The Importance of Audit Planning

Discuss About The Probable Problems Are Quickly Identified?

Audit planning is considered to be a vital area in auditing primarily carried out at the beginning of the audit to make sure that suitable attention is devoted to particular areas, probable problems are quickly identified. This aspect means developing a common strategy and a comprehensive approach to the projected timing, nature, and degree of the audit. The auditor often plans to do the audit in a timely and effective manner (Arens, Elder, Beasley, and Hogan, 2016). Generally, auditor’s design detailed procedures so as to obtain sufficient appropriate audit evidence. This assignment incorporates planning of the audit and having access to the preliminary trial balance sheet for Crimson Enterprises. The assignment extracts data from the company trial balance and identifies the accounts that are likely to require significant audit attention (Trotman, and Wright, 2012). According to the Crimson Enterprises trial balance, the selected seven accounts for audit that basically require attention are;

	Items accounts	Current year	Prior year Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	% Change
1	Inventories	185,000	174,000	6.32%
2	Cash at bank	70,000	73,000	4.1%
3	Motor vehicles	66,000	66,000	0%
4	Accumulated depreciation (MV	27,940	21,000	33%
5	Accounts receivables	120,750	122,750	2.2%
6	Bank loans	230,000	230,000	0%
7	Sales	181,454	187,450	3.2%

	30th May 2017	1st July 2016
Revenue	181,545	187,450
Cost of Sale	55,963	63,595
Gross Profit	125,582	123,855
Other income – Interest	44	50
Other income – Fees	54,313	57,000
Total Income	179,939	180,905
Operating Expenses
Bank charges	319	350
Depreciation	15,185	15,738
Interest expense	10,542	11,500
Printing	339	375
Repairs & Maintenance	1,320	5,050
Wage	48,189	53,000
Superannuation	3,661	4,770
Total Expenses	79,555	90,783
Profit/(Loss) before tax	100,384	90,122

	Ratio	Formulae	Current year	Prior year	Industry average
1	Gross profit margin	= Gross profit/Net sales	69%	66%	67.5%
2	Quick ratio	Cash + Accounts receivables + Current assets investment/Current liabilities	163%	160%	241.5%
3	Current ratio	Total current assets/Total current liabilities	1.63	1.6	1.62
4	Debt equity ratio	TL/Share equity	1.8	1.6	1.7
5	Inventory turnover	COS/Inventory	30%	37%	33.5%
6	Assets turnover	Sales/TA	34.8%	37%	35.9%
7	ROA	Operating profits/Total sales	69.2%	66.1%	67.7%

The use of analytical reviews is considered to be one method of increasing the efficiency of auditors (Balaniuk, Bessiere, Mazer, and Cobbe, 2012). Analytical procedures often consist of evaluations of financial data made by the auditor of plausible and expected relationships among both non-financial and financial information.

Accounts receivable is another item that needs much attention when planning for an audit. This is because most of the companies may post some significant amounts of accounts receivables that do not exist and therefore may result in the company making unreasonable profits. The company Accounts receivables should be examined for existence and accuracy assertions. This aspect is important because some debtors may be overstated or understated and thus affects the company debtors. Debtor’s circularization will be done so as to determine the existence of the debtors and to confirm the amount owed to the company. The 1.65% increase from the FY2016 to FY2017 should be examined so as to ensure the accuracy of the amount posted and the reason that enhanced its increase (Arens, Elder, and Mark, 2012). Because of the riskiness involved, I recommend tracing receivables reports to general ledgers. The auditors should ask for a period end accounts receivables aging details from which they outline the total to the amount in the accounts receivables accounts in the general ledger. I also recommend confirmation of the accounts receivables. A major auditor activity is often to contact the company clients directly and request them to confirm the amounts of unpaid accounts receivables as of the end of the reporting period being audited for possible misstatements.

