Waren Sports supplier Case Study Solution


This report is based on audit planning process which is of course of a fictitious company. Planning an audit involves understanding of client’s business, its processes and functions and the surroundings in which it runs, thresholds of materiality and planned audit risk. Assessing the risks of material misstatement from mistake or scam in accounting systems while evaluating client’s internal control. Audit planning is the primary step towards audit conduct and reporting, it is challenging and requires hard work of auditors.

Description of the client (business, processes, and environment)

In order to plan the audit, auditor must need to know the relevant information of client like its business, processes and environment so the plan can be carried out accordingly. For instance, a pharmaceutical company will have its different business, processes and environment than a banking company. These two will be differently audited and reported because of major change in line of business. The content and range of planning accomplishments that are required will be contingent on the size and density of the organization, the auditor’s prior involvement with the entity (if had) and the fluctuations in positions occur during audit. The auditor should evaluate the following matters:

  1. Familiarity with the company’s inside control over business reporting acquired during other engagements executed by the auditor.
  2. Issues disturbing the trade in which the corporation works, like financial reporting practices and principles, economic state of affairs, rules and procedures, and technological variations.
  3. Substances linking to the company’s business, together with its organization, operating appearances, and resources arrangement. For instance, a wholly debt financed structure would be different to analyze and audit than equity plus debt financed structure or 100% equity based holding.
  4. The degree of latest deviations, if happened in the entity, its practices, or its internal control over financial reporting.
  5. The comparative complexity of the business’s set-ups.

Like various minor firms have fewer multifaceted operations. Furthermore, some grander, compound corporations possibly will have not as much of compound units or processes. Elements that might designate less complex operations contain: fewer corporate streaks, simpler business processes and monetary reporting systems, more integrated accounting tasks, broad participation by top management in day-to-day activities of the corporate, and less ranks of management, each with anextensive length of device.

  1. Defineacquiescence with autonomy and ethics necessities.
  2. Public statistics about the corporation pertinent to the assessment of the possibility of material accounting misstatements.
  3. Environment in which it operates, (external and internal) the rivalry faced and how the competition affects the performance of management.
  4. Information about third party dealings like client personnel, customers and vendors of the company.
  5. Accounting processes as the financial reporting standards of the company and assessing whether they do compliance with the required standards.

After gathering all the above information about the client, audit firm will be able to analyze the description of client with business, processes and environment which will lead to a tailor made audit plan reflecting the description.

Planned Audit risk (AR)

In terms of Audit, Audit risk is the threat that the auditor may unwittingly and innocently fail to properlyamend his or her judgment and opinion on finance related statements that are materially misleading. The presence of audit risk is acknowledged in the description and responsibilities and tasks of the liberated auditors that defines it as “due to the nature of audit evidence and the features of scam the auditor is capable to gain rational, but not unqualified pledge that substantial misstatements are spotted. Audit risk and materiality, surrounded by other matters, need to be reflected together in shaping the nature, scheduling, and level of auditing procedures and in appraising the outcomes of those techniques. The auditor shalldesign the audit plan so that audit risk will be restricted to a lower level that is, in his or her proficient judgment, apt for articulating an opinion on the financial statements. It may be weighed in quantitative or non-quantitative terms.

A valuation of the risk of substantial misstatement (whether caused by mistake or fraud) should be made throughout scheduling. The auditor’s knowledge of internal control may amplify or alleviate the auditor’s fear about the risk of material misstatement. In bearing in mind audit risk, the auditor shall explicitly evaluate the hazard of substantial misstatement of the statements of financial information due to fraud.Information, skills, and talent of workforces allocated weighty engagement responsibilities should be proportionate with the auditor’s valuation of the level of risk for the engagement. Usually, greater risk needs more practiced workforces or more wide-ranging command by the auditor with final obligation for the entity during the planning phase and the conduct phase of commitment.

Materiality and tolerable misstatements

A fact is material if there is “a significant probability that the fact would have been observed by the reasonable investor as having meaningfully transformed the ‘total mix’ of information made existing.”  To get practicalassertion of whether the financial statements are at liberty of substantial misstatement, the auditor should plot and execute audit procedures to sense misstatements that, separately or in combination with other misstatements, would consequence in sensible misstatement of the financial conclusions. This takes account of being attentive while forecasting and executing audit dealings for misstatements that might be reckonable due to numerical or qualitative factors. Before preparing the final audit plan, the auditor would determine a level of audit risk that is acceptable and appropriate, and is a particular stated figures. For instance, an expense of $500 would be considered as immaterial and any amount above this would be material to suspect if found inappropriate. As below materiality threshold is selected as 10% and 5% for both years’ income statement and 5% and 2% for balance sheet………………………………….

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