Planning Of Audit: Analyzing And Choosing Accounts For Audit Testing

Analytical Review

For the start of any activity whether it is related to accounting, production, marketing or any other function, the planning plays the very important role in the successful execution of the function. Any activity done without proper and adequate planning will always gives the vague and futile results. In the given case, the auditing function is required to be discussed and accordingly planning is also required for the successful completion of the audit. It is the first step towards the audit. It defines the manner in which the auditor is required to execute the function of the audit. At first it writes down the nature and size of the business of the company and after that it provides the layout of the whole process of the audit including the items of the financial statements which are required to be checked in detail and how the evidences has to be obtained from the company and how the same needs to be documented in the audit file and so on. Secondly, the planning of audit also includes carrying out some preliminary tests which will help the auditors to concentrate on those items more which are more prone to the existence of the material misstatements therein (Leung, Coram, Copper and Richardson, 2015). These tests include preliminary analytical review, judging about the materiality of the concept and substantive tests. In order to conduct the study, the financials of Calamansi Enterprises have been made available.  

The first test which is done at the time of planning of the audit is the preliminary analytical review.  Under the preliminary analytical review procedures, the auditor is required to compare the items stated in the financial statements in two ways. One way is to link the items stated in the financial statements of the company for the particular year with the other stated items of that year only and the other way is to link the particular item stated in the financial statements of the company for the current year with the previous year. The both ways helps in establishing the relationship and making the comparison between two or three items.  For instance in the current year two head of accounts can be linked like gross profit margin and the sales and the requisite percentage can be find out (ACCA, 2016). And for the consecutive two years the current ratio, change in working capital, change in the revenue earned in percentage terms, change in the cash and cash equivalents in percentage term can be done. The second method of analysis is commonly known as the trend analysis and it is one of the best methods of analysis prescribed in the statistical measures. The trend analysis can give two types of results either positive or negative and provides the degree up to which the head of the account is affected by other account (Glover, Prawitt and Drake, 2014). For instance positive trend in the administration expenses indicates that the company’s management on the cost control methods has become ineffective and positive increase in sales on one hand emphasizes on the company’s reputation and on other hand raise doubts on the correctness and accuracy of the figure of the sales figure.    

Preliminary Judgment Of Materiality

In the Calamansi Enterprises, seven accounts have been selected which requires the detailed checking. These are consultancy fees, bank charges, interest income, sales, depreciation, cost of sales and superannuation.  (Abidin and Baabbad, 2015).  

Apart from the adoption of the preliminary analytical review procedures by the auditors, the auditors are also required to check the how far the head of accounts so selected for the purpose of the analysis can have the presence of the material misstatement in financial statements of the company for the period ending as on the date of analysis. Materiality in itself exhibits the importance of each and every effect that the particular item shall have in the financial statements. For instance, the consultancy fees have been increased from $57000 in the year ending 30th of June 2016 to $59250 in the year ending 30^th of June 2017. The increase counts for 3.95% which is regarded as the material enough to increase the retained earnings of the company which in turn will increase the equity and also the share price of the company (Langevoort, 2015).

While judging the materiality of the particular item as stated in the financial statements of the company, the auditor is required to set out the limit in either percentage terms or in monetary terms depending upon the nature of the item which will be regarded as the material limit. The effect of the same shall be analysed if either the item crosses the material limit or falls below the material limit. For instance, of the auditor kept the material limit for consultancy fees as 3%, then the 3.95% is the material enough to consider and for the analysis of the effect it gives over the financial health and performance of the company (Ullah, 2014). As the company’s management has not specified any materiality limit, the auditor will do the judgment in accordance with the analytical procedures (Chen and Tsay, 2017 and Mao, 2014).

There has been increase in the income from the consultancy head amounting to $29625 for the period of six months and on the basis of the projected twelve months to $59250. The rationale is the effect that the account will give in the balance of the net profit of the company.

The most important assertion that has been placed is the classification and occurrence. The Classification Is Related To The Proper Grouping Of The Transaction Under The Proper Head Of account and occurrence is related to the fact of presence of the transaction in relation to the entity only (PCAOB, 2017).  

Consultancy Fees

Auditor shall vouch and verify each invoice with the entries made in the accounting books and cross verify with the bank statement. It will give the auditor an insight that the proper classification has been done and income has been earned in relation to the operation of the entity.

The bank charges although have been fallen by 0.57% but has been considered for the selection. It is because the bank charges represents the amount of fees charged by the bank or the financial institutions with which the company is operating its functions. The revenue has been increased but the corresponding expenditure for bank charges have not been increased.

The assertion that will be considered in the bank charges is the completeness. Completeness deals with the procedure of recording all the transaction relating to that head. As the amount has been fallen, there might be the possibility that the expenditure has been booked under different heads.

The audit team is required to closely monitor and verify the bank statement of the company and obtain the confirmation from the bank as to the amount of bank charges incurred during the period.

