Audit Planning Report: Financial Statement Analysis and Procedures

This report delves into the core principles of audit planning, commencing with an overview of the audit process and the auditor's responsibility to develop a comprehensive audit plan. It explores the importance of analytical review, the assessment of materiality, and the application of audit procedures to key accounts. The report examines specific accounts such as inventory, accounts receivables, sales, owner's equity, motor vehicles, interest expense, and superannuation, providing rationales for their selection, outlining management assertions, and recommending appropriate audit procedures. Furthermore, it incorporates comparative financial statements, including income statements and balance sheets, to highlight financial performance and position. The report emphasizes the importance of understanding inherent risks, implementing effective internal controls, and conducting thorough audit procedures to mitigate the risks of material misstatements. The report concludes by highlighting the significance of audit planning in ensuring the accuracy and reliability of financial statements.

Running head: audit planning
AUDIT PLANNING

Audit planning 1
Contents
Audit Planning.............................................................................................................................................3
Analytical Review...................................................................................................................................3
Preliminary Judgement of materiality......................................................................................................3
Inventory.....................................................................................................................................................4
Rationale for selection.............................................................................................................................4
Assertion and explanation........................................................................................................................4
Recommended audit procedure...............................................................................................................4
Accounts Receivables..................................................................................................................................4
Rationale for selection.............................................................................................................................4
Assertions and explanations....................................................................................................................5
Recommend audit procedure...................................................................................................................5
Sales............................................................................................................................................................5
Rationale for selection.............................................................................................................................5
Assertions and explanation......................................................................................................................5
Recommended audit procedure...............................................................................................................5
Owner’s equity............................................................................................................................................6
Rationale for selection.............................................................................................................................6
Assertions and explanations....................................................................................................................6
Recommended audit procedure...............................................................................................................6
Motor vehicles.............................................................................................................................................6
Rationale for selection.............................................................................................................................6
Assertions and explanations....................................................................................................................6
Recommended audit procedure...............................................................................................................7
Interest expense...........................................................................................................................................7
Rationale for selection.............................................................................................................................7
Assertions and explanations....................................................................................................................7
Recommended audit procedure...............................................................................................................7
Superannuation............................................................................................................................................8
Rationale for selection.............................................................................................................................8
Assertions and explanations....................................................................................................................8
Recommended audit procedure...............................................................................................................8

Audit planning 2
Comparative income statement....................................................................................................................9
Balance sheet.............................................................................................................................................11
References.................................................................................................................................................14

Audit planning 3
Audit Planning
Audit planning is the beginning of the procedure of auditing. It is an auditor’s responsibility to
plan audit properly. As the planning include forming the strategies to develop an audit plan
which takes in particular planning the risk assessing procedures and plan the resultants to the
risks associated with the material misstatement (Hayes, 2014). Audit planning is the continuous
process starts after the previous audit ends. The whole plan includes nature, time and extent of
the procedures to be followed for the assessment of risk and various tests are to be done on these
procedures and its controls. Auditor makes sure to plan in alignment of the business standards
(Knechel, 2016).
Analytical Review
As it is clear from the name analytical review is a review of extensive ratios and trends in the
income statement and balance sheet. It basically investigates any unusual activity or fluctuation
of the items in the said income statement and balance sheet. The dependency an auditor places
on the results of the analytical review based on the facts which includes materiality, control risks
and assessment. This review assist auditor in planning the nature and extent of the audit
procedures to improve the effectiveness and reduces the detection risk for some specific financial
statement. The main purpose of analytical review is the review of financial statement in the final
stage overall (Frost, 2017).
Preliminary Judgement of materiality
It is one of the major step in applying materiality where judgements are required to be made to
the clients in regard to the materiality. At first auditor establish a preliminary judgement that
what base can be chosen and multiplied by the percentage factor in order to determine
quantitative judgement which can be further adjusted for qualitative factors about materiality.
Secondly the preliminary judgement of materiality is allocated to the classes of transactions and
make possible for auditor to plan the scope of procedures. Lastly the estimation are made for
misstatements and being compared to the judgement about materiality (Bahr, 2014).

