Audit and Attestation Report: Assessing Audit Risk with Procedures

This report, prepared by a student, assesses audit risk using analytical procedures on PepsiCo's financial statements. The report identifies five key assertion areas with the most detection risk: current ratio, profit margin, return on equity, debt to equity, and times interest earned. The analysis includes the calculation of these financial ratios for 2017 and 2018, highlighting significant changes and their implications for audit risk. For each area, the report explains why it presents risk, focusing on the potential for misstatements in financial reporting, and outlines specific test procedures auditors should perform to mitigate these risks. The report emphasizes the importance of examining underlying transactions, verifying account balances, and assessing the accuracy and completeness of financial data to ensure the reliability of the audit opinion. The report references several academic sources supporting the methodology and analysis.

Running Head: AUDIT AND ATTESTATION
AUDIT AND ATTESTATION
Name of the Student
Name of the University
Author Note

1AUDIT AND ATTESTATION
Table of Contents
Audit Assertions of Risk............................................................................................................2
Current Ratio..........................................................................................................................2
Profit Margin..........................................................................................................................2
Return on Equity....................................................................................................................3
Debt to Equity........................................................................................................................3
Times Interest Earned............................................................................................................4
Reference....................................................................................................................................5

2AUDIT AND ATTESTATION
Audit Assertions of Risk
The top five assertion areas of the risk that possess the most detection risk on the risky
areas of PepsiCo are as follows:
Current Ratio
The current ratio of the company in the year 2017 was 1.51 and during 2018 was 0.99.
It was there was reduction of 0.52 from the year 2017-2018. This area presents risk because
there has been decline in the liquidity position of the company. The ideal ratio is considered
to be 1 or more than 1. The company was in the ideal position of liquidity in the year 2017,
but in next year, the company becomes insufficient in the liquidity position. Hence, this
possesses risk of occurrence and existence because the current assets and current liabilities
that have occurred during the accounting year needs to be checked. Therefore, it needs to be
checked (Zainudin and Hashim 2016).
The specific test procedures that would be performed in this area are to access and
find the reason of the reduction of the current liabilities and assets position by the
confirmation of the account of cash and short-term liabilities. It needs to be checked that what
are the reasons that has affected the short-term assets and liabilities. There the auditor needs
to check the transaction that has affected in the increase or decrease in the short term assets
and liabilities (Zainudin and Hashim 2016).
Profit Margin
The profit margin of the company was 7.73% in the year 2017 and 19% in the year
2018. It means there was huge increase in the profit margin by 11.27% from the year 2017-
2018. There requires greater attention for finding the reason of increase in the margin of
profit drastically in one year in the sales of the company and the gross profit. Hence, this
possess the risk of accuracy and completeness, it is because it needs to be checked whether

3AUDIT AND ATTESTATION
the expenses and income is recorded with due care or not that have resulted into the increase
of profit margin by 11.27% (Kanapickienė and Grundienė 2015).
The specific test procedures can be performed in this case can be evaluating the
transactions done for the estimation of the cost of goods sold that have resulted into the sale
of the company and resulting gross profit. The method of recognition of expenses and
revenue has be accessed (Kanapickienė and Grundienė 2015).
Return on Equity
The return on equity of the company in the year 2017 was 45% and during the year
2018 was 86%. It was again major increase in the return on equity during the year 2018 by
41%. The assertion areas of the relevancy of equity include existence and occurrence, rights
and obligations and classification. It is because if any equity transaction has occurred then it
needs to be checked that the balance of selling the stock is based on the actual sale of the
stock and the money received from it. Therefore, it needs to be checked that the balance is
not fraudulently stated. In addition, it also needs to be checked how much return goes to the
account of shares.
The specific test procedures that can be performed into this is evaluation of the net
income and shareholders’ equity. It needs to be checked what transactions has resulted into
decrease in the shareholders equity either high reliance on debt or ability to generate profit
without requiring more capital and increase in ROE. (Kanapickienė and Grundienė 2015).
Debt to Equity
The debt to equity of the company in the year 2017 was 6.23% and in the year, 2018
was 9.24%. It means there was increase of 3.01% from the year 2017 to 2018. The assertion
area of risk is again classification and understandability. It is because, it needs to be checked
whether the debt is properly classified or not. Hence, the increase in the long-term debt as

4AUDIT AND ATTESTATION
compare to assets has to be accessed by checking the transactions that has resulted into the
reduction of shareholders equity and increase in the total debt of the company (Altunbas,
Binici and Gambacorta 2018).
Times Interest Earned
The times interest earned in the year 2017, was 5.26% and in the year, 2018 was
9.24%. This means there was increase of 3.98% from the year 2017 to 2018. This also
possesses assertion risk of accuracy, valuation and existennce because the reason needs to be
checked for increase in the ability of meeting the debt obligations. Hence, the transaction that
has resulted in increase in the earning of the company has to be accessed (Tavana 2018).
The test that will be done will be checking the whether the tax paid on the total
earning is correct or not. The operating earnings of the company can to be checked by
accessing the transactions that has resulted into total revenue and the cost of selling the
goods.
Therefore, the identified assertions from the analytical procedures are accuracy,
understandability, occurrences, rights and obligations and understandability. Hence, the
specific test procedures that will be performed will be transactions relating to short term
assets and liabilities, cost of goods sold and total revenue, shareholders equity and operating
earnings and tax paid on the earnings (Tavana 2018).

5AUDIT AND ATTESTATION
Reference
Kanapickienė, R. and Grundienė, Ž., 2015. The model of fraud detection in financial
statements by means of financial ratios. Procedia-Social and Behavioral Sciences, 213,
pp.321-327.
Zainudin, E.F. and Hashim, H.A., 2016. Detecting fraudulent financial reporting using
financial ratio. Journal of Financial Reporting and Accounting, 14(2), pp.266-278.
Tavana, M., Abtahi, A.R., Di Caprio, D. and Poortarigh, M., 2018. An Artificial Neural
Network and Bayesian Network model for liquidity risk assessment in
banking. Neurocomputing, 275, pp.2525-2554.
Altunbas, Y., Binici, M. and Gambacorta, L., 2018. Macroprudential policy and bank
risk. Journal of International Money and Finance, 81, pp.203-220.