University of Sunshine Coast - ACC621 Auditing Practice Report

This report addresses key issues in auditing practice, particularly focusing on the requirements of AASB 1031 for financial reporting in Australia. It critiques the materiality level suggested by the audit partner for Chestnut Enterprise, arguing it's inappropriate given the company's scale. The report includes an analytical review of Chestnut's profitability and liquidity, identifying accounts at risk of material misstatement through trend analysis, such as sales, cost of sales, repair & maintenance, and depreciation. It details specific audit procedures for verifying these accounts and emphasizes the importance of following ASA 240 guidelines regarding fraud risk, irrespective of staff trustworthiness. The report highlights the necessity of thorough investigation and adherence to accounting standards to ensure accurate financial statements.

Running head: ISSUES IN AUDITING PRACTICE
Issues in Auditing Practice
Name of the Student:
Name of the University:
Authors Note:

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ISSUES IN AUDITING PRACTICE
Contents
Task 1:.............................................................................................................................................2
Task 2:.............................................................................................................................................3
Task 3:.............................................................................................................................................6
Task 4:.............................................................................................................................................8
Task 5:...........................................................................................................................................10
References:....................................................................................................................................11

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ISSUES IN AUDITING PRACTICE
Task 1:
Entities operating in Australia must comply with the requirements of AASB 1031 to
include all material information in the financial reports of the entity. According to AASB 1031,
omission or commission of any financial information that affects the decision making process of
users of financial statements are material information and must be reported in the financial
statements. Though there has been no specific definition of materiality however, the standard
(AASB 1031) provides that materiality shall be determined on the basis of specific
circumstances of each scenario (Lakis and Masiulevičius, 2017).
Generally percentages are used to determine materiality of different items of revenue,
expenditures, assets and liabilities. 5% to 10% bracket is generally used to calculate materiality
of elements of financial statements. Using a 5% bracket on sales and cost of sales in case of
Chestnut Enterprise has been used to determine materiality level.
Jul 1, 2016 - Dec 31, 2016 Jul 1, 2015 - June 30,
2016
Materiality level
For revenue: Sales @5% 4,948.75 9,
372.50
For expenditures: 5% of Cost of sales 1,526.25 3,
179.75

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ISSUES IN AUDITING PRACTICE
Thus, for items of revenue an amount of $4,948.75 and $1,526.25 for expenditures can be used
as material amount to conduct the audit of Chestnut. The materiality level of $15,000 suggested
by the audit partner after preliminary assessment of materiality for the financial report of
Chestnut is not appropriate considering the scale of operation of the enterprise (Moroney and
Trotman, 2016).
As a result of change in materiality level, the auditor will have to include number of items of
revenue and expenditures in auditing procedures which earlier were not subjected to substantive
testing due to increased amount of materiality level. Thus, substantive audit procedures will have
to be conducted on number small items of revenue and expenditures which earlier was not a part
of audit plan. As a result the audit budget will increase significantly as the substantive testing
would be at much larger scale compared to preliminary audit planning (Choudhary, Merkley and
Schipper, 2018).
Task 2:
Analytical review:
Analytical review is a process that require an auditor to calculate different ratios on the basis of
financial information of an entity to identify significant fluctuations in profitability, liquidity and
solvency position of such entity. The analytical review of Chestnut reveals the following picture:
Profitability position of Chestnut:
Jul 1, 2016 - Dec 31, 2016 Jul 1, 2015 - June 30,
2016

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ISSUES IN AUDITING PRACTICE
Gross profit ratio
Gross profit (Sales - Cost of sales) 68,450.00 123,8
55.00
Sales 98,975.00 187,4
50.00
Gross profit ratio (Gross profit x
100/ Sales)
69.16
66.07
Net profit margin
Net profit 25,056.43 33,0
71.67
Sales 98,975.00 187,4
50.00
Net profit margin (Net profit x
100/Sales)
25.32
17.64
Liquidity position of Chestnut:
Liquidity ratio:

