Assessing Materiality and Risk Simulation 1 Assessing Materiality and Risk Simulation Acc 491 Assessing Materiality and Risk Simulation 2 6 26 Audit programs and assertions Assume that you are responsible for developing an audit program for a manufacturing client that sells to over 1 400 customers You want to ensure your audit program addresses all relevant assertions for sales and accounts receivable Address the following question in the context of the audit sales and receivables for this manufacturing client As per Generally accepted auditing standards AU 311 05 state that in planning the audit the auditor should consider the nature extent and timing of work to be performed and should prepare a written audit program for every audit the purpose of taking such steps will assist on planning and documenting an action plan to ensure taking needed steps to obtain reasonable assurance that the financial statements are presented fairly in all material respects The important factor about identifying auditing assertion such as existence or occurrence completeness rights and obligations valuation or allocation presentation and disclosure specific audit objectives as specific audit objectives will help identify relevant information about the company s sales and account receivable The manufacturing company audit program needs to include guidance to analyze transactions and events how and when are those transactions been recorded to identify occurrence Additionally the information analyzed should yield information about transactions timing of recording and whether or not such transactions were recorded at all Amounts also matter and the audit program should also identify guidance to contrast amounts recorded versus actual amounts and whether or not those transactions were recorded in the correct accounts to verify accuracy cutoff and classification The data that can be analyzed to comprehend the manufacturing company revenue cycle may include revenue transactions such as credit and cash sales as well as sales adjustments and cash receipts In terms of analyzing accounts receivable the audit program should include auditing the account balance to identify account existence completeness rights and Obligations and valuation and Allocation The purpose of the steps is to validate amounts owed by customers whether or not occurred transactions were recorded if the companies truly have claims the receivable amounts and whether or not the amounts were recorded according to GAAP using the cost principle Case 7 25 New Client Acceptance Part B Mr Conrad P Saws President Assessing Materiality and Risk Simulation 3 Mt Hood Furniture Inc Dear Mr Saws We are pleased to announce that we have prepared an engagement planning about the services we will to provide for Mt Hood Furniture Inc for the year ending December 31 20X3 We will audit the balance sheet of Mt Hood Furniture Inc as of December 31 20X3 and the related statements of income retained earnings and cash flow for the year Based on our audit objective it will express whether the company s financial statements are fairly presented or not and our audit will be conducted in accordance with Generally Accepted Accounting Principles GAAP If we are unable to complete the audit we may decline to express an opinion or to issue a report as a result of this engagement Our procedures will include the investigation of documents supporting the transactions recorded in the accounts physical existence of inventories and direct confirmation of receivables and other assets and liabilities by correspondence with selected customers creditors and banks We will require written representations from you about the financial statements and related matters to conclude the audit During the audit we will use the documentary evidence supporting the amounts and disclosures in the financial statements so it will involve judgment about the transactions and numbers to be matched with numbers showed on record We will not examine if there is a risk on material that you provide to us Our responsibility is only limited during the period that we perform our audit The audit will include to obtain any understanding of internal control to plan the audit and to determine the time and extent of procedures to be performed An audit is not designed to detect any risks frauds or to provide assurance on internal control However if we find anything suspicious that need to be reported we will communicate it to you It is truly understood that you are responsible for all of your financial records and related information available to us and that you are responsible for the accuracy and completeness of that information We will provide you our best advice about appropriate accounting principles in preparing your financial statements We understand that management and employees will prepare and provide us any documents selected by us for examining As part of our engagement we will also prepare the Federal and State income tax returns for your company for the year ended December 31 20X3 The audit will be beginning on September 15 20X3 Tax returns and reports will be released no later than March 1 20X4 The fees are estimated from 20 000 to 25 000 for the audit and 7 500 to 10 000 for the tax returns If we need additional time for the audit we will discuss it with you and arrive at a new fee estimate If you choose not to continue with our services during the time we perform the services you will still be billed for all expenditures through the date of termination We appreciate the opportunity to work with you and believe that this letter summarizes all the terms and details of our engagement If you have any questions please feel free to ask or let us know If you agree with the terms indicated on this letter please sign and return it to us Best regards Reddy and Abel Certified Public Accountants Conrad P Saws President Date References Assessing Materiality and Risk Simulation 4 Boynton W C Johnson R N 2006 Modern auditing Assurance services and the integrity of financial reporting 8th ed Hoboken NJ Wiley SEC info 2012 retrieved 4 22 2012 from http www secinfo com University of Phoenix 2006 Auditing and the Public Accounting Profession Integrity of Financial Reporting Retrieved from University of Phoenix Acc491 web site