The Essay On Audit Planning And Analytical Reviews Highlights Their Importance.

Understanding Audit Planning

Before start of any work, planning is necessary so that the aims and objectives for which work is performed are able to achieve. Similarly, audit planning is necessary and foremost step for starting the audit of Financial Statements and framing and opinion about the authenticity of the financial data presented by entity. The audit planning aims at understanding the way audit has to be performed by audit team, documents required to be taken from client management, where the misstatements present in the financial information and which matters required substantive checks from the auditor and his team (Leung, Coram, Copper and Richardson, 2015).  In audit planning generally analytical review has been done by the auditor using ratios and trends to understand the business of client, risky areas, unusual transactions and items which require detailed checking and further audit procedures to be followed by the auditor. In the given situation, Cyan Enterprises has been chosen to do analytical review so that proper audit procedures to be followed by auditor and his team can be decided.

It is the procedure used in planning stage of the audit to understand the high or significant risky areas where the attention of the auditor and stakeholders of the company is require. Analytical process is the limited process which reviews only ratios and trends to assess the reliability of financial information presented by the company (Abidin and Baabbad, 2015). 

Ratio analysis is the technique which is used to understand the decrease and increase in the style of ratios calculated by using different related or non related financial items to assess the different areas of the performance of the entity such profitability, solvency, liquidity and efficiency. In the given case of Cyan Enterprises, ratios have been calculated in Appendix to understand the different tendency of ratios (ACCA, 2016). For an example, Net profit ratio from past year is 48.08% which has been improved during the year to 55.27%. This requires auditor’s attention to understand whether same has been improved due to normal changes of business or due to manipulation or misstatements so that higher profits can be shown.

Trend analysis is the technique which has used to assess or understand the unusual movement in the accounting item or data which can be positive or negative. It is based of the past data and from which future projections can be estimated and which are compared to current data and if any uneven movement happen then it requires auditor’s attention and detailed audit procedure (Glover, Prawitt and Drake, 2014).

Analytical Reviews and their Importance

In the given case of Cyan Enterprises, seven accounts has been selected for analytical review to understand the risk and extended audit procedures which auditor require to be performed while doing audit of Cyan Eneterprises. 

Materiality means assessing the highly significant and risky areas where the chances of having misstatement has been presented. Preliminary judgment of materiality means assessing the financial items where material impact is present in financial statements at the planning stage of the audit in which primary judgment about audit risks, client business and misstatements has been developed by auditor (Chen and Tsay, 2017). 

The materiality judgment and analysis can be assessed to understand the significant changes in particular item which can impact the auditor and stakeholder’s opinion about the performance and efficiency of the entity. For example, in the given enterprise, Cyan Enterprises, Current Assets has been increased from $ 369750 in past year to $ 375750 in current year showing the change of the only 1.62% in total current asset. If the level of materiality in current asset has been set at 0.5% by auditor or management, then auditor has to do more substantive procedure to understand the reasons for change and accordingly farmed his opinion. So with this, it can be said that for making materiality judgment materiality level has to be fixed by the auditor for each financial item separately (Mao, 2014; Langevoort, 2015 and Ullah, 2014).

The consultancy fees account has been selected for doing detailed analysis in audit as it has been non-operating in nature and not the main activity of the entity. The consultancy fees were $ 57000 in 30^th June 2016 which has been projected to $ 59250 for 30^th June 2017 resulting in increase by 3.95% in other income of the entity. This can ultimately increase the net profit margin which is the basis of framing a decision about the investment in the entity.

The assertions involved in the consultancy fees are reliability and accuracy. Reliability of the income is required to understand in regard to generation of income and receipt of income as the increase in income is high in relation to increase in net profit percentage. Accuracy in term of figure of consultancy fee whether it has been recorded properly and there is no lacuna involved in the posting and earning of consultancy fees in financial statements.

The consultancy fees can vouched with the receipts or invoices issued by the company for earning the consultancy fees and the receipts can be tracked from the bank passbook so that the genuineness of the value can be ascertained. The journal entries also need to be checked in detailed so that posting in books of accounts is correct.

Ratio Analysis in Auditing

Bank Changes are selected for substantive audit as the bank changes are decreased from past year to current year by 0.57% which shows little unusual trend in bank charges. As the business increases banking facilities usage has also been increased by the entity resulting in increase in charges but it is opposite in Cyan enterprises (PCAOB, 2017).    

The major assertions involved in bank charges is reliability as the business income has been increased and charges in relation to income and facility availed from bank has been decrease making it unreasonable. 

The auditor should obtained the bank charges certificate from bank to check whether the bank charges has been recorded properly in books of accounts and should check whether the same has taken affect in Bank reconciliation.

The account of interest income has been selected for the purpose of the auditing because the interest income has been decreased by the same amount as the bank charges has been decreased. But the decrease in percentage terms is four which is material enough for the selection. (Anastasia, 2015).

