Audit Planning Report For Alizarin Enterprises

Discussion and Analysis

The report highlights what are the major steps in the audit planning of the small entity, for which the audit partner of the company has asked to audit senior to prepare the report. Materiality has been determined and preliminary analytical review has been done in the report to find out the critical accounts and audit procedures has been suggested for the same (Appelbaum, et al., 2018). Fraud risk analysis has also been done for the given client based on issues in certain key accounts.

The trial balance of the given entity “Alizarin Enterprises” has been shown below. The difference in the debit and the credit side has been assumed suspense account and the same has not been considered for any calculation as the nature of the account is not known (Bae, 2017).

Alizarin Enterprises
Trial Balance
Particulars Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper		Jul 1, 2015 – Mar 31, 2016		Jul 1, 2014 – June 30, 2015
	Debit	Credit		Debit	Credit
Cash at Bank		99,251			102,503
Accounts receivable		121,820			112,000
Inventory		189,000			175,000
Machinery		65,000			65,000
Accumulated Depreciation			43,964			24,375
Motor Vehicles		65,000			65,000
Accumulated Depreciation			26,000			20,150
Furniture		7,500			7,500
Accumulated Depreciation			2,925			2,250
Bank Loan			216,000			216,000
Sales			182,812			187,450
Cost of sales		49,024			63,595
Service fees (revenue)			44,063			58,000
Other income			900			25,000
Interest income			36			50
Bank charges		261			350
Depreciation		26,114			15,590
Interest expense		8,100			10,800
Printing		189			250
Miscellaneous		1,800			–
Wages		42,134			53,000
Superannuation		4,002			4,770
Total		579,945	516,701		572,855	533,275

Materiality is one of the important aspects of audit planning and the same needs to be determined by the auditors at the time of audit planning itself. Materiality may be defined as the level or amount beyond which the financial and economic decision of the user group may change. It helps the auditor in planning as to what should be there in the scope of audit and what can be left behind(Bizfluent, 2017). In the given case, the audit partner has suggested the materiality limit to be $ 15000 but considering the amounts in trial balance, the same seems to be too high. The accounting bodies like AASB, IASB and the consulting and auditing firms like Big 4’s have suggested materiality limits as a percentage of the sales, net profit, gross profit, total assets and shareholder’s equity value. Based on these limits the materiality has been computed for given entity as between “$ 1828 to $ 2639”. This limit will bring some of the accounts like interest, superannuation, other income and the furniture account in the ambit of audit, which would have been, ignored completely otherwise (Gooley, 2016).

(in $)
Alizarin Enterprises
Quantitative estimate of materiality
Criterion	Base	Amount	Materiality level/range
0.5% to 1% of gross revenue	Gross Revenue	182,812	914.06 to 1828.12
1% to 2% of the total assets	Total Assets	474,682	4746.82 to 9493.63
1% to 2% of the gross profit	Gross Profit	131,989	1319.89 to 2639.77
2% – 5% of the shareholders’ equity	Equity	NA	NA
5% to 10% of the net profit	Net profit	96,187	4809.33 to 9618.65

2.The preliminary analytical review has been done with the help of trend analysis and the preparation of common size income statement, which will help in finding the audit issues and critical points. Both of these have been shown below:

Alizarin Enterprises
Income Statement
Particulars	2017	% of sales	2016	% of sales
Sales	182,812	80.2%	187,450	69.3%
Consultancy fees	44,063	19.3%	58,000	21.4%
Other income	936	0.4%	25,050	9.3%
Total Revenue	227,811	100.0%	270,500	100.0%
Less: Expenses
Cost of sales	49,024	21.5%	63,595	23.5%
Superannuation	4,002	1.8%	4,770	1.8%
Bank charges	261	0.1%	350	0.1%
Depreciation	26,114	11.5%	15,590	5.8%
Interest expense	8,100	3.6%	10,800	4.0%
Printing	189	0.1%	250	0.1%
Miscellaneous	1,800	0.8%	–	0.0%
Wages	42,134	18.5%	53,000	19.6%
Total Expenses	131,625	57.8%	148,355	54.8%
Net Profit	96,187	42.2%	122,145	45.2%

Alizarin Enterprises
Income Statement
Particulars	2017	2016	Variance
Sales	182,812	187,450	–        4,638
Service fees (revenue)	44,063	58,000	–      13,937
Other income	936	25,050	–      24,114
Total Revenue	227,811	270,500	–      42,689
Less: Expenses
Cost of sales	49,024	63,595	–      14,571
Superannuation	4,002	4,770	–            768
Bank charges	261	350	–              89
Depreciation	26,114	15,590	10,524
Interest expense	8,100	10,800	–        2,700
Printing	189	250	–              61
Miscellaneous	1,800	–	1,800
Wages	42,134	53,000	–      10,866
Total Expenses	131,625	148,355	–       16,730
Net Profit	96,187	122,145	–      25,958
Net Profit %	42.22%	45.16%

