ACC621-Audit Plan For Azure Enterprises Essay

Questions

Prepare a report for the audit senior, which addresses the 5 issues below.

1. The audit partner has suggested that the preliminary assessment of materiality for the financial report as a whole be set at $15,000. Comment on the appropriateness of this figure for your client. Provide evidence to support your view. Include a brief discussion of the effect that changing the preliminary assessment would have on the audit budget.
2. Prepare an analytical review (in the form of a trend analysis) using the income statement items from the trial balance. Note: Present your analysis in table format; comments on the results are not required for requirement 2.

3. Use the trend analysis to identify 4 income statement accounts that appear to be atrisk of material misstatement. Provide justification for why these accounts should be subjected to significant audit testing. In your explanations, identify an assertion that is likely to be at-risk for each account (i.e. identify 1 assertion per account; 4 in total).

4. For each account and assertion identified in requirement 3, design and describe an audit procedure that would provide relevant evidence for this (i.e. describe 1 procedure for each account; 4 procedures in total). Note: you need to explain the procedures in your own words with as much detail as possible (for example, if applicable, identify the sampling frame and specific documents required for your procedure).
5. The audit partner has suggested that fraud risk should not be considered for this client, as he feels that the client’s staff are all very trustworthy. Comment on the appropriateness of the audit partner’s suggestion. Identify whether there are any indications of fraud evident in the analytical review.

Answers:

Introduction

ASA 240 deals with the duty of the auditor regarding fraud in the inspection of the financial statement. Moreover, the standard expands to the manner in which ASA 315, as well as ASA 330, is to be applied to determine the risk of material misstatement because of deception (Auditing Standard ASA 240.The Auditor's Responsibilities Relating to Fraud in an Audit of a Financial Report, 2017). The first aim of this standard is to identify the risk of material misstatement of the financial report due to fraud. Apart from this, the second objective of this standard is to obtain suitable audit evidence regarding the estimated risk of material misstatement due to fraud, through designing and implementing appropriate responses. As per assertions of Tassadaq and Malik (2015), the last objective on which the standard aims at is to respond suitably to deception or alleged fraud which is recognized at the time of the audit.

Discussion

1.Evaluation of materiality limit set for Azure Enterprises

From the assessment of Trial Balance of Azure Enterprises, it can be assessed that the total sales for the year are 162499.99 for the year ending on 2016, i.e. the significant transaction will be in terms of thousand only. Thus, the base which has been taken by the auditor, i.e. 15000 is appropriate as all the important and critical transaction will be amounting to approximately 15000 or above. In case the budget is amended than the new figure will determine the accounts and transactions which require deep auditing. The concept of materially is applied to assess significant and qualitative transactions of an organization so that the percentage of inherent risk can be reduced to a significant extent (Soliman and Ragab, 2014).

2.Trend Analysis of Income Statement of Azure Enterprises

Horizontal analysis, also known as trend analysis refers to financial statement analysis method which illustrates alterations in the amounts of parallel financial statement items over a period of time. Further, it is considered as a useful instrument for assessing the situations of the trend of a specified period of time. The same method is applied by the auditor of the Azure Enterprises in order to assess income statement for two years. The year 2015 is utilized as the base period and the items on the statements for all later periods are compared with the items on the statement on the statement of the base period. The changes are presented in percentage form to ascertain the significant change over period.

Year

Increase / Decrease in financial items percentage %

Sales

-13%

Cost of sales

-31%

Gross Profit

-4%

Other Income

-97%

Service fees

-32%

Interest Income

-36%

Bank charges

-34%

Depreciation

49%

Interest expenses

-33%

Printing expenses

-33%

Miscellaneous expense

NA

Wages

-29%

Superannuation

-25%

Total Expenses

-13%

Net profit

-30%

3.Assertions related to significant audit testing

Knechel and Salterio (2016) specified the five variants which are required to be asserted while auditing accounts which require detail checking are existence, completeness, valuation, rights and obligations and presentation and disclosure. In the present case, as significant variance have been assessed in various accounts such as; the cost of sales, gross profit, service fees, other income, depreciation, interest expense and wages. However, a few of them have been discussed below in detail:

Cost of Sales: It can be accessed from the trend analysis that the cost of sales has been decreased to a significant extent; however sales have not been decreased to that major extent. As these both accounts have an interconnected relation, it is required to be assessed that whether the cost of goods has been decreased due to the quantum of goods sold or due to a decrease in prices of material used in same. Appropriate valuation of the cost of goods is necessarily required in order to present the true financial position of the company (Rendon and Rendon, 2015.). Thus, due to the same reason, the cost of sales account is subject to significant auditing testing.


Interest Expenses: In order to assess whether interest expenses are deductible or not it is required to analyze whether the same has been paid or not. Moreover, it is also required to be checked that whether same relates to the current year or not. Further, the account will also have a significant impact on liability. The assertion which is required in order to provide that adequate amount has been provided in P& L is that calculation of interest has been done in an appropriate manner in order to analyze presentation and disclosure relating to same.

Service Fees: Service fees are a significant part of the income of Azure Ltd. A variance of 32 % can be analyzed from an analytical review of the income statement. Thus, assertion relating to the nature of service fees relating to accounting treatment is required to be attained from management. Moreover, appropriate notes to accounts have been provided or not in books of account in order to specify the reason behind significant downfall in service income. In case appropriate accounting has not been applied than same might lead to the inappropriate and inaccurate presentation of financial statement (Robert, 2017).

