Auditing and Professional Practices Report for Chamoisee Enterprises

This report provides an in-depth analysis of the audit planning stage for Chamoisee Enterprises, a small audit client. The report begins by assessing the appropriateness of the materiality figure and its impact on the audit budget. It then performs an analytical review of income statement items using trend analysis. The core of the report identifies three income statement accounts at risk of material misstatement – sales, consultancy fees, and depreciation – and details the associated audit risks and relevant assertions for each. Specific audit procedures are recommended for each account and assertion. Finally, the report addresses the issue of fraud risk, evaluating the audit partner's suggestion to maintain professional skepticism. The report emphasizes the importance of considering professional skepticism in the audit process, especially in the context of potential fraud.

Running head: AUDITING AND PROFESSIONAL PRACTICES
Auditing and Professional Practices
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Executive Summary:
The current report aims to evaluate three income statement accounts subject to risk and
materiality in the context of Chamoisee Enterprises. It has been found that these accounts include
revenue, consultancy fees and depreciation. Therefore, the different relevant assertions and
management assertions are taken into consideration. Finally, these three accounts are subject to
fraud risk as well despite the fact that the staffs of the organisation are honest and diligent, as the
auditor needs to consider professional scepticism.

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Table of Contents
Introduction:....................................................................................................................................3
1. Appropriateness of materiality figure and effect of preliminary assessment on audit budget:...3
2. Analytical review using the income statement items from the trial balance:..............................4
3. Identification of three income statement accounts at risk of material misstatement, audit risk
and relevant assertions:....................................................................................................................7
4. Description of audit procedures for each account and assertion identified:................................9
5. Fraud risk as per the appropriateness of the audit partner’s suggestion:...................................11
Conclusion:....................................................................................................................................12
References:....................................................................................................................................13

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Introduction:
The current report aims to provide assistance in the planning stage of a small audit client
from the perspective of an audit organisation. The audit firm has to conduct the audit operations
of Chamoisee Enterprises based on its preliminary trial balance. The first section would provide
a brief highlight on whether the materiality amount of $15,500 is appropriate and the effect of
the materiality assessment on the audit budget. The second section would involve an analytical
review of the income statement items from the trial balance by using trend analysis. The next
sections would focus on identifying three income statements at risk and accordingly, audit
procedures would be suggested for each of them. Finally, the report would shed light on fraud
risk and the appropriateness of the suggestion provided by the audit partner.
1. Appropriateness of materiality figure and effect of preliminary assessment on audit
budget:
According to Baldauf, Steller and Steckel (2015), materiality is defined as the threshold
above which incorrect or missing information in the financial reports would have an effect on the
decision making process of the users. The auditors need to consider three components of audit
risk at the time of undertaking preliminary material assessment. These mainly include the
following:
 Financial statement users like shareholders, investors, suppliers, creditors, staffs,
customers, regulators and others
 The size of the components of the financial statements like current liabilities, current
assets, total revenues, total assets and net income (Bowlin, Hobson and Piercey 2015)

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 The organisational trends in terms of earnings, revenues and cash flows
For determining the average materiality amount for a small organisation like Chamoisee
Enterprises, the materiality amount needs to be applied between 5% and 10% of the sales
revenue. In this case, the materiality amount is assumed to be 9.36% of the total revenue
generated by the organisation in 2017. In this context, Brooks and Guo (2015) cited that if the
materiality amount constitutes of a smaller portion of net income, the loss would be immaterial.
This is because the average users of the financial statements of the organisation would not be
concerned with a loss, which is, for instance, only 0.1% of the overall net income.
However, since Chamoisee Enterprises is a small organisation, there is a high chance that
most of the random expenses might be recorded in miscellaneous expense account. This is
because there is no track of credit amount of $181,845 in 2017. For instance, if it is assumed that
the miscellaneous expenses of the organisation have been $15,500, it is material to the overall
financial health and thus, the expenses need to be justified correctly. Therefore, the materiality
amount of $15,500 is deemed to be appropriate by the auditor.
2. Analytical review using the income statement items from the trial balance:
As the debit side of the provided trial balance does not tally with the credit side of the
trial balance of Chamoisee Enterprises for both the years, suspense account is used for making
both sides equal.
Adjusted trial balance:

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Income statement:

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Trend analysis as a percentage of revenue:

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3. Identification of three income statement accounts at risk of material misstatement, audit
risk and relevant assertions:
Accounts Names of
accounts
Risk of misstatement Audit risk Relevant assertions

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1 Sales In case of Chamoisee
Enterprises, sales
revenue has fallen
significantly over the
year. If the
organisation has not
followed revenue
recognition criteria
appropriately or it has
understated its
allowances, it might
lead to material
misstatement risk
(Farag and Elias
2016).
Since Chamoisee
Enterprises is a small
organisation, there
might be certain
deficiencies. This is
because a single
individual is engaged
in billing customers,
receiving money
from the customers,
making deposits,
recording such
payments in ledger
accounts along with
reconciling the
related bank account
(Hoos, Pruijssers and
Lander 2017). This
would increase the
control risk for the
auditor.
For this particular
account, the relevant
assertions include
completeness and
accuracy. This is
because there is a
high chance that the
book-keeper might
omit some
transactions or
deliberately show
lower revenue for
availing tax
benefits.
2 Consultancy fees Chamoisee Enterprises
provides consultancy
In this case, there is
high chance for
Consultancy
services provide

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services on several
technical matters. This
might include new
auditing guidelines or
tax rules (Jacoby and
Levy 2016).
manipulation, which
might be one of the
biggest threats to
consultancy services
along with its
credibility. This, in
turn, would increase
audit risk.
increased
independence risk of
the audit firm.
Moreover, the audit
firm would not be
able to perform its
obligations as an
external auditor
accurately. Hence,
the key assertions at
risk here include
accuracy, valuation
and completeness.
3 Depreciation If Chamoisee
Enterprises fails to
record the sale of
assets, there is high
likelihood of
misappropriation of
assets. Moreover, if
the expensed costs are
capitalised improperly,
it might result in
The significant audit
risks, in this case, for
the audit firm would
be the valuation of
property, plant and
equipment and
judgement related to
depreciation and
disposal of property,
plant and equipment.
For depreciation, the
key assertions at
risk include
existence, valuation,
completeness and
rights.

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material misstatement. Moreover, the
absence of evidence
of stock take on the
part of the accounts
department and
potential for theft
form part of the audit
risk as well.
4. Description of audit procedures for each account and assertion identified:
Accounts Names of
accounts
Management
assertions
Name the audit
procedures
Describe and
explain the
audit procedure
1 Sales All sales
revenues are to
be included in
completeness
assertion under
classes of
transactions.
Transaction
testing
For checking the
accuracy of the
sales figure, the
auditor needs to
review all
transactions
related to sales in
the ledger near to
the date of the

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financial
statements for
assuring that
Chamoisee
Enterprises has
included sales
prior to the date
(Kang, Trotman
and Trotman
2015).
2 Consultancy fees The management
assertion here is
classification to
check whether
transactions are
posted to the
correct accounts
(Lakis and
Masiulevičius
2017).
Recalculation This procedure
involves carrying
out the work
made by the
client for
evaluating the
difference
between the
work of the
organisation and
the work of the
auditor.
3 Depreciation The management Inquiry and At the time of