Audit Planning and Fraud Risk Assessment for Alizarin Enterprises

This report presents an audit plan for Alizarin Enterprises, a small entity, as requested by the audit partner. The plan includes determining materiality based on various financial metrics, conducting a preliminary analytical review using trend analysis and common size income statements to identify critical accounts, and suggesting appropriate audit procedures. Key accounts like sales, interest expense, and depreciation are analyzed for potential risks and misstatements. The report also addresses fraud risk analysis, emphasizing the importance of applying professional skepticism and conducting fraud risk assessments for all clients, regardless of perceived trustworthiness, highlighting discrepancies in accounts that warrant further investigation. Desklib offers a wealth of resources for students, including solved assignments and past papers.

Auditing and
Professional Practice
Assignment

1
By student name
Professor
University
Date: 25 April 2018.
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Contents
Introduction.................................................................................................................................................3
Discussion and Analysis...............................................................................................................................3
Conclusion and Recommendation...............................................................................................................7
References...................................................................................................................................................8
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Introduction
The report highlights what are the major steps in the audit planning of the small entity, for which
the audit partner of the company has asked to audit senior to prepare the report. Materiality has
been determined and preliminary analytical review has been done in the report to find out the
critical accounts and audit procedures has been suggested for the same (Appelbaum, et al., 2018).
Fraud risk analysis has also been done for the given client based on issues in certain key
accounts.
Discussion and Analysis
The trial balance of the given entity “Alizarin Enterprises” has been shown below. The
difference in the debit and the credit side has been assumed suspense account and the same has
not been considered for any calculation as the nature of the account is not known (Bae, 2017).
Alizarin Enterprises
Trial Balance
Particulars Jul 1, 2015 - Mar 31, 2016 Jul 1, 2014 - June 30, 2015
Debit Credit Debit Credit
Cash at Bank 99,251 102,503
Accounts receivable 121,820 112,000
Inventory 189,000 175,000
Machinery 65,000 65,000
Accumulated Depreciation 43,964 24,375
Motor Vehicles 65,000 65,000
Accumulated Depreciation 26,000 20,150
Furniture 7,500 7,500
Accumulated Depreciation 2,925 2,250
Bank Loan 216,000 216,000
Sales 182,812 187,450
Cost of sales 49,024 63,595
Service fees (revenue) 44,063 58,000
Other income 900 25,000
Interest income 36 50
Bank charges 261 350
Depreciation 26,114 15,590
Interest expense 8,100 10,800
Printing 189 250
Miscellaneous 1,800 -
Wages 42,134 53,000
Superannuation 4,002 4,770
Total 579,945 516,701 572,855 533,275
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1. Materiality is one of the important aspects of audit planning and the same needs to be
determined by the auditors at the time of audit planning itself. Materiality may be defined
as the level or amount beyond which the financial and economic decision of the user
group may change. It helps the auditor in planning as to what should be there in the scope
of audit and what can be left behind (Bizfluent, 2017). In the given case, the audit partner
has suggested the materiality limit to be $ 15000 but considering the amounts in trial
balance, the same seems to be too high. The accounting bodies like AASB, IASB and the
consulting and auditing firms like Big 4’s have suggested materiality limits as a
percentage of the sales, net profit, gross profit, total assets and shareholder’s equity value.
Based on these limits the materiality has been computed for given entity as between “$
1828 to $ 2639”. This limit will bring some of the accounts like interest, superannuation,
other income and the furniture account in the ambit of audit, which would have been,
ignored completely otherwise (Gooley, 2016).
(in $)
Alizarin Enterprises
Quantitative estimate of materiality
Criterion Base Amount Materiality level/range
0.5% to 1% of gross revenue Gross Revenue 182,812 914.06 to 1828.12
1% to 2% of the total assets Total Assets 474,682 4746.82 to 9493.63
1% to 2% of the gross profit Gross Profit 131,989 1319.89 to 2639.77
2% - 5% of the shareholders’
equity Equity NA NA
5% to 10% of the net profit Net profit 96,187 4809.33 to 9618.65
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2. The preliminary analytical review has been done with the help of trend analysis and the
preparation of common size income statement, which will help in finding the audit issues
and critical points. Both of these have been shown below:
Alizarin Enterprises
Income Statement
Particulars 2017 % of sales 2016 % of sales
Sales 182,812 80.2% 187,450 69.3%
Consultancy fees 44,063 19.3% 58,000 21.4%
Other income 936 0.4% 25,050 9.3%
Total Revenue 227,811 100.0% 270,500 100.0%
Less: Expenses
Cost of sales 49,024 21.5% 63,595 23.5%
Superannuation 4,002 1.8% 4,770 1.8%
Bank charges 261 0.1% 350 0.1%
Depreciation 26,114 11.5% 15,590 5.8%
Interest expense 8,100 3.6% 10,800 4.0%
Printing 189 0.1% 250 0.1%
Miscellaneous 1,800 0.8% - 0.0%
Wages 42,134 18.5% 53,000 19.6%
Total Expenses 131,625 57.8% 148,355 54.8%
Net Profit 96,187 42.2% 122,145 45.2%
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Alizarin Enterprises
Income Statement
Particulars 2017 2016 Variance
Sales 182,812 187,450 - 4,638
Service fees
(revenue) 44,063 58,000 - 13,937
Other income 936 25,050 - 24,114
