Expert answer:Auditing project assignment
Expert answer:Hi, see the attachment for details. and all instruction about the assignment.Need help with Questions number 3, 4, 6, 10 and 12
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Assume you’re the external auditor of ABC Co and you are engaged to audit the
company’s 2016 financial statements. Following are ABC Co. financial statements for the years
2016 &2015:
ABC Co. Comparative Income Statement for 2016 and 2015 For Years Ended December 31:
Sales
Cost of sales:
Beginning inventory
Purchases
Goods available for sale
Ending inventory
Cost of goods sold
Gross profit
Selling, general & administrative
expensesbefore tax
Income
Income taxes (30%)
Net income
2016
760,000
2015
510,000
270,000
398,250
668,250
360,000
308,250
451,750
130,000
321,750
96,525
SR225,225
175,000
365,050
540,050
270,000
270,050
239,950
74,000
165,950
49,785
SR116,165
ABC Co. Comparative Retained Earnings Statements for Years Ended December 31:
2016
2015
Beginning retained earnings
116,165
51,880
Add: Net income
198,800
116,165
Ending retained earnings
SR 314,965
SR 168,045
ABC Co Comparative Balance sheet for the Years Ended December 31:
2016
2015
Cash
200,000
100,000
Accounts receivable
480,000
360,000
Inventory
360,000
270,000
SR1,040,000
SR730,000
Current assets
Total current assets
Total fixed assets
Total Assets
500,000
480,000
SR1,540,000 SR1,210,000
Current liabilities
Accounts payable
240,000
180,000
Accrued expenses
48,000
36,000
Short-term debt
80,000
60,000
SR368,000
SR276,000
Long-term debt
302,000
274,000
Total liabilities
670,000
550,000
Shareholders’ equity
870,000
660,000
Total current liabilities
Total liabilities and equity
SR1,540,000 SR1,210,000
To do:
1. An understanding with the client should be established for services to be performed for
each engagement. Such understanding should be written (engagement letter). Try to write
an engagement letter with ABC Co.
2. In the planning phase, you are required to obtain knowledge of the client’s business and
industry. What do you think is the industry of the client?
3. Analytical procedures are evaluations of financial information made by a study of
plausible relationships among both financial and nonfinancial data. Analytical procedures
performed during planning consist of a review of data aggregated at a high level, such as
comparing financial statements to budgeted results in order to enhance the auditor’s
understanding of the client’s business and to identify unusual transactions and events and
amounts.
Perform analytical procedures on sales, purchases and inventories and comment, knowing
that:
2016
2015
2014
2013
Sales
760,000
510,000
400,000
313,725
Purchases
398,250
365,050
334,908
307,255
Inventories
360,000
270,000
205,000
155,000
Inquiries were made with the management regarding sales; you were informed that on
2016, a new important customer began dealing with ABC for the first time which caused
the sales to increase significantly.
4. During the planning stage, the auditor uses professional judgment to establish a
preliminary level of materiality. According to your manager, materiality for ABC Co is
equal to 5% of total sales. Calculate materiality level for ABC Co.
5. As per your manager, risk of material misstatement is low. Determine the level of
detection risk.
6. An auditor uses relevant assertions to form a basis for assessing risk, and for the design
and performance of further audit procedures.
For the inventory, identify potential misstatements relevant to the following assertions:
– Existence
– Completeness
– Valuation
& then design audit procedures to address those risks.
7. What are the procedures that you should perform regarding fraud? Your manager
concluded that significant fraud risk doesn’t exit.
8. Your managers noticed an unusual significant transaction in utilities expense (part of
SG&A) account. What should be your response to such significant risk?
9. Your manager decided that the answer to the above identified risks should be a combined
approach (Both tests of the operating effectiveness of controls and substantive procedures
are used). You noticed a strong control environment and decided subsequently that
internal control is strong, should we perform tests of controls? Tests of substantive
procedures?
10. Your manager decided that tests of details are generally more appropriate in obtaining
evidence regarding the existence and valuation of account balances, and ordered you to
perform some tests of details on utilities expenses account to ensure reliability of the
records. Knowing that total amount of utilities expenses account is SR 30,800 & tolerable
misstatement for this account as per your manager is SR 3,000, you were asked to vouch
all electricity invoices above SR2,000.
Records in ABC’s books are as follows:
Date
Description
Amount(Debit) Total
22/2/2016
Electricity expenses of January 2016
2500
2500
23/4/2016
Electricity expenses of Feb-March 2016
4950
7450
25/6/2016
24/6/2016
23/9/2016
23/11/2016
31/12/2016
Electricity expenses of Apr-May 2016
Electricity expenses of June 2016
Electricity expenses of July-Aug 2016
Electricity expenses of Sep-Oct 2016
Electricity expenses of Nov-Dec 2016
Please fill in the below table according to your findings:
Invoice
Amount in
Amount in
Difference
Date
Invoice
Records
5000
2980
5050
5120
5200
12450
15430
20480
25600
30800
Remarks
Total
11. Prenumbering of documents helps to assure that:
All transactions are recorded(Completeness)
No transactions are recorded more than once (Existence)
While checking the sales invoices, you noticed that one invoice totaling SR200 is
missing, what may be the consequences?
12. Confirmation of receivables is considered to be a generally accepted auditing procedure.
Send an account receivable confirmation request to one client (Issa Co), whose total
balance as of December 31,2016 in our books is SR 52,000.
13. Write at the end of the audit a report showing your opinion on the financial statements as
of December 31, 2016, according to your findings.
Following are all utilities invoices in 2016:
…
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