Significance of Audit Planning
Question:
Discuss About The Journal Educational Administration History?
Audit planning essentially refers to the planning by an auditor in regards to the systematic audit process that is carried out for the evaluation of the financial statements in order to ensure that the accounting statements reflect the true and fair view of the financial condition of the company. The audit of the accounting statements of a corporate entity is carried out in each financial year. A quality audit plan reflects the particular regulations and policies that should be strictly followed by an auditor for the successful execution of the auditing procedures. The major benefit that can be facilitated by the providence of an audit plan is that, by the following of the audit plan, an auditor can obtain enough evidence for the required examination and evaluation of the financial and non-financial proceedings of the company. The auditing procedure or plan effectively includes the testing of the various account balances for the identification of the material misstatements in the books of accounts. Thus, the audit testing of accounts forms a crucial part of audit planning van (Buuren caes et al., 2014).
The analytical review of the trial balance has been asked in the question can be effectively carried out by the horizontal trend analysis of the account balances of the financial statements of the company. The advantages that can be accrued from the analytical review of the trial balance is that the auditor can identify the material misstatements in the different account balances. The misstatements may have occurred either due to the fraud carried out by the concerned employee of the organization willingly or on the account of carelessness. The analytical review of the chosen accounts that have been carried out in this particular report has been effectively carried out by the horizontal trend analysis of the account balances.
The preliminary judgment of materiality refers to the particular amount of materiality that is effectively carried out by the auditor in order to ascertain the maximum permissible amount that can be allowed in case the financial accounts are misstated. This particular amount of materiality that is fixed by the auditor, is the maximum amount by which the accounts if misstated, will not hamper the quality of the financial statements and they will continue representing the true and fair view of the liquidity position of the concerned company. It should be noted here that the materiality misstatements in the account balances might have occurred due to the double entry book-keeping system in accordance to which the trial balance has been prepared (Malaescu and Sutton 2014).
Analytical Review of Trial Balance
The trial balance that is presented in the question has been utilized for the purpose of drawing the projected income statement balance sheet and significant ratios as follows:
|
Particulars |
2014 |
2015 |
Trend Analysis |
|
Cash at Bank |
102,503 |
99,251 |
96.83 |
|
Accounts receivable |
112,000 |
121,820 |
108.77 |
|
Inventory |
175,000 |
189,000 |
108.00 |
|
Machinery |
65,000 |
65,000 |
100.00 |
|
Accumulated Depreciation |
24,375 |
43,964 |
180.37 |
|
Motor Vehicles |
65,000 |
65,000 |
100.00 |
|
Accumulated Depreciation |
20,150 |
26,000 |
129.03 |
|
Furniture |
7,500 |
7,500 |
100.00 |
|
Accumulated Depreciation |
2,250 |
2,925 |
130.00 |
|
Bank Loan |
216,000 |
216,000 |
100.00 |
|
Sales |
187,450 |
182,812 |
97.53 |
|
Cost of sales |
63,595 |
49,024 |
77.09 |
|
Service fees (revenue) |
58,000 |
44,063 |
75.97 |
|
Other income |
25,000 |
900 |
3.60 |
|
Interest income |
50 |
36 |
72.00 |
|
Bank charges |
350 |
261 |
74.57 |
|
Depreciation |
15,590 |
26,114 |
167.51 |
|
Interest expense |
10,800 |
8,100 |
75.00 |
|
Printing |
250 |
189 |
75.60 |
|
Miscellaneous |
– |
1,800 |
not applicable |
|
Wages |
53,000 |
42,134 |
79.50 |
|
Superannuation |
4,770 |
4,002 |
83.91 |
|
Equity |
142,083 |
162,495 |
114.37 |
|
Income statement of Fly Group |
2015 |
2014 |
Trend Analysis |
||
|
Particulars |
|||||
|
Sales |
182,812 |
187,450 |
98% |
||
|
Cost of sales |
49,024 |
63,595 |
77% |
||
|
Gross profit |
133,789 |
123,855 |
108% |
