ACC621 Semester 2: Analyzing Issues & Materiality in Auditing Practice

This report provides an analysis of key issues in auditing practice, focusing on materiality and misstatements. It begins with a discussion of preliminary judgments for materiality, highlighting the importance of establishing a base for assessing misstatements and the impact of materiality levels on audit scope and budget. The report then examines analytical review procedures, including trend analysis, and identifies four accounts susceptible to material misstatement: sales, cost of sales, depreciation, and wages. For each account, the rationale for selection and relevant assertions are explained. The report recommends specific audit procedures for each account to prevent and detect misstatements. Finally, it addresses the auditor's responsibility in detecting fraud, emphasizing the need to evaluate both transactional data and behavioral patterns. Desklib offers a wealth of similar solved assignments and past papers to aid students in their studies.

Running head: ISSUES IN AUDITING PRACTICE
Issues in auditing practice
Name of the student
Name of the university
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1ISSUES IN AUDITING PRACTICE
Table of Contents
1.0 Preliminary judgement for materiality............................................................................2
2.0 Analytical review............................................................................................................3
3.0 Analytical review through trend analysis.............................................................................3
4.0 Accounts under material misstatement................................................................................4
4.1.1 First account selected – Sales........................................................................................4
4.1.2 Rational for selection....................................................................................................4
4.1.3 Assertion and explanation.............................................................................................4
4.2 Second account selected – Cost of sales......................................................................4
4.2.1 Rational for selection...............................................................................................4
4.2.2 Assertion and explanation........................................................................................5
4.3 Third account selected – Depreciation.............................................................................5
4.3.1 Rational for selection....................................................................................................5
4.3.2 Assertion and explanation.............................................................................................5
4.4 Fourth account selected – Wages.....................................................................................6
4.4.1 Rational for selection....................................................................................................6
4.4.2 Assertion and explanation.............................................................................................6
5.0 Recommended audit procedure............................................................................................6
5.1 Audit procedure – Sales...................................................................................................6
5.2 Audit procedure – Cost of sales.......................................................................................7
5.3 Audit procedure – Depreciation.......................................................................................7

2ISSUES IN AUDITING PRACTICE
5.4 Audit procedure – wages..................................................................................................7
6.0 Fraud....................................................................................................................................8
Reference....................................................................................................................................9

3ISSUES IN AUDITING PRACTICE
1.0 Preliminary judgement for materiality
Preliminary judgement is the maximum amount the auditor can accept the
misstatement that will not have material impact on the decision provided by the auditor for
the users of financial statements. As materiality is a relative factor it is important that it must
have a base to establish the fact that whether the misstatement is material or immaterial. Base
here is crucial as the users take their decisions based on that. Further, some of the
misstatements are more important as com-pared to others even if the amount is not big. For
instance, misstatements that involve fraud are likely to be more crucial to the users as
compared to the misstatement with regard to unintentional errors. However, the base varies
on the basis of business nature. Various bases used for establishing the level of materiality are
revenue, net income and total assets. Materiality level is established by taking into
consideration all the above mentioned factors (Eilifsen and Messier 2014).
If the quantitative factors are taken into consideration the materiality tolerance for
Cyclamen Enterprise will be 1% to 5% of sales that is $ 197,950 *1% = $ 1979.50 to $
197,950 * 5% = $ 9,897.51. Further, 50% to 75% of the materiality amount will be
considered as tolerable misstatement. Therefore, in case of Cyclamen Enterprise tolerable
misstatement will be amounted to around $ 5000. As per the auditor the preliminary
assessment for materiality shall be set at $ 15,000. However, as per the calculation the
materiality shall be set at $ 5,000 (Legoria, Melendrez and Reynolds 2013). If the materiality
level is reduced the auditor will have to check more items as per the level of tolerable
misstatement. Hence, with changes of materiality amount in case of Cyclamen Enterprise the
audit budget will increase as the auditor will be required to check more items.

