Materiality Guidance Major Auditing Firms -Myassignmenthelp.Com

Question: Discuss About The Materiality Guidance Major Auditing Firms? Answer: Introducation Audit planning is the procedure under which various strategies are developed for conducting the projected result that also defines the audit scope within the company. The nature, size and time for audit plan can be varied. It further depends on the size of the business. If the company has large scale business the planning of strategies and their implementation will take large time and overall scope of the audit may also go up (King and Oracle International Corp 2014). Further the audit plan includes the plan for assessing the risk and responses to those risks for analysing the material misstatement. However, the plan is not discrete phase of the audit rather it is the iterative and continuous process that started immediately after the completion of previous audit and then continues till the completion of current audit. Analytical review It is the auditing process based on the ratios among the accounts and it tries to recognize the significant changes. This can be useful in focussing the general areas under which the financial statements are not correct or where the transactions are misclassified. Once the evaluation recognizes the concern areas, the auditor shall conduct further investigation for focussing on the source of underlying concerns (Moeller 2013). The procedure of analytical review includes the comparison of the ratios or recorded amounts with the expectation developed by auditor. The expectations are developed by the auditor through identification prior period financial information, anticipated results and available information. Preliminary judgement for materiality Preliminary judgement regarding materiality is established by the auditor through choosing the base that is multiplied by the percentage factor for determining initial qualitative judgement regarding materiality (Arens et al. 2015). Further, the amount can be updated for the quantitative factors that are relevant for engagement. Materiality is the judgement on how much important the item is under the financial statement. It is the misstatement of the item that may affect the opinion of the auditor on whether the statement represent true and fair view of state of affairs (Gurov and Milgunova 2016). Rational for selection It can be identified that from the trial balance of Mattjon Corp that the sales of the company has been increased from 187,450 in 2015 to 203,125 in 2016. However, the cost of sales has been increased reduced from 63,595 to 54,471. This resulted into the increase of gross profit from 123,855 to 148,654 that is by 20% as compared to the previous year. Assertion and explanation Generally the cost of sales increases with the increase in sales level unless the maximum part the costs are fixed. Here in the given case of Mattjon Corp though the sales have been increased, the cost of sales has been reduced as compared to the previous year. Therefore, chances are there that the management has manipulated sales and cost of sales to record higher profit so that the potential investors make decisions for investing in the company (Titera 2013). Chances are also there that the transfers of goods within the company are treated as sales to third party. Recommended audit procedure The auditor shall analyse the sales cycle of the company for determining the reliability of that. If the sales cycle of the company is strong then the testing number for transaction can be reduced by the auditor. The auditor shall select random sample from the transaction and analyse the associated invoice, purchase orders and the customer statements. Further, the numbered invoices for sales shall be analysed to ensure that all the invoices are taken into consideration (Eilifsen and Messier 2013). Another thing that must be checked is that the cash sales shall be matched with the cash receipts and the credit sales shall be matched with the account receivables of the company. If any errors or fraud is found then the auditor shall increase the number of transaction for testing purpose. Rational for selection It can be identified that the instead of increase of sales and gross profit as compared to the previous year, the net profit of the company reduced. The net profit of the company for the year 2015 was 122,145 whereas the net profit for the year ended 2016 was 106,874 and the reduction was by 12.5% as compared to the previous year. Assertion and explanation Generally the net profit of any company goes up with the increase in sales level and gross profit if the expenses are maintained at the same level. Here in the given case of Mattjon Corp though the sales as well as gross profit have been increased, the net profit of the company has been reduced by 12.5% as compared to the previous year (Legoria, Melendrez and Reynolds 2013). Therefore, chances are there that the management has manipulated expenses to record lower net profit. Recommended audit procedure In the very 1st step the auditor shall re-calculate the major calculation to find out the calculations is not misstated. It shall be started with income part to confirm the total revenue equates the total of income lines. The same process shall be repeated for the categories of expenses. The difference among income and expenses shall be calculated manually. Once the calculation is complete, the vouchers for expenses shall be checked and matched with the recorded amount. Further, proper authorization on each voucher shall be checked properly (Hayes, Wallage and Gortemaker 2014). Rational for selection It can be recognized from the trial balance that the inventory has been increased from 175,000 in 2015 to 189,000 in 2016. The increase is 8% as compared to the previous year. Therefore, there shall be new purchases on account of inventories. Assertion and explanation Inventory is an item that is susceptible to the intentional or unintentional error, fraud or misstatement. Amount of inventory also varies on the basis of the method of valuation used by the company. Further, the physical inventory is exposed to the risk of theft or embezzlement. The costs of the inventories are also exposed to miscomputation if the appropriate rate is not applied while calculating the value of inventory. Recommended audit procedure Physical inventory shall be checked to assure that the inventory count matches with the recorded inventory quantity. Further, the auditor shall check that the method