Earthwear Clothiers Audit Plan
Being a lead auditor of Willis & Adams auditing company, I made an auditing plan for Earthwear Clothiers 2016 after they approached our company looking for auditing experts to audit their company. Earthwear clothiers intend to implement a business objective that would see their company incur a reduction in delivery, and time taken to distribute products and services by addition of additional warehouse locations. Being the lead auditor, I was obliged to identify risk incurred in the business, management assertions, internal control, audit risk, effects on audit procedures, and determine materiality.
Business Risk
EWC decided on their business expansion, but they did not correctly estimate the demands for the organization’s products. The advantage of extra warehouses and the danger of keeping up an excessive amount of stock in numerous areas are overestimated. EWC has had excess inventory on hand time after time, which shows why having many regions with a similar stock wouldn’t profit the organization. The first proportion is the days of inventory on hand. 58.70 is the industry average. EWC 2016 unaudited is 94.99 (which are 13.27 more than the years below 2016). The subsequent proportion is Stock Turnover, which has an industry average of 6.20. EWC 2016 unaudited is 3.87 which are underneath earlier years for EWC and a considerably less than the industry average, which are the reasons why it wouldn’t profit EWC to have extra distribution centers with similar stock. EWC utilizes the last-in, First-out (LIFO) strategy, which is the reason why inventory is lower than normal. If the organization had utilized first-in, First-out (FIFO) “stock would have been around $10.8 million and $13.7 million higher in 2015 than 2014.
Management Assertions
Management assertions are cases made by individuals from the management concerning features of the business. EWC has a plan to reduce distribution and delivery time, and expand their business by adding extra warehouses. Assertions to check on regarding inventory are completeness, valuation, and existence. Regarding existence, I would like to certify all the inventory mentioned in EWC financial statements were existing and that none were missing. To make sure that inventory gets completeness, EWC has to ensure that all the inventory was recorded in the financial statement. EWC assured me that the information in the fiscal statement was legal and suitable.
Audit Risks
EWC’s utilization of the LIFO technique causes a rise in the amount of inventory on hand lower than market valuation, which makes an inventory to be downplayed. EWC neglected to report all inventory at all distribution centers and failed to inform the development of inventory, which leads stock to be exaggerated (or downplayed).
Internal Controls
As indicated by the Flowchart of the Property organization procedure, EWC is said to finish month to month settlements on their sub-record Property plant and hardware. EWC conducts year-end inventory tallies at each distribution center. During these checks, “agents of the organization tally all inventory things and record the tally of each inventory “tally tag.”
Effects of Audit Procedures
Being the leading auditor, I have to make sure my auditing teams and I do our additional testing on inventory and PPE. I will do assessments for completeness and precision assertions (floor to a sheet). I conducted test tally on a model of inventory items during the floor to sheet test. I also conducted sheet to floor, which is a test for the existence and correctness assertions. During the floor to sheet and the sheet to floor procedure, I do test tally selections, and perform a comparison on the items with the corresponding tally tags for confirmation of the inventory listed on the inventory status report is accurate.
Materiality Calculations
After performing my primer risk assessment, I set materiality at 5% of a person which is likewise the joined misquotes of the salary before income tax. The general materiality was determined to be $3.51 thousand. Monetary record records were set at a tolerable misstatement of half of the general materiality. Our second bearable misstatement was set at 25% of the record balance.
References
https://pcaobus.org/Standards/Auditing/Pages/AS2201.aspx
https://www.studocu.com/en/document/central-queensland-university/financial-auditing-and- ethics/mandatory-assignments/auditing-solutions-chapter-1-20/969583/view