ACC621: Materiality Assessment and Audit Procedures for Azure Ent.

This report focuses on the audit of Azure Enterprise's income statement, establishing a materiality level and identifying material items. It details the rational for selection, relevant assertions (occurrence, accuracy, cut off and ownership), and suggested audit procedures for key accounts like sales, other income, depreciation, and wages. The report also addresses the auditor's responsibility in detecting fraud and concludes that while material items were identified through analytical review, no instances of fraud were detected. The report highlights the importance of proper audit planning, including analytical review and preliminary materiality judgments, in ensuring the accuracy and reliability of financial statements. Desklib provides similar past papers and solved assignments for students.

Running head: AUDITING ISSUES AND PRACTICE
Auditing issues and practice
Name of the student
Name of the university
Author note

AUDITING ISSUES AND PRACTICE 1
Executive summary
The main objective of the report is to consider the income statement of Azure Enterprise and
establishing the materiality level. Based on the materiality level the report will identify
material items from the income statement and will determine the assertion involved with
those account. Further, the report will state the audit procedure that will be carried out by the
auditor while audit will be carried out for the identified items. The report will further
determine whether any fraud risk detected from the analytical review.

AUDITING ISSUES AND PRACTICE 2
Table of Contents
1.0 Audit planning.................................................................................................................4
1.1 Analytical review.............................................................................................................4
1.2 Preliminary judgement for materiality.............................................................................6
Accounts regarded as material...................................................................................................8
2.0 First account – Sales.........................................................................................................8
2.1 Rational for selection.......................................................................................................8
2.2 Assertion and explanation...........................................................................................8
3.0 Second account – Other income..................................................................................8
3.1 Rational for selection.......................................................................................................8
3.2 Assertion and explanation................................................................................................9
4.0 Third account – Depreciation...........................................................................................9
4.1 Rational for selection.......................................................................................................9
4.2 Assertion and explanation................................................................................................9
5.0 Fourth account – Wages............................................................................................10
5.1 Rational for selection.....................................................................................................10
5.2 Assertion and explanation..............................................................................................10
6.0 Suggested audit procedure.................................................................................................10
6.1 Audit procedure – sales..................................................................................................10
6.2 Audit procedure – other income.....................................................................................11
6.3 Audit procedure – depreciation......................................................................................11

AUDITING ISSUES AND PRACTICE 3
6.4 Audit procedure – wages................................................................................................11
7.0 Fraud..................................................................................................................................11
8.0 Conclusion..........................................................................................................................12
Reference..................................................................................................................................13
Appendix..................................................................................................................................15

AUDITING ISSUES AND PRACTICE 4
1.0 Audit planning
The main objective of auditor is planning the audit to conduct is effectively. The audit
engagement partner is further responsible for engagement and performance. The auditor shall
plan the audit properly that includes the establishment of overall audit strategy for
engagement and development of the audit plan. Planning is not the discrete phase of audit
rather it is the iterative and continual procedure that are expected to start just after the
completion of last audit (Byrnes et al. 2015). Main objective of this report is to focus on
establishing the materiality level for Azure Enterprise. The report will further carry out the
analytical procedure to identify the material items from the income statement and will state
the key assertions involved with the accounts and the audit procedures required to be carried
out for each material item.
1.1 Analytical review
Analytical review is carried out to assess the reasonableness associated with the
account balance. Analytical review is carried out through ratio analysis and trend analysis and
comparing it with the company’s past performance. In case of Azure enterprise trend analysis
will be performed for the income statement for the year ended 30th June 2015 and 30th June
2016. Once the concerned areas are recognized through analytical review further plan will be
made for the purpose of investigation (Christensen, Glover and Wood 2013). It helps the
auditor to set the timing, nature and extent of audit procedure to be carried out. Further, it is
used as the substantive procedure as detailed tests are time consuming and less efficient. The
analysis for Azure Enterprise will be carried out through horizontal trend analysis as follows
–

AUDITING ISSUES AND PRACTICE 5
Computation of changes in percentage form and value form –

AUDITING ISSUES AND PRACTICE 6
1.2 Preliminary judgement for materiality
Preliminary judgement is the level of reliance that can be placed on the internal
control system of the entity. It is formed on the basis of the company’s financial reports
issued for the users. Preliminary judgement improves the internal auditor’s independence,
objectivity and integrity. It is maximum tolerance level of misstatement with regard to
specific misstated account. Materiality is established through taking into some accounts like
revenue, assets or net income as the base (Eilifsen and Messier 2014).

