TABLE OF CONTENT

I.

Plan an audit with reference to scope, materiality and risk (3.1)

1.

Scope

2.

Audit risk

3.

Materiality

II.

Appropriate audit test based on information about Pyrmont Plc (3.2)

1.

Test of control

2.

Substantive procedure

3.

Audit sampling

4.

Conclusion

III.

Record the audit process in an appropriate manner (3.3)

1.

Questionnaires

2.

Conclusion

IV.

V.

Draft audit report (4.1)

8
9
10
10

1.

Definition and benefits of audit report:

10

2.

The content of a statutory audit report

11

3.

Different types of qualification within an audit report:

12

4.

A draft audit report

13

Draft management letter in relation to a statutory audit (4.2)

15

CONCLUSION

17

REFERENCES

18

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INTRODUCTION
Pyrmont is a limited liability company. The company's year-end is 31 December, and Pyrmont
has been a client for seven years. Clients vary in size from small businesses making yachts to
large companies maintaining large luxury cruise ships. No manufacturing takes place in
Pyrmont.
Moobray Computers Ltd subsidiary of the Pyrmont for the year ended 31 December 2011. The
company assembles microcomputers from components purchased from the Far East and sells
them to retailers and to individuals and businesses by mail order. In the current year, there has
been a recession and strong competition which has resulted in a fall in sales and the gross profit
margin.
As the Junior Audit Assistant in charge of the audit of Pyrmont, we were required to solve the
following sections:

Plan an audit with reference to scope, materiality and risk

Identify and use appropriate audit tests
Record the audit process in an appropriate manner
Prepare a draft audit report
Draft suitable management letters in relation to a statutory audit

The information in this report is taken from several sources, especially course book of managing
financial resources and decisions, the Internet, etc.
Hopefully, the report can help everyone who cares about Auditing and Financial Systems.

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MAIN BODY
I.

Plan an audit with reference to scope, materiality and risk (3.1)

Audit planning is defined as the process in which the strategy is designed to conduct the
expected result which also defines the scope of audit inside the company.
According to Ready Ratios website, its basically the step by step methodology where the audit
in control reviews the financial process and the internal environment along with the engagement
preparation (n.d.).
1. Scope
According to course book (2010, p.56), for statutory audits the scope is clearly laid down in the
Companies Act 2006 as expanded by auditing standards.
Some advantages of determining scope:

To help the company define how much the client will be involved in the audit
To avoid confusion during the audit, summarize the scope document for the client's

management team
To keep the company from being distracted with issues that do not immediately relate to
the current audit
2. Audit risk

Audit risk is the risk that auditors may give an inappropriate opinion on the financial statements.
(BPP, 2010, p.60)
Audit risk has three components: inherent risk, control risk and detection risk.
a. Inherent risk
Inherent risk is the susceptibility of an assertion to a misstatement that could be material, either
individually or when aggregated with other misstatements, assuming that there are no related
controls (ISA 200.20)
Pyrmont is a limited liability company and no manufacturing takes place in Pyrmont.
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The company purchases and resells fittings for ships including anchors, compasses,

rudders, sails etc.

Non-current assets mainly relate to company premises for storing inventory. Therefore,

inherent risk evaluation plays an important role in performing of the company.

b. Control risk
Control risk is the risk that a misstatement that could occur in an assertion and that could be
material, either individually or when aggregated with other misstatements, will not be prevented,
or detected and corrected, on a timely basis by the entitys internal control (ISA 200.20) (BPP,
2010, p.63)

In the case of Pyrmont, inventory is stored in ten different locations across the country.
Therefore it is very difficult to control company's inventory although the firm had offices

close to seven of those locations.

A computerized inventory control system was introduced in August 2011. However, the

mistakes from their employees cannot avoid.

c. Detection risk:
Detection risk is the risk that the auditor will not detect a misstatement that exists in an assertion
that could be material, either individually, or when aggregated with other misstatements (ISA
200.22) (BPP, 2010, p.63)
For Pyrmont, the auditor should check all documents including invoices for in and out to reduce
the ability of skipping the fraud while auditing in the company.
3. Materiality
Materiality means A matter is material if its omission or misstatement could influence the
economic decisions of users taken on the basis of the financial statements
There are two difficulties that auditors have to face in assessing materiality are the need of
quantitative and qualitative factors.