Identifying Accounts that Require Significant Audit Attention

When planning for an audit, bank loans should have much concern because of its riskiness in misappropriation. The amount of bank loans should be examined during audit. This aspect makes this item to require much attention so as to ensure that there are reasonableness and accuracy in the amount posted in the company trial balance. Phone calls should be made to the associated banks so as to determine the percentage used as interest rates and the existence of this loan in the company accounting records (Crowther, 2016). According to the Crimson Enterprises Company, FY2016 indicated that the company had bank loans worth 230,000 and the same amount in the FY2017. This amount should be examined to determine the accuracy of calculations and repayments as the major assertion. Basing on the riskiness of this item, I recommend the auditors to perform a walkthrough of the area to establish various roles in loan operations as this activity helps both new and existing auditors to update in future years (Cohen, Holder, Nath, and Wood, 2012). I also recommend reviewing and testing the process for detailing the origination fees and also reviewing and testing how loan documentations exemptions are reviewed and cleared by the company. I also recommend reviews and tests on reconciliation process for possible misstatements.

Inventory is one of the areas that require more attention. This is because inventories often form a critical part of the company operations. Companies usually purchase more inventories then convert them into finished goods that are sold to customers for a profit. According to the Crimson Enterprises Company trial balance, the trial balance indicates that during the FY2016 the amount of inventories was 174,000 and during the FY2016, the inventory was 185,000. This aspect indicates that the company has a vast amount of unmovable stocks which is usually liability to the company. Reviewing the inventory, there was a significant increase in the amount of inventories by 5.9% which means that the firm did not make huge sales during the FY2016 (Chan, and Vasarhelyi, 2011). Basically, the degree of the analytical review needed often depends on the materiality of the items. After extensive observations, existence is one of the assertions in this area will require additional attention so as to attempt to determine the major reasons that resulted in the variations of the amount available in the bank. This item basically contains more questionable activities on the existence of the remaining stocks because I was able to carry out physically check on its availability. The company financial managers should provide the supporting data, and the quality of internal control systems in the company should also provide assurance, accuracy, and reliability of the accounts. When planning for inventories audit, I recommend that the auditor should perform a cut-off analysis where he or she will examine the company procedures for receiving new inventories into the warehouses. I also recommend that the auditor should observe the physical inventory count to determine existence.

The Use of Analytical Reviews

Company sales are another item that needs much attention when planning for the audit. This item is selected because of the riskiness that may be involved when a corporation is in operations. This requires much attention because the company often convert its sales to either cash or credit (Gurov, and Milgunova, 2016). This is vital, and thus it requires proper analytical procedures to be done to determine its existence in the sales records. The company should also provide with supporting documents that show the movement of sales during the two fiscal periods. According to the Crimson Enterprises Company, FY2016 indicated that the company made sales worth 187,450 and 181,454 in the FY2017. The variations should be examined to check the reasonableness of the differences. Since this is one of the risky items when planning for an audit, I recommend the auditor to test the controls of the company set up for sales cycle so as to determine how reliable and strong they are (Knechel, Krishnan, Pevzner, Shefchik, and Velury, 2012). The auditor should determine if the financial statements amounts of sales and accounts receivables are accurate by verifying individual transactions for possible misstatements.

Cash at the bank is another area in the company trial balance that requires attention. This aspect is because it is more at risk of misappropriation by the management. The managers can misuse the amount in the bank because of their easy accessibility. According to the company financial reports, the amount of Cash at bank at the FY2016 was 73,000 and 70,000 in the FY2017. This item also requires attention because according to the analysis, there is an indication that there was a 4.3% decrease in the amount available in the bank (Hammersley, 2011). This should be examined to determine if the company may have spent a lot of money that was available or there could be a possibility of misuse of the company resources. Carrying out substantial procedures of making several comparisons to prior periods should be done to ensure the accuracy of the amounts posted on the financial statements. This aspect is vital because it will enhance its materiality (Knechel, and Salterio, 2016). Basing on the riskiness of this item, I recommend that the auditor should send the confirmation letters to banks to ensure year-end financial balance from third parties and also requests the company client’s to provide their bank details for existence and confirmation.

