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ACC321 Auditing And Professional Practice

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ACC321 Auditing And Professional Practice

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Course Code: ACC321
University: University Of The Sunshine Coast

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Country: Australia

Question:
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 3 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; 3 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; 3 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.
Answer:

Introduction 
Audit materiality, one of the most crucial concepts in auditing includes misstatements, omissions those will be considered as material individually or in combination with other item. As per ISA 320 on materiality judgements regarding materiality are formed on the basis of associated circumstances and are impacted by nature or size of the misstatement or in combination for both (Ifac.org 2018).
Calculation of performance materiality not only involves the mechanical calculation but also the application of professional judgement. It is based on the auditor’s understanding regarding the entity that is updated during the procedures of risk assessment. Various benchmarks those can be used for computing the materiality are revenue, total assets, net asset value, gross profit and net profit. If revenue is taken as the base materiality will be established at 2% to 5% of revenues. Hence, for Cerise Enterprise materiality level will be at ($ 189,000 * 2%) = $ 3,780 to ($ 189,000 * 2%) = $ 9,450. However, 50% to 75% of materiality level will be considered as tolerable misstatement. Hence, the tolerable misstatement for Cerise Enterprise will be around $ 7,000. However, if the audit partner suggests the materiality level at $ 15,000 they will have to revise it to $ 7,000 (Choudhary, Merkley and Schipper 2018).
Audit budget identifies the number of items to be analysed based on the nature, amount of the items. However, if the materiality level is revised the audit budget will also be revised accordingly. Therefore, as in case of Cerise Enterprise tolerable misstatement level has been reduced from $ 15,000 to $ $ 7,000 audit budget will be increased.
This is used under financial audit for helping the auditors in understanding the business approach of the company and potential risk involved there. Analytical review is performed for assessing the financial statement of the company through trend analysis and ratio analysis to determine the fluctuation as compared to previous year.
Accounts under material misstatement
Sales as the major of earning for any company are always susceptible to misstatement. Therefore, even if the increasing amount of sales is negligible that is only 0.83%, sales is considered as material by its nature.
Assertion and explanation
Sales revenue is vulnerable to various assertions like accuracy and cut – off. Assertion of accuracy indicates that sale revenue amount has not been recorded appropriately or is misstated. Further, the assertion regarding cut-off indicates that the sales revenue recorded in the account is not related to the period under concern (Mock and Fukukawa 2015).
As major proportion of sales are consumed by COGS it is vulnerable to misstatement. It is identified that the COGS of the company has been enhanced by 9.28%. However, as the amount left from sales after paying off the COGS is used for paying the operational expenses, COGS plays important role in determining the gross profit of the company (Ruhnke and Schmidt 2014).
COGS are generally involved with the assertion related to accuracy that is COGS amount has not been recorded appropriately or is misstated. Another assertion related to COGS is occurrence that is all the expenses listed under COGS were actually had taken place (Ruhnke and Schmidt 2014).
Wages is major expense incurred for the business operation of the company. Employees are required to be paid for smooth business operation. Therefore, even if the reducing amount of wages is negligible that is only 9.43% wages is considered as material by its nature.
Assertion and explanation
The assertions related to wage expenses are (i) accuracy that is the payment made to employees is recorded in full (ii) classification that is transactions related to wages have been recognised under appropriate accounts and occurrence that is the recorded transaction for payment toll place actually that is payments actually made (Lessambo 2018).
Sale price shall be matched with the sale register with regard to names of purchaser, quantity purchased and unit price. Further the unit price shall be matched with the authorised price list of the company.
Audit procedure – Cost of sales
Expenses included under COGS shall be verified with the payment voucher and the transaction date shall be checked to confirm that transactions from other period have not been included under current period (Mock and Fukukawa 2015).
Wage payment made shall be confirmed with the wage register and employee register with regard to employee names, amount of payment made to each employee, advance payment and arrear payment, if any (Kogan et al. 2014). Employees engaged and retired during the period shall be verified with the employee register.
Fraud is the intentional error made with the objective of fulfilling any personal advantage (Boyle, DeZoort and Hermanson 2015). Auditors while carrying out the audit is responsible to state the true and fair representation of the financial statement. Therefore even if the audit partner feels that chances of fraud is not there as the employees are faithful, they shall be carried out the audit for detecting fraud risk (Antonio 2014).
Conclusion
From the above interpretation it is concluded that some of the items included in the income statement of Cerise Enterprise like sales, COGS and wages are material by their nature. Therefore, these items shall be verified carefully. Further, through the audit partner feels that chances of fraud is not there as the employees are faithful, they shall be carried out the audit for detecting fraud risk.
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.
Ifac.org. 2018. [online] Available at: https://www.ifac.org/system/files/downloads/a018-2010-iaasb-handbook-isa-320.pdf [Accessed 23 Sep. 2018].
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.
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.
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.

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