Audit Testing of Various Accounts for Trial - myassignmenthelp

Question: Discuss about theAudit Testing of Various Accounts for Trial Balance. Answer: Introduction Audit Testing Audit is a crucial part of management of financial statements of a particular organization. Audit testing of accounts is very important and is done on a periodical basis in order to check that whether the accounts represent a true and fair view of the financial position of the company. Preparations of accounting statements require monitoring of different accounts. This is what is exactly done by audit testing of accounts. A good auditing done reveals the evidences that seconds the assertion that the financial statements are proper, accurate and in accordance to the laid down accounting standards (Huber 2016). Analytical review The analytical review of the trial balance report is generally prepared with the help of the account balances that are extracted from the general ledger. If any particular entry is missing then that can be identified from the trial balance as the total debit and credit balance will not match, thus the trial balance cannot be closed. The preparation of the trial balance is an imminent step in preparation of financial statements because it provides a material proof that the account balances are proper and error free. The steps in analytical review of the trial balance are generating a trial balance; matching the totals of the debit and credit balances of the respective trial balance. In case there is any kind of problem in the accounts then adjusting entries need to be passed. For instance if an expense is wrongly recorded then an adjusting entry of the same amount representing gain must be passed in order to cancel the wrongly entered expense entry (Veronica and Bachtiar 2014).The acc ount balances should also be checked individually in order to make sure that the amounts associated with each of the accounts are accurate, in case there is any discrepancy then the purpose of that particular entry must be reviewed and amended, if required. In case of the trial balance provided in the question, Chamoisee Enterprises Trial Balance shows the debit and credit balances for two financial years 2015-16 and 2016-17 and appears to be alright (Desai 2015). Preliminary judgment of materiality The term preliminary judgment about materiality refers to the maximized amount that is believed by the auditor that even if these statement of accounts are misstated then also it would not affect the decision making process or the true and fair view of the accounts as such. The materiality is mostly allocated to balance sheet and not income statement accounts because of the double-entry book keeping system which imposes a similar effect both on the income statements and balance sheet (Barndt, Fuller and Flynn 2016). There is also an allotted amount of allowed misstatement under which any amount of materiality is allowed because some accounts may be understated and again some accounts may be overstated that leads to a net total amount less than the tolerable amount. Materiality is an important tool in the hands of the auditor and can be used efficiently in order to assess the quality of the accounts prepared (Eilifsen, Hamilton and Messier Jr 2017). Repairs and Mainter Account Rationale for selection After analytical review of the trial balance and the execution of materiality assessment the account of Repairs and Mainter is selected. This is because the total debit balance of the account for the financial year 2015-16 is $5050 and the debit balance for the financial year 2016-17 is $960. The percentage change in the account balance is 81%. Assertion and Explanation This account may be at risk of fraud because there has been a huge change in the account balance, precisely of $4090. The change may be due to genuine reasons but as no further information is provided as to why there is such a disparity in the balances of two consecutive financial years, it may be assumed that the statement has been misstated. This has been done to show increased profits of the firm for the current financial year by decreasing the actual amount of expenses incurred on repairs and maintenance so as to lure the shareholders and investors. This might also be the case that the fraud was committed in the last financial year that is 2015-16. The balance of the repair and maintenance account may be increased deliberately so as to increase the expenditure amount so that the firm can evade extra tax which it has to pay on the basis of the revenue earned (Gaber and Lusk 2015). Recommended Audit Procedure The recommended audit procedure for treating accounts with fraud risk is that the auditor should monitor and assess the relevant information that is collected from the risk based auditing procedures and confirm whether one or more than one fraud related risk factors are present or not and should be listed down and considered while identifying and assessing fraud risks. Factors that help in identifying risks associated with fraudulent activities are events that tend to indicate a monetary incentive or pressure that ultimately leads to fraud; a loophole that is enough for initiating the fraud, or a perspective or attitude that is enough to justify the unethical action. Needless to say fraud related risks do not mandatorily suggest that a fraudulent activity is being carried out in the firm but the existence of even a single indicator is enough to take preventions against fraud. Cost of Sales Account Rationale for selection The account that requires audit attention for qualitative reasons other than fraud related risks is Cost of Sales Account. This account is selected because this is one of the most important accounts, that is prepared in order to figure out the total manufacturing costs. Assertion and Explanation The Cost of Sales Account is selected because this account is directly linked with the cost of manufacturing the goods. Cost of goods sold account generally includes all the direct costs associated with the goods producedby a company along with the direct labor costs. The primary purpose of a business is to incur profits. The net profit that is incurred from business cannot be exactly calculated if enough attention is not given on the cost of goods sold. This is because the cost of goods sold account is a clear indicator of the fact that the newest strategies and plans implemented to maximize the profit is working or not. The cost of goods sold also reveals the areas of resourcefulness in the business. In simpler terms, the components of manufacture that attribute most to profits is