ACC305 Auditing and Professional Practice Editing Services

ACC305 Auditing and Professional Practice Assignments

ACC305 Auditing and Professional Practice Editing Services

Introduction

Authorisation

The audit planning report for Cyan Enterprises has been asked by the audit partner of the firm along with the audit recommendations, the high risk management critical accounts and the audit procedure to be taken in respect of the same.

Limitations

Since the trial balance of the company which has been given for the year 2016 and 2017 is not balanced in terms of the debit and the credit totals, the difference can be assumed to be the suspense account and the same has not been considered in any of the preliminary analytical reviews as the nature of the same is not known[ CITATION Axe17 \l 1033 ].

Scope

The information and all the analysis including preliminary analytical review has been done on the basis of the trial balance for the given entity. The scope of the project report includes identifying the high risk critical accounts which require the audit attention, the audit assertions in respect of the same and what the audit procedures to be taken to gather sufficient and appropriate audit evidences to give opinion on financial statements[ CITATION Bum18 \l 1033 ].

Inputs to the report - Analysis

Trial balance input

The trial balance of the given entity Cyan enterprises has been shown below but since the previous year figures have been mentioned for full 12 months and the current year figures have been mentioned for just 9 months, the same have been annualised for review purposes.

Cyan Enterprises
Trial Balance

Particulars	Jul 1, 16 - Mar 31, 17			Jul 1, 15 - June 30, 16
Particulars	Debit	Credit	Debit		Credit
Cash at Bank	70,000		73,000
Accounts receivable	120,750		122,750
Inventory	185,000		174,000
Machinery	71,000		64,000
Accumulated Depreciation		30,207			24,000
Motor Vehicles	66,000		66,000
Accumulated Depreciation		26,678			21,000
Furniture	7,400		7,400
Accumulated Depreciation		2,760			2,220
Bank Loan		230,000			230,000
Sales		148,463			187,450
Cost of sales	45,788		63,595
Consultancy fees		44,438			57,000
Interest income		36			50
Bank charges	261		350
Depreciation	12,424		15,738
Interest expense	8,625		11,500
Printing	278		375
Repairs and Maintenance	1,080		5,050
Wages	39,428		53,000
Superannuation	2,996		4,770
Total	631,028	482,581	661,528		521,720

Determination of Materiality

Materiality is one of the most critical and important aspects in the audit planning as it helps the auditor in understanding what all areas needs to be focused and what can be left behind. Materiality in simple words can be defined as something which has the ability to change the decision making of the end user. The audit partner of the firm has suggested the materiality to be taken as $15000 for the given entity but the same seems to be very high when the trial balance of company is assessed[ CITATION Dum17 \l 1033 ]. Accounting bodies over the world like those of IASB and AASB and the auditing firm like those of Big 4’s have suggested certain percentage to be used to determine materiality. Some of those are percentage of net profit, gross profit, sales, and equity or total assets. Using the same on given entity, the materiality should fall within the range of $1484 to $1993. With this range, many of other critical accounts would also fall under the ambit of audit like those of Depreciation, interest expenses, Repair and maintenance and the superannuation account[ CITATION Hem17 \l 1033 ].

*(Amt in $)*
Cyan Enterprises
Quantitative estimate of materiality
Criterion	Base	Amount	Materiality level/range
0.5% to 1% of gross revenue	Gross Revenue	148,463	742.31 to 1484.63
1% to 2% of the total assets	Total Assets	460,505	4605.05 to 9210.1
1% to 2% of the gross profit	Gross Profit	99,679	996.79 to 1993.59
2% - 5% of the shareholders’ equity	Equity	NA	NA
5% to 10% of the net profit	Net profit	82,058	4102.91 to 8205.81

Preliminary Analytical Review

As part of preliminary analytical review, the two analysis which have been done is the variance analysis and the common size income statement which have been shown below:

Cyan Enterprises
Income Statement
Particulars	2017	% of sales	2016	% of sales
Sales	148,463	76.9%	187,450	76.7%
Service fees	44,438	23.0%	57,000	23.3%
Other Income + Interest	36	0.0%	50	0.0%
Total Revenue	192,936	100.0%	244,500	100.0%

Less: Expenses
Cost of sales	45,788	23.7%	63,595	26.0%
Bank charges	261	0.1%	350	0.1%
Depreciation	12,424	6.4%	15,738	6.4%
Interest expense	8,625	4.5%	11,500	4.7%
Printing	278	0.1%	375	0.2%
Repairs and Maintenance	1,080	0.6%	5,050	2.1%
Wages	39,428	20.4%	53,000	21.7%
Superannuation	2,996	1.6%	4,770	2.0%
Total Expenses	110,878	57.5%	154,378	63.1%

