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Milestone2.docxRunning head: DRAFT DETAILED AUDIT PLAN 1
DRAFT DETAILED AUDIT PLAN 6
Draft Detailed Audit Plan
Robert Shulzinsky
Southern New Hampshire University
Audit Plan
Auditing helps, the management of an organization understands the risks that face its operations. The objective of this audit plan is to determine the number of elements in the trial balance that lack credit approval. It is essential for the new management of Newham Inc. to understand the business risk that may be affecting the operations. From the analysis of the business risk and the audit program, it will be possible to provide recommendations that will make the operations of the organization more effective.
Business Risk Analysis
Business risk refers to the factors that may limit the organization’s ability to achieve its goals and objectives in the organization. AS 12 of the PCAOB audit standards provides the guidelines that may help in the identification and assessment of the risks that are material to the financials of the organization. Sarbanes-Oxley Act of 2002 requires auditors to have an understanding of both a company’s internal and external environment when carrying out the analytical procedures of an audit program. Newham is operating in an environment that is composed of different business risks as detailed in the table below.
|
Business Risk |
Details |
|
Change in Management |
There has been a change in the executive management, including the CEO and CFO of the organization. The change expose the organization to managerial risks |
|
Lawsuit |
There is a recent lawsuit filed on claims that a new product was not properly advertised, which led to many customers experience allergic reactions |
|
Internal control procedures |
It is the role of the assistant controller to take care of all cash activities and management of bank reconciliations. The office secretary receives receipts by mail and prepares the cash receipt listing. Such actions expose the company to financial management problems and possibility of fraud. |
|
Competition |
Revlon Inc. and Avon Products Inc. compete with the company in the personal product market. |
Sample Audit Program
Interim Standard 350 of the PCAOB is important when undertaking audit sampling. The components of the trial balance that will be investigated are composed of 216 elements, but only a few are considered as part of the sample for the audit. The standard also highlight the audit procedure performance while AS 2135 is a standard that will help in carrying out substantive tests and tests of control (Anand, 2011).
For Newham’s audit, the first step of the audit is to specify the audit test objective, which is to investigate the number of elements in the trial balance that lack credit approval. The sample for the audit program will be the sales transactions while the control tribute is the credit approval for the transactions.
The second step is calculation of the confidence levels, expected deviation rate, and tolerable rate. The sample was 42 transactions while the population of the audit is 216 transactions. The audit plan places the level of trust of 85%, which means that 32 units of transactions will not have the control tribute. The audit plan places the expected deviation rate of 18% based on the business risk of the lack of enough internal control and the environment and since the identified deviations were 82. Changes in internal control during the audit will lead to a tolerable rate of 20%. The audit tolerable rate, standard deviation, and confidence levels will help in making conclusions.
Report of Recommendations
Explanation of the findings in the Risk Analysis
The company is having a management, which will expose the company to business hazards. The internal control placed on financial transactions is insufficient.
Upper tolerable rate will be give by; Actual deviation + (Tolerable rate – expected deviation rate)
= 82/216*100% + (20%-18%)
= 40.5%
The upper tolerable rate is higher than the tolerable rate and as such, the controls are ineffective in preparation of financial statements (AICPA, 2017).
The lawsuit against the company is likely to tarnish the brand name of Newham leading to business risks. The product under scrutiny has minimum sales and the company does not have the ability to recover advertising and production costs. Competition affects the sales of the company. Additionally, the audit will find that lack of sufficient internal controls over cash receipts will have the potential of leading to misappropriation and fraud.
Sarbanes-Oxley Concerns or Requirements
Section 302 of the Sarbanes-Oxley Act 2002 indicates that both CEO and CFO should carry the responsibility of ensuring that there are sufficient internal controls for a period of 90 days (Arwinge, 2012). Segregation of duties and delegation should also be done in a professional way. For example, the front office clerk should not be responsible for the receipts.
Recommendations on Appropriate Sampling Methods
Attribute sampling is important to help the auditor focus on specific items and in this case, sales transactions. The sampling method involved selection of certain characteristics of items. Such a sampling method should be random to avoid cases of bias and ensure that the sample size is small. A small sample size will make it easy to carry out tests of controls.
Recommendations for Preparation and Success in the External Audit
The management should ensure that there are internal controls that are able to negate the impact of internal business risks. The shipping should be supported with documents as required by accounting principles. Newham audit will help in identification of risks that prevent the organization from attainment of goals and objectives.
References
AICPA. (2017). Audit Guide: Audit Sampling. Hoboken, NJ: John Wiley & Sons.
Anand, S. (2011). Essentials of Sarbanes-Oxley. Hoboken, NJ: John Wiley & Sons.
Arwinge, O. (2012). Internal Control: A Study of Concept and Themes. Berlin: Springer Science & Business Media.
