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ACC621 Issues in Auditing Practice Editing Services
This report is being prepared as per the directions of the audit partner of the firm to whom the report will be handed over at the end[ CITATION Bro16 \l 1033 ]. Several recommendations and suggestions have been given by the senior audit partner which has also been discussed.
The entire report has been prepared on the basis of the trial balance of the entity, however the debit and the credit totals of the same is not matching and therefore the same can be assumed to be suspense account but it has not been considered in any of the analysis as the nature of the account is not known[ CITATION Bum18 \l 1033 ].
The report will include selection and identification of the key risk account where audit attention is required, the audit assertions and procedures on the basis of preliminary analytical procedures. The report will also highlight the selection of materiality limit and possibility of frauds in any of the accounts mentioned in trial balance.
Inputs to the report - Analysis
Trial balance input
The trial balance of the entity “Cerise Enterprises” lists the full year figures for the last financial year but for the current year, it mentions figures only for a few months and therefore the data has been annualised for the purpose of better analysis.
Determination of Materiality
The first step in the audit planning of an entity is the determination of the extent of materiality. It is very critical and important from the perspective of the auditor as it helps the auditor to understand which all areas need to be focused and what all can be ignored considering the immateriality[ CITATION Axe17 \l 1033 ]. Materiality is something which is significant and can change the decision makingprocess of the user of financial statements. In the given case, the audit partner of the company has suggested the materiality to be taken as $15000 but in case the same is being considered, many of the critical accounts like superannuation, repair and maintenance, furniture account, interest and depreciation would be ignored and therefore materiality could be in between the range of $1732 to $2125 based on below working. These percentages of sales, profitability, assets and equity have been suggested by accounting bodies like IASB and AASB and even some of the consulting firms like Big 4’s.
(Amt in $)
Quantitative estimate of materiality
0.5% to 1% of gross revenue
866.25 to 1732.5
1% to 2% of the total assets
4728.03 to 9456.06
1% to 2% of the gross profit
1062.78 to 2125.57
2% - 5% of the shareholders’ equity
5% to 10% of the net profit
4469.12 to 8938.23
Preliminary Analytical Review
The preliminary analytical review has been done based on the trial balance of the entity and the common size income statement and the variance analysis has been prepared for the purpose of selecting critical accounts[ CITATION Cho18 \l 1033 ].
% of sales
% of sales
Other Income + Interest
Cost of sales
Repairs and Maintenance
Cost of sales
Repairs and Maintenance
Net Profit %
Discussion on the report
Income statement accounts to be analysed
Some of the critical income statement accounts chosen for analysis have been mentioned below. The relevant audit assertions and the risk in accounts have been mentioned below
Audit Assertion and risk
The Sales has increased by only 1% as compared to the last year whereas as percentage of the total receipts, the same has decreased by 0.6%. This shows the company has shown decline and it needs to be checked if management assertion with regards to rights to book revenue as per the accounting standards has been taken care off[ CITATION Wil171 \l 1033 ].
Cost of Sales
The cost of sales has increased by 9% over last year and even as a percentage of the total receipts, it has increased from 26% to 28% and it needs to be examined if the costs have been booked correctly and matching concept has been adhered to by the management. The assertion w.r.t. accuracy, cut off and occurrence needs to be examined here[ CITATION Vie17 \l 1033 ].
Repair and maintenance
The repair and maintenance expenses has decreased by a massive 71% as compared to the last year and as a percentage of the total receipts as well, it has declined by 1.5% and it needs to be checked if the management has met the assertions of completeness and existence of these expenses[ CITATION Fay17 \l 1033 ].
The wages has declined by 9% as compared to the last year and as a percentage of sales as well, it has declined by 2.5%. This is in sharp contrast to the increase in sales and the cost of sales and therefore it needs to be checked on the accuracy and completeness of recording these expenses and whether adequate provision has been taken at the time of cut off[ CITATION Dic17 \l 1033 ].
Audit procedures to be undertaken
For the accounts identified above in the analysis, some of the audit procedures to be undertaken by the auditor in this regards are mentioned below:
1. Sales: The sales invoices needs to be checked and vouched for accuracy and whether the same is matching with the sales ledger records. Also the revenue recognition policy needs to be checked by the auditors if the policy has been followed and the right to recognise the revenue has been established.
2. Cost of Sales: Since the cost of sales has increased by huge amount, it needs to be vouched if all the expenses incurred in the accounting period has been recorded with accuracy or the future expenses have also been considered. Also, cut off accounting entries at the month and year end also needs to be checked if the same has been taken appropriately and extra cost is not accounted in the current year[ CITATION Rai16 \l 1033 ].
3. Repair and Maintenance: The repair expenses has come down drastically and hence it needs to be checked if the management has ensured that all the expenses pertaining to the accounting year has been recorded in the books and if the requisite provision has also been taken. All the management estimates as well as the judgements in this regards also needs to be verified[ CITATION Mer17 \l 1033 ].
4. Wages: The wages has decreased by 9% and hence it needs to check if the efficiency of operations has improved or the wage rates have been lowered. The employee register needs to be checked and also it needs to be checked if the company has complied with all the labour laws and the appropriate disclosures have been given in this regard[ CITATION Kac18 \l 1033 ].
Conclusion – Fraud Risk Analysis
Fraud risk analysis is analysing the possibility of the fraud in the organization. It is one of the key steps in auditing and therefore needs to be conducted compulsorily. The same has been stated in a number of places like APES 110 on ethics of auditing. Besides this, the concept of professional scepticism also advocates that the fraud risk analysis should be conducted for all the clients irrespective of anything[ CITATION Gre17 \l 1033 ]. In the given case the audit partner has recommended and suggested that the given client should not be subjected to fraud risk analysis considering the trustworthiness but his contention is wrong as per the points already explained above.
Some of the accounts in the given entity do hint towards the possibility of the fraud in the organization, which are wages account and cost of sales account, for the reasons explained above. Furthermore, superannuation account also needs to be reviewed as the same has gone down considerably as compared to the last year and depreciation account which has increased despite no changes in the asset balances as compared to the last year
Few of the recommendations for the given client’s audit is:
1. Apart from the income statement analysis, opening balance confirmation also needs to be done.
2. Balance sheet analysis can also be considered in case the auditor is not able to establish sufficient and appropriate audit evidences.
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