Planning And Audit Of Financial Statements â€Myassignmenthelp.Com

Question: Discuss About The Planning And Audit Of Financial Statements? Answer: Introducation Before starting any type of the audit, whether it is statutory audit or the internal audit or the limited review or the special audit, the auditor is required to make the plan. This preparation of the plan is required to make the audit team understand as to how the audit will be pursued. The basic premise of the audit plan is to consider the various procedures as to how the audit shall be conducted, the number of members who will conduct the audit with their names and designation, what type of procedures and tests will the auditor apply and so on. There are two important concepts in audit planning. One is the analytical review and other one is the judgment of the materiality of the items present in the financial statements. These two concepts are followed through the analysis of the trial balance, balance sheet and the income statement for the last two years of Fucshia Enterprises. First Step - Analytical Review It is regarded as the first step in planning of the audit and is referred to as the adoption of the analytical review procedures. These procedures entail the designed and systematic review of the financial statements of the company and helps in explaining the relationship and the comparison of the various items present therein. The relationship can be based on the two items of the same year or one item for different financial years but the comparison is made by using the financial data of the company for the last two years. In the given case, the trial balance, balance sheet and income statement of Fucshia enterprises have been analytically reviewed. As per the requirement, seven accounts out of the accounts as stated in the financial statements have been selected for the purpose of the analysis. It includes loan obtained from bank, interest income earned, miscellaneous expense, accounts receivable, interest expense, inventory and the depreciation. The amount of the aforesaid seven accounts is duly compared with the figures of the previous financial years. For instance, the accounts receivable has been increased from $103585 as on 30th of June 2016 to $109850 as on 30th of June 2017. The increase in respect to sales has been from 42.37 % in the year 2016 to 47.22 % in the year 2017. It depicts that the companys policy for collecting the amount from the debtors has weaken or the companys liquidity management is weak which needs attention of the management. Second instance that has been noticed is the unchanged balance of the loan obtained from the bank amounting to $240000 over the past two years irrespective of the payment of int erest expense. Other accounts have also shown significant change which requires deep verification (ACCA, 2016). Second Step - Preliminary Judgment Of Materiality The second step in the audit planning is to judge the materiality of the items stated in the financial statements. The materiality is judged by the analyzing the impact of the particular item stated in the financial statements of the company. The concept of materiality is very much important in the field of accounting and auditing and also when the management wants to take an effective and efficient decision the materiality of the items concerned is checked and verified. The concept in terms of auditing entails the three important things nature of the audit evidence obtained, its timely detection and the extent of the same. The judgment done preliminary basically involves the analysis of the extent at which the particular item can lead to misstatement of the financial information and which is material too. For instance the depreciation has been increased from $15738 in the financial year ending 30th of June 2016 to $32583 in the financial year ending 30th of June 2017 without the respective increase in the amount of the property plant and equipment of the company. The difference is almost 100% plus. It will have the effect on the Profit before tax as stated in the statement of income. Similarly, the inventory has been decreased from $174000 as on 30th of June 2016 to $164500 as on 30th of June 2017. The decrease in the level of the inventory is approximately 5.46% which is quite significant while analyzing the financial statements of the company and the effect of each item therein. The cost of sales which includes the figure of the closing balance of the inventory has also been decreased by $ 9466 and h as led to decrease in the figure of cost of sales to approximately 14.89% and which is quite significant. The company has not provided any limit as to above which item shall be considered as the material and which item shall be considered as immaterial. Due to lack of the information in this regard, the auditor has issued the opinion which is totally unqualified (Ullah, 2014). Rationale For Selection The basis for selection of the head of the bank loan from the financial statement is that the amount has been changed over the past two years. It is has been increased to $288000. The bank loan has been grouped under the major head of noncurrent liability (PCAOB, 2017). Item 2017 2016 Bank Loan $ 288,000 S 240000 Assertion And Explanation The assertion made under this head is the completeness and the accuracy. The completeness has been included because the company has incurred the interest expense during the year but the corresponding loan has not been reduced rather it has been increased. It depicts that the amount of bank loan is not complete and is therefore not accurate. Recommended Audit Procedure The auditor shall verify the amount of bank loan with the sanction letter of the bank and with the repayment schedule of the bank stating the amount of installment to be paid for setting