4ISSUES IN AUDITING PRACTICE
2.0 Analytical review
It is the audit procedure that is carried out on the basis of accounting ratios and it tries
to recognize significant changes. It includes analysing of trends and ratios and identifies the
unusual items and fluctuation from the balance sheet as well as the income statement. The
reliance that can be placed by the auditor on the analytical review depends on the materiality
level and assessment of the control risks and inherent risks. Purposes for which the analytical
review in audit is carried out are as follows –
 It provides overall review of financial statement in final audit review stage.
 It helps the auditor to plan the extent, timing and nature of the audit procedures.
 It works as a substantive procedure and its use can be more efficient and effective as
compared to detail tests for reducing the detection risk for particular assertion
involved in financial statement.
3.0 Analytical review through trend analysis

5ISSUES IN AUDITING PRACTICE
4.0 Accounts under material misstatement
4.1.1 First account selected – Sales
4.1.2 Rational for selection
Sales reflect the performance and activities of the company as the potential investors
and lenders assess the risks of their investments through the sales trends of the entity. In case
of Cyclamen Enterprise the sales revenue has been increased from $ 187,450 to $ 197,950
over last one year time period. Further, as different recognition method for sales revenue is
applied by different entities sales revenue must be verified for material misstatements.
4.1.3 Assertion and explanation
The auditor is mainly concerned about 3 types of material misstatements with regard
to sales – (i) sales made and recorded to the fictitious customers (ii) recognising the revenue
even if the goods have not yet been shipped or the service have not yet been provided and
(iii) goods are already shipped or the services are already provided but the revenue is not yet
recognized. The major assertion involves with the sales revenue transaction is accuracy
(Mock and Fukukawa 2015). The availability of authorized price list and trade terms
minimizes the inaccuracy risks. Therefore the assertion involve with sales revenue is that the
sales revenue transaction involves mathematical inaccuracy.
4.2 Second account selected – Cost of sales
4.2.1 Rational for selection
Cost of sales consumes maximum major proportion of the sales revenue. Further, the
other expenses of the entity are met from the amount left after meeting the cost of sales from
sales revenue. In case of Cyclamen Enterprise the cost of sales has been reduced from $
63,595 to $ 61,051 over last one year time period.

6ISSUES IN AUDITING PRACTICE
4.2.2 Assertion and explanation
Generally, the cost of sales increases with the increase in sales revenue and number of
products or services sold and in the contrary it reduces with the reduction in sales revenue
and number of products or services sold. However, the situation may be changed if the
product or service selling prices have been enhanced or the company made any mistake in
recording the COGS under appropriate period (Antonio 2014). Therefore, the assertion
associated with COGS is cut-off that is the COGS is not recorded under correct accounting
period.
4.3 Third account selected – Depreciation
4.3.1 Rational for selection
Depreciation amount increases when the entity purchases any new asset or the entity
has changed the method of depreciation. It is found from the income statement of Cyclamen
Enterprise the cost of sales has been reduced from $ 63,595 to $ 61,051 over last one year
time period. However, no new purchase was found in case of the fixed asset from the trial
balance.
4.3.2 Assertion and explanation
As it is found that the depreciation is increased though any new asset has not been
purchased, likelihood is there that the company changed the depreciation charging method or
misstated the amount. Assertion may involve in case of depreciation is occurrence that is the
the depreciation recorded for all the assets are recorded for correct accounting period.
Another assertion involves here is cut-off that is the depreciation is charged for proper
accounts (Titera 2013).

7ISSUES IN AUDITING PRACTICE
4.4 Fourth account selected – Wages
4.4.1 Rational for selection
As wages forms a major portion of the operating expenses in case of any entity, the
wages shall be analysed properly. Further, as the wages involve payment for the employees
those are generally in big numbers likelihood is there the payment is been misstated for one
or more employees. It is found from the income statement of Cyclamen Enterprise the wages
has been reduced from $ 53,000 to $ 52,570 over last one year time period.
4.4.2 Assertion and explanation
As wage involves payment to number of employees, advance payment made to them
and arrear payment due to them, it give ample chance to the management to misstate the
wage payment. Further, as the amount of wage has been reduced as compared to the previous
year likelihood is there that 1 or more employee retired during the year or payment to some
employees are due or the amount has been misstated (Lessambo 2018). Therefore, the
assertion involves here is accuracy that amounts and data associated to wage record have
been appropriately recorded.
5.0 Recommended audit procedure
5.1 Audit procedure – Sales
For preventing the fictitious sale the company shall segregate the duties including the
billing function, order entry and shipping function. Further, it must be verified that the sales
are recorded with approved shipping order and customer order (Ruhnke and Schmidt 2014).
Further, to minimize the accuracy misstatement sales invoice shall be matched with customer
order and shipping document with details like mathematical accuracy, price of the product
and quantity. The sales invoices shall be verified with the sales report on daily basis.