4.Audit process of accounts entailing significant audit testing

Cost of Sales: The procedure of auditing cost of sales can be initiated by carrying out a prognostic test of the cost of sale by product line, division or another business segment through reference to information of units dispatched and average unit costs. After this, exploration of important differences among the forecasted and recorded amounts should be done. The next step will be expanding the vouching test of purchase transactions to test associated cost of sales transactions through tracing the units costs utilized to alleviate stock in order to costs records tested in the audit of stock.

Hence, the audit process is to be followed strictly on a regular basis in order to determine whether the cost of sales have decreased or increased (Audit Procedures, 2017). In addition to this, proper recording of goods that have been vetted but not dispatched have been characterized as sales in the financial statements rather than inventory will also be checked.


Service Fees: The first step to be taken for an audit of service fees is authenticating the summary calculations. The auditing has to start with income segment, confirming that the total income is equivalent to the total of the income lines. Subsequently, estimate the variance between income and expenditure numbers in order to verify the equity section, since the owner’s equity is merely the difference between income and expenditure. Once it is verified that the estimations which are done in the income statement are correct, then re-examine the detail which contributes to the figures (Revenue Audit Procedures, 2017). Draw summary transaction reports from the general ledger for every income account. Moreover, the every-transactional level report demonstrates the figure that has been recorded in the statement. After doing so, contrast the transactions in the ledger to the hard copy files for example invoice or check stubs the journal entries to verify that they were recorded accurately. When the audit of the income statement is done then select, some transactions form every relevant account, for example, some credits posted to service fees.

Interest Expense: The auditing process of interest expense can be initiated with the expense section, verifying that the total interest expense amount is equivalent to the total of expense lines. Drag ledger accounts of the transactions into the account of expense. Reconsider the transaction detail reports for interest expense account in order to verify that the total of expenses on the income statement report is appropriately contrasted to the ledger activity (Nuijten, Twist and Steen, 2015). The next step is analysing the detail level in the ledger for the entity transaction recorded in the period to confirm that they were posted accurately. After doing so, check the dates on the interest expenses to be confirmed that they apply in the period accurately and authenticate physically through adding them up, to make sure that the totals of interest expenses which are recorded in the statement are accurate.

5.Criticizing Suggestions by the audit partner

AUDITING STANDARD ASA 240 deals with the auditor’s responsibilities relating to fraud in an audit of a financial report. Further, it also provides explanation relating to the manner in which ASA 315[1] and ASA 330[2] are to be applied relating to the risk of material misstatement due to fraud (Mohanaprakash and Andrews, 2018). Para 11 of ASA 240 specifies objectives of an auditor in relation with fraud and same are as follows:

  • Firstly to recognize and evaluate the risks of material misstatement of the financial statement because of deception.
  • Further, to acquire adequate, appropriate audit proof related to the evaluated risks of material misstatement because of deception by designing and executing suitable reactions.
  • Lastly, to react suitably to deception or alleged deception recognized during the inspection.

Thus, in the present case, it can be commented that auditor partner suggestion for not considering fraud risk is not appropriate. The reason behind the same is that as significant variance in trend is available in the analytical review which requires detail assessment. Mere trustworthiness of staff cannot be applied as adequate, appropriate audit evidence for audit opinion purpose.

Conclusion

After considering all the facts and figures, it can be concluded that it is necessary to recognize and evaluate the risks of material misstatement of the financial statement due to fraud. Furthermore, in order to react suitably to deception or supposed deception recognized during the audit an auditor requires to assess internal control of management as well as audit evidence attained during the audit.

References

Audit Procedures. 2017. [Online]. Available through < [Accessed on 13th September 2019]

Auditing Standard ASA 240. The Auditor's Responsibilities Relating to Fraud in an Audit of a Financial Report. 2017. [Online]. Available through < [Accessed on 13th September 2019]

Knechel, W.R. and Salterio, S.E., 2016. Auditing: assurance and risk. Routledge.

Mohanaprakash, T.A. and Andrews, J., 2018. An examination on data integrity auditing patterns in cloud computing. International Journal of Engineering & Technology, 7(1.9), Pp.254-259.

Nuijten, A., Twist, M. and Steen, M., 2015. Auditing interactive complexity: Challenges for the internal audit profession. International Journal of Auditing, 19(3), pp.195-205.

Rendon, R.G. and Rendon, J.M., 2015. Auditability in public procurement: An analysis of internal controls and fraud vulnerability. International Journal of Procurement Management, 8(6), Pp.710-730.

Revenue Audit Procedures. 2017. [Online]. Available through < [Accessed on 13th September 2019]

Robert, R. The five assertions of Auditing. 2017. [Online]. Available through < [Accessed on 13th September 2019]

Soliman, M.M. and Ragab, A.A., 2014. Audit committee effectiveness, audit quality and earnings management: an empirical study of the listed companies in Egypt. Research Journal of Finance and Accounting. 5(2).Pp.155-166.

Tassadaq, F. and Malik, Q.A., 2015. Creative Accounting & Financial Reporting: Model Development & Empirical Testing. International Journal of Economics and Financial Issues, 5(2).

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