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ISSUES IN AUDITING PRACTICE
Current ratio
Total current assets:
Cash at Bank
70,000
73,0
00
Accounts receivable
120,750
122,7
50
Inventory
185,000
174,0
00
375,750
369,7
50
Total Current liabilities:
Current liabilities (Assumption equivalent to cost of sales and
inventories) 215,525
237,5
95
Current ratio 1.743417237 1.5562
2
Task 3:
Trend analysis help an auditor to identify abnormal fluctuations in different items of
revenue and expenditures. In case there is no appropriate justification behind such fluctuations

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ISSUES IN AUDITING PRACTICE
then, the auditor will have to use all necessary substantive testing on the items related to such
fluctuations to ensure that the financial statements are not materially misstated. On the basis of
the analytical procedures and the significant differences between items of revenue and
expenditures as provided in the table below, a detailed discussion on 4 accounts from income
statement of Chestnut that appear to be at risk of being materially misstated are discussed here
(Eilifsen, Hamilton and Messier Jr, 2017).
6 months
ending on
December
31, 2016
Annual
equivalent
expenses
for June
30, 2017
12
months
ending of
June 30,
2016
Differenc
e
Bank charges 174.
00
348.
00
350.
00
(2.00)
Depreciation 8,282.
50
16,565.
00
15,738.
33
826.67
Interest expense 5,750.
00
11,500.
00
11,500.
00 -
Printing 185.
00
370.
00
375.
00
(5.0
0)
Repairs and 720. 1,440. 5,050. (3,610.00

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ISSUES IN AUDITING PRACTICE
Maintenance 00 00 00 )
Wages 26,285.
00
52,570.
00
53,000.
00
(430.0
0)
Superannuation 1,997.
08
3,994.
15
4,770.
00
(775.85)
Sales and cost of sales: Increase in gross profit margin from 66.07% to 69.16% indicates that
there have been significant reduction in cost of sales. The items included in cost of sales must be
verified properly to ensure there is no error in recording the cost of sales in the books of accounts
of Chestnut (Bumgarner and Vasarhelyi, 2018).
Expenditures: The net profit margin of the organization has increased significantly since last
year. Within a period of 6 months the net profit margin has increased by almost 8% to 25.32%
for the 6 months period ending on December 31, 2016. It is important to conduct thorough
investigation of all expenditures as to whether these have been correctly recorded in the books of
accounts or there has been any omission or commission in recording items of expenditures in the
Income statement of the organization (van Buuren et. al. 2017).
Repair and maintenance: Repair and maintenance expenditure for the six month period has
reduced by an annual equivalent amount of $3,610 in the 6 months period ending on December
31, 2016. Considering the significant drop the auditor will have to verify the amount of repair
and maintenance for the 12 months period ending on June 30, 2016 and for the 6 months period
ending on December 31, 2016.

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ISSUES IN AUDITING PRACTICE
Depreciation: Increase in annual equivalent amount of depreciation is another account balance to
be checked for risk of material misstatement. Audit testing shall be conducted to verify whether
the amount of depreciation has been correctly provided or not. The method used to calculate the
amount depreciation shall also be checked and verified (Beasley et. al. 2018).
Task 4:
Audit procedures:
Sales and cost of sales:
The auditor needs to check the internal controls within the organization to correctly record sales
and cost of sales transactions. Revenue from sales must be recorded in the books of accounts
only when there is no uncertainty in receiving the revenue by the organization. Auditor must
verify the process of recognizing revenue in the books of accounts. In case there is any
uncertainty in receiving the revenue whether appropriate provision for such uncertainties have
been made in the books of accounts is also to be checked (Wright, 2016).
For cost of sales, the method followed by the organization to ascertain the cost of goods sold and
the inventory valuation method used by the organization also to be verified and checked. The
accounting records shall also be verified with supporting documents such as purchase orders and
sales order. In case of returns, sales as well as purchase returns, whether appropriate credit and
debit notes have been issued and accordingly, adjustments have been made in the books of
accounts of the organization to ensure that net revenue and cost of sales reflect actual revenue
and cost of sales to the organization.
Expenditures:

