Auditing and Assurance for Contemporary Accounting Research

Question: Discuss about theAuditing and Assurance for Contemporary Accounting Research. Answer: Calculation of planned materiality Calculation of equity Total assets 28,267,831.00 Interest bearing liabilities 7,758,750.00 Equity 20,509,081.00 Calculation of planning materiality base Base Amount Materiality levels Amount Profit for the year ended 2017 765,271.00 Expected profit for the year ended 2018 788,229.13 5% 39,411.46 Total assets 28,267,831.00 0.50% 141,339.16 Equity 20,509,081.00 1% 205,090.81 Justification of base chosen Profit before tax 5% of profit before tax has been chosen for materiality base as the profit for the last 2 years is stable, expected profit for next year is predictable and the size of the company is represented through the size of the profit. Further, combined omissions or misstatement lower than 5% of net profit before tax is presumed as immaterial (Legoria, Melendrez Reynolds, 2013). Total assets - combined omissions or misstatement lower than 5% of total assets are presumed as immaterial. Further, it is chosen as the materiality base as the assets are susceptible to theft, misstatement or misappropriation (Christensen, Glover Wood, 2013). Equity as equity is easy to audit and potential misstatement is lower therefore small amount like 1% is considered as tolerable misstatement to get large amount available for allocating the amount to other accounts those are costly and difficult to audit (Vls?noiu Buzenche, 2014). Risk assessment, identification of account balance and relevant assertion Revenue Revenue is highly susceptible to misstatement as the company has the pressure to meet the budget target. Further, it is very easy to misstate the revenue through counting the last years sale into current years sales (Eilifsen Messier 2014). It can be identified from the given financial information of the company that the revenue of the company has been increased from 32,812,543 to 33,708,353 over the years from 30th June 2016 to 30th June 2017. It shows 2.73% increase as compared to the previous year. To check the revenue that whether it has been misstated or not the auditor must check whether the sales have been made to the valid customers and whether the sales met the valid criteria for sales (Weygandt, Kimmel Kieso, 2015). The auditor shall also check whether the revenues were properly valued or has been made in arms length price and the sales have been properly classified under proper account. Relevant assertion for revenue will be occurrence for ensuring that the amount of sta ted revenue is correct and not overstated. Borrowing cost It can be identified from the given financial information that the borrowing cost of Crikey Computers Ltd has been increased from 398,579 to 637,725 over the years from 30th June 2016 to 30th June 2017. It shows significant 60% increase as compared to the previous year. The associated risk with the borrowing cost determination may be (1) the breach of the covenants demanding the classification of long-term debt into short term or (2) lack of financial statement disclosure or (3) wrong capitalization of the borrowing costs. Relevant assertion for situation (1) will be allocation and valuation, for (2) valuation and accuracy and for (3) completeness (Delen, Kuzey Uyar, 2013). Inventory Auditors use various analytical procedures for checking the inventory method of the company and confirm the balance with the financial records of the company as well s with the physical count. It can be identified from the given financial information that the inventory of Crikey Computers Ltd has been increased from 29,21,738 to 56,36,918 over the years from 30th June 2016 to 30th June 2017. It shows significant 92.93% increase as compared to the previous year. The associated risk with inventory determination may be (1) inventories have not been recorded at appropriate amount (2) possibility of manipulating the transactions related to closing inventory or (3) inventories may be obsolete or damaged. Relevant assertion for situation (1) will be existence for (2) obligations and rights and for (3) valuation. Comprehensive analysis of ratios Liquidity ratio Liquid ratio is the indicator for whether the current assets of the company are sufficient for meeting up the short-term obligation of the company after they become due. Current ratio, quick ratio, accounts receivable days and inventory turnover ratios are analysed to analyse the liquidity position of the company (Brigham Ehrhardt, 2013). If the current ratio and the quick ratio of the company for the last 2 years are taken into consideration it can be observed that both the ratios of the company for the year ended 2017 have been reduced as compared to the previous year. Inventory turnover of the company as well as the accounts receivable turnover ratio of the company has been reduced that is the company is taking more time to sell its inventory and receiving their account dues as compared to the previous year. Therefore, the overall liquidity position of the company is deteriorated. Hence, the company shall try to convert their long term assets into short term or pay off the liabil ities to improve the liquidity position (Ruhnke, Pronobis Michel, 2014). Solvency ratio It is the key metric for measuring the ability of the company to meet their long-term obligation. As part of the financial ratio the solvency ratio assist the managers to determine the survival of the company. The debt to equity ratio of the company over the years from 2016 to 2017 has been increased that states that the associated capital risk of the company and financial leverage of the company is increased (Palepu, Healy Peek, 2013). Further, the times interest earned of the company has been reduced from 4.2 times to 2.2 times. Therefore, the solvency position of the company has been deteriorated. Profitability ratios The profitability ratios state the profit earning capability of the company to earn incomes with regard to the assets in the balance sheet, operating cost, revenue and shareholders equity (Brochet, Jagolinzer Riedl, 2013). Though the gross profit of the company has been increased over the year, the net profit of the company has been reduced from 4% to 2% over the years from 2016 to 2017. Therefore, the company shall control the operating expenses, wherever possible. Conclusion and recommendation It has been concluded from the above figures that profit before tax, equity and total assets have been considered for planning the materiality base. Looking into the financial information of the company it has been identified that the revenue, borrowing cost and inventory of the company have been significantly increased as compared to the previous year. Further, looking into the ratios of the company it has been analysed that the the overall liquidity position of the company is deteriorated. Further, the debt to equity ratio of the company over the years from 2016 to 2017 has been increased and the times interest earned of the company have been reduced from 4.2 times to 2.2 times. 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