Sales 126,000 187,450
Net Profit Margin 51.59% 48.08%
Accounts Receivable 118,340 111,000
Sales 126,000 187,450

Average Debtor 59,170 55,500
Debtor Turnover Ratio 2.13 3.38
Debt 230,000 230,000
Equity 181,845 135,683
Debt to Equity Ratio 1.26 1.70
Chamoisee Enterprises
STATEMENT OF PROFIT AND LOSS
FOR THE YEAR ENDED 31TH OF DEC 2016
Amount
Revenue
Sales Revenue
$
126,000.00
Other Revenue $39,532
Total Revenue
$
165,532.00
Expenses
Cost of Sales $46,333
Employee Benefit Expense $34,373
Administration Expense $960
Selling and Distribution Expense 168
Amortization and Depreciation $10,793
Total Expenses $92,628
Earnings Before Interest and
Tax
$
72,904.00
Finance Costs 7898.666667
Earnings before Tax
$
65,005.33
Income Tax 0
Profit after Tax
$
65,005.33
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31TH OF DEC 2016
Profit after Tax
$
65,005.33
Other Comprehensive Income

NA
$
-
Total Comprehensive Income
attributable to the members of
the company
$
65,005.33
Chamoisee Enterprises
STATEMENT OF FINANCIAL POSITION AS ON 31TH OF DEC 2016
Amount Amount
Current Assets
Cash and Cash
Equivalents $85,000
Accounts Receivable
$118,34
0
Inventories
$187,50
0
Other Current Assets
Total Current Assets $390,840
Non Current Assets
Machinery $71,000
Accumulated
Depreciation
($29,642
) $41,358
Motor Vehicle $66,000
Accumulated
Depreciation
($26,047
) $39,953
Furniture $7,400
Accumulated
Depreciation ($2,700) $4,700
Total Non Current Assets $86,010
Total Assets $476,850
Current Liabilities
Other Current Liabilities
Total Current Liabilities 0
Non Current Liabilities

Bank Loan 230000
Other
Total Non Current
Liabilities $230,000
Total Liabilities $230,000
Net Assets $246,850
Equity
Contributed Equity 181845
Retained Earnings
$
65,005
Total Equity $246,850
Chamoisee Enterprises
STATEMENT OF PROFIT AND LOSS
FOR THE YEAR ENDED 30TH OF JUNE 2016
Amount
Revenue
Sales Revenue
$187,45
0
Other Revenue $57,050
Total Revenue $244,500
Expenses
Cost of Sales $63,595
Employee Benefit Expense $57,770
Administration Expense $250
Selling and Distribution Expense 5050
Amortization and Depreciation $15,863
Total Expenses $142,528
Earnings Before Interest and
Tax $101,972
Finance Costs $11,850
Earnings before Tax $90,122
Income Tax 0
Profit after Tax $90,122

STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31TH OF JAN 2017
Profit after Tax $90,122
Other Comprehensive Income
NA
$
-
Total Comprehensive Income
attributable to the members of
the company $90,122
Chamoisee Enterprises
STATEMENT OF FINANCIAL POSITION AS ON 30TH OF JUNE 2016
Amount Amount
Current Assets
Cash and Cash Equivalents $80,000
Accounts Receivable $111,000
Inventories $174,000
Other Current Assets
Total Current Assets $365,000
Non Current Assets
Machinery $65,000
Accumulated Depreciation ($24,375) $40,625
Motor Vehicle $66,000
Accumulated Depreciation ($21,000) $45,000
Furniture $7,400
Accumulated Depreciation ($2,220) $5,180
Total Non Current Assets $90,805
Total Assets $455,805
Current Liabilities
Other Current Liabilities

Total Current Liabilities $ -
Non Current Liabilities
Bank Loan $230,000
Other
Total Non Current Liabilities $230,000
Total Liabilities $230,000
Net Assets $225,805
Equity
Contributed Equity $135,683
Retained Earnings $90,122
Total Equity $225,805