Answer:
Audit planning
Analytical review
An analytical procedure in accounting is one of the financial audit processes that help to understand the business and relevant changes that are required in the business. This includes the comparison of data in financial statement and financial information with the prior periods and forecasts. Horizontal analysis of the Income statement and Balance sheet of the given company, RAR Company is made to ascertain its financial growth in the year 2017 as compared to the previous year 2106.
The gross profit margin of the company is determined by calculating the sales percentage that exceeds the cost of goods sold. This helps in evaluating the efficiency of a company that uses its labor and material for producing and selling its products more profitably. The gross profit for the assessment year 2017 is 179,848 and the margin is ascertained by using the formulae, Gross Profit margin= (revenue- cost of goods sold) / revenue. The margin is 0. 69 or 69%. This shows that RAR Company earns 69 cents on the dollar that is gross margin. The net profit margin of the company is the ratio of the company’s net profits to the given revenues. The margin is evaluated by the formula of Net Income/ Net Sales, which is 0.55 or 55%. The net profit has improved as the revenue has increased and expenses decreased for the year. The net margin of the company is 55%. Current ratio of the company is further evaluated by dividing the company’s current assets with current liabilities, which is 0.24. This gives an idea about the organization ability to pay back its debt and determines the company’s financial health.
Preliminary judgment of materiality
Audit risk and materiality puts a great impact on the application of generally accepted accounting standards. Both materiality and audit risk is to be considered together for determining the timing, nature and extent of the procedures related to auditing and further evaluates the results of the auditing procedures. Proper review of the accounting procedures helps in identifying and ascertaining the potential risks areas and planning the audit procedures more effectively. The auditor’s standard report should show true and fair view regarding all the material aspects of the organization.
Sales Accounts
Rationale for selection
The Sales account is one of the most important accounts of the business. The Sales account reflects the sales, which the company has made in a given year. Sales formulates as one of the core aspects of the business. If a company does not incur adequate sales, it will not be able to survive in the business organization . The given account consists of both cash as well as credit sales. Once these sales transactions are recorded in the sales account, the company then, pairs the account with the returns and various allowances in order to derive the net sales figures.
The sale of various years is tracked to estimate the growth of the business. Hence, this account was chosen for the calculation.
Assertion and explanation
As seen from the horizontal analysis which has undertaken, it was observed that during the year 2016, the sales amount was 11500$, however, in the year 2017, this amount dropped to 10541.67. It can be observed that there has been a considerable decrease in the sales amount. The difference in the amount has been 958$ and the percentage decrease has been 8.33%. This kind of decrease in percentage cannot be taken to be an acceptable amount. The sales of the company should always be increasing; however, this is not the case here for the RAR Company.
Recommended audit procedure
Internal Auditing: The Company also checks out for any internal physical loopholes.
Transactional Testing: In the given auditing, the auditor shall check the validity of the statements by checking each transaction separately. He sends out confirmation message to the customers, to verify the existence of all transactions.
Interest Expenses Accounts
Rationale for selection
A bank needs capital for its operations. Hence, it often takes up certain loans and debentures in order to make up for its business. Due to this, it has to pay high amount of interest expenses to the company. The company RAR company, has taken a bank loan of around 277220$ in 2016, and 392699$ in 2017. Hence, one it takes up these loans, in order to fulfill its requirements, the company has to incur high amount of interest expenses. This account has been taken to see to it that how the expenses of the company have been doing.
Assertion and explanation
The interest expenses in 11500$ in 2016 and 10541 in 2017. Hence, the difference in the two different amounts is equal to 958$. The percentage difference between the two years is 8.33%. This is a decrease. Hence, it can be stated that a decrease in the interest expenses is good for the company.
Recommended audit procedure
Internal auditing: The auditing has to see to it that the company has entered the accounts in a proper manner and that all loans have been considered carefully before entering.
The auditor can also check with banks to make sure that their calculations match up to the company`s statements.
Accounts receivables
Rationale for selection
Accounts receivables is often the largest asset of the company, therefore it is important to identify the validity of the stated asset for future forecast. Accounts receivables are always reviewed in detail to obtain the fair position of the company.
Assertion and explanation
Accounts receivables have increased from $1, 74,000 to $185,000 in the financial year 2017. Therefore, increasing the current asset of RAR Company by 6.3%. The rate is good for the growth and productivity of the company.
Recommended audit procedure
Calculating receivables report total: the invoices in the account receivables report should be added. Furthermore, the receivables report should be traced to general ledger.
Investigating reconciliation items: the journal entry made for the account receivables should be fully documented.
Cost of Sales Account
Rationale for selection
Cost of sales ascertains and measures the cost of good produced and sold within the time period for the company. It includes only the direct costs and does not show include any kind of overhead costs. It reflects the method for allocating the inventory costs of the organization.
Assertion and explanation
The cost of sales for the year 2107 of RAR Company has decreased by 12%. The direct cost related with the sales of the product has reduced as compared to the previous year. Though the cost of inventory has slightly risen by 1.6%. Effective control over inventories needs appropriate control over receiving, purchasing and issuing materials. A perpetual inventory system is effective for the organization.
Recommended audit procedure
Inventory cut off test: The inventory should be measured after the year end. The information for last shipped item should be received and shipped at the year end. All the inherent risks are to be considered.
Avoiding inherent risks: proper determination of cost of sales is to be valued according to the standards of GAAP. As audit of inventory is directly linked with cost of sales.
Substantive test for inventory account: there is immense possibility of the overstatement of the company’s year end balances. All the obsolete units while counting of inventory should be written down.
Fixed Asset account
Rationale for selection
Fixed assets of an organization are the vital asset account elements and the major target for asset audit. Auditing fixed assets facilitates in uncovering the valid asset transaction. The tangible assets are the major areas of management that requires adequate involvement for the efficiency and growth of the business in the long-run.
Assertion and explanation
The total fixed assets of RAR Company have increased by $7000 in 2017 through the purchase of machinery as it increased from $64,000 to $ 71,000. While machinery and furniture values are still the same. The increment of 5% in assets is good sign for the company effectiveness.
Recommended audit procedure
Risks of material misstatement: the risk for material misstatements should be properly assessed for the growth of the business and the title deeds, ownership agreements and documents should be properly verified.
Avoiding fraud and errors: purchase of assets at higher prices should be properly verified and value of impairment should be determined.
The cut off costs for transaction should be properly verified affecting the fixed assets. Proper allocation or valuation of fixed assets should be established.
Depreciation Account
Rationale for selection
It provides the correct value of the fixed assets and present true and fair view of the organization. It facilitates in maintaining the replacement of assets and integrity of capital. It complies with the provision of companies act.
Assertion and explanation
The accumulated depreciation has increased by $15,186 in the year 2017. Fixed assets of the RAR Company repair and renewal cost has increased by 32% in the given year. Generally, residual value or scrap reduces the cost of fixed assets during its life period. Obsolescence is another factor to be considered.
Recommended audit procedure
Impairment of assets: the carrying amount should be reduced to the fixed assets recoverable amount. The depreciation method applied should be thoroughly reviewed to reflect it usage. The assets should be appropriately tested for impairment.
Internal auditing: The depreciation for the relevant assets should be done as per the rates prescribed in the companies act. It should be ensured that the depreciation is charged as per pro rata basis. During revaluation the depreciation should be charged basically on the revalued amount.
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