Auditing and Assurance Report: Case Study Analysis, Trimester 3 2019

This report on Auditing and Assurance provides a comprehensive analysis of key auditing concepts. It begins by defining and explaining the importance of analytical procedures in risk assessment, referencing ASA315 and highlighting their role in identifying potential misstatements. The report then delves into professional skepticism, emphasizing its crucial role in effective audits, especially in the context of PCAOB standards. It discusses how professional skepticism influences audit procedures and judgments. The report then moves on to the calculation of planning materiality and tolerable misstatement based on provided financial data. Finally, the report analyzes financial ratios, including profitability, liquidity, turnover, and leverage ratios, to assess the financial health of a company and identify areas requiring special audit attention, such as cash and sales revenues. The report concludes by outlining specific areas that demand heightened scrutiny during the audit process.

Running head: AUDITING AND ASSURANCE
Auditing and assurance
Name of the student
Name of the university
Student ID
Author note

1AUDITING AND ASSURANCE
Table of Contents
Requirement 1............................................................................................................................2
Requirement 2............................................................................................................................2
Requirement 3............................................................................................................................3
Requirement 4............................................................................................................................4
Requirement 5............................................................................................................................5
Reference....................................................................................................................................6
Appendix....................................................................................................................................7

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Requirement 1
Analytical procedures are the kind of evidence that is applied during the audit
procedures. It indicates the probable issues associated with financial records of the client that
can be analysed more thoroughly. In accordance with Para A14 of ASA315, analytical
procedures carried out as the procedure for risk assessment may recognise different aspects of
the entity. In this regard the auditors is not aware and is in the position to help in analysing
risks related to misstatement for providing basis for designing as well as implementing
responses for assessing the risks (Auasb.gov.au 2020). Analytical procedure is carried out as
the procedures for assessing the risks that includes financial as well as non-financial
information. For instance, relationship among sales and square footage of selling space or
goods sold or volumes. In addition, analytical procedures assist in identifying existence of
unusual events or transactions and ratios, amounts as well as trend that may indicate the
matters those have implication of audit. Unexpected or unusual relationship those are
recognized may assist auditors to recognise risks related to material misstatement specifically
the risks associated with material misstatement occurring due to frauds (Auasb.gov.au 2020).
Requirement 2
Professional scepticism is the attitude that includes questioning mind, being alerts for
the condition that may signify possible misstatement owing to fraud, error and the critical
assessment regarding audit evidence. In other words, professional scepticism is required
while performing the effective audits in the under PCAOB (Accaglobal.com 2020 )
Professional scepticism plays crucial role in audit and considered as the integral part
for the skill set of the auditor. It enables appropriate exercise for professional judgment,
specifically regarding the decisions in context of –

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 Extent, timing and nature of the audit procedures that will be carried out for reducing
the risks to appropriate level.
 Whether the obtained audit evidences are adequate and whether more requirement to
be done for gaining objectives of associated assurance standards
 Analysis of management’s judgment particularly in context of applying the applicable
financial reporting framework for the annual audit
 Drawing of the conclusion based on gathered evidences. (Accaglobal.com 2020)
In addition, approaching the professional scepticism enhances effectiveness of the
audit procedures as well as it’s application of the same which in turn reduces likelihood that
the auditor may choose an inappropriate procedure for audit, misapply the appropriate
procedures for audit and misinterpret the result (Analytical procedures. (auditing) (Quality
Review) 2020).
Requirement 3
Base
Ranges of
percentages
applied to base
Profit before tax 5 - 10% -359.35 -718.7
Total Revenue 0.5 – 1% 916.29 183.25
Total Assets 0.5 – 1% 95.595 191.19
Equity 1 - 2% 44.4 88.8
Planning materiality is misstatement amount that is set aside by the auditors at the
stage of planning for the audit on the basis of materiality. It is used by the auditors for
analysing whether misstatements is individual or in aggregate that is materially misstated
under financial statement. While computing the materiality auditor may take the highest
amount from the above presented table. However, the auditors shall also understand
qualitative factors regarding materiality under financial statement shall also be considered by

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the auditors while concluding size regarding the planning materiality. Generally, the highest
amount from the above presented table is regarded as amount for planning materiality.
Hence, the amount which is highest in above table is $ 916.29 which will be considered as
the amount for planning materiality. Apart from that generally the auditors take the 75%
amount that is $916.29*75% = $229.07 in this case as tolerable material misstatement
(Analytical procedures. (auditing) (Quality Review 2020).
Requirement 4
Profitability ratio – it measures the profit earning capability of the firm using the revenues
left with it after making payment for the operational expenses. It can be identified that Morris
Ltd could not make bottom-line profit and hence, except the gross profit margin all other
profitability ratios are in negative. Hence, the auditor shall analyse the revenues and match
the balances of all the revenue related transaction with the books under which the same is
recorded. In addition, the expenses related vouchers shall be maintained and properly
checked by the auditors that all the expenses are actually expensed and amount reported are
accurate (Bragg 2018).
Liquidity ratio – it measures the entity’s liquidity position that is whether the entity is able to
make payment for its dues within appropriate time with the current assets available with it. It
has been identified that both current ratio as well as quick ratio in 2019 reduced by significant
amount as against preceding year. In this regard the auditor shall process with checking the
current assets balance against previous years. It is further identified that cash and cash
equivalents have been reduced significantly. Hence, the auditor shall confirm the cash
balance with bank and reconcile cash balance with bank. Further, the auditor shall check that
cash balance withdraw has proper control as well as authorization (Bragg 2018).

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Turnover ratios – it can be recognised that all the turnover ratios have been deteriorated in the
current year. Hence, the auditor shall thoroughly check the balance of sales revenue,
purchases and physical stock count.
Leverage ratio – leverage position of the entity is deteriorated and hence the entity has
became highly leveraged in current year as against preceding year. The auditor shall check all
the documents related to loan agreement, interest rates, payment mood and time of payment
(Robinson 2020)
Requirement 5
Areas those require special attention are as follows –
 Cash and cash equivalent – being the most liquid assets it is always exposed to theft,
embezzlement and misstatement. Further, the cash balance of the entity reduced to
$2376,000 from $5166,000. Hence, the audit shall check the cash balance with the
bank and verify that all the cash related transactions have been reported at proper
amount.
 Sales revenues – as the sales revenue has been increased significantly in 2019 as
against 2018, sales related all the transactions shall be verified with the sales bill and
shall be assured that the amount at which the same are recorded are right (Prentice
2016)

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Reference
Accaglobal.com. 2020 Available at:
https://www.accaglobal.com/content/dam/acca/global/pdf/sa_sept10_audit.pdf (Accessed: 19
January 2020).
Analytical procedures. (auditing) (Quality Review) 2020. Available at:
http://archives.cpajournal.com/old/12268860.htm (Accessed: 19 January 2020).
Auasb.gov.au. 2020 Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf
(Accessed: 19 January 2020).
Bragg, S.M., 2018. The Interpretation of Financial Statements. AccountingTools,
Incorporated.
Prentice, C.R., 2016. Why so many measures of nonprofit financial performance? Analyzing
and improving the use of financial measures in nonprofit research. Nonprofit and Voluntary
Sector Quarterly, 45(4), pp.715-740.
Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.

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Appendix