AUDITING ISSUES AND PRACTICE 7
In case of Azure Enterprise sales revenue will be taken as the base for establishing the
materiality. Materiality is generally calculated as 5% to 10% of the sales revenue. Hence, in
case of Azure Enterprise the materiality will be ($ 243,750 *5%) = $ 12,187.50 to ($ 243,750
* 10%) = $ 24,375. The maximum amount of tolerable misstatement for the company will
assumed to be 50% to 75% of misstatement as all the accounts are not misstated for entire
amount. Therefore, the level of tolerable misstatement will be assumed around $ 18,000
(Legoria, Melendrez and Reynolds 2013).
While setting the audit budget the audit shall consider the common item those are risk
associated like sales, other income, depreciation and wages in case of Azure Enterprise.
Hence, if the preliminary assessment is changed it will have great impact on the audit budget.
In the given case the, the audit partner suggested that preliminary assessment with regard to
materiality shall be set at $ 15,000 whereas as per the calculation the materiality shall be set

AUDITING ISSUES AND PRACTICE 8
at $ 18,000. Hence, with increase of materiality level the audit budget will be reduced and the
auditor will require checking less number of items while performing the audit (Legoria,
Melendrez and Reynolds 2013).
Accounts regarded as material
2.0 First account – Sales
2.1 Rational for selection
Sales being an important item are always susceptible to misstatement, fraud or
intentional error. It is found that the sales revenue of Azure Enterprise has been increased by
$ 56,300 that is by 30.03% as compared to the previous year. Irrespective of the amounts
involved sales is considered material item by its nature.
2.2 Assertion and explanation
Sales are generally misstated through – (i) recording sales for fictitious customers (ii)
misstating the amount of invoice while recording (iii) not raising invoice for the sales made
and goods delivered or (iv) recognising revenue for the sales not yet made and goods not
despatched. Therefore, the assertions pertain to sales are – (i) occurrence that the sales
transactions recorded by the company have been taken place and related to the company (ii)
accuracy – amounts related to sales transactions have been recorded at proper amount and
under proper account (Glover and Prawitt 2014).
3.0 Second account – Other income
3.1 Rational for selection
It is recognized that the income from other sources was one of the biggest source of of
the company’s revenue in previous year. However the receipt has been reduced by a
significant amount that is by $ 23,629 or 94.51%. Therefore, the item will be considered as

AUDITING ISSUES AND PRACTICE 9
material by amount as well as nature both. Further, as the income from other sources
generally includes incomes from various sources, it is susceptible to misstatement. Further,
irrespective of the source the managements and employee’s remuneration or bonus are
dependent on the income of the company. Therefore, any source of income is always
considered as material (Ruhnke, Pronobis and Michel 2014).
3.2 Assertion and explanation
Receipts from other sources are generally involved with the assertion that all the
transactions related to income from other sources might have been recorded wrongly by
mistake or intentionally. Further, another misstatement may be that the receipts are not
recorded under proper period. Therefore the assertions are - (i) Accuracy that the transaction
related to income from other sources have not been recorded under proper head and related
disclosures have not been made (ii) cut off that is the transaction related to income from other
sources for another period have been recorded under current period.
4.0 Third account – Depreciation
4.1 Rational for selection
Depreciation for Azure Enterprise has been increased from $ 15,590 to $ 34,280 that
is by $ 19,230 or 123.35%. Therefore, depreciation will be considered as material by amount.
Generally, depreciation goes up when the method of charging depreciation is changed by the
company or there is purchase of any new asset. However, it is found that the company has not
purchased any new fixed asset during the year (Louwers et al. 2015).
4.2 Assertion and explanation
Various assertions associated with the depreciation account is – (i) occurrence that is
transactions related to fixed assets actually taken place during the accounting period (ii)

AUDITING ISSUES AND PRACTICE 10
ownership that is the company has lawful claim on the assets those are recorded under
balance sheet.
5.0 Fourth account – Wages
5.1 Rational for selection
Wages expenses shall be considered as material item as a major proportion of
revenues are consumed by this and it is an important expense for normal daily operation of
the company. Therefore wage expense is material by its nature. It can be identified that the
wage expenses of Azure Enterprise has been increased by $ 3,180 or by 6%.
5.2 Assertion and explanation
While auditing for wage expense the auditor is mainly concerned regarding (i) the
wage payment made to fictitious employees (ii) expenses has been recognised without
making the payment (iii) payment has been made but the expenses has not been recorded.
Therefore, the assertions pertain to wages are – (i) occurrence that the wages expenses
recorded by the company have been actually for the payment made during the accounting
period (ii) accuracy – amounts related to wage expenses have been recorded at proper amount
and under proper account (Kharisova and Kozlova 2014).
6.0 Suggested audit procedure
6.1 Audit procedure – sales
While performing the audit for sales revenue the auditor shall verify the recognition
method for sales used by the company and shall check that the company is using the method
on consistent basis. Further, sales transaction with big amount shall be checked with the
customer name, bill raised to the customer, quantity and the price shall be verified with the

