Comprehensive Audit Report on Azure Enterprises' Financial Statements

This report presents an audit assessment of Azure Enterprises' trial balance, focusing on areas requiring detailed examination and relevant audit procedures. It emphasizes the importance of adequate audit evidence in forming opinions on financial statements. The report includes an executive summary that highlights the significance of risk analysis in audit planning, covering aspects like client understanding, internal controls, IT environment, corporate governance, and closing processes. Trend analysis is used to identify significant accounts, such as cost of sales, other income, and depreciation, each discussed with appropriate audit procedures. The report also addresses fraud risk, emphasizing the need for professional skepticism and caution against relying solely on management's trustworthiness. It concludes that auditors must make thorough inquiries and critically assess evidence before forming opinions on financial statements, referencing ASA 315 and other relevant literature.

ASSIGNMENT

To,
Respected Sir,
Audit Senior
Present report relates to audit assessment of the trial balance of Azure Enterprises as
requested by you. The report specifies the area which requires to be emphasized in more
detail along with the audit procedures required to be applied on same. It can be concluded
that adequate, appropriate audit evidence is necessary for forming an opinion on financial
statements.
Yours sincerely.

AUDIT PLANNING

Executive Summary
By comprehending the significance of risk analysis, an auditor can plan their inspection to
invest more time in the areas where the risks are maximum. In addition to this during the
period of planning, an auditor should assess about the client, their client’s internal controls,
information technology environment of their client, corporate governance of their client and
closing process of the client. Present report analyzes the trial balance of Azure Enterprises in
order to ascertain those accounts which require significant audit analysis. The accounts which
have been assessed to be significant on the basis of trend analysis have been explained along
with appropriate audit procedure. It can be concluded from the present analysis that an
auditor necessarily requires audit evidence along with management trustworthiness in order
to make a decision that whether fraud variant exists in books of accounts or not.

Table of Contents
Introduction................................................................................................................................6
Discussions.................................................................................................................................6
(a) Assessment of materiality set for Azure Enterprises........................................................6
(b) Analytical Review of Income Statement of Azure Ltd through trend analysis:...............7
(c) Accounts subject to significant audit testing....................................................................8
(d) Audit procedure of accounts require significant audit testing..........................................9
(e) Comment on suggestion relating to fraud risk................................................................10
Conclusion................................................................................................................................10

INTRODUCTION
ASA 315 “Identifying and Assessing the Risk of Material Misstatement through
understanding the entity and its environment” specifies the responsibilities of Auditor
regarding determining and evaluation of risk of material misstatement in the financial
statement by comprehending the environment of any individual including individual’s
internal control (ASA 315. Understanding the Entity and Its Environment and assessing the
risk of material misstatement, 2017.). Present report revolves around audit procedure which
has been applied to assess the trial balance of Azure Enterprises. Further, trend analysis has
been applied in order to ascertain the accounts which require detail assessment. The report
ends up with discussion relating to variants which should be analyzed in order to ascertain an
indication of fraud in financial statements.
DISCUSSIONS
(a) Assessment of materiality set for Azure Enterprises
At the time of planning and reporting, the auditor takes a wide view of the client as a whole
and the diligence in which it functions. Further, information related to the client is achieved
in the early stages of every audit, and that information impels the planning of the audit. The
concept of materiality is applied by an auditor as planning as well as performing audit in
order to analyze the impact of ascertained misstatement if any in financial statement so that
appropriate opinion can be formed in auditor’s report. (Griffiths, 2016). According to
Beasley, et al. (2018) concept of materiality recognizes that transactions or accounts which
individually or in aggregate have significant impact on the true and fair opinion relating to
books of account of an organization.
It can be accessed from the Trial Balance that the total sales for the year ending 2016 of
Azure Enterprise of the year are 162499.99 which means that transactions which are
important or material will be done in expressions of thousands only. Hence, the figure which
is taken as a base by the auditor that is 15000 is correct since all the significant, as well as
crucial transaction, will be amounting to around 15000 or more than that. Moreover, if the
budget is modified than in that case the new base will ascertain the accounts and transactions
which involve deep inspection.

(b) Analytical Review of Income Statement of Azure Ltd through trend analysis:
Year 2016 2015
Revenue
Sales 162500.00 187450.00
Increase / Decrease in percentage -13%
Cost of Sales 43577.00 63595.00
Increase / Decrease in percentage -31%
Gross Profit 118923.00 123855.00
Increase / Decrease in percentage -4%
Other Income 800.00 25000.00
Increase / Decrease in percentage -97%
Service Fees 39167.00 58000.00
Increase / Decrease in percentage -32%
Interest Income 32.00 50.00
Increase / Decrease in percentage -36%
Expenses
Bank Charges 232.00 350.00
Increase / Decrease in percentage -34%
Depreciation 23213.00 15590.00
Increase / Decrease in percentage 49%
Interest Expenses 7200.00 10800.00
Increase / Decrease in percentage -33%
Printing Expenses 168.00 250.00