8ISSUES IN AUDITING PRACTICE
5.2 Audit procedure – Cost of sales
For auditing the COGS the auditor shall perform the predictive test for each product
line, business segments or divisions through reference of details with regard to the average
unit cost and units shipped. Investigation shall be made for any difference in recorded
amounts and predicted amounts. Vouchers related to COGS shall be traced through unit costs
used for releasing the inventory under the cost records (Kogan et al. 2014). Further, the
auditor shall check that the COGS have been charged to appropriate period under which the
sales are made.
5.3 Audit procedure – Depreciation
The auditor while auditing the depreciation must analyse the internal control related to
the assets on which the depreciations have been charged. The key controls those are
important for the auditors to check upon are the asset purchase authorisation procedure,
amount involved in purchasing the assets, selling procedure and authorisation for asset,
purchase date of asset and depreciation method used for the asset (Choudhary, Merkley and
Schipper 2018). Further, the auditor must use his professional scepticism and select few
sample calculation for depreciation to check that there is no computation error. The auditor
may recalculate the depreciation for sample items, if required.
5.4 Audit procedure – wages
While auditing for wages the wage payment shall be matched with the employee
register with details of their names, amount of monthly wages, advance payment made to
them and arrear payment made or due to any employee. The auditor shall verify the entire
payment voucher with the employee register (Christensen, Glover and Wood 2013). Further,
if any new employee is engaged or retired during the year payment made to the new
employee and stoppage of payment for retired employee shall be checked appropriately.

9ISSUES IN AUDITING PRACTICE
6.0 Fraud
The auditor is responsible for planning and performing the audit for obtaining
reasonable assurance that the financial statements are free from the material misstatements
owing to fraud or error (Power 2013). Fraud is the intentional and purposeful misstatement
committed to obtain some personal target. Frauds are committed to hide any fraudulent
activities or getting higher amount of incentives. Fraud is not just identifying unusual
transaction, however, auditors are also responsible to evaluate the behavioural patterns of
management as well as employees to check if any indication is there that may have impact on
the financial statements (Boyle, DeZoort and Hermanson 2015). Therefore, even if the staffs
are faithful there always remains the likelihood of fraud and therefore, the audit partner’s
suggestion is not appropriate.

10ISSUES IN AUDITING PRACTICE
Reference
Antonio, G.R., 2014. Continuous auditing: Developing automated audit systems for fraud and
error detections. Journal of Economics, Business & Accountancy Ventura, 17(1), pp.127-144.
Boyle, D.M., DeZoort, F.T. and Hermanson, D.R., 2015. The effect of alternative fraud
model use on auditors’ fraud risk judgments. Journal of Accounting and Public Policy, 34(6),
pp.578-596.
Choudhary, P., Merkley, K.J. and Schipper, K., 2018. Auditors’ Quantitative Materiality
Judgments: Properties and Implications for Financial Reporting Reliability.
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.
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.
Kogan, A., Alles, M.G., Vasarhelyi, M.A. and Wu, J., 2014. Design and evaluation of a
continuous data level auditing system. Auditing: A Journal of Practice & Theory, 33(4),
pp.221-245.
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.
Lessambo, F.I., 2018. Audit Risks: Identification and Procedures. In Auditing, Assurance
Services, and Forensics(pp. 183-202). Palgrave Macmillan, Cham.
Mock, T.J. and Fukukawa, H., 2015. Auditors' risk assessments: The effects of elicitation
approach and assertion framing. Behavioral Research in Accounting, 28(2), pp.75-84.

11ISSUES IN AUDITING PRACTICE
Power, M., 2013. The apparatus of fraud risk. Accounting, Organizations and Society, 38(6-
7), pp.525-543.
Ruhnke, K. and Schmidt, M., 2014. Misstatements in financial statements: The relationship
between inherent and control risk factors and audit adjustments. Auditing: A Journal of
Practice & Theory, 33(4), pp.247-269.
Titera, W.R., 2013. Updating audit standard—Enabling audit data analysis. Journal of
Information Systems, 27(1), pp.325-331.