||
|
Service Fees (revenue) |
44,063 |
58,000 |
76% |
||
|
Other income |
900 |
25,000 |
4% |
||
|
Interest income |
36 |
50 |
72% |
||
|
Operating Income |
178,787 |
206,905 |
86% |
||
|
Less: Expenses |
|||||
|
Bank charges |
261 |
350 |
75% |
||
|
Depreciation |
26,114 |
15,590 |
168% |
||
|
Interest expense |
8,100 |
10,800 |
75% |
||
|
Printing |
189 |
250 |
76% |
||
|
Miscellaneous |
1,800 |
– |
not applicable |
||
|
Wages |
42,134 |
53,000 |
79% |
||
|
Superannuation |
4,002 |
4,770 |
84% |
||
|
Net Profit |
96,187 |
122,145 |
79% |
||
|
Ratios |
|||||
|
2014 |
2015 |
||||
|
Net profit margin |
65% |
53% |
|||
|
Gross profit margin |
66% |
73% |
|||
|
Inventory turnover ratio |
1.07 |
0.96 |
|||
|
Assets turnover ratio |
0.39 |
0.39 |
|
Balance Sheet of Fly Group |
|||
|
2014 |
2015 |
Trend Analysis |
|
|
Current Assets |
|||
|
Cash at Bank |
102,503 |
99,251 |
97% |
|
Accounts Receivables |
112,000 |
121,820 |
109% |
|
Inventory |
175,000 |
189,000 |
108% |
|
Total Current Assets |
389,503 |
410,071 |
105% |
|
Non-current Assets |
|||
|
Machinery |
65,000 |
65,000 |
100% |
|
Accumulated Depreciation |
24,375 |
43,964 |
180% |
|
Value |
40,625 |
21,036 |
52% |
|
Motor Vehicles |
65,000 |
65,000 |
100% |
|
Accumulated Depreciation |
20,150 |
26,000 |
129% |
|
Value |
44,850 |
39,000 |
87% |
|
Furniture |
7,500 |
7,500 |
100% |
|
Accumulated Depreciation |
2,250 |
2,925 |
130% |
|
Value |
5,250 |
4,575 |
87% |
|
Total Non-current Assets |
90,725 |
64,611 |
71% |
|
Total Assets |
480,228 |
474,682 |
99% |
|
Liabilities and Equity |
|||
|
Bank Loan |
216,000 |
216,000 |
100% |
|
Owner’s Equity |
142,083 |
162,495 |
114% |
|
Net profit |
122,145 |
96,187 |
79% |
|
Total Liability and Equity |
480,228 |
474,682 |
99% |
The accounts that have been selected have been listed down as follows:
- Account Receivable
- Inventory
- Cost of Sales
- Service Fees (revenue)
- Wages
- Other Income
The accounts receivable has been selected for the purpose of audit testing in order to identify the materiality in the accounts
The Accounts Receivable account has been selected due to the fact that this particular account has increased by 108.77%. This means that the auditor should look into such a rising trend as because materiality may have occurred in the selected account. This is also a crucial financial component because it is directly linked with the total sales revenue incurred by the firm.
The accounts receivable represents that part of the total sales that has been incurred on credit. This means that the revenue that the business has generated has not yet been received. The chances of the accounts receivable balance being understated or overstated is high as this particular balance does not impact the cash generated by the firm. Therefore, a particular employee carrying out fraudulent activities may understate or overstate this account for increasing or decreasing the profitability of the firm. The accounts receivable is treated as an asset in the balance sheet of a particular company.
The recommended audit procedure for the auditor is that the auditor should look into each credit sales of the organization. The credit transaction should be checked with the respective customers and the other stakeholders of business. Moreover, the accounts receivable balance in the subsidiary ledger should be matched with the general ledger in terms of each credit transaction (Earley 2015).
The inventory has been selected for the purpose of audit testing in order to identify the materiality in the accounts
The inventory account has been selected because this particular account displays an increase by 108%.
The inventory account that has been selected might be subjected to materiality. This is due to the fact that often the inventory of a particular organization is maintained by different techniques like the perpetual inventory system and the periodic inventory system. This increases the chances of misstatement in the inventory account. It should be noted here that the inventory account has a direct link with the liquidity position of the company. This means that the overstatement or the understatement of the inventory account will affect the financial position of the company.
