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ACC621 Issues In Auditing Practice

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ACC621 Issues In Auditing Practice

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Course Code: ACC621
University: University Of The Sunshine Coast

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Country: Australia

Prepare a report for the audit senior, which addresses the 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 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. 

Preparation of financial statements has specific purpose and objectives that should be achieved by such statements for growth and development of a company. Main purpose of these financial statements is to satisfy the demands of stakeholders. For example, shareholders of the company expect that financial statements of the company should represent its actual financial position in market. This is the main reason that audit of the financial statements are conducted at the end of financial year (Louwers et.al, 2015). There are specific rules and responsibility that an auditor of the company should follow while conducting financial audit. This report is prepared in order to conduct audit of Chamoisee Enterprises. Various aspects of auditing are included in this report with respect to errors and material misstatements that can be evaluated form trail balance of the company. 
Materiality for the financial report  
Concept of materiality is applied by auditor of the company during the planning stage of audit. This concept is related to minimum level of financial amount which could be considered as threshold limit for taking relevant decisions by stakeholders. In simple words, Maternity in financial statement can be defined as the limit of discrepancy in financial data after audit is conducted on financial statement which can affect decisions to be taken by stakeholders (Choudhary, Merkley and Schipper, 2018). For example, let’s assume that material at in financial statement is $5000 then stakeholder’s decision in relation to business will not be affected by discrepancy in financial data below $5000 but if it exceeds $5000 then it might change decision of stakeholder. There are commonly used percentages of financial items in balance sheet that are considered by auditor before setting Maternity threshold limit.

Financial item


Total net profit


Net profit distributable to equity shareholders


Total revenue earned

.5% to 2%

Total shareholder’s equity

2% to 5%

According to the above data following threshold limit should be decided by auditors of Chamoisee Enterprises. (Calculation of Net profit are given in Appendix)


Amount and Percentage


Net profit

                        57,000 & 5%


Total revenue

                     1,87,450 & 2%  


During the planning stage of auditing Chamoisee Enterprise, audit partner decided to set the limit of materiality at $15000 which is very high as compared to commonly acceptable limit for an organisation like currently in consideration.      
Above step taken by the audit partner can affect the audit budget prepared by auditors in a negative manner. According to the threshold limit of $15000, shareholders will not be affected if there is a discrepancy in financial statements prepared by the management up to 15000 but in actually they will be affected if this discrepancy goes beyond $4000. Therefore management of audit firm is required to conduct more audit procedures as compared to audit procedure decided in planning stage. This will require more human capital and time which will increase overall audit budget (Lakis and Masiulevi?ius, 2017).   


Preceding financial year

Proportional Eight months for last year

Eight months of current year

Trend Analysis





Sales of the company in current financial year has increased as compared to last financial year. It might be due to increase in demand of the products and services offered by the company to its customer.  

Cost of goods sold




Cost of goods sold has also increased in current as compared to last financial year. This is common trend in business that if sales of the company increases then cost of goods also will also increases as it is a variable expense proportional to total revenue.  

Total indirect expenses




 Management of the company has adopted effective management and cost control strategies for bringing efficiency in business operations that has resulted In decrease of overall indirect expenditure.

Net profit




Net profit earned by the company has increased as revenue has increased and indirect expenses has gone down as compared to last year (Arens, Elder and Beasley, 2014).

Gross profit




 Gross profits earned by the company has decreased as compared to last financial years because the rate of increase in cost of goods sold is higher as compared to rate of increase in total revenue.  

Net profit ratio




 As company has controlled its total indirect expenditure, net profits of the company has increased as compared to last financial year.   

Gross profit Ratio




 Rate of increase in cost of goods sold is higher as compared to rate of increase in total revenue that has resulted in decreased in gross profit margin.  

Four income statement accounts that appear to be at risk
Identification of fraud and errors is one of the basic and primary responsibility of auditor of the company. At the initial state of auditing, auditor is required to identify the financial items that can have material misstatements just by observation of financial statement. Here following financial items are identified that seems to be at risk of material misstatement. After identification odd these statement, an auditor is required to implement additional audit procedures to acquire audit evidence so that opinion on financial data can be formed (Arens et.al, 2015).      