Auditors consider the possibility of misstatements of relatively small amounts that could

have a material effect on the financial statements.

In general, qualitative factors are more difficult to assess than the size of a misstatement
or omission.

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Materiality depends on the size of the item of error judged in the particular circumstances
of its omission or misstatement

According to course book (2010, p.67), the auditors will often calculate a range of values, such
as those shown below:
Value

II.

Profit before tax

Gross profit

-1

Turnover

-1

Total Assets

1-2

Net assets

2-5

Profit after tax

5 - 10

Appropriate audit test based on information about Pyrmont Plc (3.2)

According to ISA 500.3, Audit evidence is all the information used by the auditor in arriving at
the conclusions on which the audit opinion is based, and included the information contained in
the accounting records underlying the financial statements and other information.
To obtain the audit evidence, auditors perform the audit procedures:
Audit test is a procedure performed by either an external or internal auditor in order to assess the
accuracy of various financial statement assertions (Sernel, 2013). There are two main types of
audit tests:

Test of control: Tests performed to obtain audit evidence about the operationing
effectiveness of controls in preventing, or detecting and correcting, material

misstatements at the assertion level.

Substantive Procedures: Tests performed to obtain audit evidence to detect material
misstatements at the assertion level.

(BPP, 2010)

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1.

Test of control

Pyrmont Company purchases and resells goods for customers, so the effectiveness of sales
system will affect profit of this company. The auditor of Pyrmont Company may carry out some
tests to make confirmation:

The auditor will ensure that the client invoices are correct by inspecting some random

invoices.
The auditor will ensure that unauthorized personnel are prevented from entering the

stockrooms by checking the security of stockrooms.

The auditor will ensure that fitting for ships are authorized by checking origin of them.
The auditor will ensure that customers orders are being matched with production orders
and dispatch notes by inspecting sample of orders.
2.

Substantive procedure

There are 2 types of substantive procedures:

Test of details of classes of transaction, account balances, and disclosures

The auditor confirms that the transactions and events have been recorded in

correct accounting period by checking the income statement (Cut off)

The auditor confirms that amounts and other data relating to recorded transactions
and events of Pyrmont have been recorded appropriately by inspecting a sample

of transaction. (Accuracy)
The auditor confirms that all transactions and events that should have been
recorded have been recorded by vouching all of the income statement.

(Completeness)
The auditor confirms that all accounts exist in balance sheet by inspecting the

balance sheet (Existence)

Substantive analytical procedures.
2012 Forecast

2011 Actual

000

000

45,928

40,825

5,103

Cost of sales

(37,998)

(31,874)

6,124

Gross profit

7,930

8,951

1,021

Revenue

Variances

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Administration costs

(4,994)

(4,758)

236

Distribution costs

(2,500)

(2,500)

436

1,693

1,257

3,600

4,500

900

200

1,278

1,078

6,000

4,052

1,948

500

1,590

1,090

10,300

11,420

1,120

Share capital

1,000

1,000

Accumulated profits

5,300

5,764

464

Total shareholders funds

6,300

6,764

364

Non-current liabilities

1,000

2,058

1,058

Current liabilities

3,000

2,598

402

10,300

11,420

1,120

Net profit

Non-current assets (at net book value)

Current assets
Inventory
Receivables
Cash and bank
Total assets

Capital and reserves

Table: The variance in financial performance of Pyrmont

According to the table above, it can be concluded that:

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Sales have increased by 12% but Cost of sales increased by 19%.There is a risk of Cost

of sales being overstated.

Gross margin for 2012 is 17.2% (2011: 21.9%) this is significantly reduced, the reason
can be recession and construction industry risks but should be reviewed as could indicate

undervalued inventory.
Inventory in 2012 decreases significantly comparing to 2011, indicating that there may be
valuation or quantity errors.
3.

Audit sampling

Audit sampling refers to the application of an audit procedure to less than 100% of the items
within an account balance or class of transactions for the purpose of evaluating some
characteristic of all the items within the balance or class of transactions (Anon, 2001).
Audit sampling can use either a statistical or non-statistical approach.
4.