Inventories Require More Attention

Motor vehicles are another item that needs much concern during the audit. Motor vehicles item is at risk because most of the company management often use the company resources such as the cars for private purposes. Planning for this particular audit requires that the company provide the purchasing agreements and log books of the company motor vehicles so as to evaluate the amount it cost during purchase and attempts to compare the amount with the market value (Hellman, 2011). According to the company trial balance, there is an indication that the company machinery is valued at 64,000 as at 2016 and 71,000 at 2017. The 10.9% variations should be evaluated and determined so as to provide the actual amount it cost during the initial procurement. In this case, I recommend that the auditors should basically check at the motor vehicles log books to substantiate the amount indicated and perform a physical check for existence for possible misappropriation (Titera, 2013).

The actual depreciation of the company is another item that basically needs much attention because of its sensitivity (Messier, Simon, and Smith, 2012). This item is also selected because of its riskiness during company existence. The method used to determine the amount of depreciation should be examined to ensure that it is free from any manipulations. Planning for this audit will also require that the amount of accumulated depreciation should be calculated again so as to ensure accuracy. The 31.6% increase in accumulated depreciation should be determined and supported with reasonable evidence by the company (Hammersley, Johnstone, and Kadous, 2011). Basing on the riskiness of this particular aspect, I recommend that the auditor should verify the manufacturing, motor vehicles, and equipment different from the current assets for depreciation expenses verifications. The auditor should also compare depreciation expenses to determine possible misstatements.

References

Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016. Auditing and assurance services. Pearson.

Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated approach. Boston: Prentice Hall.

Balaniuk, R., Bessiere, P., Mazer, E. and Cobbe, P., 2012. Risk based government audit planning using naïve bayes classifiers. In Advances in Knowledge-Based and Intelligent Information and Engineering Systems.

Chan, D.Y. and Vasarhelyi, M.A., 2011. Innovation and practice of continuous auditing. International Journal of Accounting Information Systems, 12(2), pp.152-160.

Crowther, D., 2016. A social critique of corporate reporting: Semiotics and web-based integrated reporting. Routledge.

Cohen, J.R., Holder-Webb, L.L., Nath, L. and Wood, D., 2012. Corporate reporting of nonfinancial leading indicators of economic performance and sustainability. Accounting Horizons, 26(1), pp.65-90.

Gurov, V. and Milgunova, I., 2016. Improving of assessment methodology of the audited organizations performance at the stage of audit planning. ??????????? ???????-???, (157), pp.115-118.

Hammersley, J.S., 2011. A review and model of auditor judgments in fraud-related planning tasks. Auditing: A Journal of Practice & Theory, 30(4), pp.101-128.

Hammersley, J.S., Johnstone, K.M. and Kadous, K., 2011. How do audit seniors respond to heightened fraud risk?. Auditing: A Journal of Practice & Theory, 30(3), pp.81-101.

Hellman, N., 2011. Chief financial officer influence on audit planning. International journal of auditing, 15(3), pp.247-274.

Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.

Knechel, W.R., Krishnan, G.V., Pevzner, M., Shefchik, L.B. and Velury, U.K., 2012. Audit quality: Insights from the academic literature. Auditing: A Journal of Practice & Theory, 32(sp1), pp.385-421.

Messier Jr, W.F., Simon, C.A. and Smith, J.L., 2012. Two decades of behavioral research on analytical procedures: What have we learned?. Auditing: A Journal of Practice & Theory, 32(1), pp.139-181.

Titera, W.R., 2013. Updating audit standard—Enabling audit data analysis. Journal of Information Systems, 27(1), pp.325-331.

Trotman, K.T. and Wright, W.F., 2012. Triangulation of audit evidence in fraud risk assessments. Accounting, Organizations and Society, 37(1), pp.41-53.