Total Revenue 227,811 270,500 - 42,689
Less: Expenses
Cost of sales 49,024 63,595 - 14,571
Superannuation 4,002 4,770 - 768
Bank charges 261 350 - 89
Depreciation 26,114 15,590
10,52
4
Interest expense 8,100 10,800 - 2,700
Printing 189 250 - 61
Miscellaneous 1,800 - 1,800
Wages 42,134 53,000 - 10,866
Total Expenses 131,625 148,355 - 16,730
Net Profit 96,187 122,145 - 25,958
Net Profit % 42.22% 45.16%
3. On the basis of above analysis, several critical accounts have been chosen for review
purposes, some of which are shown below:
Sl. No. Account Name Audit Assertion and risk
1. Sales The sales of the company has declined by just 2% as
compared to the last year but the profitability has got
impacted by more than 21%. Sales as a percentage of
total receipts has gone by up from 69% to 80% and
therefore it needs to be seen why there is such an
anomaly. Further the other income account also needs to
be checked as to where the company has gone wrong
here such that there is no income from this source
altogether in the current year (Dumay & Baard, 2017).
2 Interest expense The interest expenses have gone down by 25% as
compared to the last year. But the balance of the
principal loan is still the same as compared to the last
year and hence it needs to be carefully scrutinized as to
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what is the issue behind this decline in expenses. This
may be an accounting error as well (Knechel & Salterio,
2016).
3 Depreciation Depreciation is the only expense which has risen as
compared to the last year, all the other expenses have
gone down so it needs to be checked what is the reason
behind such an increase of 64%, this is one of the major
reasons for decline in profitability by 21%.
4. Based on the above audit assertions and the audit risks to the above mentioned accounts,
few of the audit processes that can be employed by the auditor in this regards are
mentioned below:
a. Sales: The sales vouching needs to be done and it should be checked if the system
total is matching with the invoicing total. The auditor should also be checking the
revenue recognition criteria of the client and what is the reason of decrease in sales, if
it is price increase or decrease in quantitative sales or competitive pressure (Kew &
Stredwick, 2017).
b. Interest Expenses: Here the auditor should reconcile the balances from the loan from
the bank statement and if the company has repaid any loan. The auditor should also
calculate the expenses and check if the entire booking and requisite provision has
been taken in the books of accounts. The auditor should also be verifying that the
company is not shifting the current year expenses to the next year and has followed
all the relevant accounting standards while preparation of the books of accounts and
booking of the expenses (Arnott, et al., 2017).
c. Depreciation: The auditor should be checking all the management estimates and
judgements here about the rate and method of depreciation, being used by
management and whether there is any change in the same during the year. The auditor
should enquire on the acquisition and disposals during the year as the balance of
depreciation has increased monumentally (Bailey, et al., 2017).
Conclusion and Recommendation
5. Fraud Risk analysis may be defined as one of the audit procedure which is being applied
by the auditors to check on the possibility of fraud in the organization. In the given case,
the audit partner has suggested that the given company should not be subject to the fraud
risk analysis since he considers the client trustworthy. But as per the principles of
professional scepticism and those mentioned in the Professional Standards in APES 110,
it is against the ethics of auditor and all the clients irrespective of anything and any
relation must be subject to the fraud risk analysis. In the given case as well, there are
several account, which show the risk of fraud in company (DeZoort & Harrison, 2016).
Some of these are depreciation account and the interest expenses account for the reasons,
which have been mentioned above, the other income account as the same has declined by
96% during the current year and it needs to be enquired what, is the reason behind the
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same. Also, the cost of goods sold account needs to be verified as there is a decrease of
23% in expenses as compared to last year even though the absolute sales has almost been
constant (Félix, 2017).
References
Appelbaum, D., Kogan, A. & Vasarhelyi, M., 2018. Analytical procedures in external auditing: A
comprehensive literature survey and framework for external audit analytics.. Journal of Accounting
Literature, 40(1), pp. 83-101.
Arnott, D., Lizama, F. & Song, Y., 2017. Patterns of business intelligence systems use in organizations.
Decision Support Systems, Volume 97, pp. 58-68.
Bae, S., 2017. The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From
Korea. Journal of Applied Business Research, 33(1), pp. 153-172.
Bailey, C., Collins, D. & Abbott, L., 2017. The Impact of Enterprise Risk Management on the Audit
Process: Evidence from Audit Fees and Audit Delay. Auditing: A Journal of Practice & Theory, 37(3), pp.
25-46.
Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].
DeZoort, F. & Harrison, P., 2016. Understanding Auditors sense of Responsibility for detecting fraud
within organization. Journal of Business Ethics, pp. 1-18.
Dumay, J. & Baard, V., 2017. An introduction to interventionist research in accounting.. The Routledge
Companion to Qualitative Accounting Research Methods, p. 265.
Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of
insurance companies. MASTER THESIS, pp. 1-69.
Gooley, J., 2016. Principles of Australian Contract Law. Australia: Lexis Nexis.
Kew, J. & Stredwick, J., 2017. Business Environment: Managing in a Strategic Context. second ed.
London: Chartered Institute of Personnel and Development.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.
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