On the basis of above analysis, several critical accounts have been chosen for review purposes, some of which are shown below:

Sl. No.	Account Name	Audit Assertion and risk
1.	Sales	The sales of the company has declined by just 2% as compared to the last year but the profitability has got impacted by more than 21%. Sales as a percentage of total receipts has gone by up from 69% to 80% and therefore it needs to be seen why there is such an anomaly. Further the other income account also needs to be checked as to where the company has gone wrong here such that there is no income from this source altogether in the current year (Dumay & Baard, 2017).
2	Interest expense	The interest expenses have gone down by 25% as compared to the last year. But the balance of the principal loan is still the same as compared to the last year and hence it needs to be carefully scrutinized as to what is the issue behind this decline in expenses. This may be an accounting error as well (Knechel & Salterio, 2016).
3	Depreciation	Depreciation is the only expense which has risen as compared to the last year, all the other expenses have gone down so it needs to be checked what is the reason behind such an increase of 64%, this is one of the major reasons for decline in profitability by 21%.

Based on the above audit assertions and the audit risks to the above mentioned accounts, few of the audit processes that can be employed by the auditor in this regards are mentioned below:

Sales: The sales vouching needs to be done and it should be checked if the system total is matching with the invoicing total. The auditor should also be checking the revenue recognition criteria of the client and what is the reason of decrease in sales, if it is price increase or decrease in quantitative sales or competitive pressure(Kew & Stredwick, 2017).

Interest Expenses: Here the auditor should reconcile the balances from the loan from the bank statement and if the company has repaid any loan. The auditor should also calculate the expenses and check if the entire booking and requisite provision has been taken in the books of accounts. The auditor should also be verifying that the company is not shifting the current year expenses to the next year and has followed all the relevant accounting standards while preparation of the books of accounts and booking of the expenses(Arnott, et al., 2017).

Depreciation: The auditor should be checking all the management estimates and judgements here about the rate and method of depreciation, being used by management and whether there is any change in the same during the year. The auditor should enquire on the acquisition and disposals during the year as the balance of depreciation has increased monumentally(Bailey, et al., 2017).

Conclusion and Recommendation

Fraud Risk analysis may be defined as one of the audit procedure which is being applied by the auditors to check on the possibility of fraud in the organization. In the given case, the audit partner has suggested that the given company should not be subject to the fraud risk analysis since he considers the client trustworthy. But as per the principles of professional scepticism and those mentioned in the Professional Standards in APES 110, it is against the ethics of auditor and all the clients irrespective of anything and any relation must be subject to the fraud risk analysis. In the given case as well, there are several account, which show the risk of fraud in company(DeZoort & Harrison, 2016). Some of these are depreciation account and the interest expenses account for the reasons, which have been mentioned above, the other income account as the same has declined by 96% during the current year and it needs to be enquired what, is the reason behind the same. Also, the cost of goods sold account needs to be verified as there is a decrease of 23% in expenses as compared to last year even though the absolute sales has almost been constant (Félix, 2017).
 

References

Appelbaum, D., Kogan, A. & Vasarhelyi, M., 2018. Analytical procedures in external auditing: A comprehensive literature survey and framework for external audit analytics.. Journal of Accounting Literature, 40(1), pp. 83-101.

Arnott, D., Lizama, F. & Song, Y., 2017. Patterns of business intelligence systems use in organizations. Decision Support Systems, Volume 97, pp. 58-68.

Bae, S., 2017. The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From Korea. Journal of Applied Business Research, 33(1), pp. 153-172.

Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]  Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html [Accessed 07 december 2017].

DeZoort, F. & Harrison, P., 2016. Understanding Auditors sense of Responsibility for detecting fraud within organization. Journal of Business Ethics, pp. 1-18.

Dumay, J. & Baard, V., 2017. An introduction to interventionist research in accounting.. The Routledge Companion to Qualitative Accounting Research Methods, p. 265.

Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of insurance companies. MASTER THESIS, pp. 1-69.

Gooley, J., 2016. Principles of Australian Contract Law. Australia: Lexis Nexis.

Kew, J. & Stredwick, J., 2017. Business Environment: Managing in a Strategic Context. second ed. London: Chartered Institute of Personnel and Development.

Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.