Conclusion

Through this part, it is easy to see the sampling which auditor use to audit the internal system of
Pyrmont. Confirmation about system also indicates whether Pyrmont operate business with true
and fair view.
III.

Record the audit process in an appropriate manner (3.3)

Recording the work is an integral part in process of auditors. So, they should use some
techniques which help them to record more easily:

Narrative notes
Questionnaire
Flowcharts
Checklist

In the case of Pyrmont, auditors should focus on the Inventory of this company because a new
computerized inventory control system was introduced so it can have some problems. In order to
record, Pyrmont can use Narrative notes and Questionnaires.
1

Questionnaires

The most popular method to check the functions of internal control within Pyrmont is to use
Questionnaires. There are 2 types of questionnaires:
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Internal Control Questionnaire (ICQ): are used to check whether a particular control
exists or not to detect or prevent and correcting a material misstatement (or simply
misstatement) at an assertion level (Fazal, 2011). Below is the Internal Control
Questionnaires of the inventory control system in Pyrmont.

Questions
Yes
1 Are entries to perpetual inventory

records made timely upon the

receipt of goods?
2 Is
a
definite
responsibility

designated for each inventory type?

3 Are adjustments to inventory

records approved by a properly

designated official?
4 Is there adequate physical security
surrounding inventories?

Are receiving, issuing, accounting

and storing responsibilities properly
segregated?
Does Pyrmont use computer
software for perpetual inventory
balances?

No

Comments

Pyrmont should also invest in

security
surrounding
inventories to prevent the
possible loss from thief.

Internal Control Evaluation Questionnaires (ICEQs) are control questions which are
used to check whether a certain existing control is operating effectively or not to detect or
prevent and correct a material misstatement (or simply misstatement) at an assertion level
(Fazal, 2011). In other words, ICEQs are used to appraise the operating effectiveness of
the internal control system.

Questions
1 Are the fittings for ships authorized?
2

Is purchase of inventory authorized?

Are there, in a computerized system,

Yes

No

Comments

sensible control totals to reconcile the

stock system input with the creditors

system?
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Are all the fittings for ships invoiced?

Is the computerized inventory system

This can lead to the risk of

secured?

fraud. A dishonest vendor

can hack the system to

receive

payment

for

not

buying the stocks.

6

Are the stock checked carefully before

takings into usage?
2

Conclusion

So, through the flowchart and questionnaires, auditing inventory system of Pyrmont is recorded
easily to understand. Managers can see the possible risks inside this system through some
comments of auditor.
IV.

Draft audit report (4.1)

1

Definition and benefits of audit report:

The audit report is in which the external auditors express their opinion on the truth and fairness
of a companys finance statements. This is not only for the benefit of the shareholder but also for
others users because the audit report is usually kept on public record
2

The content of a statutory audit report

An audit report should contain a clear expression of opinion based on review and assessment of
the conclusion from the evidence obtained in the course of audit.
An audit should follow this structure:

A title identifying the persons to whom the report is addressed. They are the persons who

the auditors write the audit report to.

An introductory paragraph identifying the financial statements audited.
Separate sections, appropriately headed, and dealing with the contents below.
a. Statements of responsibility and basic opinion

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The responsibilities of auditors and the responsibilities of directors should be distinguished in the
report:

A statement that the directors have responsibility to prepare the financial statement.
A reference to a description of the directors responsibilities when set out elsewhere in the
financial statement or accompanying information

If the financial statement or accompanying information do not contain a fully description of the
responsibilities of directors, the audit report should include those responsibilities.
b. Explain of auditor opinion
The basic of auditors opinion should be explained in their report:

A statement as to their compliance or otherwise with Auditing Standards together with

the reasons for any departure.