Audit planning 4
Inventory
1. Inventory has been selected from the given trial balance as the inventory account can be
seen at-risk of material misstatement.
Rationale for selection
The audit of inventory carries significant risks along with it as inventories represent a major
portion in the current assets and inventory is known to be the base from where all the valuation
methods are used and it directly impact the cost of goods sold. There is an inherent complexity in
determining the quality and value of inventory. In the income statement the percentage change
can be seen which is negative (Krishnan, 2014).
Assertion and explanation
For inventory there are five management assertions while an audit takes place. The occurrence
tests taken by having the samples of purchase vouchers and vouch them to requisitions it is
basically tracing of vouchers to support the document. Then completeness is being evaluated as
completeness in inventory process is of higher risk as it may lead to the occurrence of poor
inventory controls. The third is authorization which addresses whether proper internal control is
followed and by selecting a sample of inventory the authorization can be checked. Fourth is
accuracy, it addresses whether the purchase transactions are containing any error or not. Last is
cutoff which involves the reporting of transactions that they are being correctly recorded or not
(Lenz, 2014).
Recommended audit procedure
Here as per the study of trial balance the audit procedure which can be followed would be
reconciling the inventory count with the general ledger it helps in observing the physical count of
inventory (Cannon, 2016).
Accounts Receivables
2. Account receivables is been selected from the given trial balance as it represents audit
risk and other problems.
Rationale for selection
There are several potential problems exist while auditing, it could create material misstatement.
The material misstatement may have some errors and few would indicate frauds. There can be

Audit planning 5
many errors involved while auditing account receivables as it consists of all amounts which
could have been manipulated and result into frauds (Arens et al., 2016).
Assertions and explanations
The company can place a system to record the related transactions and make proper shipment,
control and collect the receivables which helps in preventing errors and frauds. All the entries are
to be mount up and forwarded to the general accounts department (Moroney et al., 2014).
Recommend audit procedure
By performing analytical procedure auditor can identify the client figures and auditor’s
expectations and they help in assessing the inherent risks associated with the account receivables.
The completeness should be tested in the procedure adopted (Johnstone, 2013).
Sales
3. There is always a chance that sales could be false. The income shown reduced in order to
show the report of income down.
Rationale for selection
Sales is one of the most fraudulent account occurred in many companies. As sales affect most
the financial statement of the business which directly impact the profits of the company,
salaries of the workers and creates a market share which attract stakeholders to invest more.
Assertions and explanation
It needs a basic internal control strategy where customer invoice is compare and send to the
sales department to keep the record properly and cross check whenever required. If balance
still doesn’t match up with the actual records then both collection and receivable department
are filed and actions planned for the same (Arena, 2016).
Recommended audit procedure
By looking at the overall balance of sales, the returns and the debts and being compare it to
the past years to check the accuracy and the completeness which later on verify the actual
transactions.

Audit planning 6
Owner’s equity
4. The said account is chosen from the trial balance as owner’s equity are known to be an
important aspect in financial statement and they are the riskier in audit procedure. The
fall in owner’s equity can be evident in the comparative balance sheet here under.
Rationale for selection
Equity is to be known as the pivotal part of the financial statement which indicates the flow
of liquidity in the account balances of bank and the organizations. It is also one of the major
element where frauds and errors are detected and result into inaccurate cash position of a
company.
Assertions and explanations
The existence needs to be checked by proofing the cash receipts which have been deposited
into the bank. Secondly determining the checks whether there are any missing or outstanding
checks left which can affect the cash balance understated or over stated.
Recommended audit procedure
The audit procedure for equity account can be analytical only. Where the prior owner’s
equity is being compared to current year’s balance and make necessary provisions for the
same.
Motor vehicles
5. Motor vehicles do consider various inherent risks of misstatements and materiality. The
management of fixed asset process helps in identifying risks and provide control.
Rationale for selection
Fixed assets generally create difficulty while audit takes place because of the complexity
presented in the accounting transactions. Every organization has different aspect of
calculating costs of their fixed assets which creates problems for auditor on how to measure
the accuracy.
Assertions and explanations
By recording the purchase cost on the cost basis it is to be checked that any repairs or
maintenance are added up in the account under the fixed assets. The complexities of knowing
what major repairs are needed to add under the head fixed assets. Most of the fixed asset

Audit planning 7
calculations are easier and straightforward and can be recorded on the cost basis directly but
there are lease accounting which are not purchased they carry complex accounting issues and
creates inherent risks while auditing.
Recommended audit procedure
In order to avoid such complexities and inherent risks while auditing fixed assets there is an
audit procedure which is required to be followed is verifying the ownership of the asset
whether it is the machinery, furniture, motor vehicles as mentioned in the given trial balance.
The ownership is being examined and confirmed by the title of documents of the said
property as mentioned above gives the proper proof which helps in verifying the costs
attached to it.
Interest expense
6. Interest expense is one of the unique expense who involve such inherent risks while
taking up the auditing.
Rationale for selection
Interest expense involve few risks which are quite unique in nature. The inherent and control
risk associated with such expense relates to the material misstatement as there are few
expense who are less riskier than others it shows a complexity while auditing the interest
expense. In the comparative balance it can be seen that it shows a percentage decrease.
Assertions and explanations
The identification of some specific but known misstatements are being carried on and
concluded that if any such misstatement exists or not. Then if required the substantive
analytical procedures are followed which indicates the errors in the class of transactions and
balances of accounts. The expenses are compared their intensity of risks associated are
compared and on the basis of the intensity the auditor verify the expenses.
Recommended audit procedure
The recommended audit procedure for the audit of interest expense account is a detailed
observation into the account details to check the level of intensity an expense is having as it
shows the cash outflow so it is important to not to ignore the fact.

