Answer To: 1 General information about the assignment The assignment must be your own individual work; i.e. it...
Pulkit answered on Oct 06 2020
Executive Summary
The report is about the case of a client of an audit firm and discusses about the optimum level of materiality to be set during the audit planning. There have been discussions with regard to the accounts where the auditor is required to undertake substantive audit procedures and audit assertions in each of such account has been identified.
Table of Contents
Executive Summary 1
Preliminary Assessment of materiality 1
Analytical review (trend analysis) 3
Significant accounts and audit assertions- 5
Audit Procedures 7
Probability of fraud risk 7
Conclusion 8
References 8
Preliminary Assessment of materiality
Preliminary Assessment of materiality refers to the step of audit planning where the auditor decides the materiality level for the purpose of a specific audit assignment. This assessment is to be performed very early in the audit and accordingly the auditor needs to decide the level of testing to be done and to make a decision about the transactions to be set. In the case where audit risk (both inherent and control risk) is assumed to be lower, the level of materiality is generally set at a higher amount and in case audit risk is assumed to be higher, level of materiality will be set at a lower level. (Piccoli, G., Ahmad, R. and Ives, B., 2001.)
The level of materiality in a company is set according to the benchmark decided by the auditor for setting such materiality. There can be certain benchmarks from which the auditor might choose or the auditor can choose a mix of certain benchmarks. Some examples of the benchmarks which can be used by the auditor for setting up the materiality level in a company include profits before tax, total income or total expenses, net assets, total equity, gross profit, etc. There is no specific standardization with regard to the benchmark which is to be selected. (Voss, R.S. and Emmons, L., 1996.)
In the given case the audit partner has suggested that the preliminary assessment of materiality for the financial report as a whole be set at $15,000. In a company which has an annual turnover of around $97000 and a profit of $44000, the materiality level at $15000 would be too high. In a case like this the auditor can decide the materiality level to be around 10% of the reported profit which would bring this preliminary assessment of materiality to be as low as $4000.
For example, when the materiality level has been set at $15000 a very important item of revenue expense which is depreciation (that has been values at $17773) in the given case would not be checked substantively. Although depreciation is an item that requires substantive procedures to be followed for checking, and therefore this level if materiality is not prudent for this client and it should be lowered down further.
A higher preliminary assessment of materiality would require lesser checking to be performed by the audit team. This would certainly require lesser time for completing the audit assignment and thus the budget to be allocated for this audit assignment would be lower if higher preliminary assessment of materiality is set. On the contrary if the preliminary assessment of materiality is set at a lower level, lesser checking is required to be performed by the audit team. This would certainly require higher time, energy and efforts for completing the audit assignment and thus the budget to be allocated for this audit assignment would be quite high. (Storey, J., 1992.)
Analytical review (trend analysis)
Jul 1, 2016 - Dec 31, 2016
Jul 1, 2015 - June 30, 2016
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