Planning Of Audit: Analyzing Trial Balance And Identifying Accounts Requiring Significant Audit Attention

Analytical Review: A Crucial Part of Audit Planning

Audit planning is the first stage of the process of the audit.  It is regarded as the main part of the whole process of the audit. It is because the whole process of the audit depends upon the planning only and that shall be done with the due care and professional responsibilities. The first basic aim of the audit planning is to equip the auditors with the understanding as to how to conduct the audit, what things are required to be kept in mind and in the audit documentation while conducting the audit, which areas are required to be checked in detail and which items as stated in the financial statements has the high probability of providing the distorted information to the users of the financial statements and etc. In the given case, company – Chamoisee Enterprises has been provided for analyzing. The second main aim of the audit planning is to conduct the preliminary analytical review procedures and substantive tests (Leung, Coram, Copper and Richardson, 2015). The aforesaid two tests are performed to have the detailed analysis of the financial statements with regard to the accounting ratios and the trend analysis over the past two years.

The analytical review is defined as having the analysis of the financial statements of the company in an analytical manner. This analytical analysis consists of the two set of processes. First process is known as the ratio analysis and the second process is known as the analysis through trend or movement in the items of the financial statements for the last two or three years. The first process is the ratio analysis and it informs the nature of relationship between two or more items of the financial statements and describe as to why the figure of the ratio sometimes justifies that the auditor is required to undertake the audit procedures which are in addition to the normal and defined audit procedures. These procedures are normally undertaken to ensure that the items as stated in the financial statements of the company is accurate, complete and authentic (Abidin and Baabbad, 2015).  

 The other process is the trend analysis. Trend describes the movement of the items of the financial statements over the past two or three years. The trend may be positive one or negative one. In simple words, the trend analysis may be upward or downward depending upon the results and the circumstances. It helps the auditor in considering the reasons for having such an increasing or decreasing trend during the planning of an audit and laid down the audit procedures which are required to be followed by the audit team (Glover, Prawitt and Drake, 2014). In this report of the company Chamoisee Enterprises, seven accounts has been selected for the purpose of the analysis and which includes consultancy fees, bank charges, interest income, sales, depreciation, cost of sales and superannuation has been listed and described and has been accordingly analysed.  (ACCA, 2016).   

Materiality concept is the key concept in the management subject as well as in the area of financial accounting and financial auditing. In the latter case, materiality concept focuses on the items which have material or significant effect on the financial results and operations of the company. Preliminary judgment means judgment before start of the audit which is during the planning of audit. During planning, the auditor through the analytical review identifies the material items and their likely effect on the financial position and the financial performance of the company (Chen and Tsay, 2017).

Ratio Analysis and Trend Analysis

The auditor is required to apply his professional skills and due care while judging for the materiality. It is required because every head in the financial statements has its own significance and therefore, the materiality of each head shall be considered. In the given case of the company, the cost of sales has been considerably increased from 33.93% to 36.77%. Three items are included in cost of sales- opening inventory, purchases and the closing inventory. If there is the significant variation then the auditor is required to set the materiality percentage. It is because the company has not provided any materiality level for each of the item stated in the financial report. In this case the materiality percentage may be set as 35% and auditor is required to perform the audit procedures accordingly (Mao, 2014; Langevoort, 2015 and Ullah, 2014). Similarly, for other items also the auditor is required to set the materiality level and is required to work accordingly.  

First account that has been selected is the consultancy fees. Consultancy fees have undergone sudden increase in the six months ending 31^st of December 2016 and which will result to 38.56% increase in the coming financial ending 30^th of June 2017. The increase in the consultancy fees will increase the retained earnings of the company and thus will have the effect on the equity. 

Accuracy and reliability are the most important assertions that have been placed on the increase in the amount of the consultancy fees. Accuracy is related to the recording of the income in accordance with the invoices and the bank statement and reliability is related to the genuineness of the figure stated in the financial statements. As the percentage increase is higher, there might be the possibility that the figures may have accuracy and thus are also not reliable.

