AUDIT 1
5-2 Final Project Milestone Two: Audit Plan
ACC645
SNHU
September 25,2022
AUDIT 2
Wills & Adams has decided to perform an audit of the EarthWear Clothiers client. One of the
business objectives of the client business has been selected, and an audit plan of its financial
statements is created. The specific business objective that is chosen is ‘Increase customer base by
introducing a new extreme sports product line to attract younger consumers.’
Business Risks
According to Auditing Standard 12, which has been introduced by the Public Company
Accounting Oversight Board (PCAOB), it is critical to understand the objectives, strategies and
associated business risks of companies. This comprehension is vital since it can help in
understanding the business risks that can be logically expected due to material misstatement of
financial statements (Louwers et al., 2018, p. 105). Business risks have the potential to minimize
the profitability of a company (Polinkevych et al., 2021). The business goal that has been
identified can increase the business risk of EarthWear Clothiers. According to Auditing Standard
12 (15), new products and services give rise to business risks as there is a possibility that the new
offering will not be successful in the market (Louwers et al., 2018,p .106). To evaluate its
business risk, Wills & Adams must analyze its inventory turnover and gross profit margin.
Management Assertions
Management assertions refer to the claims that have been made by the member of
management of an organization regarding certain aspects of the business. The manager may
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claim that specific controls are in place that help in the achievement of the stated controlled
objective. It may also share pieces of evidence in order to support the assertions (Louwers et al.,
2018, p. 618). The independent auditor must utilize the internal control system to obtain ample
evidence. According to Auditing Standard 12 (04), the auditor has to plan as well as perform
audit procedures that will help in capturing sufficient and relevant evidence that can act as a
reasonable basis for establishing his or her opinions (Louwers et al., 2018,p . 20). The
management has made assertions and claims regarding the application of LIFO inventory
valuation approach which can directly impact the launch of the new product line to attract new
customers. Wills & Adams must critically examine the inventory balance and inventory
management technique to check its claims.
Audit Risks
Audit risk can be defined as the risk that an auditor expresses as ‘an inappropriate audit
option’ when a company’s financial statements are considerably misstated (Louwers et al., 2018,
p.16). The auditor has to conduct an in-depth investigation process so that the level of audit risk
can be minimized or curtailed. In the context of EarthWear Clothiers, audit risk can be reduced
by performing their role with due diligence and making the optimum use of auditing tools and
techniques. The auditor must emphasize the requirements of the Securities and Exchange
Commission for the client business. The inventory management aspects must be thoroughly
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checked to capture the risk of inventory misevaluation and damage.
Internal Controls
The internal controls that are in place offer ample assurance regarding the accuracy and
quality of information (Internal controls. Audit & Advisory Services, 2021). According to
Auditing Standard 22 (01) effective internal control over financial reporting is crucial as it offers
reasonable assurance in terms of the financial reporting of a company and the preparation of the
financial statements of the business. In the case of the client business, an Electronic Data
Interchange System is in place for performing diverse functions like ordering, paying for goods
and handing shipment receipts. The use of an automated system along with a manual system
increases audit risk. Thus, Wills & Adams must perform a comprehensive check by
focusing on independence, training and proficiency as well as due professional care (Louwers et
al., 2018,p .
129). A similar control framework must be used by the auditing company while performing the
audit activity so that uniformity can be maintained.
Effect on Audit Procedure
The audit procedures that are adopted by Wills & Adams for conducting the auditing
of the client business must take into account its business objectives. As the specific business
objective that has been identified relates to the creation of a new extreme sports product line for
the purpose of attracting new customers, the audit plan lays high emphasis on the inventory
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management aspects. While designing this plan, some of the key elements that have been
integrated into the auditing procedure include the possibility of misevaluation of the inventory
materials, adoption of the LIFO inventory valuation approach and checking of the inventory
balance. It is necessary to make sure that the automated controls, as well as the manual controls,
boost the accuracy and efficiency of handling the inventory items. It is essential to make sure
that tracking and tracing of documents that capture inventory movement are thoroughly
integrated into the auditing procedure.
Materiality
In the auditing context, materiality is a broad concept. It involves not only the justified
amount that is captured but also the impact that the specific amount may have on diverse
contexts. While conducting the auditing of the financial statements of a business, it is the
responsibility of the auditor to ascertain the level of materiality that will be considered
(Materiality in audits. PwC, 2021). Issues relating to materiality may arise due to factors such as
omission or incorrect recording of accounting information. According to the materiality
guidelines of Wills & Adams, the quantitative materiality is computed as a % of the most
relevant basis. In the case of the client business, the suitable basis is pretax. Thus, the pretax
income is the ideal basis to ascertain its materiality. The tolerable mismanagement % of
inventory must be considered to ensure proper flexibility exists while performing the auditing
activity.
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References
Internal controls. Audit & Advisory Services. (2021). Retrieved September 23, 2022, from
https://audit.ucsf.edu/internal-
controls#:~:text=Internal%20control%20is%20a%20process,regulations%2C%20contrats
%2C%20policies%20and%20procedures
Louwers, T. J., Sinason, D. H., Strawser, J. R., Thibodeau, J. C., & Blay, A. D. a a a a a a a a a a a a a a a a a a a a a a a a
a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a
(2018). Auditing & assurance services. McGraw-Hill Education.
Materiality in audits. PwC. (2021). Retrieved September 23, 2022, from
https://www.pwc.com.au/publications/materiality-in-
audits.html#:~:text=In%20auditing%2C%20materiality%20means%20not,financial%20a
tements%20to%20be%20audited.
Polinkevych, O., Khovrak, I., Trynchuk, V., Klapkiv, Y., & Volynets, I. (2021). Business
risk management in times of crises and pandemics. Montenegrin Journal of Economics,
17(3), 99-110.