used for inventory sell that is LIFO or FIFO has been applied consistently throughout the year for all the items. As it can be seen that the inventories have been increased as compared to the previous year the increase must be checked with the purchase invoice and physical count of the same. Further, the cost of each item and purchase numbers for each item shall be analysed so that it matches with the total inventory. Moreover, the inventory with high value and high purchase cost shall be re-calculated to check that appropriate amount has been recorded under inventory. Rational for selection The wages has been reduced from 53,000 in 2015 to 46,816 in 2016 that comes to reduction by 12%. Chances are there that the payroll system has been misstated to record higher profit. Assertion and explanation As most part of the audit work with regard to wages are performed under the internal audit, the external auditor may place some reliance on the work of them. However, owing to the volume and nature of the payroll transaction chances are there that the internal auditor may overlook some transactions unintentionally (Albertini 2013). Therefore, the external auditor shall go through all the transactions or the transactions with higher payment to assure that no misstatement exists there. Recommended audit procedure To analyse the control system on wages the auditor shall start with considering the objectives that the control activities are designed to achieve. Te important control objectives with regard to the wages are ensuring that the employees are paid for the work done only, ensuring that wages are paid only to the valid employees (Moroney and Trotman 2016). Further, as the wages of the company has been reduced as compared to the previous year the auditor shall check the name of the employees who have retired or left during the year. This shall be checked to assure that no employees remained unpaid or paid at lower amount than they are entitled to get. Rational for selection Expenses with regard to the superannuation have been reduced to 4,447 in 2016 as compared to 4,770 for the year 2015. Therefore the superannuation has been reduced by 7% that may have direct association with the payroll expenses and number of employees in the company. Assertion and explanation Superannuation expenses are carried accounting the employer to provide retirement benefits to the employees. It has been identified from the trial balance that the wages have been reduced by 12% as compared to the previous year whereas the superannuation expenses have been reduced only by 7%. Generally, if the wages expenses have been reduced there must be reduction of the number of employees (Mao 2014). Therefore, the superannuation expenses shall also be reduced accordingly with the reduction in wages. However as the case for Mattjon Corp is not same therefore, the superannuation expenses must be analysed. Recommended procedure The auditor must ensure that the payment of superannuation is as per the regulation of superannuation. Further the auditor shall analyse the accuracy and validity of the financial records with regard to the superannuation and shall make sure that the fund is compliant with the rules of superannuation (Brown-Liburd, Issa and Lombardi 2015). The analysis shall include the registration of the company and its employees, cancellation of registration, if any, changes in any details, reporting obligations and ongoing requirements. Thereafter the superannuation register shall be matched with the employee register to match the details like retirement of any employee and new addition of any employee and make it sure that the superannuation payment matches with the employee register. It will further ensure that the payment is not mad for any fictitious employee or higher payment is not made as compared to the entitlement. Rational for selection The amount of other income has been reduced from 25,000 in 2015 to 1,000 in 2016. It results into the reduction by huge 96% as compared to the previous year. Assertion and explanation As the other income has been reduced by huge 96%, chances are there that the incomes are manipulated to lower the amount of profit. There may be instances that the incomes have not been recorded or recorded at lower amount than actually received (Arens et al. 2016). Recommended procedure The auditor shall compare the other income sources for the previous year with the current year. The sources from where the income has not been received in the current year or very low income received shall be analysed. The auditor further questions the management regarding the possible reason of income reduction. The validity of the possible reasons must be evaluated before taking any final decision. Reference Albertini, E., 2013. Does environmental management improve financial performance? A meta-analytical review.Organization Environment,26(4), pp.431-457. 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., Beasley, M.S. and Jones, J., 2015.Auditing: The Art and Science of Assurance Engagements. Pearson Canada. Brown-Liburd, H., Issa, H. and Lombardi, D., 2015. Behavioral implications of Big Data's impact on audit judgment and decision making and future research directions.Accounting Horizons,29(2), pp.451-468. Eilifsen, A. and Messier Jr, W.F., 2013, May. Materiality guidance of the major auditing firms. InInternational Symposium on Audit Research Conference. 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. Hayes, R., Wallage, P. and Gortemaker, H., 2014.Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed. King, N., Oracle International Corp, 2014.Audit planning. U.S. Patent 8,712,813. Legoria, J., Melendrez, K.D. and Reynolds, J.K., 2013. Qualitative audit materiality and earnings management.Review of Accounting Studies,18(2), pp.414-442. Mao, M., 2014, June. Experimental Methods of Materiality Judgment on Auditors Experience and Performance. In3rd International Conference on Science and Social Research (ICSSR 2014). Atlantis Press. Moeller, R.R., 2013. Role of Internal Audit in Enterprise Risk Management.COSO Enterprise Risk Management: Establishing Effective Governance, Risk, and Compliance Processes, Second Edition, pp.247-266. Moroney, R. and Trotman, K.T., 2016. Differences in Auditors' Materiality Assessments When Auditing Financial Statements and Sustainability Reports.Contemporary Accounting Research,33(2), pp.551-575. Titera, W.R., 2013. Updating audit standardEnabling audit data analysis.Journal of Information Systems,27(1), pp.325-33