Audit Planning For Feldgrau Enterprises: Report For Audit Senior

Analysis and Discussion

Fredgrau Enterprises is a small company for which the audit planning needs to be done and therefore the audit partner of the company has asked to the course of action to be taken about the same. Based on the trial balance given by the company the audit procedure to be taken has been designed besides identification of the key and critical accounts, which shows the huge deviation (Axelsen, et al., 2017). Materiality level for the company has also been determined and the comparative analysis of the company for 2 years 2016 and 2017 has been done via the trend analysis and the common size income statement. This preliminary analytical review has helped the company in determining the audit risk and thus audit procedures have been deigned accordingly. In the end, the fraud risk analysis has also been done for the client to check if it was a privy to any of the fraud transactions.

The trial balance of the company Feldgrau Enterprises has been given below and the same shows a difference in the debit as well as the credit side totals. The same can be taken as suspense account and it has not been considered in any of the calculations further as the nature of the missing line items is not known as to whether it is an assets, liability, income or expense (Bennouna, et al., 2010).

Feldgrau 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, 2016 – Feb 28, 2017	Jul 1, 2015 – June 30, 2016
Debit	Credit	Debit	Credit
Cash at Bank	89,750		83,000
Accounts receivable	109,850		103,585
Inventory	164,500		174,000
Machinery	64,000		64,000
Accumulated Depreciation		29,517		24,000
Motor Vehicles	66,000		66,000
Accumulated Depreciation		38,700		21,000
Furniture	7,400		7,400
Accumulated Depreciation		2,700		2,220
Bank Loan		240,000		240,000
Sales		129,683		187,450
Cost of sales	39,367		63,595
Consultancy fees		39,500		57,000
Interest income		32		50
Bank charges	232		350
Depreciation	23,697		15,738
Interest expense	7,667		12,000
Printing	247		375
Miscellaneous	960		–
Wages	35,047		53,000
Superannuation	3,330		5,035
Total	612,045	480,133	648,078	531,720

1. Materiality has been asked to be determined in the first part of the audit plan. An item can be said to be material if it in individual or in aggregate with the similar nature line items can change the decision of the user of the financial statements. It is something which is very critical and important to determine from audit perspective as it helps the auditor in knowing which all areas needs to be checked anyhow and what all areas can be ignored for the time being(Fukukawa & Mock, 2011). Furthermore, in the given case, the audit partner has determined the materiality to be at $ 15000, which is very high considering the trial balance of the client. There are global accounting bodies and committees all over the world like those of AASB and IASB as well as the reputed audit and consulting firms like Big 4’s which have suggested that the materiality can be determined as a % of sales, or Net profit or gross profit or total assets, or total fixed assets balance or as percentage of shareholder’s equity. Based on these percentages the same has been calculated to be between the range of $1105 to $ 1296 as it would help the auditors to check several other accounts as well which were not covered earlier like those of Interest expenses, superannuation expenses and the Furniture account (Delone & Mclean, 2004).

(in $)
Feldgrau Enterprises
Quantitative estimate of materiality
Criterion	Base	Amount	Materiality level/range
0.5% to 1% of gross revenue	Gross Revenue	129,683	648.42 to 1296.83
1% to 2% of the total assets	Total Assets	430,582	4305.82 to 8611.64
1% to 2% of the gross profit	Gross Profit	55,270	552.7 to 1105.4
2% – 5% of the shareholders’ equity	Equity	NA	NA
5% to 10% of the net profit	Net profit	58,670	2933.5 to 5866.99

1. As part of the preliminary analytical review the trend analysis and the common size income statement has been prepared for the given companies for the 2 years namely 2016 and 2017.

Feldgrau Enterprises
Income Statement
Particulars	2017	% of sales	2016	% of sales
Sales	129,683	76.6%	187,450	76.7%
Consultancy fees	39,500	23.3%	57,000	23.3%
Interest income	32	0.0%	50	0.0%
Total Revenue	169,215	100.0%	244,500	100.0%
Less: Expenses
Cost of sales	39,367	23.3%	63,595	26.0%
Bank charges	232	0.1%	350	0.1%
Depreciation	23,697	14.0%	15,738	6.4%
Interest expense	7,667	4.5%	12,000	4.9%
Printing	247	0.1%	375	0.2%
Repairs and Maintenance	960	0.6%	–	0.0%
Wages	35,047	20.7%	53,000	21.7%
Superannuation	3,330	2.0%	5,035	2.1%
Total Expenses	110,545	65.3%	150,093	61.4%
Net Profit	58,670	34.7%	94,407	38.6%

