Account and Auditing Planning Memorandum

Question: Discuss about the Account and Auditing for Planning Memorandum. Answer: BEGA CHEESE LIMITED AUDIT PLANNING MEMORANDUM Prepared by : Reviewed by : Date : 1. TERMS OF ENGAGEMENT The audit planning will help to determine and analyse the financial position and risk associated with the company. The terms of engagement shows the terms and condition between the company and the audit firm. Therefore, the auditors will specific guidelines and procedures to handle the engagement (Braiotta, 2004). It refers to the initial stage of the audit during which the firm notifies that the client has accepted the work of audit and clarifies that the firm has understood the purpose and scope of audit. The audit firm ensures that the information provided by the company is fair and accurate that will help to audit the financial statements. 2. BACKGROUND INFORMATION 2.1 Business Risk Factors Financial statement is considered to be helpful for several users as it provide platform to determine the financial health of the company. Business risk is determined based on the financial ratio calculation which is done from the company financial statement (Elliott and Elliott, 2008). 2.1.1 Factors that increase risk Increase in liability and debt of the company increase the current ratio which decreases the chance of the company to meet the current obligation. This lead to the liquidity business risk. Several other key factor also increase the chance of risk such as if auditor manipulate with the profit data increase the chance of solvency as the company will report false profit margin which will throw negative impact on the company overall reputation which will eventually force the investor and other user of the financial data to quit from investing in the fraudulent company (Holton, 2012). Decrease in the finance leverage and return on equity and return on asset increase the chance of the solvency risk as the quick ratio of the company will fall below one. 2.1.2 Factors that decrease risk Increase in the return on asset and return on capital employed increase the revenue which eventually increase the gross profit margin. The company current ratio above one suggests that the company is able to meet its current obligation which decreases the chance of liquidity risk and solvency risk of the company (Paramasivan and Subramanian, 2009). 2.2 Internal Control Environment Internal control environment is broadly defined as one of the primary process which is affected by an entity of the board of director, shareholders and other key management personnel, framed to provide suitable assurance related to the accomplishment of the aim and objective (Saxena et al., 2010). Internal control environment depend on three basic categories which are effectiveness of the operation which specify on basic business objective which consist of profitability and performance aspect. Second is reliability of financial reporting which helps to assure that the financial data is accurate and dependable (Spiceland, Sepe and Nelson, 2011). Third is compliance with applicable law and regulation which deal with complying with the key laws and regulation. Internal control regulate at various level of effectiveness internal control can be easily examined and judged based on the effectiveness of the three basic levels, if the management or board of director have sufficient assurance that they understand the level to which the company operation can be accomplished. The first level of control define that the prepared and published annual report are accurate and reliable to follow. Second the applicable law and the respective regulation are being complied with the laws (Stittle and Wearing, 2008). Thirdly the internal control is a key process which show the overall effectiveness which is considered to be a state or a condition of the key processes a one or more point in time. Control environment is considered to be vital for the organization or any firm as it help to set the tone of the organization which is considered t be primarily influencing the control consciousness of its management. It is considered to be the foundation of the all the other core component of the internal control which help to set the platform for providing the discipline and key structure. 2.3 Risk of Fraud for Bega Cheese Limited 2.3.1 Discuss whether you consider there to be any accounts susceptible to asset misappropriation Asset misappropriation is basically due to the misstatement which leads to the involvement of the theft of entitys asset either through employee or from external source in come peculiar cased however through top management or the internal sources of the organization. Misappropriation of asset is considered to accompany by irrelevant record or manipulative records or the key document in order to once the theft (Holton, 2012). From the overall analysis of the company financial data and statement it is clear that there no such account susceptible to asset misappropriation exist as the company is showing its complete financial data and the financial statement is audited by both internal and external auditor. The external auditor report suggest that the company have maintained the code of ethic and compliance with the accounting standard which helps the comapyn to provide the actual and reliable financial data incurred for the given fiscal year. 2.3.2 Discuss whether you consider there to be any accounts susceptible to fraudulent financial reporting The sales, expense, account receivable and account payable can be misstated in the financial statements. The misstatements can lead to increase or decrease in the value of the company. The misstatements affects the total financial value of the company. 3. PLANNING MATERIALITY 3.1 Brief Justification of materiality base selected and percentage applied The planning materiality will help to analyse the financial situation of Bega Cheese Limited and also helps to provide crucial information to the shareholders. The investors analyses the financial position of the company and take investment decisions. The planning materiality helps to determine the risk of Bega Cheese Limited and it is estimated as per the rules stated by AASB 1031. The materiality misstatement is to be calculated on an appropriate base as well as applying percentage on it. The judgement is based on the value of the financial report of the company (Annual Report, 2016). The percentage materiality is to be estimated on the basis of profit margin of the company. The issue of debt and equity shows the capital structure of the company. The valuation of items included in current liabilities and current assets is to be valued appropriately in the financial position statements of the company. The investors and shareholders attracts towards the company after evaluating the m ateriality of the company. 3.2 Base amount selected and percentage applied The materiality of Bega Cheese Limited is estimated at 0.30%. The materiality level of the organization is as follows: Materiality level = 0.30% * $11666 = $34.99 The planning materiality of Bega cheese limited has been calculated on the basis of net income of the company during a specific period of time. It helps the auditors to determine and evaluate the risk of the organization. The misstatement in the financial report will lead to increase or decrease in the value of the organization. The financial report of a company shows the financial position and market share of the company (Elliott and Elliott, 2008). The main aim of the audit department is to show the actual value of the company as well as determining misstatements in the accounts. The income statement shows the sales, expenses, profit or loss of the company during a specific period of time. References Annual Report, (2016). [online] Available at: https://www.begacheese.com.au/wp-content/uploads/2012/10/04-2015-ANNUAL-REPORT.pdf [Accessed 26 Sep. 2016]. Braiotta, L. (2004).The audit committee handbook. New York: Wiley. Elliott, B. and Elliott, J. (2008).Financial accounting and reporting. Harlow: Financial Times Prentice Hall. Holton, R. (2012).Global finance. Abingdon, Oxon: Routledge. Paramasivan, C. and Subramanian, T. (2009).Financial management. New Delhi: New Age International (P) Ltd., Publishers. Saxena, R., Srinivas, K., Rai, U. and Rai, S. (2010).Auditing. Mumbai [India]: Himalaya Pub. House. Spiceland, J., Sepe, J. and Nelson, M. (2011).Intermediate accounting. New York: McGraw-Hill Irwin. Stittle, J. and Wearing, B. (2008).Financial accounting. Los Angeles: SAGE Publications.