Net Profit	82,058	42.5%	90,122	36.9%

Cyan Enterprises
Income Statement
Particulars	2017	2016	Variance	Variance %
Sales	148,463	187,450	10,500	6%
Consultancy fees	44,438	57,000	2,250	4%
Interest income	36	50	- 2	-4%
Total Revenue	192,936	244,500	12,748	5%

Less: Expenses
Cost of sales	45,788	63,595	- 2,545	-4%
Bank charges	261	350	- 2	-1%
Depreciation	12,424	15,738	827	5%
Interest expense	8,625	11,500	-	0%
Printing	278	375	- 5	-1%
Repairs and Maintenance	1,080	5,050	- 3,610	-71%
Wages	39,428	53,000	- 430	-1%
Superannuation	2,996	4,770	- 776	-16%
Total Expenses	110,878	154,378	- 6,541	-4%

Net Profit	82,058	90,122	19,289	21%
Net Profit %	42.53%	36.86%

Discussion on the report

Income statement accounts to be analysed

On the basis of the above analysis, some of the critical and significant accounts which need audit attention are mentioned below with the relevant assertions and the corresponding risks. For comparison sake, the accounts have been annualized and the variances have been measured.

Sl. No.	Account Name	Audit Assertion and risk
1.	Sales	The sales has increased by 6% as compared to last year but it has been same in terms of the total receipts. Therefore, the management assertion is this respect as to whether all the sales has been recorded needs to be checked by the auditor. Also, the revenue recognition criteria needs to be checked[ CITATION Mar18 \l 1033 ].
2	Cost of Sales	The sales has increased by 6%, whereas the cost of sales has decreased by 4%. In terms of total receipts, the percentage of cost of sales has decreased from 26% to 23.7%. Therefore, it needs to be checked if the management has ensured the completeness in recording of the transaction and uniformity in the policies[ CITATION Fuk11 \l 1033 ].
3	Repair and maintenance	This is one expenses which has by 71% as compared to the last year and in terms of percentage of total receipts, it has fallen by nearly 2% and therefore it needs to be checked requisite provisions have been taken in books and something that needs to be charged to P&L has not been capitalised.
4	Depreciation	Where most of the expenses of the company have decreased, the depreciation expenses have increased by 5% as compared to the last year and it needs to be seen if the accounting estimates and the management judgements with respect to the fixed assets have changed[ CITATION HEr17 \l 1033 ].

Audit procedures to be undertaken

With respect to the above audit assertions and the audit risks, some of the audit procedures which can be taken in respect of auditing these accounts are mentioned below:

Sales: For checking the sales, the vouching of the sample invoices must be done and the rates and prices mentioned in the system must be cross verified with the invoice prices. Also, the total of the sales invoices must be checked with the sales register to ensure completeness in recording. IN addition to all this, the revenue recognition criteria being used by the client needs to be verified and audited[ CITATION Biz17 \l 1033 ].

Cost of Sales: the cost of sales has dropped drastically and thus the vouching of sales invoices is warranted. Along with the same, it needs to be checked if the decrease in costs is due to increase in efficiency or the lowering down of raw material costs. The auditor should also be the market prices with the actual procurement price[ CITATION Vie17 \l 1033 ].

Repair and Maintenance: Since there is a huge decline in repair and maintenance expenses, first of all the auditor should be checking the accounting treatment as to whether these expenses are capitalised or charged to P&L. Also, it should be verified if the company has ensured completeness in booking of all the expenses and has followed accrual basis for taking requisite provisions in books[ CITATION Goo16 \l 1033 ].

Depreciation: Lastly the depreciation expenses also needs to be verified with respect to the accounting policies and judgements being used by the management. The auditor should check the method and rate of depreciation being used, the useful life assessment and whether the company has made and acquisition or disposal during the year[ CITATION Sit17 \l 1033 ].

Conclusion – Fraud Risk Analysis

The last step which has been asked by the audit partner is fraud risk analysis but he has recommended that the same need not be carried for the client in hand as Cyan Enterprises is a trustworthy client. But this contention of the audit partner is completely wrong and unjustified considering the principles of professional scepticism and the principles of ethics laid down in APES 110[ CITATION Fay17 \l 1033 ]. It is a well-established fact that all the clients need to be assessed for fraud risk analysis irrespective of the fact that whether or not they are trustworthy. There are some accounts which hints towards the possibility of fraud in the accounts like those of depreciation and the repair and maintenance accounts for the reasons which have been explained above. In addition, the superannuation account also needs to check as it has decreased by 16% and therefore the employee register needs to be checked if there is a decline in the number of employees[ CITATION Kac18 \l 1033 ].

Recommendations

Some of the recommendations with respect to the audit are:

1.The fraud risk analysis should be compulsorily done for the given client
2. Apart from the income statement analysis, the balance sheet analysis also needs to be done and the opening balances should be checked.

References

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