A statement that the audit process includes:
examining, on a test basic, evidence relevant to the amounts and disclosures in the

financial statement
assessing the significant estimates and judgments made by the reporting director

in preparing the financial statements

Considering whether the accounting policies are appropriate to the reporting

circumstance, consistently applied and adequately disclosed.

c. Expression of opinion
An auditors report should content a clear expression of pinion on the financial statements and on
any further matters required by statute or other requirements applicable to the particular
engagement.
The auditor's unqualified report contains three paragraphs. The introductory paragraph identifies
the financial statements audited, states that management is responsible for those statements, and
asserts that the auditor is responsible for expressing an opinion on them.
d. Date and signature of the auditors report
If the date on which the auditors sign the report is later than that on which the directors approve
the financial statements, then the auditors must check that the post balance sheet event review
has been carried out up to the date they sign their report and that the directors would also have
approved the financial statements on that date.
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e. Forming an opinion on financial statements

Auditors should consider the form of opinion to achieve three requirements:

They completed all procedures necessary to meet auditing standards and to obtain all the

information and explanations necessary for their audit.

The financial statements prepared in accordance with the applicable accounting

requirements.
The financial statements, as prepared by the directors, give a true and fair view.
3

Different types of qualification within an audit report:

a. Unqualified opinion
The most frequent type of qualification is referred to as the Unqualified Opinion. This type of
opinion is auditor's opinion of a financial statement, given without any reservations. (Invest
world, 2004).

This type of qualification is used by an auditor when the financial statements presented
are free of material misstatements and are in accordance with Generally Accepted

Accounting Principles (GAAP).

In other words means that the companys financial condition, position, and operations are

true and fairly presented in the financial statements.

It is the best type of report an audible may receive from an external auditor.
b. Qualified opinion
Qualified opinion is an opinion issued by an auditor that expresses reservations about a
companys financial statements. The two types of situations which would cause an auditor to
issue this opinion are:

Limitation of scope: - this type of qualification occurs where the scope of the audit is
limited by the inability to obtain sufficient evidence. For a qualification arising from a
scope of limitation, the following phrase is added to the opinion paragraph (example
about inventory):
In our opinion, except for the effects of such adjustmentser tests and procedures on the
Companys inventory, the financial statement presents fairly, in all material respects, the
financial position of

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Disagreement: - this type of qualification occurs when the auditor disagree with the
treatment or disclosure, (example about depreciation):
In our opinion, except for the effects of the Companys incorrect determination of
depreciation expense, the financial statement presents fairly, in all material respects, the
financial position of
4

A draft audit report

Unqualified opinion: Moobray Computers Ltd

INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS OF MOOBRAY

COMPUTER Ltd.
We have audited the financial statements of Moobray Computer Ltd for the year ended 31
December 2011 which comprise profit and loss account, the balance sheet, the cash flow, the
statement of total recognized gains or losses and the related notes.
Respective responsibilities of directors and auditors
The directors responsibilities for preparing the annual report and the financial statements in
accordance with applicable law and UK Accounting standards (UK Generally accepted
accounting practice) are set out in the statement of directors responsibilities.
We report to you our opinion as to whether the financial statements give a true and fair view and
are properly prepared in accordance with the Companies Act 2006. We report to you whether in
our opinion the information given in the directors report is consistent with the financial
statements.
We read the directors report and consider the implications for our report if we become aware of
any apparent misstatements within it
Basis of audit opinion
We conducted our audit in accordance with International Standards on Accounting (UK and
Ireland) issued by the Auditing Practices Board. An audit includes examinations, on a test basis,
of evidence relevant to the amounts and disclosures in the financial statements

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We planned and performed our audit so as to obtain all the information and explanations which
we considered necessary in order to provide us with sufficient evidence to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by
fraud or other irregular or error.
Opinion
In our opinion the financial statements:

Give a true and fair view, in accordance with UK Generally Accepted Accounting
Practice, of the state of the companys affairs as atand of its profit for the year then
ended;

Have been properly prepared in accordance with the Companies Act 2006; and

The information given in the directors report is consistent with the financial statements.

The financial statements give sufficient disclosure of the going concern problems.

Registered auditors

Address

Date

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V.

Draft management letter in relation to a statutory audit (4.2)

Management Letter
The Board of Director
Moobray Computers Ltd
No.5 Chua Boc Street
Dong Da District, Hanoi

13rd June, 2012

Dear members of the Board,

Management report- Financial Statements for the year ended 31 December 2011
We have audited the financial statements of the company, as of and for the fiscal year ended 31
Dec 2011, and have issued our report thereon dated 13 June 2012. Based on our normal practice
we set out in this letter certain matters which arose as result of our review of the accounting and
internal control systems and procedures operated by your company during our recent interim
audit.
We would point out that the matters dealt with in this letter came to our notice during the conduct
of our normal audit procedures which are designed primarily for the purpose of expressing our
opinion on the financial statements of your company.
1. Dispatch note and the supplier list
Present system
The absence of dispatch note in delivery and there is no serial number in document for supplier
list.
Implication
It is difficult for company to check sales orders, deliver and sales invoice because of the absence
of dispatch note in delivery. In addition, the storekeeper made the purchase for raw material; the
risk can be the storekeeper will give out wrong information and number of the material.

