Uden Company Analytical Procedures
A risk assessment means identifying account balances, and transactions with a high risk of material misstatement, whether due to fraud or error. Analytical procedures performed as a part of risk assessment may bring to light issues surrounding the client, that the auditor was not aware. The auditor will design their responses to the assessed risks, such as adjusting the nature, timing and extent of further audit procedures in her efforts to detect any misstatements (AICPA, 2012).
In the planning stage of the Uden audit, Marilyn utilized her knowledge of economic conditions, industry trends, inquiries of management, trend and ratio analysis to develop her expectations of financial performance for 20X4. This information allows the auditor to obtain an understanding of Uden Supply Company, assess the risks of material misstatement, and design further audit procedures around her initial findings to reduce her detection risk, the risk that she will not detect a material misstatement.
2. Develop the expected amounts for 20X4 for each of the income statement …show more content…
The increases from year to year are consistent, and thus the auditor based her 20X4 expected expenses according to the trends identified as follows: Assuming the 20X4 unaudited income statement for Uden Supply Company reflected a gross profit percentage of 31%, this would equate to a $248K increase in gross profit over the auditor’s expectations. In order for there to be an increase in the Gross Profit percentage from 28.7% to 31%, means there was either an increase in sales, or a reduction in the cost of goods sold, or a combination of both. As demonstrated below, if the unaudited income statement reflected a reduction in the costs of goods sold (from expectations of $7,700K down to $7,452K), the gross profit percentage increases to 31%. This change in cost of goods sold drives a change in the reported Net Income before Taxes, increasing this account by $248K. Financial Accounting Standards Board (2008) defines materiality as “The magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement (p. 7).” In this case, I believe the $248K change in Net Income before Taxes is material. Left as is, this misstatement would give the impression that