off the bank loan. Rationale For Selection The income earned as interest has been decreased from $50 in the financial year ending 30th of June 2016 to $44 in the financial year ending 30th of June 2017. The decrease is 12%. It has affected the balance of retained earnings. Though it is not material in actual terms but has material effect in absolute terms as 12%. Item 2017 2016 Change Percentage Decreased Interest Income $ 44 S 50 Decrease $6 12% Assertion And Explanation The assertion is the accuracy. The interest income is earned on the amount deposited in banks. The amount of the cash and cash equivalents has been increased over the year from $83000 to $107700. Thus, the question of having the decrease in interest income does not arise and hence the figure is not accurate. Recommended Audit Procedure The auditor shall check the amount of interest with the voucher prepared by the finance department along with the bank statement detailing the amount of interest. The auditor can also obtain the interest certificate from the bank. Rationale For Selection The company has incurred the miscellaneous expense of $1320 in the financial year ending 30th of June 2017 and has not incurred any expense under this head in the previous financial year ending 30th of June 2016. The second rationale for selection is that the increase has affected the retained earnings of the company. Item 2017 2016 Change Percentage Increased Miscellaneous Expense $ 1320 S 0 Increase $1320 100% Assertion And Explanation The assertion is the accuracy and the reliability. The sudden creation of the expense in the head of miscellaneous expense for the year ending 30th of June 2017 is questioning the reliability of the expense and the amount of $1320 is exhibiting the accuracy of the expenses. The auditor is required to check each voucher of the miscellaneous expenses along with the supporting bills and invoices and also check the payment with the bank statement. Rationale For Selection The amount of the accounts receivable has been increased from $103585 in the year 2016 to $131820 in the year 2017. The increase is 27.25% and corresponding increase in sales is 3.78%. It has affected the current ratio of the company including the cash balance and the retained earnings. The companys collection procedure is required to be checked. Item 2017 2016 Change Percentage Increased/ (Decreased) Accounts Receivable $ 131820 S 103585 Increase $28235 27.25% Sales $ 194525 $ 187450 Increase $7075 3.78% Assertion And Explanation The assertion is the reliability. As the increases in the amount of debtors have been received this shows that the amount stated in the financial statements is not reliable for taking the effective decision. Recommended Audit Procedure The auditor shall verify each sale invoice with the accounting voucher and shall obtain the balance confirmation from each of the party mentioned in the accounts receivable. Rationale For Selection The expenditure on interest has been decreased by $500 over the past two years. The rationale for selection of this account is that the corresponding loan account balance has not been changed. The amount of interest expense would have been increased due to non repayment of bank loan. Item 2017 2016 Change Percentage Decreased Interest Expense $ 11500 S 12000 Decrease $500 4.17% Assertion And Explanation The assertion placed is the completeness. The amount of the interest expense cannot be said as it is complete as the interest expense has been decreased irrespective of unchanged balance of loan. Recommended Audit Procedure The auditor shall verify the bank statement detailing the amount paid along with the repayment schedule and check whether the same amount has been entered in the books of accounts. Rationale For Selection The basis for selection of the inventory account is that the balance has been increased by 13.45% over the past year. It has affected the cost of sales and which in turn has affected the retained earnings of the company (Anastasia, 2015). Item 2017 2016 Change Percentage Decreased Inventory $ 197400 S 174000 Increase $23400 13.45% Assertion And Explanation The assertion placed in this case is the accuracy. The figures stated in the inventory account do not evidence the change in the working capital of the company. The auditor is required to check the method of valuation of the inventory along with the purchased bills for the year ending 30th of June 2017. He shall at first check the valuation of inventory along with the bills supporting the valuation. Secondly the auditor shall have the bin card so as to assess whether the company has been following the FIFO method or the weighted average method. Rationale For Selection The depreciation has been considerably increased from $15738 in the year 2016 to $35545 in the year 2017 without the corresponding increase in the figures of the machinery, motor vehicles and furniture. It has adversely affected the retained earnings by $19807 despite of its being the non cash item. Item 2017 2016 Change Percentage Decreased Depreciation $ 35545 $ 15738 Increase $19807 125.85% The assertion is the reliability. The depreciation amount has been increased by the higher amount and is not reliable in parlance with amount of the tangible assets. The auditor shall check the calculation sheet of the depreciation and check whether there has been any change in the method of depreciation. 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 25-09-2017. Anastasia, (2015), Financial Statement Analysis : An Introduction available on https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 25-09-2017 PCAOB, (2017), Analytical Procedures available athttps://pcaobus.org/Standards/Archived/Pages/AU329A.aspx accessed on 25-09-2017 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 25-09-2017