The Importance of Analytical Review in Audit Planning

Question:

Discuss About The Depreciation Check Account Policies Company?

Analytical review is the preliminary stage in the audit planning. The auditors of the company are required to conduct the analytical review of the financial statements of the company which are unaudited. In this the auditors perform the ratio analysis and the trend analysis based on the financial statements of the earlier three consecutive years (ACCA, 2016).  

Along with the analytical review the auditor is required to conduct the preliminary judgment of the items which can have the material effect on the financial position and the financial performance of the company (Ullah, 2014).

The bank loan accounting has been selected at first for the purpose of the analysis. It represents the amount of the loan taken by the company for the purpose of the expansion of the business. It has been selected because of the no movement of the loan account for the last two years. The balance of the loan is same (PCAOB, 2017).   

The assertion that has been made is that the amount of bank loan has been made in tact with an amount of 240000 dollars irrespective of the passing of period of the two years. In other words, the amount of loan is same as on 2016 and as on 2017, no payment has been made during the last two years. 

The auditor is required to perform the additional audit procedures as to obtaining the sanction letter of the bank or the financial institutions from whom the loan has been obtained and what are the terms and conditions that have been laid down with the sanction letter regarding the mode of payment and the time of payment. The auditor is required to check whether the company is under the moratorium period or had defaulted in making the payment to the banks or concerned financial institutions.

Interest income is the source of revenue that the company earns from the fixed deposit made with the bank or from the funds deposited with other institutions. It has been selected because of the decrease in the figures irrespective of the increase in the revenue of the company. 

The assertion that has been made while selecting the account for the purpose of the analysis is that the company has not earned the income in relation to the figure of the revenue earned by the company. The interest income has been declined from $ 50 in the year 2016 to $44 in the year of 2017. It depicts that the company has either failed to book the interest income in the accounting books or else had not followed the proper way of depositing the money or advancing the money in the market.    

Analyzing the Bank Loan Accounting

The auditor in this case is required to check the securities in which the company has made the deposits or the other entities where the company has invested their amount in order to earn interest income. Secondly, the auditor shall check whether the company has accounted for all the interest income that has been earned by the company whether it has been accounted for the same periods. 

The miscellaneous expense has been selected because the company has incurred the miscellaneous expense amounting to 1320 in the current year. Secondly the miscellaneous expense consists of the expense which cannot be bifurcated and is common for all type of the business whether it is trading, manufacturing or the service providing company.

The assertion that has been placed is that the company has incurred the zero value of the expense under the head of miscellaneous expense in the previous year where as in the current year under consideration, the company has incurred the expenditure of 1320. It depicts that the company has started incurring certain expenditures which have not been incurred earlier before. There might be the possibility that the company might have incurred certain expenditure which might be disallowable as per Income Tax laws and therefore the basic name of the expenditure has been removed rather has been clubbed under the head of Miscellaneous expense.

The auditors of the company shall extend their audit procedures with the introduction of the test of balances and test of controls. In this regard it will be checked whether the company has been able to substantiate the expenditure incurred with the supporting evidence. The second procedure is to check the linkage of the expenditure so incurred with the nature of the business of the company.

The accounts receivable consists of the customers of the companies from whom the company have the legal right to receive the payments. The accounting trial balance of the company depicts that the company has not received any payments from the accounts receivables from the last previous year till the current year. Because of this nature, the accounts have been selected.

The assertion that has been made by the auditor of the company is that the company does not focus at all on the liquidity ratio of the company and how far the company will be able to make the liquid cash available from the market. The second assertion that has been made by the auditor is that the account receivable may contain certain parties which may be bogus. It is because of the covenants that the banks or the financial institutions made while issuing the loan like maintenance of the current ratio in accordance with minimum stipulated value like 1.32 or 1.40.    

Investigating Interest Income

The auditor is required to perform the extra checks to see whether the accounts receivables so shown by the company are genuine and real and it tallies with the sale invoices and the bank details supporting each sale recorded and payment received respectively. 

The interest expense is the expense that the company incurs on the amount borrowed from the financial institutions or banks or some other parties. The interest amount majorly affects the financial statements of the company in the materialistic manner. The rationale for selecting the account for the analysis is to ascertain what type of amounts is included in the expense and from where the same has been originated.

The first assertion that has been made by the auditor of the company is that how the interest expense has been recognized during the year irrespective of the fact that no payment has been made for the loan during the year. It has been kept intact for the last two consecutive years. The second assertion that has been made by the auditor is that on what basis the interest expense over the last two years has been decreased from 12000 to 10541.667 rather it shall be increased as when the borrower fails to make the payment for one month then it goes on accumulating and the interest thereon is charged as per the compounding interest method.

The first audit procedure that is recommended for the auditor is to check the schedule of payment if any provided by the banks and how the company has treated the same in the books of accounts. Secondly, the documents relating to the entries made in the books of accounts shall be checked and reviewed on regularly basis.

The inventory plays the important role in the financial management as it tells about how much goods are possessed by the company as on date and how the same shall be dealt with in the books of accounts of the company. On the hypothecation of the inventory the company can easily obtains the loan from the banks or the financial institutions (Anastasia, 2015).

The first assertion that is made by the auditor is that how the inventory equals to the approximate cost of the goods that have been sold in the market in the current year as well as in the previous year. The second assertion is that despite of the lower cost of sales, the company has reported the higher turnover in the current year as well as in the previous year.

The auditor 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.

Depreciation is the expense on the loss of wear and tear of the asset of the company. The basis for selection of the depreciation expense is the variation in the figures in relation to the asset figure of the company. The depreciation has been selected for the study because it gives the tax saving to the company concerned. 

The first assertion that has been made by the auditor of the company is that the depreciation might be inflated so as to have the extra tax savings on the allowable expense of depreciation and how the same have been accounted in the books of accounts. The second assertion that has been made by the auditor of the company is that the depreciation amount might have been wrongly calculated. 

The auditor shall calculate the depreciation on its own and check the accounting policies adopted by the company with regard to its useful life of an asset.

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 27-09-2017.

Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on https://www.cleverism.com/financial-statement-analysis-introduction/   accessed on 27-09-2017

PCAOB, (2017), “Analytical Procedures” available at https://pcaobus.org/Standards/Archived/Pages/AU329A.aspx  accessed on 27-09-2017

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 27-09-2017