Overview of Audit Planning

Audit planning refers to the systematic process of audit that is conducted for the purpose of evaluation of the financial statements in order to ensure that the accounting statements reflect the true and fair view of the financial condition of the company. The audit of the financial statements of the company is executed annually. An audit plan refers to the specific guideline that should be followed for conducting the audit. An efficient audit plan results in the auditor obtaining enough evidence for the circumstances.   The effectiveness of an audit plan lies in the fact that it facilitates the obtaining of required data that is necessary for examining the financial statements and other non-financial proceedings of business. It should also be noted here that the major portion of auditing covers the financial statements of an organization that includes various accounts. Thus, the audit testing of accounts forms a crucial part of audit planning (Earley 2015).

The analytical review of the trial balance that has been provided in the question is executed with the help of the different account balances. The particular benefit that can be derived by the analytical review of the trial balance is that the auditor can identify the material misstatements that may have occurred in the accounting statements either willingly or due to carelessness on the part of the accountant. The different account balances in the trial balance present the auditor with an overview into the crucial financial statements of the company. The analytical review that has been carried out in this particular study includes the horizontal analysis of the trial balance accounts.

The preliminary judgment of materiality refers to the maximum permissible amount that the auditor can allow in the different financial accounts, in case these accounts have been misstated. The auditor believes this permissible amount, to have no effect on the fair image of the financial statements of the company. A common reason behind the occurrence of materiality in an account is that the financial statements of a company are prepared by following the double-entry book keeping system. Therefore, the auditor should efficiently assess the trial balance accounts in order to make sure that the amount of materiality in the chosen accounts does not exceed the allowed limit (Graham 2015).

Trend Analysis

It should be noted here that the accounts have been chosen on the basis of degree of blended materiality. This means that the accounts showing the highest degree of change or abnormal change in the consecutive financial years and has the potential to affect other accounts if subjected to material misstatement has been chosen. The degree of blended materiality in the accounts are as follows:

Particulars	2015	2016	Trend Analysis
Cash at Bank	80,000	85,000	106.25
Accounts receivable	111,000	118,340	106.61
Inventory	174,000	187,500	107.76
Machinery	65,000	71,000	109.23
Accumulated Depreciation	24,375	28,984	118.91
Motor Vehicles	66,000	66,000	100.00
Accumulated Depreciation	21,000	25,416	121.03
Furniture	7,400	7,400	100.00
Accumulated Depreciation	2,220	2,640	118.94
Bank Loan	230,000	230,000	100.00
Sales	187,450	110,250	58.82
Cost of sales	63,595	40,542	63.75
Consultancy fees	57,000	34,563	60.64
Interest Income	50	28	56.00
Bank charges	350	203	58.00
Depreciation	15,863	9,444	59.53
Interest expense	11,500	6,708	58.33
Printing	250	147	58.80
Repairs and Maintenance	5,050	840	16.63
Wages	53,000	28,000	52.83
Superannuation	4,770	2,077	43.54
Equity	135,683	191,320	141.00

Income statement of MJC Company	2016	2015	Trend Analysis
Particulars
Sales	110,250		187,450		59%
Cost of sales	40,542		63,595		64%
Gross profit		69,708		123,855	56%
Consultancy Fees (revenue)	34,563		57,000		61%
Interest income	28		50		56%
Operating Income		104,299		180,905	58%
Less: Expenses
Bank charges		203		350	58%
Depreciation		9,444		15,863	60%
Interest expense		6,708		11,500	58%
Printing		147		250	59%
Repairs and maintenance		840		5,050	17%
Wages		28,000		53,000	53%
Superannuation		2,077		4,770	44%
Net Profit		56,880		90,122	63%
Ratios
	2014	2015
Net profit margin	48%	52%
Gross profit margin	66%	63%
Inventory turnover ratio	1.07	0.96
Assets turnover ratio	0.41	0.23

Balance Sheet of MJC Company
	2015	2016	Trend Analysis
Current Assets
Cash at Bank	80,000	85,000	106%
Accounts Receivables	111,000	118,340	107%
Inventory	174,000	187,500	108%
Total Current Assets	365,000	390,840	107%
Non-current Assets
Machinery	65,000	71,000	109%
Accumulated Depreciation	24,375	28,984	119%
Value	40,625	42,016	103%
Motor Vehicles	66,000	66,000	100%
Accumulated Depreciation	21,000	25,416	121%
Value	45,000	40,584	90%
Furniture	7,400	7,400	100%
Accumulated Depreciation	2,220	2,640	119%
Value	5,180	4,760	92%
Total Non-current Assets	90,805	87,360	96%
Total Assets	455,805	478,200	105%
Liabilities and Equity
Bank Loan	230,000	230,000	100%
Owner’s Equity	135,683	191,320	141%
Net profit	90,122	56,880	63%
Total Liability and Equity	455,805	478,200	105%

Analyzing Trial Balance for Material Misstatements

The accounts that have been selected are listed down as follows:

• Accounts Receivable Account
• Cost of Sales
• Consultancy Fees
• Repairs and Maintenance
• Wages
• Superannuation

The accounts receivable account has been selected for the primary judgment of the materiality issue

The account receivable has been selected from the trial balance. This particular account has been selected because the accounts receivable account has a direct link with the revenue generated by the firm. Thus, the increase or decrease in receivables will affect the sales revenue incurred by the firm.

The accounts receivable account has been selected because it is one of the crucial accounts that is maintained by the firm and represents the total credit sales of the firm. The accounts receivable represents the portion of the revenue, which has still not been received by business and appears as an asset in the balance sheet of the company. The balance in the accounts receivable account has increased by 106.61%. This being an asset, which has still, has not been realized is vulnerable to material misstatement and should be evaluated by an auditor efficiently ( Lamber caes et al., 2017).

