Audit Planning Report For Small Client

Concept of Materiality

An audit the basic practice involved in the transactions, which needs the inspection of the financial statements of the corporation, firm, person and various enterprises. An audit refers to the scrutiny or assessment of several books of accounts by the auditors followed by physical valuation of the stock and asset to ensure that all divisions are following recognized system of recording dealings. It is done to check and determine the correctness of the financial statements given by the company.  The audit firm requires the proper arrangement and the implementation and for similar trial balance has been examined, the possible areas as well as the non-potential areas are verified for making the views. Further materiality is a concept within auditing and accounting concerning to the significance of an amount or deals. The main object of an audit of financial statements is to make able the auditors to express views whether financial statements are arranged in the material respects.

The trial balance of the Chestnut Enterprises is given below-

Answer to question 1

The materiality concept is fundamental in both the accounting and audit. It is related to the important and amount of the operation or inconsistency. The materiality factor is of the importance that it has the authority to affect the decision of the stakeholders. Any mistake, misstatement, error, or blunder in financial statement, individually or in aggregate method has the chance to modify the attitude of the shareholders. The main evaluation is conducted on the basis of the material deals and non-material deals. The primary evaluation of the materiality of the financial report completely is set at 15000 $ that is far more than what is recommended by the International Accounting Standards Board. There are many guiding principle, that are stated by International Accounting Standards Board decide the materiality’s range (Griffiths, 2016).

According to the set standards or norms of International Accounting Standards Board in respect of the materiality, the gross profit is in range of .6-1.1% of gross sales 1-3% of total assets of the profit, 6-11% of net profit, or 3-7% of equity of shareholders of company. According to the calculation mentioned below in tabular form, it will support the auditor in deciding their views on the financial statements, else there are many accounts that will not be certified by auditors and will be overlooked. The accounts, which are remain with the auditors to inspect, are the account of liabilities, account of assets, superannuation account, and miscellaneous accounts (Kumar and Sharma, 2015).

Chestnut Enterprises

Answer to question 2

Note: In the above trend analysis, the figures of the year June 1, 2015 to June 30, 2016 have been averaged by dividing by two, to make it equivalent for comparison.

Answer to question 3

The trend analysis is an important tool to analyse the various accounts (Queensland Government, 2018). As conducted above it depicts the various changes that have occurred over the period of six months, in percentage and numerical terms. As visible from the analysis, the following accounts appear to be at risk:

Firstly, there is a huge change in the repair and maintenance account. The repairs have drastically reduced with a change depicted of about 72 percent. Thus, the auditors would be required to verify the reasons and the rationale behind the sudden reduction in the same.

Answer to Question 1

The second account that depicts the major change is that of the superannuation charges. These too have reduced around 16 percent. The auditors need to vouch the accuracy of the same. This would be done in relation to the wages. As the wages have reduced about 0.6 percent, but the superannuation expenses have reduced by 16 percent, the same pose a risk, that needs to be verified by the auditors.

Thirdly, the depreciation account shows an increase of about 5 percent. On evaluation of the fixed assets from the financial statements it is found that only the figures of machinery have changed in terms of the increase in the fixed assets. These have increased by an amount of 7000. The computation of the depreciation must be cross checked by the auditors, to check whether the same have been done correctly in accordance with the stated rates and amount of the fixed assets.

Thus the major changes occurring expose the accounts to significant audit risks and testing procedures to be performed thereon (Chan and Vasarhelyi, 2018).

Answer to question 4

Audit Procedures

The next step to be adopted by the auditors is to conduct the audit procedures, to eventually verify the relevant evidences obtained in relation to these accounts. The lists of the procedures that can be adopted by the audit team have been described as follows.

In order to verify the repair and maintenance account, the auditors must evaluate the invoices of the repairs. The increase in machinery can be because of the capitalization of the repair expenses in the machinery account. The auditor must examine the nature and the amount that has been capitalised in the machinery account, together with that of the repair and maintenance accounts. In case the addition in the machinery account is because of the charges of regular nature, the same would be suggested to be charged back to the repair account. Thus, the nature and the materiality of amount is required to be examined.

In addition, the depreciation calculations must be re performed by the audit team to vouch for its accuracy in terms of the rate selected and the period of time, over which the depreciation has been charged.

In order to verify the amount of the superannuation expense, the audit team must examine the labour rates, and the number of the labours currently employed. In addition, the receipt of the contribution of the superannuation amount must be verified, in case of contribution to regulatory fund.

Answer to question 5

As per this analytical review, the audit partner is not in the position with what the concept has been defined in connotation with an auditor. The model of the professional scepticism will be contravened if the factor related to fraud risk is not regarded. The preservation of the books of accounts is not only the benchmark, which may expose that a person or the firm has been, followed all principles, rules, and regulations. In this way, it is very significant to conduct the audit of accounts. Moreover, it was found after the analytical review that there are many disagreements, which are required to be consider and which are required to be remedied. Because of these elements, the increment in expenses and reduction in the expenses without any note and it will be normally immoral to not to have a scrutiny. In this way, the analysis is very much important to find the fraud risk factors (Knechel and Salterio, 2016). Thus, it can be stated that fraud risk should be considered for each of the client, irrespective of the integrity of the staff.

Conclusion

Thus, as per the discussions conducted in the previous parts it can be concluded that a trend analysis can be a useful tool for the analytical review procedures of the audit team. The auditors must exercise professional scepticism, experience and the technique of re computation.  The same will aid the audit team to decide the level of materiality, to vouch the accuracy of the accounts and the supporting calculations mentioned therein. Further, it is suggested that auditor must consider the fraud risks and examine the invoices and other supporting documents.

References

Chan, D.Y. and Vasarhelyi, M.A. (2018) Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application. Emerald Publishing Limited, pp. 271-283.

Griffiths, P. (2016) Risk-based auditing. California: Routledge.

Knechel, W. R. and Salterio, S. E. (2016) Auditing: Assurance and risk. Oxon: Routledge.

Kumar, R. and Sharma, V. (2015) Auditing: Principles and practice. Phillipines: PHI Learning Pvt. Ltd.

Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., and Thibodeau, J. C. (2015) Auditing & assurance services. Boston: McGraw-Hill Education.

Queensland Government (2018) Trend analysis for business improvement [online] Available from: https://www.business.qld.gov.au/running-business/growing-business/trend-analysis [Accessed on: 28/09/18].