Audit Planning and Control Assignment Instructions
It is common industry knowledge that an audit plan provides the specific guidelines auditors must follow when conducting an external audit. External public accounting firms conduct external audits to ensure outside stakeholders that the company’s financial statements are prepared in accordance with generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS) standards. Use the Internet to select a public accounting company that appeals to you. Imagine that you are a senior partner in a public accounting firm hired to complete an audit for the chosen public company.
Write a four to six (4-6) page paper in which you:
- Outline the critical steps inherent in planning an audit and designing an effective audit program. Based upon the type of company selected, provide specific details of the actions that the company should undertake during planning and designing the audit program.
- Examine at least two (2) performance ratios that you would use in order to determine which analytical tests to perform. Identify the accounts that you would test, and select at least three (3)analytical procedures that you would use in your audit.
- Analyze the balance sheet and income statement of the company that you have selected, and outline your method for evidence collection which should include, but not be limited to, the type of evidence to collect and the manner in which you would determine the sufficiency of the evidence.
- Discuss the audit risk model, and ascertain which sampling or non-sampling techniques you would use in order to establish your preliminary judgment about materiality. Justify your response.
- Assuming that the end result is an unqualified audit report, outline the primary responsibilities of the audit firm after it issues the report in question.
- Use at least two (2) quality academic resources in this assignment.
Planning an Audit and Designing an Effective Audit Program – Wal-Mart Stores
Audit planning involves the assessment the risks of material misstatements in financial reports and accounting statements (Loughran, 2013). However, success of any audit program depends on planning, which must be done according to certain guidelines. While carrying out external audit, auditor must follow certain guidelines provided in audit planning. The external audit requires that the external stakeholders must prepare company financial accounts that are of the IFRS or GAAP standards.
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Critical Steps Important for Planning and Design of an Effective Audit Program
A number of steps must be followed for an effective audit program to be undertaken in Wal-Mart.
- Responsibilities and duties as outlined in terms of engagement between the company and external auditor must be considered.
- External auditor must understand the company’s business and the industry it operates.
- The accounting systems and internal control procedures of the company must be obtained and understood.
- Audit strategy to be used should be determined
- For detailed evaluation of certain internal control procedures, analytical procedures and substantive tests must be performed.
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An effective audit planning in Wal-Mart Stores Inc. demands an understanding of the accounting procedures, internal company controls and the whole industry in which the company operates. In addition, the external auditor must determine, understand and adopt an audit strategy before being used for external audit of company’s financial statements. The audit procedures that are commensurate with the assessed levels of risks must be designed.
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Performance Ratios that would be employed in determining the Analytical Tests
Liquidity ratios.
These ratios include current and quick ratio, and provides an indication whether the chain of stores is able to meet its short-term obligations. If on comparison with the industry average and found to be lower, it would show that Wal-Mart Inc. has a healthy financial condition. The external auditors focus on liquidity ratios to identify areas of risks. The following data shows a comparison of current, quick and cash ratios of the company from 2013-2015.
| Year | 31-1-2013 | 31-1-2014 | 31-1-2015 |
| Cash ratio (%) | 83 | 88 | 97 |
| Quick ratio (%) | 22 | 24 | 28 |
| Current ratio (%) | 11 | 10 | 14 |
The ratio shows that Wal-Mart Inc. has faced increased competition from other national chain stores such as Coulomb Technologies, Target and Amazon, which has affected company sales and its profitability. However, the increase in the liquidity ratios means the company has experienced healthy financial states. For example, the cash ratio increased from 2013-2015, meaning the company has seen growth in its assets base in the years following the previous. The liquidity ratio of the company is below the industry average, showing that Wal-Mart Inc. has a healthy income statement.
Profitability ratios.
These are financial metrics that measures the ability of a firm to generate revenues compared to expenses incurred in a particular period (Finch, n.d.). They include the return on assets and gross profit. An analysis of the profitability ratios shows that Wal-Mart Inc. doing well despite fierce competition in the industry.
| Year | 31-1-2013 | 31-1-2014 | 31-1-2015 |
| Gross margin (%) | 25 | 25 | 25 |
| Profit margin (%) | 4 | 3 | 3 |
| Operating margin (%) | 6 | 6 | 6 |
| After Tax ROE (%) | 22 | 21 | 20 |
According to (Stefaniak, Houston & Cornell, 2012) there are two types of tests that can be used in auditing process; the compliance and substantive tests. According to the authors, compliance tests are performed to determine whether internal control procedures are carried out as planned. The substantive tests help in determination of the validity, accuracy and completeness of the amounts which appear in the financial statements. These tests will be done in the audit of the Wal-Mart Inc. financial statements.
Analysis of the Balance Sheet and Income Statement of Wal-Mart Inc
Based on the analysis of the financial statements of Wal-Mart Inc, the external auditors would require corroboration from the company on changes in advertising, bad expenses and expenses on office maintenance and repairs. To begin with, it was noted that the company’s advertising as a percentage of total sales have increased. However, the development of new advertising strategies could possibly explain the increase. As a result, the dollar amount of the company’s debt has not changed significantly, which led to its reduction as percentage of sales. The external auditors must determine whether the company understated the allowance for doubtful accounts and in its bad debt expense. The company’s financial statements also reveal significant changes in the maintenance and repairs expenses. However, such fluctuations may not be unusual as the company could have encountered unexpected repairs. The external auditors should investigate these accounts to determine whether such expenses should be capitalized on the company’s fixed assets.
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The other issues that can arise, is when the external auditor compares the company data with the expected results. In such a circumstance, (King, 2014) points that the external auditors should make estimates using historical trends, of what account balances would be in relation to the balance sheet and income statements. The auditors make calculations of interest rate expense on long-term loans by multiplying the average monthly interest rate by the balances in note payables. This will provide a way of testing the reasonableness of the interest expense. Moreover, the external auditors must calculate the average of allowance of the company doubtful account receivables as a percentage of the gross account receivables. According to the company’s 2014 and 2015 financial statements, $6677 and $6778 million respectively, which denotes an increase (Wal-Mart, 2015). The figures denote that the company needed more figures on the accounts of doubtful debts in 2015.
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The Audit Risk Model
When an external auditor does an audit to a company, it does so provide confidence to the users of the financial statements of that particular company, that the documents have got no material misstatements (Hogan, & Wilkins, 2008). According to (Loughran, 2013) an audit risk model is employed, which consists of inherent, detection risk and control, in determination of procedures for accounts employed by the client. The author further notes that audit risk consists of adverse and unqualified opinions.
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In most cases, auditors can establish preliminary judge about material materiality owing to the fact that they are aware of account balances and transactions that are likely to contain some errors (Loughran, 2013). However, sometimes the external auditor may have less knowledge of the account balances and transactions, which necessitates the use of sampling. In the case of Wal-Mart Inc. the auditors need good judgment in planning, performing and evaluating the sample. In order to establish preliminary judgement about the materiality in Wal-Mart Inc would be monetary unit sampling. The selection of the techniques is based on the fact that it is value-weighted and best helps in determination of accuracy of financial accounts.
Primary Responsibilities of Audit Firm after issuing Unqualified Report
The best opinion that an audit firm can issue to a client is unqualified audit report. The unqualified audit report denotes that in all material respects, the financial statements of the client offer a fair representation of the financial position of the company in conformity to GAAP (Asare, Fitzgerald, Graham, Joe, Negangard & Wolfe, 2012). In issuing the unqualified opinion, the external auditor is responsible for the opinion on the financial statements. Therefore, it is their responsibility to obtain reasonable assurance whether the financial statements are free from material misstatements.
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