indicated also by the cost of sales account. Therefore the Cost of Sales account should be audited with utmost care (Bernard 2016). Recommended Audit Procedure The recommended audit procedure for auditing the cost of sales account revolves around a lot of procedures like authorizing the purchase of raw materials, accurate recording of inventory costs, inventory tests. The auditor should keep a keen eye as to how a particular category of goods are prepared, costs incurred and the related statements recorded. Accounts Receivable Account Rationale for selection The next account selected for audit testing is accounts receivable account. This account represents the receivables of a particular firm. This account has a direct link with the sales account as increase in sales will definitely increase the receivables. Assertion and Explanation The Accounts Receivable account is selected because it is one of the most important accounts that represent the future receiving of a firm in the form of credit sales. Generally the accounts receivable account is treated as an asset because it represents future income. But in case of customers who are not able to pay in time, this appears to be a loss for the company and the amount is transferred to the bad debts account. Thus the accounts receivables account must be audited with due care and importance (Hribar, Kravet and Wilson 2014). Recommended Audit Procedure The recommended audit procedure for auditing the accounts receivables account is that the auditor should test whether the balance in the subsidiary ledger is matching with the balance in the general ledger. The auditor should also communicate with the various customers and confirm the exceptions. He should also confirm the same on the part of the banks and find the reasonability behind discounted or unbilled receivables. Consultancy fees Account Rationale for selection The Consultancy fees account is selected because it is an expense account and can be materially misstated. The balance of this particular account is $57000 for the financial year 2015-16 and $39500 for the financial year 2016-17. Assertion and Explanation The Consultancy fees account is selected because the expenditure for consultation incurred by the firm was $57000 previously and $39500 for the next financial year. Now it is apparent that the firm had expensed less in the financial year of 2016-17. This may be a genuine occurrence or may be done purposely in order to increase the profit and lure the shareholders and investors. The materiality of misstatement is an issue of concern and may be applied by the company in order to show increased revenues of the firm (Alexeyeva and Svanstrm 2015). Recommended Audit Procedure The recommended audit procedure for auditing the consultancy fees account is that the auditor should crucially check the recorded statements and transactions incurred between the firm and the consulting body. The auditor should also communicate with the consultancy, in order to make sure that all proceedings have been carried out correctly and then the chances of misstatement should be cut out. Superannuation Account Rationale for selection The Superannuation account is selected next because as per the set standards every employer has to keep away a certain percentage of the employees salary and even contribute a certain percentage from the part of the employer for employee benefit purposes. The balance for the year 2015-16 is $4770 and $2373 for the year 2016-17. Assertion and Explanation The superannuation account is selected because it is the duty of the auditor to be highly vigilant whether the employee welfare policies of a particular company are properly implemented. In case of Chamoisee Enterprises the amount has decreased from $4770 to $2373. This implies that either the company has contributed less to the fund of employees or it there has been a reduction in the number of employees. The auditor should keep these facts in mind and execute proper investigations (Boone 2017). Recommended Audit Procedure The recommended audit procedure would be that the auditor should be very strict with employee welfare policies and should take enough care as to why the contribution of the company in relation to this has decreased. The auditor should carry out a thorough investigation. Owners Equity Account Rationale for Selection The owners equity account is selected because this account represents the owners investment in the firm excluding the withdrawals made by the owner, added with the net income since the beginning of the venture. Assertion and Explanation As observed in the provided trial balance owners equity balance for the financial year 2015-16 is $135683 and for the financial year 2016-17 is $181845. It is apparent that the owners equity account balance has increased which is a healthy indication, but also auditing of this account is equally important as the risk of material misstatement is very high in case of these kinds of accounts (Needles, Powers and Crosson 2013). Recommended Audit Procedure The recommended audit procedure that the auditor should follow is that he should consider past profits as recorded in the previous accounting statements and check whether the net profits has been added properly. He should also check whether the profit earned is properly distributed among the owners in accordance with the accounting ratios. Wages Account Rationale for Selection The Wages account is selected because of the reason to check whether the domain of direct labor is properly maintained by the company and in accordance to the set standards by the labor association. Assertion and Explanation As observed in the trial balance, the wages account balance in the financial year of 2015-16 is $53000 and for the financial year of 2016-17 is $32000. The only reason for this account being selected is that the auditor should keep a vigilant eye towards the labor welfare policies and whether the policies are being properly implemented or not (Ionescu 2016). Recommended Audit Procedure The recommended audit procedure that the auditor should follow is that he should make sure that the labor welfare policies are properly implemented and the standardized rules set out by the labor association are being followed. The wages account balance has also decreased from $53000 to $32000 which is also an issue of concern and should be looked into. References Alexeyeva, I. and Svanstrm, T., 2015. The impact of the global financial crisis on audit and non-audit fees: Evidence from Sweden.Managerial Auditing Journal,30(4/5), pp.302-323. 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