Assessing Materiality
In the given case various auditing standards and their implication procedure in the process of audit have been disused. The report analyses the trial balance and sheet of the company Ateneo Enterprise Trial Balance for the purpose of audit. The report highlights auditing assumptions and their reasoning are also discussed. In addition to this, the trend analysis is conducted to define the materiality, and to understand components of the financial statement in which the auditor has identified material risks (Knechel & Salterio 2016). The analytical review procedure are applied for identifying the material misstatement in the financial statements. Further, the auditing procedures that are required to deal with the misstatement is discussed in the contents of the report.
In the given case, the partner or the client suggested that for the primary assessment of materiality for the financial statement as a whole is be set as $ 15000. In accordance with the Auditing Standard 580, the management representations are one of the many sources of audit evidences. In the given case the partner had suggested the auditor a materiality level of $ 15000 so substantial audit procedure will be adopted for items above the materiality (Groomer & Murthy 2018). This is not an obligation to the auditor but is an optional to the auditor weather to exercise on them or not. In addition to that, in accordance with the ASA 540 Auditing accounting estimates provides guidance to the auditor to fix the materiality of the statements and various components of the company. In accordance with the ASA, the auditor must personally assess the materiality of the primary assessment task. The ASA 540 suggested the auditor to make the following procedure to understand the reliability
- The materiality concept is applicable and applied by the auditor in both the audit planning and at the time of auditing.
- The ASA 580 suggested the auditor to comply with the ISA 320 (revised) the auditor will identify and assess the risk of materiality based on the nature and environment of the entity. In addition to that, the auditor based on experience will define in accordance with the AAS materiality.
- Further, the auditor will fixed the materiality in such a way so that there are higher probabilities to identify any material misstatement.
- In the given case a majority of the components are very low there for the materiality will be $5000 and above.
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Ateneo Enterprises |
Trend |
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|
Trial Balance ($) |
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|
Jul 1, 2015 – Nov 30, 2015 |
Jul 1, 2014 – June 30, 2015 |
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|
Debit |
Credit |
Debit |
Credit |
Debit |
Credit |
|
|
Cash at Bank |
99,251 |
102,503 |
103% |
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|
Accounts receivable |
121,820 |
112,000 |
92% |
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|
Inventory |
189,000 |
175,000 |
93% |
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|
Machinery |
65,000 |
65,000 |
100% |
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|
Accumulated Depreciation |
35,258 |
24,375 |
69% |
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|
Motor Vehicles |
65,000 |
65,000 |
100% |
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|
Accumulated Depreciation |
23,400 |
20,150 |
86% |
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|
Furniture |
7,500 |
7,500 |
100% |
|||
|
Accumulated Depreciation |
2,625 |
2,250 |
86% |
|||
|
Bank Loan |
216,000 |
216,000 |
100% |
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|
Sales |
101,562 |
187,450 |
185% |
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|
Cost of sales |
27,235 |
63,595 |
234% |
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|
Service fees (revenue) |
24,479 |
58,000 |
237% |
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|
Other income |
500 |
25,000 |
5000% |
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|
Interest income |
20 |
50 |
250% |
|||
|
Bank charges |
145 |
350 |
241% |
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|
Depreciation |
14,508 |
15,590 |
107% |
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|
Interest expense |
4,500 |
10,800 |
240% |
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|
Printing |
105 |
250 |
238% |
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Miscellaneous |
1,000 |
– |
0% |
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|
Wages |
23,408 |
53,000 |
226% |
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|
Superannuation |
2,224 |
4,770 |
215% |
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From the above trend or analytical analysis the auditor finds some relative data that influence the auditor in determining some material miss-statement in certain accounts the details are provided below:
|
Account |
Assertion |
Explanation |
|
Accumulated Depreciation |
Valuation / allocation |
After analysing the above case the auditor finds that then percentage of change in the allocation of the accumulate depreciation change has increased by more than a substantial amount (Moroney & Trotman 2016). For both the assets is that the motor vehicle and Furniture the company depreciated more than the requirement. Therefore the valuation and the calculation is required to check. |
|
Sales |
· Existence and occurrence · Presentation and discloser |
In the given report the company, the sales ware increased by 185% in the year, this denoted that there might be some material misstatement that might have occurred in the disclosure in the sales (Green & Cheng 2018). On the other hand, valuing the sales amount. In addition to that, the auditor might have thought that the company has increased the sales to show higher profits. If the percentage in increase in sales were in between 10 Percent to 20 percent then it is within the performance of the business nature of the entity. |
|
Service revenue |
Valuation |
In the given report the company, the service Revenue ware increased by 237 % in the year, this denoted that there might be some material misstatement or arithmetical deficiencies that might have occurred in the discloser in the service Revenue . On the other hand, valuing the service Revenue amount. In addition to that, the auditor might have thought that the company has increased the service Revenue to show higher profits. If the percentage in increase in service Revenue were in between 10 Percent to 20 percent then it is within the performance of the business nature of the entity. |
|
Other Income |
· Existence and occurrence · Presentation and discloser · Valuation |
From the analytical review it is asserted that the company has increased the other incomes by 5000% this is irrational in every circumstances. There must be some material miss-statement. If there are some real existences of the income, then disclose the source (Axelsen et al. 2017). Because in the trial balance of the company, there are no such investment policies that are able to provide that much of income to the company. Even if the company has sold some of their asset then the trial balance of the company is not reflecting that. |
In accordance with the Australian auditing standards AAS 300, the auditor is guided to plan the auditing procedure to review the identified components of the financial report that the auditor finds the hints of miss-statement. In addition to that, the auditor will assess the risk assessment in accordance with ASA 330. The auditor is required to comment on the financial statement of the client that weather it is reflecting true and fair view or not. In addition to that, the company is liable to disclose the account in accordance with the relevant accounting standards of Australia (Chen et al. 2018). In the given case, the auditor has identified some relevant components in the financial reports that had affect the auditor regarding the chances of risk or miss-statements.