Verification of the figures of the consultancy fees shall be done with the sales invoices issued and the transactions shown in the bank statement. These are checked as to whether the correct entries have been made in the books of accounts or not from which the financial statements have been prepared.   

It represents the amount which is charged by the bank in lieu of providing the various types of services. The basis for selecting the account for the study is the increase in percentage of the expenses which has been reached at the level of 32.58%. The percentage has been identified by projecting the actual figure for the full year. The reason for sudden increase in the bank charges is required to be checked and verified (PCAOB, 2017).   

Reliability is one of the assertions that have been placed in the bank charges. It is because the amount shall be increase when the company has obtained the amount from the bank as loan or has taken some other facility. But no such facility is prima facie available in the balance sheet and the statement of income.

Bank statement shall be closely scrutinized with the entries made in the books of accounts of the company from which the financial statements and the projections have been prepared. In addition to this, the auditor is required to perform substantive procedures to take the confirmation letter stating the amount of bank charges from the bank of the company. Reconciliation statement shall also require to be verified.

Preliminary Judgment of Materiality

The main reason for selection of the head of the interest incomes is that the income has been suddenly increased by 28% if it taken on projection basis for the period of twelve months. The bank charges have been increased by 32.58% and interest income has been increased by 28%. Therefore the company is having the net loss from the banking facilities approximately 5% and thus has been chosen for the purpose of the analysis (Anastasia, 2015).

Correctness is the assertion considered in the head of the bank charges. It is because the company has neither advanced any amount to any other person nor has the business of financing. Thus, there might be the chances of passing the wrong accounting entry in the books of accounts.

First procedure that the auditor is required is to verify the books of accounts with the bank statement and secondly shall obtain the confirmation from the bank. Thirdly, if the interest income is not from the bank then the auditor shall be required to know the source of the income and shall proceed accordingly.

The reason for selection is the sudden increase in the figure of the sales over the past two years. The increase has reached the level of 34.44%. The change is material enough which can distort the actual picture of the financial results of the company in case it contains some material misstatements or the risk which can hamper the company.

Reliability is major assertion concerned with the sales. It is because the increase made over the year is material and there might be the chances that the company has inflated the turnover by following the manipulating practices (Kharisova, 2014).

Verify each and every sale invoices with the books of accounts and shall obtain the ledger account of the debtors including the balance confirmation as on date.

he company has only purchased the machinery amounting to 6000 dollar and on that the company cannot charge the depreciation to the level which can increase the total depreciation by 36.07%. Due to sudden increase in the depreciation expense without the corresponding increase in the asset have formed the rationale for selection. 

The assertion placed is with reference to the method adopted by the company for the purpose of calculation of the depreciation. It is because the depreciation expense has been increased for all of the assets over the year (Vasarhelyi, 2014). The calculation of the depreciation with the old method as well as the new method is required to be checked by the auditor along with the effect of the additional depreciation or reduced depreciation shall be checked in the books of accounts.

The cost of sales has been increased by 45.71% with the 34.44% in the sales if the projection based figure has been considered for the whole year of twelve months. The sudden increase in the value of the cost of sales is the basis for the selection of the head of account (Mock, 2015).

Two assertions are involved in the given head of account. One is the valuation of the inventory and the second is the accuracy of the amount of the purchases mentioned in the books of accounts.

Purchase shall be verified with the all the purchase bills along with the GST Returns and the inventory valuation shall be verified in accordance with the adopted method.

Although the change in the superannuation expense is very less but the reason for selection is that the expenditure incurred under this account does not substantiate the increase in the amount of wages and salaries.

Completeness and the reliability are the two assertions involved in the given head of account. It is because the superannuation expense has been decreased despite of the fact that the wages and salaries have been increased.

The actuarial valuation report for the superannuation expense is required to be checked with the accounting entries made in the books of accounts and accordingly wages and salaries amount is also required to be checked.

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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