Preceding financial year

Eight months of current year




Accounts receivable






Bank loan



Cash – Cash is always considered as a financial item that is most prone to fraud and errors. Majority of the frauds conducted by management of the company are related to cash. Therefore it is important for every auditor to examine cash management policies and procedures in detain. Management should evaluate roles and responsibilities of employees that are handling cash in the organisation (Ashley-Smith, 2013).
Account receivable- account receivable are the amount dues from customers that have consumed goods and services of the company on credit and company is expecting to receive money from such customer. Generally there are specific policies and procedures that management prepared in order to recover amount from customer. In given case, inventory outstanding at end of accounting period is very high if sales made by the company in a year is considered. This can mean that management is selling majority of goods and services on credit but amount of total receivable outstanding should not be more that 20-30% of sales which generally represents sale made in last 2-3 month. This large outstanding amount of receivable can suggest that management is giving special relaxation period to certain customers without getting approval from management.   
Inventory- amount of inventory has also increased as compared to financial year. Management of the company should evaluate inventory management of the company. It is general practice of business organisations to adopt FIFO method as it reduces wastage of inventory (Melikhova, and Nikolayenko¸ 2017). In current year outstanding inventory is increased, therefore management should evaluate the reason for such.
Bank loan- In case of bank loan, management of the company is required to make annual instalment and such payments should be deducted from total amount of loan in the balance sheet. In case of Chamoisee Enterprises, the amount of bank loan is similar in both financial years. This can be a result of error or omission in accounting.
Audit procedure 

Audit of the company should check the bank statement of the company and compare it with cash register maintained in the books of accounts.
Bank confirmation should be taken by auditor from banking institution for closing balance.
This can be done with the help of preparing a Bank Reconciliation statement.             

Accounts receivable
Auditor should evaluate the steps and procedures taken by the company in order to recover money from these accounts and determine whether such policies are in the interest of the company or not. In addition to that management should also evaluate that such polices are applied for recovery from each account (Knechel and Salterio, 2016).
Best audit procedure to conduct to evaluate fraud and errors in inventory is through physical verification. Auditor should evaluate proper records are maintained by the management in respect to inventory or not (Makarenko and Yardanova, 2015).
Bank loan
Audit should check the terms and conditions of the loan between organisation and banking institution to make sure that records are maintained according to such terms and conditions.
Risk of Fraud
Identification and estimation of fraud is one of the most important function of audit and it is included in roles and responsibilities of an auditor. It is important that proper evidences are collected by auditor before making the audit opinion that there are no risk of fraud in a particular business organisation (Arens et.al, 2013). In this case of Chamoisee Enterprises, audit partner is of the opinion that there is no risk of management fraud just on the basis of his interaction with the management. This is not sufficient audit evidence to make such conclusion. Therefore it can be said that audit is not correct in making such suggestion.         
This report has discussed various aspect of auditing procedures to be conducted in a proprietorship firm. This report has identified some financial items that have possibility of material misstatement on the basis of trend analysis of trial balance of the company. In addition to that various audit procedures are also suggested to auditors of the company to form accurate audit opinion on such expected material misstatements. In addition to that this report has also discussed the concept of materiality with its impact on audit budget.    
Arens, A., Elder, R. and Beasley, M., 2014. Auditing and assurance services-An integrated approach; includes coverage of international standards and global auditing issues, in addition to coverage of. Boston: Aufl.
Arens, A.A., Best, P., Shailer, G. and Fiedler, B., 2013. Auditing, Assurance Services and Ethics in Australia. Pearson Higher Education AU.
Arens, A.A., Elder, R.J., Beasley, M.S. and Jones, J., 2015. Auditing: The Art and Science of Assurance Engagements. Pearson Canada.
Ashley-Smith, J., 2013. Risk assessment for object conservation. Routledge.
Choudhary, P., Merkley, K.J. and Schipper, K., 2018. Auditors’ Quantitative Materiality Judgments: Properties and Implications for Financial Reporting Reliability.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Lakis, V. and Masiulevi?ius, A., 2017. Acceptable audit materiality for users of financial statements. Journal of Management, 2(31).
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.
Makarenko, A.P. and Yardanova, T.H., 2015. Development of a program of inventory audit. Naukovi pratsi Poltavskoyi derzhavnoyi ahrarnoyi akademiyi, 2(11), pp.40-48.
Melikhova, T.O. and Nikolayenko, N.S., 2017. Development of an inventory audit program to increase financial security of the enterprise. Ekonomika ta derzhava, 1, pp.51-55.

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