The main assertion placed in the case of the interest income is the completeness and the occurrence. It is because there might be the chances that the interest income have been wrongly grouped which otherwise should have been treated as under the other head of account.

Auditor of the company is required to extend the audit procedures by checking the interest income from the bank statement and by verifying each figure with the entries shown in the ledger account of the interest income. Additionally the auditor shall verify the calculation of the interest income and the accounting treatment of the same to check if any income has been deferred for future years. 

The next account which has been selected for the purpose of the report is the sales account. The basic premise for the selection of the account is the increase in the value of sales in the projected period of twelve months amounting to $197950 in 2017 from $187450 in 2016 and thus thereby increasing the sales figure by 5.60 %. As the auditor have selected the 5% materiality under this head and thus the sales account is material for selection.

Completeness is closely connected as assertion with the sales account. It is because there might be the chances that the sales have been wrongly grouped under the account instead of other account or might be related to the different period. It is also because of the fact that the bank charges have been decreased in spite of increase in the sales figure (Kharisova, 2014).

Trend Analysis in Auditing

The auditor is required to check the bills of supply issued with the accounting ledger and check for any type of deviation. It may be positive or negative.

The depreciation account has been selected because of the reason for increase in the depreciation amounting to only $827. It is despite of the fact that the company has made an addition of $7000 in the financial year and if depreciation at the rate of 20% is taken then it will come out as $1400 and the depreciation increase is only $827. 

The accuracy has been considered under this selected account as the value of the depreciation does not corresponds with the amount of the increase in the value of the machinery and therefore there might be the possibility that the method of calculation of the depreciation has been changed. (Vasarhelyi, 2014).

The audit team is required to verify the calculation of the depreciation so made and shall also check whether the effects of the change in the method of depreciation have been taken in the financial statements or not.

The basic premise of the selection of the cost of sales account is that the account has encountered decrease in the cost of sales by 4% which is material enough in relation to 5.60% increase in the amount of the sales (Mock, 2015).

The assertion that is concerned with this head of account is cut offs and the reliability. The cut offs deals with period of consideration and the reliability deals with the results of the operations of the company. From the user’s point of view both the assertions are fair.

Each item of the cost of sales shall be verified with supporting evidences. These items are purchase, opening stock and closing stock.

This head of account has been selected in connection with the account of wages and salaries. The wages and salaries have been decreased by 0.81% whereas the superannuation expense has been decreased by 16.27%.

The account of the superannuation is incomplete in the monetary terms and therefore the assertion of completeness has been placed over the account. With the completeness, the reliability has also been considered.

The expense is required to be verified with the supporting documents and vouchers and additionally the conformation of accounts from the actuarial valuation consultants.

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 08-10-2017.

Abidin, S., & Baabbad, M. A. (2015), “The use of analytical procedures by yemeni auditors”,Corporate Ownership & Control, 12(2), 17-25. 

Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on https://www.cleverism.com/financial-statement-analysis-introduction/   accessed on 08-10-2017

Chen, S., & Tsay, B. Y. (2017), “Refer to Materiality as a Legal Concept”. Journal of Corporate Accounting & Finance, 28(2), 55-61. 

Glover, S. M., Prawitt, D. F., & Drake, M. S. (2014), “Between a Rock and a Hard Place: A Path Forward for Using Substantive Analytical Procedures in Auditing Large P&L Accounts:Commentary and Analysis”. Auditing: A Journal of Practice & Theory, 34(3), 161-179.

Kharisova, F. I., (2014), “Applying the category of Assertions (or preconditions)» in audit of financial statement”. Mediterranean Journal of Social Sciences, 5(24), 180 

Langevoort, D. C. (2015), “Judgment Day for Fraud-on-the-Market: Reflections on Amgen and the Second Coming of Halliburton”. Ariz. L. Rev., 57, 37.

Leung P, Coram P, Copper B and Richardson P, (2015), “Modern Auditing and Assurance Services”, Wiley John and Sons, Ed. 6, Pp 425-463, 582-684. 

Mao, M., (2014), “Experimental Methods of Materiality Judgment on Auditor’s Experience and Performance” In 3rd International Conference on Science and Social Research (ICSSR 2014) Atlantis Press. 

Mock, T. J, (2015). “Auditors' Risk Assessments: The Effects of Elicitation Approach and Assertion Framing” Behavioral Research in Accounting, 28(2), 75-84.

PCAOB, (2017), “Analytical Procedures” available at  https://pcaobus.org/Standards/Archived/Pages/AU329A.aspx  accessed on 08-10-2017 

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 08-10-2017 

Vasarhelyi, M. A., (2014), “Embracing the Automated Audit: How the Audit Data Standards and Audit Tools Can Enhance Auditor Judgment and Assurance” Journal of accountancy, 217(4), 34.