Audit planning 8
Superannuation
7. Superannuation are the direct investments to gain a control of the portfolio. It is a cash
outflow which needs to be shown in the balance sheet accurately to maintain fair records
of the company.
Rationale for selection
Investment are considered to be one of the most malicious audit risk component. The
inherent risk involve in investment cannot be easily avoided while carrying audit. The cash
outflow directly affects balance sheet so to maintain a fair picture of financial records it
needs a special attention (Barndt et al., 2016).
Assertions and explanations
A proper audit training is provided and create controls in the process of audit. The control risks
are realized when a financial misstatement occurs in it. It requires a proper accounting control to
save it from errors and frauds.
Recommended audit procedure
As explained above cash carries higher degree of risk involve in it so the audit procedure for the
same is proper training in audit and forming and engagement strategy to keep a regular check on
self-investments or superannuation.

Audit planning 9
Comparative income statement
Income statement for 9 months
[Curre
nt
Period]
[Prior
Perio
d]
Increase
/
(Decreas
e)
Perce
nt
Chang
e
Revenue
Gross Sales 162,104 187,450 (25,346) -13.52%
Less: Sales Returns and
Allowances 0
Net Sales 162,104 187,450 (25,346) -13.52%
Cost of Goods Sold
Beginning Inventory 164,500 174,000 (9,500) -5.46%
Add: Purchases 0
Freight-in 0
Direct Labor 0
Indirect
Expenses 0
Inventory Available 164,500 174,000 (9,500) -5.46%
Less: Ending Inventory 0
Cost of Goods Sold 164,500 174,000 (9,500) -5.46%
Gross Profit (Loss) (2,396) 13,450 (15,846)
-
117.81
%
Expenses
Advertising 0
Amortization 0
Bad Debts 0
Bank Charges 290 350 (60) -17.14%
Charitable Contributions 0
Commissions 0
Contract Labor 0
Depreciation 15,738 (15,738)
-
100.00
%
Dues and Subscriptions 0
Employee Benefit Programs 0
Insurance 0
Interest 0

Audit planning
10
Legal and Professional Fees 0
Licenses and Fees 0
Miscellaneous 1,200 1,200
Office Expense 0
Payroll Taxes 0
Postage 308 375 (67) -17.87%
Rent 0
Repairs and Maintenance 0
Supplies 0
Telephone 0
Travel 0
Utilities 0
Vehicle Expenses 0
Wages 43,808 53,000 (9,192) -17.34%
Total Expenses 45,606 69,463 (23,857) -34.34%
Net Operating Income (48,002)
(56,013
) 8,011 -14.30%
(64,003)
Other Income
Gain (Loss) on Sale of Assets 0
Interest Income 40 50 (10) -20.00%
Total Other Income 40 50 (10) -20.00%
Net Income (Loss) (55,963) 8,001 (63,964)
-
799.45
%
Income statement for 12 months
Financial statements in U.S. dollars
[Curre
nt
Period]
[Prior
Perio
d]
Increase
/
(Decreas
e)
Perce
nt
Chang
e
Revenue
Gross Sales 216,139 187,450 28,689 15.30%
Less: Sales Returns and
Allowances 0 0
Net Sales 216,139 187,450 28,689 15.30%
0
Cost of Goods Sold 0
Beginning Inventory 219,333 174,000 45,333 26.05%

Audit planning
11
Add: Purchases 0 0
Freight-in 0 0
Direct Labor 0 0
Indirect
Expenses 0 0
Inventory Available 219,333 174,000 45,333 26.05%
Less: Ending Inventory 0 0
Cost of Goods Sold 219,333 174,000 45,333 26.05%
0
Gross Profit (Loss) (3,195) 13,450 (16,645)
-
123.75
%
0
Expenses 0
Advertising 0 0
Amortization 0 0
Bad Debts 0 0
Bank Charges 387 350 37 10.48%
Charitable Contributions 0 0
Commissions 0 0
Contract Labor 0 0
Depreciation 0 15,738 (15,738)
-
100.00
%
Dues and Subscriptions 0 0
Employee Benefit Programs 0 0
Insurance 0 0
Interest 0 0
Legal and Professional Fees 0 0
Licenses and Fees 0 0
Miscellaneous 1,600 1,600
Office Expense 0 0
Payroll Taxes 0 0
Postage 411 375 36 9.51%
Rent 0 0
Repairs and Maintenance 0 0
Supplies 0 0
Telephone 0 0
Travel 0 0
Utilities 0 0
Vehicle Expenses 0 0
Wages 58,411 53,000 5,411 10.21%
Total Expenses 60,808 69,463 (8,655) -12.46%
0