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ISSUES IN AUDITING PRACTICE
The auditor must verify the accounting entries of different expenditures with vouchers to check
whether the accounting entries made to record different expenditures are correctly reflecting the
actual expenditures incurred in earning revenue for the business.
Repair and maintenance:
Repair and maintenance expenditures have reduced significantly in the six months period ending
on December 31, 2016. Reduction of an annual equivalent amount of $3,610 in repairing and
maintenance is significantly for Chestnut. The auditor must verify the supporting documents of
repairing and maintenance expenditures to ensure that all repairing and maintenance
expenditures have been correctly recorded in the books of accounts (Buckless, Krawczyk and
Showalter, 2014).
Depreciation:
The amount of depreciation has increased by an annual equivalent amount of $826.67. The
auditor must evaluate the depreciation method used to calculate the amount of depreciation.
Whether the same method was followed in earlier years and in case of change in method of
depreciation then the reason for such change shall also be assessed by the auditor. AASB 116
must be followed by Chestnut in recording the amount of depreciation. The auditor needs to
verify whether AASB 116 has been followed by Chestnut to record depreciation in the books of
accounts (Krahel and Titera, 2015).
Task 5:
ASA 240 guides the practice of an auditor in relation to risk of fraud in an audit of
financial statements. Irrespective of the situation, an auditor must follow the guidelines provided
in ASA 240 to discharge his responsibilities in considering fraud in relation to the financial

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ISSUES IN AUDITING PRACTICE
statements of an entity. The standard procedure must be followed in discharging the
responsibilities of an auditor as per ASA 240 even if the employees and staffs of an organization
are trustworthy (Badara and Saidin, 2014).
In this case, the suggestion of the audit partner to not consider fraud risk in relation to the audit
of Chestnut as the staffs of the organization are trustworthy is not appropriate as the standard
procedure mentioned in ASA 240 must be followed in the audit of Chestnut.

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ISSUES IN AUDITING PRACTICE
References:
Badara, M.A.S. and Saidin, S.Z., 2014. Empirical evidence of the moderating effect of effective
audit committee on audit experience in the public sector: Perception of internal
auditors. Mediterranean Journal of Social Sciences, 5(10), p.176.
Beasley, M.S., Blay, A.D., Lewellen, C. and McAllister, M., 2018. The Association Between
Board Risk Oversight and the Risk of Material Misstatement.
Buckless, F.A., Krawczyk, K. and Showalter, D.S., 2014. Using virtual worlds to simulate real-
world audit procedures. Issues in Accounting Education, 29(3), pp.389-417. Available at:
http://www.aaajournals.org/doi/abs/10.2308/iace-50785?code=aaan-site [Accessed on 7 October
2018]
Bumgarner, N. and Vasarhelyi, M.A., 2018. Continuous auditing—a new view. In Continuous
Auditing: Theory and Application (pp. 7-51). Emerald Publishing Limited.
Choudhary, P., Merkley, K.J. and Schipper, K., 2018. Auditors’ Quantitative Materiality
Judgments: Properties and Implications for Financial Reporting Reliability.
Eilifsen, A., Hamilton, E.L. and Messier Jr, W.F., 2017. The Importance of Quantifying
Uncertainty: Examining the Effect of Audit Materiality and Sensitivity Analysis Disclosures on
Investors’ Judgments and Decisions.
Krahel, J.P. and Titera, W.R., 2015. Consequences of Big Data and formalization on accounting
and auditing standards. Accounting Horizons, 29(2), pp.409-422.

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ISSUES IN AUDITING PRACTICE
Lakis, V. and Masiulevičius, A., 2017. ACCEPTABLE AUDIT MATERIALITY FOR USERS
OF FINANCIAL STATEMENTS. Journal of Management, 2(31).
Moroney, R. and Trotman, K.T., 2016. Differences in Auditors' Materiality Assessments When
Auditing Financial Statements and Sustainability Reports. Contemporary Accounting
Research, 33(2), pp.551-575.
van Buuren, J., Koch, C., van Nieuw Amerongen, N. and Wright, A.M., 2014. The use of
business risk audit perspectives by non-Big 4 audit firms. Auditing: A Journal of Practice &
Theory, 33(3), pp.105-128.
Wright, W.F., 2016. Client business models, process business risks and the risk of material
misstatement of revenue. Accounting, Organizations and Society, 48, pp.43-55. Available at:
https://www.sciencedirect.com/science/article/pii/S0361368215300040 [Accessed on 7 October
2018]