Increase / Decrease in percentage -33%
Miscellaneous 1600.00 0.00
Increase / Decrease in percentage NA
Wages 37453.00 53000.00
Increase / Decrease in percentage -29%
Superannuation 3558.00 4770.00
Increase / Decrease in percentage -25%
Total Expenses 73424.00 84760.00
Increase / Decrease in percentage -13%
Net Profit 85498.00 122145.00
Increase / Decrease in percentage -30%
(c) Accounts subject to significant audit testing
 Cost of Sales: The sales have been declined to the significant level through the decline
in sales is not at the extreme level. The same can be evaluated form the trend analysis
of the cost of sales. Since these both accounts have an interrelated connection, it is
essential to evaluate that whether the cost of goods has been declined because of the
quantum of goods sold or because of decline in the cost of material utilized in same. It
is necessary to evaluate the cost of goods in order to asses’ appropriate financial
position of an organization (Albrecht, 2016).
 Other Income: The assertion due to which the specified account is likely to be at risk
as an organization might use this account in order to account fake income for
elevating profits. A significant variance exists in comparison to the previous year.
Thus the account is subject to significant auditing testing.
 Depreciation: Depreciation account affects P& L and Balance Sheet as well. As
depreciation has an increasing trend which specifies that asset has been acquired in

the present year. Thus, assertions are required to access whether appropriate
accounting treatment, as well as disclosure, have been provided relating to same or
not.
(d) Audit procedure of accounts require significant audit testing
Cost of sales:
 The first step in auditing process of the cost of sales is operating an analytical test of
the cost of sale through the product line, division or other business section by
reference to details of units’ transmitted and average unit costs.
 Subsequently, investigation of vital variations between the predicted and posted
amounts should be performed.
 After this, the intensifying the vouching test of expense transaction to test linked cost
of sales transaction by tracing units costs employed to assuage inventory to costs
records tested in the inspection of stock.
 Thus, as per assertions of Knechel, and Salterio, (2016) the audit procedure should be
followed rigorously from time to time so that the assessment can be done that is
whether the cost of sales has augmented or declined.
Other Income:
 The first step in auditing procedure of other income is to comprehend the internal
controls and transaction cycle of income. The same will comprises meeting with
administration and learning about the accounting of other income procedure,
process and controls which the organization has implemented to guard against
loss. As per the study of Bailey, Collins and Abbott (2017), this procedure is
frequently known as design and implementation testing.
 Further, along with execution of investigation of administration, auditors must
also review flowcharts related to invoice flow, ask for duplicates of vital contracts
as well as document any alteration to the income process that has to arise as the
last audit.
 The procedure will get finish by mapping the internal control activities that were
recognized when learning about the internal control system to specific
administration assertion of incomes.
Depreciation:

 For auditing the depreciation expense, the auditor must evaluate the rationality of
depreciation which individual offers to group or class of assets. The rate must be
consistency to the ability which fixed assets can provide to the inflow of economic.
Further, the inspection should evaluate the depreciation rate also which is offered by
tax authority and their comprehending.
 Subsequently, the auditor should review the depreciation expenses which are
calculated by accountants in their depreciation program. After reviewing the
depreciation rate, auditors must contrast their outcomes with their client’s outcomes.
The difference must be inspected accurately.
(e) Comment on suggestion relating to fraud risk
Misstatements in the financial statement can occur from either deception or fault (Guénin et
al., 2014.). The distinctive factor among deception as well as the fault is whether the
underlying action that results in the misstatement of the financial statement is deliberated or
accidental. Professional skepticism can be referred as an attitude which comprises
questioning mind, being alert in scenarios which provide hint of possible misstatement due to
fraud or error as well as critical assessment of audit evidence. An auditor requires application
of skepticism in order to evaluate evidence and risk throughout the audit procedure. assessing
administration’s procedure for recognizing and reacting to the risks of deception in the
individual, comprising any particular risks of deception that administration has recognized or
that have been brought to its concentration, or classes of transactions, account balances or
revelations for which a risk of deception is expected to exist (McKee, 2014).
The suggestion of an audit partner is not appropriate as the decision is to take after
considering the above specified enquiries. Moreover, mere trustworthy of client staff cannot
be treated as adequate audit evidence for an opinion, as application of professional skepticism
is necessary for auditor to attain appropriate evidence.
CONCLUSION
It can be concluded from the above study that the auditor is required to make enquiries of
administration concerning prior to making a decision whether fraud risk shall be taken into
consideration or not. Further, administration evaluation of the risk that the financial statement
might be materially misstated because of deception, comprising the nature, level and rate of
such evaluations can be specified as base taken by the auditor in order to provide opinion on
financial statements of an organization.

References
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ASA 315. Understanding the Entity and Its Environment and assessing risk of material
misstatement. 2017. [PDF]. Available through <
https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_28-04-06.pdf>. [Accessed on
14th September 2018]
Bailey, C., Collins, D.L. and Abbott, L.J., 2017. The Impact of Enterprise Risk Management
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Beasley, M.S., Blay, A.D., Lewellen, C. and McAllister, M., 2018. The Association Between
Board Risk Oversight and the Risk of Material Misstatement.
Griffiths, P., 2016. Risk-based auditing. Routledge.
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