Auditing project assignment

Anonymous
timer Asked: Dec 29th, 2017
account_balance_wallet $50

Question description

Hi, see the attachment for details. and all instruction about the assignment.

Need help with Questions number 3, 4, 6, 10 and 12

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:

Tutor Answer

Ace_Tutor
School: New York University

attached is my answer

Question 3:
The analytical procedures for sales, purchases and inventories can be performed as follow:

Sales
800000
700000
600000
500000
400000
300000
200000
100000
0
2013

2014

2015

2016

2015

2016

Purchases
450000
400000
350000
300000
250000
200000
150000
100000
50000
0
2013

2014

Inventories
400000
350000
300000
250000
200000
150000
100000
50000
0
2013

2014

2015

2016

Comment: In general, there is an increasing trend for all of the sales, purchases and inventories from
2013 to 2016. Moreover, there is an absolutely linear relationship only on procedures on purchases.
Question 4:
The materiality level for ABC Co is calculated by

Materiality level  5%  Total sales
 5%   760, 000  510, 000 
 5% 1, 270, 000
 63,500
Question 6:
The potential misstatements relevant to existence are risks of material error can emerge from an
assortment of sources, including outer components, for example, conditions in the organization's
business and condition, and friends particular elem...

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Review

Anonymous
Awesome! Exactly what I wanted.

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