Audit Planning Report For Cadmium Enterprises

Limitations

The given report has been prepared for the audit partner of the firm and will be handed over with the details on the audit planning of one of the small entities “Cadmium Enterprises”. The report also has conclusion and the recommendation at the end.

The given report has only one of the limitations in the form of the trial balances which is not balanced. The debit and the credit totals are not matching for both the periods and therefore the same has been assumed to be suspense account. Since the nature of the same is not known, it has not been considered in any of the analytics (Bumgarner & Vasarhelyi, 2018).

The report starts with the determination of the materiality limit for the entity. It also enlists the critical accounts to be audited and the audit procedures to be undertaken to audit them. It encloses the common size income statement and the variance analysis in respect of the entity. Towards the end, the fraud risk analysis has been done for the given entity to check on the possibility of fraud (Willcocks, 2017).

The trial balance of “Cadmium Enterprises” has been enclosed below for the year 2015-16. For the year 2016-17, the balance is only for first 5 months so better analysis purpose, the same has been annualised to enable comparability and uniformity

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Trial Balance

Particulars		Jul 1,’16 – Nov 30,’16		Jul 1,’15 – June 30,’16
	Debit	Credit		Debit	Credit
Cash at Bank		85,000			80,000
Accounts receivable		118,340			111,000
Inventory		187,500			174,000
Machinery		71,000			65,000
Accumulated Depreciation			27,667			24,375
Motor Vehicles		66,000			66,000
Accumulated Depreciation			24,155			21,000
Furniture		7,400			7,400
Accumulated Depreciation			2,520			2,220
Bank Loan			230,000			230,000
Sales			78,750			187,450
Cost of sales		28,958			63,595
Consultancy fees			24,688			57,000
Interest income			20			50
Bank charges		145			350
Depreciation		6,746			15,863
Interest expense		4,792			11,500
Printing		105			250
Repairs and Maintenance		600			5,050
Wages		20,000			53,000
Superannuation		1,483			4,770
Total		598,069	387,800		657,778	522,095

Materiality may be defined as one of the key criteria’s in determining what to be focused upon and what not during the conduction of audit. It is one of the key tools being used in auditing. Anything can be said to be material, if the same has ability to change or vary the decision of the user (Kuhn & Morris, 2016). In the given case, the audit partner has suggested the materiality to be taken as $15000 but the same is too large for the given entity and if the same is being considered many of the critical accounts would be left from the ambit of audit. There are many international accounting bodies round the world like those of IASB and AASB which have suggested as to how to calculate materiality. Some of these are as a percentage of sales, assets, profits or owner’s equity as per which the materiality has been calculated. For the given organization, materiality should fall within the range of $787 to $ 966 as then the accounts like depreciation, interest, superannuation, repair and maintenance and furniture would also be checked and audited (Alexander, 2016).

(Amt in $)
Cadmium Enterprises
Quantitative estimate of materiality
Criterion	Base	Amount	Materiality level/range
0.5% to 1% of gross revenue	Gross Revenue	78,750	393.75 to 787.5
1% to 2% of the total assets	Total Assets	480,898	4808.98 to 9617.96
1% to 2% of the gross profit	Gross Profit	48,308	483.08 to 966.17
2% – 5% of the shareholders’ equity	Equity	NA	NA
5% to 10% of the net profit	Net profit	40,628	2031.42 to 4062.83

As a part of the preliminary analytical review, the common size income statement and the variance analysis has been prepared for the given entity. For variance analysis to be effective and comparable, the numbers have been annualised.

Cadmium Enterprises
Income Statement
Particulars	2017	% of sales	2016	% of sales
Sales	78,750	76.1%	187,450	76.7%
Consultancy fees	24,688	23.9%	57,000	23.3%
Other Income + Interest	20	0.0%	50	0.0%
Total Revenue	103,458	100.0%	244,500	100.0%

Less: Expenses
Cost of sales	28,958	28.0%	63,595	26.0%
Bank charges	145	0.1%	350	0.1%
Depreciation	6,746	6.5%	15,863	6.5%
Interest expense	4,792	4.6%	11,500	4.7%
Printing	105	0.1%	250	0.1%
Repairs and Maintenance	600	0.6%	5,050	2.1%
Wages	20,000	19.3%	53,000	21.7%
Superannuation	1,483	1.4%	4,770	2.0%
Total Expenses	62,829	60.7%	154,378	63.1%

Net Profit	40,628	39.3%	90,122	36.9%

Cadmium Enterprises
Income Statement
Particulars	2017	2016	Variance	Variance %
Sales	78,750	187,450	1,550	1%
Consultancy fees	24,688	57,000	2,250	4%
Interest income	20	50	– 2	-4%
Total Revenue	103,458	244,500	3,798	2%

Less: Expenses
Cost of sales	28,958	63,595	5,905	9%
Bank charges	145	350	– 2	-1%
Depreciation	6,746	15,863	327	2%
Interest expense	4,792	11,500	–	0%
Printing	105	250	2	1%
Repairs and Maintenance	600	5,050	– 3,610	-71%
Wages	20,000	53,000	– 5,000	-9%
Superannuation	1,483	4,770	– 1,210	-25%
Total Expenses	62,829	154,378	– 3,588	-2%

Net Profit	40,628	90,122	7,386	8%
Net Profit %	39.27%	36.86%

Discussion on the report

Based on the analysis above, several critical accounts have been chosen for analysis which have been enlisted below along with the assertions and the relevant risks.