Trend Analysis of the Income Statement
To identify the actual risk involvement the auditor is required to do the following:
Existence and occurrence:
The auditor needs to verify the existence of every assets of the company is actual as the part of compliance procedure of auditing. In addition to that, the company is able to include all the asset in the books is actual or fair valuations. As per the standers of auditing the auditor requires to inspect the books of accounts and the asset and the ownership by inspecting documents and confirming the sources of valuation and what accounting technic and assumption are considered in the relevant case.
Rights and obligations:
The auditor needs to understand the accounting procedure and nature of the clients business to understand what are the rights and obligation of the company to record any data.
Valuation and allocation:
The valuation of the allocation of the asset and liabilities are to be valued in accordance with the relevant Australian accounting standards. In addition, to that for the valuation the auditor will cross check the books, accounting measure, assertions, assumptions and others. In the given case, the valuation of the fixed assets of the company is required to re-verify as there is significant risk involvement analysed by the auditor (Christensen et al. 2016).
Sampling:
Sampling is an integral part of auditing compliance procedure. In the given case, the sampling will be required more in the sales, service revenues, and other incomes to determine weather there are any miss-statement is available in those. In the sampling procedure, the auditor will inspect the accounts, sales voucher, invoice, bank statement (other income) and investments of the company.
In the given case, the partner has assured the auditor to fraud risk should not be considered for the client, as he feels that the client’s staffs are all very trustworthy. This is not a valid auditing terms as per the Australian accounting standards ASA 210.
As per the ASA 210 and the ASA 200, the auditor primary responsibility is comment on the financial reports of the client. The auditor is not obliged to detect fraud and errors unless specifically asked. Nevertheless, if in the auditing procedure the auditor finds any hints where fraud has taken place in that case the auditor needs to find out the source of that hint either to accept or reject the fraud. Even if it is not primary responsibility or communicated by the client to check or not to check the fraud depends on the auditor (Bumgarner, N. & Vasarhelyi 2018). As specified in the ASA 240 all adequate provisions and verification must be conducted by the auditor.
Conclusion
In the relevant case study some important and material information and auditing procedure is identified and the procedure of audit planning and conduction technical, reasonability and others are discussed in the statement on the guidance of the ASA’s.
References
Axelsen, M., Green, P. & Ridley, G., 2017. Explaining the information systems auditor role in the public sector financial audit. International Journal of Accounting Information Systems, 24, pp.15-31.
Bumgarner, N. & Vasarhelyi, M.A., 2018. Continuous auditing—a new view. In Continuous Auditing: Theory and Application (pp. 7-51). Emerald Publishing Limited.
Chen, W., Khalifa, A.S., Morgan, K.L. & Trotman, K.T., 2018. The effect of brainstorming guidelines on individual auditors’ identification of potential frauds. Australian Journal of Management, 43(2), pp.225-240.
Christensen, B.E., Glover, S.M., Omer, T.C. & Shelley, M.K., 2016. Understanding audit quality: Insights from audit partners and investors. Contemporary Accounting Research, 33(4), pp.1648-1684.
Green, W.J. & Cheng, M.M., 2018. Materiality judgments in an integrated reporting setting: The effect of strategic relevance and strategy map. Accounting, Organizations and Society.
Groomer, S. M., & Murthy, U. S. (2018). Continuous auditing of database applications: An embedded audit module approach. In Continuous Auditing: Theory and Application (pp. 105-124). Emerald Publishing Limited.
Knechel, W.R. & Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Moroney, R. & Trotman, K.T., 2016. Differences in Auditors’ Materiality Assessments When Auditing Financial Statements and Sustainability Reports. Contemporary Accounting Research, 33(2), pp.551-575
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