AUDITING ISSUES AND PRACTICE 11
approved price list. Sales receipt shall be further segregated as sales made on cash basis and
sales made on credit basis (Leung et al. 2015).
6.2 Audit procedure – other income
While performing the audit procedure for income from other sources the auditor shall
verify the sources from where these incomes are received. Further, the income from various
sources shall be compared with the previous year’s receipt (Coetzee and Lubbe 2014). For
significant difference found the auditor shall ask the management for justification or can even
contact the third party for confirming the reason.
6.3 Audit procedure – depreciation
The auditor shall confirm the amount of fixed asset and purchase or sales of fixed
asset through the asset register. Auditor shall further verify the method used for charging
depreciation, rate of depreciation for particular asset and shall be matched with the amount
recorded as depreciation in the accounts (Wali 2015).
6.4 Audit procedure – wages
Wage payment made to the employees under the accounting period shall be verified
with the employee register with the details like name of the employees, number of
employees, number of days worked by each employee, amount of wage entitlement for each
employee, arrear of wages for any employee and advance payment, if any paid to any
employee (Arens et al. 2016). Further, the employee register shall be verified for engagement
and retirement of any employee during the year and wage payment pertains to them.
7.0 Fraud
Fraud is the intentional error committed by any employee or management to fulfil
own objectives. Auditors while carrying out the audit procedure is responsible for identifying

AUDITING ISSUES AND PRACTICE 12
the reasonableness of the financial statement presented to them. As it is done purposefully
therefore in most of the organization fraud is committed by all levels of employees.
Therefore, even if the audit partner is in the view that the employees are trustworthy, the
audit team is responsible for detecting fraud and carrying out audit for detecting fraud (Titera
2013). Further, from the analytical review it is found that some items like sales, other income,
depreciation and wages will be considered as material. However, no instances of fraud were
found from the analytical review.
8.0 Conclusion
From the above analysis it is concluded that the auditor of Azure Enterprise shall
conduct its audit with the objective of detecting the material misstatement presented in the
income statement through establishing the tolerance level of materiality. Based on the nature
and amount various accounts like sales, wages, depreciation and other income shall be
audited for detecting material misstatement. Further, based on the materiality the auditor shall
plan the procedures to be followed for detecting misstatement and fraud.

AUDITING ISSUES AND PRACTICE 13
Reference
Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016. Auditing and assurance
services. Pearson.
Byrnes, P.E., Al-Awadhi, C.A., Gullvist, B., Brown-Liburd, H., Teeter, C.R., Warren Jr, J.D.
and Vasarhelyi, M., 2015. Evolution of auditing: From the traditional approach to the future
audit. Audit Analytics, 71.
Christensen, B.E., Glover, S.M. and Wood, D.A., 2013. Extreme estimation uncertainty and
audit assurance. Current Issues in Auditing, 7(1), pp.P36-P42.
Coetzee, P. and Lubbe, D., 2014. Improving the efficiency and effectiveness of risk‐based
internal audit engagements. International Journal of Auditing, 18(2), pp.115-125.
Eilifsen, A. and Messier Jr, W.F., 2014. Materiality guidance of the major public accounting
firms. Auditing: A Journal of Practice & Theory, 34(2), pp.3-26.
Glover, S.M. and Prawitt, D.F., 2014. Enhancing auditor professional skepticism: The
professional skepticism continuum. Current Issues in Auditing, 8(2), pp.P1-P10.
Kharisova, F.I. and Kozlova, N.N., 2014. Applying the category of «Assertions (or
preconditions)» In audit of financial statement. Mediterranean Journal of Social
Sciences, 5(24), p.180.
Legoria, J., Melendrez, K.D. and Reynolds, J.K., 2013. Qualitative audit materiality and
earnings management. Review of Accounting Studies, 18(2), pp.414-442.
Leung, P., Coram, P., Cooper, B.J. and Richardson, P., 2014. Modern Auditing and
Assurance Services 6e. Wiley.

AUDITING ISSUES AND PRACTICE 14
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015.
Auditing & assurance services. McGraw-Hill Education.
Ruhnke, K., Pronobis, P. and Michel, M., 2014. Audit materiality disclosures and credit
lending decisions.
Titera, W.R., 2013. Updating audit standard—Enabling audit data analysis. Journal of
Information Systems, 27(1), pp.325-331.
Wali, S., 2015. Mechanisms of corporate governance and fixed asset
revaluation. International Journal of Accounting and Finance, 5(1), pp.82-97.

AUDITING ISSUES AND PRACTICE 15
Appendix
1. Current year projection has been done as follows –
Current year value for 8 months / 8 * 12
2. Computation of changes in dollar
= Current Year value in dollar – Prior year value in dollar
3. Computation of % change in the value
= Current year Value−Prior Year value
Prior Year Value X 100 %