Question

Overall Planning Materiality

Based on the information provided below.

a. Explain why ABC's auditor chose Sales as a Measurement Benchmark in planning Wesly Co. Audit for the year 2018.

b. Explain why ABC's auditor chose Total Assets as a Measurement Benchmark in planning Wesly Co. Audit for the year 2018.

c. Explain why ABC's auditor chose Gross Profit as a Measurement Benchmark in planning Wesly Co. Audit for the year 2018.

Account	12/31/2018 Balance (projected)	12/31/2017 Balance          (audited)	12/31/2016 Balance      (audited)
Sales	$ 65,000,000	$    30,000,000	$      5,000,000
Total Assets	$          40,000,000	35,000,000	$    25,000,000
Gross Profit	25,000,000	$    10,000,000	$      1,000,000
Pre-Tax Income	(37,000,000)	(55,000,000)	$ (29,845,000)

Answer 1

Solution

An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon" .

Auditing is important as it provides credibility to a set of financial statements.

It gives the shareholders confidence that the accounts are true and fair.

It also help to improve a company’s internal controls and systems.

In the light of the importance of audit in a company.We will analyse each sub questions.

a) Importance of Sales in Audit

i)Effective Sales Audit will not only find loopholes but also find opportunities unexplored for the Sales of the company, thereby maximizing Sales and increasing the profit levels.

ii) Auditing helps in Sales budgeting for the subsequent period for the organization.

iii)Sales audit can spot and stop Sales Fraud, unethical behavior selling and to prevent tarnishing of the company’s reputation in the market.

b )Importance of Total Assets in Audit

i) Asset auditing helps to to keep the asset secured from theft and unauthorized access

ii) Under such audit,physical verification of asset is done to examine whether such asset actually exists or not,thereby helps in disclosing the true and fair view of the company's asset.

iii)An asset suffers depreciation with the passage of time.Efficient application of audit procedures and techniques helps an auditor to ensure whether periodic depreciation is charged on the asset and are systematically recorded in the books of account till date.

c) Importance of Gross Profit in Audit

Gross profit helps determine the operating profitability and the financial performance of a business.

Gross profit margin  is generally important because it is the starting point toward achieving a healthy net profit.

i)In my opininon, Gross Profit depicts the efficiency of a business in terms of making use of its labor, raw material and other supplies.

ii) The amount of profit that is available to cover operating and non-operating expense of your business.

iii) High Gross Profit Margin indicates you are in better position to have a strong operating profit margin and strong net income and vice-versa.

Hence Gross Profit is a key factor in auditing as it highlights the operating effectiveness of every business.