Sl. No.	Account Name	Audit Assertion and risk
1.	Sales	The sales has increased by just 1% as compared to the last year on annualised basis, whereas the profit of entity has increased by 8% and therefore it needs to be checked if the management assertion of revenue recognition criteria has been met and the right to recognise the revenue in books was established (Erik & Jan, 2017).
2	Cost of Sales	The cost of sales has increased by a massive 9% for the sales increase of 1%. As a % of total receipts as well, the same has increased from 26% to 28% and therefore management assertion of accuracy in recording the cost and appropriateness of the cut off entries w.r.t. the cost needs to be checked (Belton, 2017).
3	Repair and maintenance	The repair expenses has shown a sharp decline of 71% as compared to last year and even as percentage of total receipts, it has fallen by 1.5% and therefore it needs to be checked if the expenses have been recorded completely and accrual and matching concept has been taken into consideration (Meroño-Cerdán, et al., 2017).
4	Superannuation	These have had a decline of 25% as compared to last year despite having the same sales. Therefore it needs to be checked if employees has left or resigned and if management assertion of completeness in recording of expenses has been met (Chron, 2017).

For the accounts identified above in the analysis, some of the audit procedures to be undertaken by the auditor in this regards are mentioned below:

Sales: For checking on the sales revenue of the entity, the vouching of the sales invoices needs to be done and it needs to be checked if the same is matching with the sales ledger and books of accounts. The revenue recognition policy of the company needs to be compared with the accounting standard and the appropriateness of the same needs to be validated to check if the right to accrue revenue has been established(Kangarluie & Aalizadeh, 2017).
Cost of Sales: The cost of sales has increased by a massive 9% on the sales base increase of 1%. It needs to be checked if the management has recorded all the expenses correctly and what is the accounting treatment of the cut off entries being done in the books of accounts. Vouching of bills needs to be employed for this.
Repair and Maintenance: The decline in repair and maintenance expenditure is substantial and it needs to be checked if the management has taken the provision entries in the books and has ensured completeness in recording of all the period expenses. It also needs to be checked if the expenses has not been capitalised in the balance sheet(Truong, et al., 2008).
Superannuation: The superannuation expenses have declined and therefore the employee register needs to be checked to verify if the employee head count has gone down or the company has changed the policy in respect of the superannuation expenses. The auditor also needs to check if the company has followed all the laws and regulations in place(Vieira, et al., 2017).

Conclusion

The last section in the audit of the entity is the fraud risk analysis which is generally done to check the possibility of fraud in the organization but in the given case, the partner of the firm has suggested that the fraud risk analysis need not be done for the given client as the client is trustworthy. But this is completely against the concept of professional scepticism and the ethics for auditors as stated in APES 110 as per which the auditor should apply professional judgement in such circumstances and check the client for FRF irrespective of anything else (Fay & Negangard, 2017).

There are few accounts of the entity which hint towards the possibility of the fraud in the organization. Some of such accounts are cost of sales and the repair and expenditure account for the reasons which have already been explained above. Furthermore the wages account and the superannuation account needs to be verified as there is a substantial decline with decrease in the sales.

Few of the recommendations for the given client’s audit is:

The auditors should not only be emphasizing on the income statement accounts but also be checking the balance sheet for further evidences.
The opening balance verification also needs to be done in case the auditor is new.

References

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Bumgarner, N. & Vasarhelyi, M., 2018. Continuous auditing—a new view.. Continuous Auditing: Theory and Application, 20(1), pp. 7-51.

Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: https://smallbusiness.chron.com/five-common-features-internal-control-system-business-430.html
[Accessed 07 december 2017].

Erik, H. & Jan, B., 2017. Supply chain management and activity-based costing: Current status and directions for the future. International Journal of Physical Distribution & Logistics Management, 47(8), pp. 712-735.

Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal of Accounting Education, Volume 38, pp. 37-49.

Kangarluie, S. & Aalizadeh, A., 2017. ‘The expectation gap in auditing. Accounting, 3(1), pp. 19-22.

Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of Enterprise Information Management, 30(6).

Meroño-Cerdán, A., Lopez-Nicolas, C. & Molina-Castillo, F., 2017. Risk aversion, innovation and performance in family firms. Economics of Innovation and new technology, pp. 1-15.

Truong, G., Partington, G. & M, P., 2008. Cost of Capital Estimation and Capital Budgeting Practice in Australia. Australian Journal of Management, 33(1), pp. 95-121.

Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems. SAGE Journals, 30(1).

Willcocks, L. P. L. M. C. &. S. C., 2017. Introduction. In Outsourcing and Offshoring Business Services. Cham: Palgrave Macmillan,.

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