Selected Accounts for Audit Testing
The recommended audit procedure that should be applied by the auditor is that he should identify the particular process that is adopted by the corporate entity for treating the inventory of the organization. Moreover, the accounting records that have been maintained in regards to the purchase and sale of the inventory should be checked in order to filter out the instances of materiality in the books of accounts (Earley 2015).
The cost of sales account has been selected for the purpose of audit testing in order to identify the materiality in the accounts
The cost of sales account has been selected because this particular account has decreased to 77.09%.
The cost of sales account refers to the different costs that are incurred by the firms and constitutes of the direct costs like the direct labor cost. The cost of sales account is directly related to the sales revenue that is, if the cost of sales has been understated or overstated the profitability of the firm will directly increase or decrease. Therefore, the cost of sales also signifies the fact that whether the profitability strategies that are incorporated by the firm are working out or not.
The recommended audit procedure that should be applied by the auditor is that he should check whether all the purchase or sales in regards to the cost of sales has been properly recorded and authorized. He should also monitor the results of the different inventory tests (Earley 2015).
The service fees (revenue) account has been selected for the purpose of audit testing in order to identify the materiality in the accounts.
The service fees account has been selected due to the fact that the account has decreased to 75.97%
The service fees account has been selected due to the fact that the account displays an abnormal decrease in the account balance. It might be the case, that the account balance decreases due to a genuine reason. However, it is the primary duty of the auditor to look into the reason, as to why the service fees have decreased.
The recommended audit procedure that should be applied by the auditor is that he should look into the factors that led to the decrease in the service fees and determine whether there has been any genuine reason for such materiality (Graham 2015).
The wages account has been selected for the purpose of audit testing in order to identify the materiality in the accounts
Recommended Audit Procedures
The wages has been selected because this particular account has increased by 125.7%.
The wages account shows an unprecedented rise in the current year. This might be due to the fact that there has been a huge recruitment drive for workers in the organization. However, it is the primary duty of the auditor to look into the fact as to why the wages account has increased. The wages account if subjected to materiality will directly be reflected in the profitability of the organization.
The recommended audit procedure that should be applied by the auditor is that he should check the total number of workers recruited or the workers who have been promoted and the particular wages offered to them. This will help the auditor to ascertain the fact whether there has been any materiality issue in the account (Graham 2015).
The other income account has been selected for the purpose of audit testing in order to identify the materiality in the accounts
The other income account has been selected because this particular account decreases to 3.60%.
The other income has been selected because this particular account displays an abnormal decrease in the account balance. The auditor should review this highly abnormal phenomenon.
The recommended audit procedure that should be applied by the auditor is that he should monitor and check all the components of the other income account and trace back the transactions to their point of generation (Graham 2015).
References
Earley, C.E., 2015. Data analytics in auditing: Opportunities and challenges. Business Horizons, 58(5), pp.493-500.
Graham, L., 2015. Internal Control Audit and Compliance: Documentation and Testing Under the New COSO Framework. John Wiley & Sons.
Lambert, T.A., Jones, K.L., Brazel, J.F. and Showalter, D.S., 2017. Audit time pressure and earnings quality: An examination of accelerated filings. Accounting, Organizations and Society.
Luippold, B.L., Kida, T., Piercey, M.D. and Smith, J.F., 2015. Managing audits to manage earnings: The impact of diversions on an auditor’s detection of earnings management. Accounting, Organizations and Society, 41, pp.39-54.
Malaescu, I. and Sutton, S.G., 2014. The reliance of external auditors on internal audit’s use of continuous audit. Journal of Information Systems, 29(1), pp.95-114.
Mitra, S., Song, H. and Yang, J.S., 2015. The effect of Auditing Standard No. 5 on audit report lags. Accounting Horizons, 29(3), pp.507-527.
Thompson, G. and Mockler, N., 2016. Principals of audit: Testing, data and ‘implicated advocacy’. Journal of Educational Administration and History, 48(1), pp.1-18.
van Buuren, J., Koch, C., van Nieuw Amerongen, N. and Wright, A.M., 2014. The use of business risk audit perspectives by non-big 4 audit firms. Auditing: A Journal of Practice & Theory, 33(3), pp.105-128.
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