Feldgrau Enterprises
Income Statement
Particulars	2017	2016	Variance
Sales	129,683	187,450	–      57,767
Consultancy fees	39,500	57,000	–      17,500
Interest income	32	50	–               18
Total Revenue	169,215	244,500	–      75,285
Less: Expenses
Cost of sales	39,367	63,595	–      24,228
Bank charges	232	350	–            118
Depreciation	23,697	15,738	7,958
Interest expense	7,667	12,000	–         4,333
Printing	247	375	–            128
Miscellaneous	960	–	960
Wages	35,047	53,000	–      17,953
Superannuation	3,330	5,035	–         1,705
Total Expenses	110,545	150,093	–       39,548
Net Profit	58,670	94,407	–      35,737
Net Profit %	34.67%	38.61%

1. Based on the above analysis, several key accounts have been selected for further review and audit considering the criticality of the variations. Some of these are:

Sl. No.	Account Name	Audit Assertion and risk
1.	Sales	The sales has decreased by almost 31% as compared to the last year even though as a percentage of the overall receipts, it has been almost the same, it needs to be properly evaluated and checked for reason of significant drop in sales. The profit has been further impacted due to this and dropped 38% (Zhou, 2018).
2.	Depreciation	When all the expenses has dropped as a result of fall in sales the depreciation expenses have increased drastically by 51% as compared to the last year. All the management assertions with respect to the same like the useful life, the rate and method of depreciation needs to be validated in order to find the issues (Bumgarner & Vasarhelyi, 2018).
3	Interest	The interest expenses has fallen by 36% as compared to the last year despite the bank loan balance being same. It needs to be checked if the company has booked the cost correctly and not shifted the same to future accounting years (Lessambo, 2018).

1. Based on the key accounts to be audited the next year, below mentioned are few of the steps to be undertaken to audit the same:
2. Sales: For checking the sales the vouching of the invoices need to be done and checked if the total is matching with the ledger and journal posting. It needs to be determined that if the sales has fallen due to fall in quantitative sales or the selling prices or due to competitive pressure. Furthermore, the auditor should also be testing the revenue recognition criteria followed by the entity for few of the sample cases(Mock, et al., 2018).
3. Depreciation: About this, it needs to be checked what is the method and rates of depreciation being used by the entity, how the company has classified its assets and whether the annual review of the fixed assets impairment and depreciation is being done. The auditor should check the physical verification report in order to establish the existence of assets and completeness in recording of assets(Knechel & Salterio, 2016)
4. Interest: The interest expenses during the year needs to be cross verified from the bank statement of the company and it needs to be checked why the same has decreased in spite of non-repayment of the loan during the year, what the terms of the loans and whether it is a fixed rate or floating rate interest loan(Gooley, 2016).

Conclusion & Recommendation

1. As per the professional ethics and the standards being set in APES 110 and the concept of professional scepticism, the auditor must check the client in all the respects and basis the trust and past relationship, any of the checking procedure should not be ignored. In the given case, the audit partner of the company has suggested that the client should not be checked on the criteria of fraud risk analysis as the same is trustworthy(Kuhn & Morris, 2016). However, this is against the principles mentioned above and therefore the client should be subject to audit and fraud risk analysis. There are a few accounts which show the possibility of fraud in the financial statements, some of which are interest account and depreciation account for the reasons mentioned above, the cost of sales which has declined by 38% as compared to the last year and therefore it needs to be checked if the prices of raw materials and input has fallen or this is an instance of cost shifting. Furthermore, the superannuation expenses account also needs to be checked as the same has fallen by 34% and the reason for the same needs to be studied (Mubako & O’Donnell, 2018).

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(1), pp. 15-31.

Bennouna, K., Meredith, G. & Marchant, T., 2010. Improved capital budgeting decision making: evidence from Canada. SCHOOL OF BUSINESS AND TOURISM, 48(2), pp. 225-247.

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

Delone, W. & Mclean, E., 2004. Measuring e-Commerce Success: Applying the DeLone & McLean Information Systems Success Model. International Journal of Electronic Commerce, 9(1).

Fukukawa, H. & Mock, T., 2011. Audit risk assessments using belief versus probability. Auditing: A Journal of Practice & Theory, 30(1), pp. 75-99.

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

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

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

Lessambo, F., 2018. Audit Risks: Identification and Procedures. Auditing, Assurance Services, and Forensics, 3(1), pp. 183-202.

Mock, T. J., Ragothaman, S. C. & Srivastava, R. P., 2018. Using Evidential Reasoning Technology to Enhance the Audit Quality Assurance Inspection Process. Journal of Emerging Technologies in Accounting, 15(1), pp. 29-43.

Mubako, G. & O’Donnell, E., 2018. Effect of fraud risk assessments on auditor skepticism: Unintended consequences on evidence evaluation. International Journal of Auditing, 22(1), pp. 55-64.

Zhou, C. &. P. A., 2018. Developing creativity and learning design by information and communication technology (ICT) in developing contexts. Encyclopedia of Information Science and Technology, pp. 4178-4188.