Audit planning
12
Net Operating Income (64,003)
(56,013
) (7,990) 14.26%
Other Income
Gain (Loss) on Sale of Assets 0
Interest Income 40 50 (10) -20.00%
Total Other Income 40 50 (10) -20.00%
Net Income (Loss) (55,963) (8,000) (47,963)
599.57
%

Audit planning
13
Balance sheet
BALANCE SHEET
Assets
Current Assets: 2016 2015 Change %
Chang
e
Cash $89,750 $83,000 $6,750 8.13%
Accounts Receivable $109,85
0
$103,585 $6,265 6.05%
Less: Reserve for Bad
Debts
$0
$0
Merchandise Inventory $164,50
0
$174,000 ($9,500) -5.46%
Interest Expense $9,583 $12,000 ($2,417) -
20.14%
Notes Receivable $0
Total Current Assets $373,68
3
$372,585 $1,098 0.29%
$0
Fixed Assets: $0
Vehicles $66,000 $66,000 $0 0.00%

Audit planning
14
Less: Accumulated
Depreciation
$43,125 $21,000 $22,125 105.36
%
$109,12
5
$87,000 $22,125 25.43%
Furniture and Fixtures $7,400 $7,400 $0 0.00%
Less: Accumulated
Depreciation
$2,820 $2,220 $600 27.03%
$10,220 $9,620 $600 6.24%
Machinery $64,000 $64,000 $0 0.00%
Less: Accumulated
Depreciation
$30,896 $24,000 $6,896 28.73%
$94,896 $88,000 $6,896 7.84%
Total Fixed Assets $214,24
1
$184,620 $29,621 16.04%
$0
Other Assets: $0
Depreciation $0 $15,738 ($15,738) -
100.00
%
Total Other Assets $0 $0 $0
$0
Total Assets $587,92
4
$557,205 $30,719 5.51%
$0

Audit planning
15
$0
Liabilities and Capital $0
$0
Current Liabilities: $0
Accounts Payable $0
Sales Taxes Payable $0
Payroll Taxes Payable $0
Income Taxes Payable $0
Accrued Wages Payable $0
Unearned Revenues $0
Total Current Liabilities $0 $0 $0
$0
Long term Liabilities $0
Bank loan $240,00
0
$240,000 $0 0.00%
$0
$0
$0
Total Liabilities $0 $0 $0
$0
$0
Capital: $0
Owner's Equity $111,32 $116,358 ($5,037) -4.33%

Audit planning
16
1
Investment $4,163 $5,035 ($872) -
17.32%
Total Capital $115,48
4
$116,358 ($874) -0.75%
$0
Total Liabilities and
Capital
$115,48
4
($116,35
8)
$231,842 -
199.25
%
NET WORTH $472,44
0
$673,563 ($201,12
3)
-
29.86%

Audit planning
17
References
Arena, M. and Jeppesen, K.K., 2016. Practice variation in public sector internal auditing: an
institutional analysis. European Accounting Review, 25(2), pp.319-345.
Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016. Auditing and assurance services.
Pearson.
Bahr, N.J., 2014. System safety engineering and risk assessment: a practical approach. CRC
Press.
Barndt, R.J., Fuller, L.R. and Flynn, K.E., 2016. Teaching Inherent Risk and Tolerable
Misstatement in Auditing: A Modified Delphi Method as a Teaching Tool. In Advances in
Accounting Education: Teaching and Curriculum Innovations (pp. 125-140). Emerald Group
Publishing Limited.
Cannon, N.H. and Bedard, J.C., 2016. Auditing challenging fair value measurements: Evidence
from the field. The Accounting Review, 92(4), pp.81-114.
Frost, R.B. and Choo, C.W., 2017. Revisiting the information audit: A systematic literature
review and synthesis. International Journal of Information Management, 37(1), pp.1380-1390.
Hayes, R., Wallage, P. and Gortemaker, H., 2014. Principles of auditing: an introduction to
international standards on auditing. Pearson Higher Ed.
Johnstone, K., Gramling, A. and Rittenberg, L.E., 2013. Auditing: a risk-based approach to
conducting a quality audit. Cengage learning.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Krishnan, G.V. and Wang, C., 2014. The relation between managerial ability and audit fees and
going concern opinions. Auditing: A Journal of Practice & Theory, 34(3), pp.139-160.
Lenz, R., Sarens, G. and D'Silva, K., 2014. Probing the discriminatory power of characteristics
of internal audit functions: sorting the wheat from the chaff. International Journal of Auditing,
18(2), pp.126-138.