The account has been selected because of the equivalent decrease in the bank charges which is $2. In the case of interest income the percentage change is 4% which is material enough for the purpose of the study (Anastasia, 2015).

In this head also the completeness has been placed on the item. It is because the interest income has been decreased without the corresponding decrease in the cash and cash equivalents or any other advances made by the company from which interest income has come.

The audit team shall enquire the staff of the company first to know the nature of the income and then check the accounting books and verify them with the bank statement and shall obtain the letter of confirmation from the party paying the interest.

The sales account has been selected for the basic reason which is the mere increase in the amount of sales on the projection basis of 12 months ending 30^th of June 2017. The increase is only 0.82%.

Assertion placed is the occurrence and the completeness. It is because there might be the chances that the sales which have been occurred for the entity has not been recorded in the financial statements due to which the sales figure has not been increased by at least 10% (Kharisova, 2014).

Bank Charges

Audit team is required to check each and every sale bills with the ledger confirmation from the customers.

The amount of the depreciation has been increased by 4% which depicts that the company has changed the method of calculation of the depreciation. There has been only 6000$ increase in the value of Machinery and in case 15% depreciation is calculated then the value of depreciation comes out with 900$. Therefore, the item is material as the increase is not in consonance with the increase in the value of machinery.

Reliability is the assertion observed as the amount of increase in depreciation is very small and thus not reliable for the users of the financial statements (Vasarhelyi, 2014).

The audit team shall check the purchase bills of machinery and shall verify the calculation of the depreciation and disclose if there is any change in the method of depreciation and its necessary impact on the financial health of the company.

The head of cost of sales has been increased by 9.29% which is material enough for the selection of analysis purpose. The cost of sales have been increased without corresponding increase in the sales figure.. (Mock, 2015).

Accuracy assertion has been placed under this head of account as the cost of sales have been increased and the major reason that can be observed is the decrease in the value of the closing inventory or increase in the value of the purchases.

The audit team is required to verify the inventory valuation as well as the recording of the purchases in the accounting books.

The expenditure under the head superannuation has been considerably decreased by 25.37% with the corresponding decrease of only 9.44 % in the account of wages and salaries.

The assertion explained under this head of account is the completeness and occurrence. There might be the chances that the wrong expenditure has been booked under this head which Otherwise Would Have Been Recorded In Other Head Of Account.

The audit team is required to check the accounting ledger with the evidences supporting the ledger entries and the balances.

References

ACCA, (2016), “Analytical Procedures”, available on https://www.accaglobal.com/vn/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/analytical-procedures.html  accessed on 08-10-2017.

Abidin, S., & Baabbad, M. A. (2015), “The use of analytical procedures by yemeni auditors”,Corporate Ownership & Control, 12(2), 17-25.

Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on https://www.cleverism.com/financial-statement-analysis-introduction/   accessed on 08-10-2017

Chen, S., & Tsay, B. Y. (2017), “Refer to Materiality as a Legal Concept”. Journal of  Corporate Accounting & Finance, 28(2), 55-61.

Glover, S. M., Prawitt, D. F., & Drake, M. S. (2014), “Between a Rock and a Hard Place: A Path Forward for Using Substantive Analytical Procedures in Auditing Large P&L Accounts:Commentary and Analysis”. Auditing: A Journal of Practice & Theory, 34(3), 161-179.

Kharisova, F. I., (2014), “Applying the category of Assertions (or preconditions)» in audit of financial statement”. Mediterranean Journal of Social Sciences, 5(24), 180

Langevoort, D. C. (2015), “Judgment Day for Fraud-on-the-Market: Reflections on Amgen and the Second Coming of Halliburton”. Ariz. L. Rev., 57, 37.

Leung P, Coram P, Copper B and Richardson P, (2015), “Modern Auditing and Assurance Services”, Wiley John and Sons, Ed. 6, Pp 425-463, 582-684.

Mao, M., (2014), “Experimental Methods of Materiality Judgment on Auditor’s Experience  and Performance” In 3rd International Conference on Science and Social Research  (ICSSR 2014) Atlantis Press.

Mock, T. J, (2015). “Auditors’ Risk Assessments: The Effects of Elicitation Approach and Assertion Framing” Behavioral Research in Accounting, 28(2), 75-84.

PCAOB, (2017), “Analytical Procedures” available at  https://pcaobus.org/Standards/Archived/Pages/AU329A.aspx  accessed on 08-10-2017

Ullah A, (2014), “Planning and Audit of Financial Statements” available on https://leaccountant.com/2014/12/08/asa-300-summary-planning-an-audit-of-financial -statements/  accessed on 08-10-2017

Vasarhelyi, M. A., (2014), “Embracing the Automated Audit: How the Audit Data Standards and  Audit Tools Can Enhance Auditor Judgment and Assurance” Journal of  accountancy, 217(4), 34.

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