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Besides, there is no serial number in document for supplier list, the management set al orders, the
prices of the goods will be charged to the company based on price listed in the quotation.
Recommendation
We suggest that the company should create dispatch note for delivery process for ensure the
goods which are delivered to customer on time and with right quantity and quality. If company
received complaint form customer, it is evidence for the delivery. When the company incurred
incorrect problem, the dispatch note and sales invoices play as significant procedures should be
reviewed in process.
2. Wages of production staff
Present system
Timesheets completed by production department workers are submitted to the payroll department
without being checked.

Implication
Staff in the production department could complete their timesheets incorrectly and hence be paid
the wrong amounts.

Recommendation
The production department supervisor should check all timesheets before they are submitted to
the payroll department. The company should also consider introducing a computerized clock in
system.
Our comments have been discussed with your finance director and the Chief Accountant and
these matters will be considered by us again during future audits. We look forward to receiving
your comments on the points made. Do not hesitate to contact us should you require any further
information or explanations.
We should like to take this opportunity of thanking your staff for their co-operation and
assistance during the course of our audit.
Yours faithfully,
Orange Group

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CONCLUSION
Through the report, the readers can get the skills needed to plan an audit with reference to scope,
materiality and risk. Besides this, the readers can also get more information about appropriate
audit test; record the audit process in an appropriate manner. In addition, based on the
information from the report, the readers will have the knowledge to prepare a draft audit report
and draft suitable management letters in relation to a statutory audit.
We think our report is very good because we spend quite a lot of time to study about each issue
we mentioned. We understand very clear everything we wrote and we thought all are helpful for
the reader, not too much knowledge, but enough. We tried to perform the report in the reasonable
order and we think it will actually make the reader feel clear to follow. However, next study will
be better if we expand the researching scope. Hopefully, Pyrmont Company and Moobray
Computers Ltd can have some useful advice for the company.

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REFERENCES
EDEXCEL HNC & HND BUSINESS, (2004) Mandatory Unit 11: Financial systems and
Auditing supporting foundation degrees. 1st ed., London: BPP professional education,
Aldine House, Aldine Place, pg 524, 526, 528, 535,537,538,540
Alan, H.M. (2002), Auditing, 8th ed., London, Continuum.
Exforsys Inc, 2000-2009, General Information Regarding the Occupation of an Auditor ,
[Internet], assessed 20th Dec 2009,
http://www.exforsys.com/career-center/career-tracks/general-information-regarding-theoccupation-of-an-auditor.htm
Legal Service India.com, 2009, Fiduciary duty of an auditor,[Internet], assessed 20th Dec 2009,
http://www.legalservicesindia.com/articles/auditors.htm
Wise Geek.com, 2003 2009, What is a disclaimer of opinion
http://www.wisegeek.com/what-is-a-disclaimer-of-opinion.htm
Company accounts: analysis, interpretation and understanding, By Maurice Pendlebury, Roger
Groves
Wikipedia, Audit report ;Materiality,[Internet], assessed 20th Dec 2009,
http://en.wikipedia.org/wiki/Auditor's_report
http://en.wikipedia.org/wiki/Materiality_(auditing)
Investopedia, "Fundamental Analysis: The Auditors Report",[Internet], assessed 20th Dec 2009,
http://www.investopedia.com/rotate.aspx?invsection=home&backurl=http%3a%2f
%2fwww.investopedia.com%2f
Accountancyfoundation,The Accountancy Foundation Limited, Materiality and the audit ( Issued
March 1995) ,[Internet], assessed 20th Dec 2009,
http://www.accountancyfoundation.com/terms
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Bnet, 2009, Audit plan,[Internet], assessed 20th Dec 2009

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