Audit Assignment Harvard Case Solution & Analysis

Audit Assignment Case Study Solution 

Introduction (Business processes, Client, Vendors)

A retail sports business offers sports equipment such as bats, balls, sticks, gloves, clubs, rackets and other sports-related items to customers.

A retail businessman can open an online shop to target the consumers as this involves lower risk investment or he can rent a space and sell products to the people nearby.

Companies offer their products to consumers and businesses. They use b2c and b2b business models.

Most of the companies in the sports industry follow GAAP principles in their accounting processes.

They use accrual-based accounting, not cash based accounting. This means if someone is buying any sports item from the retailer they charge it as their revenue either the customer pays cash or not. They will incur their revenue.

As every business has its suppliers, businesses working in the sports industry also have their suppliers.

They buy wood for bat from the suppliers.Moreover, there are large companies operating in the sports industry and there are a lot of suppliers in this industry, so there is less bargaining power of supplier in this industry.

In this industry, there are large businesses such as Nike, Adidas, and Puma. These businesses have billions of dollars of revenues and profits.

Planned Audit Risk:

For an effective and efficient audit, planning is essential.It is considered as the first step in the audit process.In this step,auditor develops a general strategy and an approach which should be followed throughout the audit.Furthermore,auditor also identifies the important areas which need proper attention and defines the expected timing, nature, and extent of the audit.

Moreover, at this stage auditor defines the overall objectives and scope of the audit. Along with this he also defines the expected time which will be needed to complete the audit. Moreover,he defines the method which will be followed to conduct the audit.

After conducting audit planning, an auditor can understand the operations and environment of the client well as this understanding will help the auditor in identifying the areas which may be materially misstated hence we can conclude that through planning auditor can effectively manage the overall audit risk.

Materiality and tolerable misstatements:

Materiality is defined as the threshold above which the misstatement or omission may impact over the economic decision of the individual. According to ISA 320, Materiality in Planning and Performing an Audit is defined as the misstatement or omission which individually or in aggregation may change the economic decision of the individual which he takes on the basis of the financial statements of the company.

Tolerable misstatement is defined as the amount till which the financial statement may change from its fair values because till this amount it will not impact on the economic decision of the individuals.

Auditors benchmark certain account balances to set the materiality. For the income statement, they use PBIT or sales revenue as the benchmark, however for balance sheet they use total or non-current assets. Generally, 10% of PBIT or 2% of sales revenue is considered as material for income statement items, however for balance sheet amount more than 5% of total assets is considered as material. The amount lower than 5%, 1% and 2% of PBIT, sales revenue, and total assets respectively is considered as tolerable misstatements. However, to determine the materiality of the amounts which lies between the above thresholds, auditors use judgmental approach. (evidence, 2016)

In our case of Waren Sports Supply, we use PBIT as a benchmark for income statement items and total assets for balance sheet items. From our benchmarking, we conclude that the amount higher than 13289 will be considered as the material for the income statement, however, an amount lower than 6645 will be considered as immaterial or tolerable misstatements. For balance sheet, amount higher than 17981 will be considered as material, however, an amount lower than 7192 will be considered as immaterial or tolerable misstatements.

Analytical Procedures:

According to ISA 520 Analytical Procedures, these are the procedures which are used to identify discrepancies or material misstatement in the financial statements.This can be done by evaluating financial information. Financial information can be evaluated either by analyzing the reasonable relationships between different account balances or between nonfinancial and financial data along with this information can also be evaluated by analyzing the change in the account balances.

Moreover, analytical procedures are the procedures which are used at each stage of the audit such as atinitial stage, detail testing stage and final stage. At the initial stage, it is used as preliminary analytical review procedures according to ISA 315, at this stage analytical procedures are used to obtain the understanding of the entity and its environment along with this at this stage, auditor also use these procedures to identify the initial discrepancies in the financial results of the entity. To determine the initial discrepancies in the financial statements, auditors mainly compare recorded values with the past data or with the industry average and analyze the reasonableness of the relationships among different accounts. At the detail testing stage,it is used as the substantive audit procedure to identify the material misstatement at the assertions level. However, at the final stage, it is used as the final analytical procedure to ascertain that either the obtained results from the audit are an inconsistency with the overall entity and industry knowledge of the auditor................

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