Audit Process Planning - Paper Example

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Audit process usually intends to find out whether Auburn Enterprises has any suspicious accounts that would require further analysis. It is of the need to find out if there are material misstatements that would adversely affect the decision-making process. The recommended procedure to find out material misstatements and fraud in the preparation of the accounts (Whittington, & Delaney, 2013). There are two selected methods to discover suspicious accounts that need a thorough audit.

1.1Analytical review

This involves checking whether there is a significant change in the stated figures which would lead to speculation requiring further study of the accounts. The ratio of change will be important in finding out whether there is a need to perform additional analysis of the identified accounts (Whittington, & Delaney, 2013).

1.2 Preliminary judgment on materiality

The materiality of items in the trial balance depends on whether they affect the decision-making process of the users of the financial statements. The materiality of an item depends on the quantity as well as the quality of the presented information (Whittington, & Delaney, 2013).

Generally, the two methods are used in this case to find out whether there are fraud and misstatements in the accounts of the company.

2.0 Service fees (revenue)

The analytical review shows that there was a 49% decline in the revenue from the previous financial year. This is a material change that can affect decision making by various stakeholders considering that it affects the net profits for the company. There is a need to conduct an audit of this account to ensure that there are proper methods of recording the service provision and the receipt of the revenue. The aim is to ensure that the individuals providing the services do not pocket the money from customers without the knowledge of the management.

The recommended procedure is to evaluate the internal controls of the company, to ensure that there are no loopholes that would lead to fraudulent activities that deprive the company of its revenue. First, the nature of services is identified, and how a customer order is documented, services are provided, and then payment is made. If a different person records the requests from a customer and another person or persons provide services before payment is made to a different employee, then there are no loopholes to revenue loss, otherwise, there may be fraudulent activities in the company leading to revenue loss (Giove, 1992).

3.0Equity account

There was a 43% increase in the company equity, and this is a reason for suspicion. This has a material effect on the shareholder's dividend per share and the percent control that the initial shareholders had over the company. There is need to understand the reason why the shares were issued and whether the right procedure was followed in the issue of shares.

The procedure is to ask the management to provide a minute of the meeting that authorized the issue of additional shares and then evaluate the prospectus that advertised the shares. The price at which the shares were issued is evaluated, and the total capital raised is also evaluated. There is a need to follow up and get to understand how the capital was utilized after the money was received. It is of a need to know if there was a misappropriation of capital, or whether shares were issued irregularly to benefit the management or other parties. The prospectus would help tell whether there was appropriate disclosure of information that would help guide the investors on whether to buy company shares or not (Giove, 1992).

4.0Miscelleneous expense account

The miscellaneous expense account is a subject of suspicion because it was not there in the previous year, but is reported in the current year. This is a material thing to evaluate and confirm that the account is not created to steal money from the company.

The procedure for auditing this account would be first evaluating the expenses that are stated as miscellaneous. Receipts for such expenditure is to be evaluated to ensure that the total expenditure matches what is reported. The third step would be to evaluate the procedure of incurring the expenses incurred as miscellaneous. It is important to identify who authorizes the transaction, approves and pays for the same. (Whittington, & Delaney, 2013) This can tell whether it is possible to engage in fraudulent activities with the existing procedures.

5.0Bank loan account

The loan for the company is reported to have remained the same in the two financial years, and this raises suspicion. This is an example of an account that has to be evaluated for qualitative reasons. It would mean that the company is not making payments for the bank loan that it had borrowed. This would be risky for existing and potential investors in that there are chances that the company may become bankrupt. Using the materiality concept, there is a need to understand the reason for this situation and the impact that it would have to the various stakeholders.

The first procedure is to ask for a detailed explanation from the management and the accountants on whether there have been payments made to the bank. If there have been payments for the loan, then there should be bank deposit slips or other evidence to show that the bank was receiving payments. Requesting for a bank statement would help tell whether the money was being banked to the bank. If there were some other arrangements with the bank, the management has to provide an agreement, and if there has been a legal suit for failure to pay the loan, the same should have been reported in the account statements so that users of financial statements are aware of the implication of this situation. Following all these procedures will help reveal whether the loan exists, payments are made, and if not, the implication of the same to various stakeholders (Basu, 2006).

6.0 Wages account

There was a 47% decline in the wages in the company, and this is a significant change within a year. The analytical review of this account thus reveals that the account is risky and needs further evaluations. The assertion is that such a decrease in expense could reveal that there was a previous misappropriation of funds by paying people who did not exist. Such a fraud could hurt the net profits for the company in a great way.

The audit procedure is to find out the reason why there was a decline in wages, whether some people were terminated or not. The list of employees for the company and their salary for the two years can be obtained, and a study made to find out the wage bill for the years. The hours they work and the duties assigned can also help evaluate the account. Additionally, there would be a need to have a head count of all the employees of the company, so that to be sure that there are no ghost workers drawing the salary and not working for the business. If the employees were terminated, a copy of a letter of termination and reason for the same could be obtained. This can help confirm that the company did not terminate key employees which would make it impossible for the business to operate in the future (Gomez, 2012). Consistency in the letters and change in wage bill would help tell whether there was any kind of fraudulent activity.

7.0 Other income

There was a significant change in the amount of this account, and this raises suspicion about the account. A 98% decline in the other incomes imply that there must be a great change in the company business and this would affect various stakeholders in the company. The assertion is that the change could be as a result of misappropriation of the incomes or that in the previous year, there was a window dressing to make the earnings of the company look greater. Revisiting the accounts would thus help reveal any material misstatements.

The procedure for auditing the account is evaluating the sources of these incomes, and find out the reason for the decline. It would require contacting customers and seeking more information about the investments that the company had made with them or the services that were provided over the years. There would be a need to evaluate the implication of the changes in the sources of income for the company (Gomez, 2012).

8.0 Inventory account

This is one of the accounts that would require an audit for qualitative reasons. The risk inherent in this case is the quality of the stock available cannot be guaranteed. The evaluations done in the audit process can help tell that the stock available guarantees economic value in the following year.

The procedure for auditing the stock is to have a physical count of the stock. There is a need to evaluate whether there is any damaged stock that is not usable, but is still recorded in the company books of account. Additionally, it is important to find out the methods that are used to evaluate the cost of stock, so that the recorded assets for the company are reasonable (Gomez, 2012).

In conclusion, there are various accounts that have to be evaluated from the trial balance. Specified procedures for each account can help tell whether there are fraudulent activities that employees are engaging in. A Proper audit can help ensure that the users of the financial information have reliable data to rely on.


Basu, S. K. (2006). Auditing: Principles and techniques. New Delhi: Pearson Education.

Giove, F. C. (1992). The essentials of auditing. Piscataway, N.J: Research and Education Association.

Gomez, C. (2012). Auditing and assurance: Theory and practice. New Delhi: PHI Learning.

Whittington, R., & Delaney, P. R. (2013). Wiley CPA exam review 2013. Hoboken: Wiley.


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