The recommended audit procedure for the accounts receivable is that the auditor should efficiently measure whether the balance in the subsidiary ledger is similar to the amount that has been included in the general ledger. All the credit transactions should be checked with the customers and other stakeholders of business.

The reason behind the selection of this account is that the cost of sales account represents the costs that have been incurred in the process of manufacturing the products. This is one of the most crucial accounts, which if tampered with will reduce or increase the net sales revenue incurred by the firm. The cost of sales account has decreased by 63.75%.

The cost of goods sold or the cost of sales fundamentally consists of the direct costs like the direct labor cost. The cost of goods sold has enough capacity to increase or decrease the total sales revenue, incurred by business. Therefore, an auditor must evaluate the cost of sales account with enough concentration. The cost of sales account also indicates the fact whether the profitability strategies are working out or not.

The recommended audit procedure that should be adopted by the auditor in order to evaluate the cost of sales account is that he should undertake a number of procedures like the monitoring the authorization of the purchase of the raw materials for business, checking the inventory in regards to the cost and proper inventory tests ( Lamber caes et al., 2017)..

Understanding Preliminary Judgment of Materiality

The Consultancy Fees Account has been selected for the primary judgment of the materiality issue

The Consultancy Fees account has been selected because it decreases by 60.64%. This must be monitored and evaluated by the auditor.

The consultancy fees account might be subjected to materiality. This is because the consultancy fees in regards to 2015 has been of the amount $57,000 and that for 2016 has been $34.562.5. Now, the misstatement can be executed in the consultancy fees. It should be noted here that the consultancy fees if understated or overstated, will hamper the profitability of the firm and result in the restriction of a true and fair view that should be reflected by the financial statements.

The recommended audit procedure for the identifying the misstatement in the consultancy fees account is that the auditor should crucially monitor the recorded statements and transactions incurred between the firm and the consulting body (Thompson and Mockler 2016).

 The Repairs and Maintenance Account has been selected for the primary judgment of the materiality issue

The Repairs and Maintenance account has been selected because the account had decreased to 16% from 2015 to 2016. This unprecedented decrease in the account balance in regards to Repairs and Maintenance Account should be evaluated by the auditor and looked into.

The Repairs and Maintenance account should be evaluated as the balance for this particular account has decreased abnormally. The particular account balance may have decreased due to genuine reasons. However, the auditor should sincerely look into the fact as to why there has been such a disparity between the balances for the two consecutive financial years. The disparity might be due to the fact that the account balances have been understated or overstated so that the profits of the firm can be reduced or increased in order to evade taxes or improve the image of the firms to the stakeholders.

The recommended audit procedure that should be applied by the auditor is that the auditor should check the financial proceedings in regards to the repairs and maintenance of the firm. The transactional bills should be checked and the invoices should be checked and authorized by the auditor in order to identify any kind of abnormality that would have led to the misstatements in the particular financial account (Thompson and Mockler 2016).

The Wages Account has been selected for the primary judgment of the materiality issue

The wages account has been selected because this particular account has displayed a decrease to 52.83%. The wages are directly linked to the profitability of the firm and can affect the total revenue as the increase or decrease in wages will increase or decrease the net profit accordingly.

Trend Analysis of Accounts

The account balance in regards to the wages has decreased unprecedentedly. This may be due to the fact that the number of employees have decreased. However, the auditor should look into such an abnormal disparity.

The recommended audit procedure for such an occurrence is that the auditor should check the number of employees that have been employed and the number of employees resigned in the particular financial years of 2015 and 2016. Furthermore, the wages or salaries drawn by these individuals should also be checked in order to indentify the misstatement (Thompson and Mockler 2016)..

The Superannuation Account has been selected for the primary judgment of the materiality issue

This particular account has been selected because it has decreased to a 43.54%. This abnormal decrease in the account balance  should be checked into.

The superannuation account has been selected in order to ensure that the employee welfare policies of the company whose financial statements have been audited, are properly implemented.

The auditor should strictly focus on the implementation of the employee welfare policies as the primary duty of the auditor is to ensure that the management of the company properly caters to all the stakeholders of business (van Buuren caes et al., 2014).

References

Earley, C.E., 2015. Data analytics in auditing: Opportunities and challenges. Business Horizons, 58(5), pp.493-500.

Graham, L., 2015. Internal Control Audit and Compliance: Documentation and Testing Under the New COSO Framework. John Wiley & Sons.

Lambert, T.A., Jones, K.L., Brazel, J.F. and Showalter, D.S., 2017. Audit time pressure and earnings quality: An examination of accelerated filings. Accounting, Organizations and Society.

Luippold, B.L., Kida, T., Piercey, M.D. and Smith, J.F., 2015. Managing audits to manage earnings: The impact of diversions on an auditor’s detection of earnings management. Accounting, Organizations and Society, 41, pp.39-54.

Malaescu, I. and Sutton, S.G., 2014. The reliance of external auditors on internal audit’s use of continuous audit. Journal of Information Systems, 29(1), pp.95-114.

Mitra, S., Song, H. and Yang, J.S., 2015. The effect of Auditing Standard No. 5 on audit report lags. Accounting Horizons, 29(3), pp.507-527.

Thompson, G. and Mockler, N., 2016. Principals of audit: Testing, data and ‘implicated advocacy’. Journal of Educational Administration and History, 48(1), pp.1-18.

van Buuren, J., Koch, C., van Nieuw Amerongen, N. and Wright, A.M., 2014. The use of business risk audit perspectives by non-big 4 audit firms. Auditing: A Journal of Practice & Theory, 33(3), pp.105-128.