Audit Plan for EarthWear Clothier
Overview
For the final project, you will work through components of a case study in which you will assume the role of a lead auditor at Willis & Adams. Your firm has been approached by EarthWear Clothiers to perform an audit. In your role as lead auditor, you will evaluate internal and external factors to determine client engagement, develop an audit plan, determine recommendations for improving internal controls, and communicate the audit opinion. For this milestone, you will develop the audit plan. Prompt Your organization has decided to move forward with the audit of EarthWear Clothiers. As lead auditor, you will select one of EarthWear Clothiers’ business objectives and create an audit plan of their financial statements. The business objectives are: Expand further into the global market by launching internet sites into South American countries Increase customer base by introducing a new extreme sports product line to attract younger consumers Reduce pricing to be more competitive in the marketplace by seeking out additional vendor relationships to lower costs of goods sold Implement an employee stock purchase plan to increase productivity and employee morale Reduce delivery and distribution time of products and services by adding additional warehouse locations Use the information from your preliminary review and auditing standards to support your plan. Using your selected business objective, create an audit plan of the organization’s financial statements that addresses the following: business risks, management assertions, audit risk, internal controls, and the effect on audit procedures. Support your plan with the appropriate auditing standards. Also, determine materiality by conducting a preliminary risk assessment, and explain which factors were used in making this determination. You can obtain the ICFR and materiality guidelines on the Willis & Adams website. (Clicking the link initiates an automatic download of a ZIP file. You will need a utility to unzip the archive before you can use it as intended.) Specifically, the following critical elements must be addressed: II. Planning the Audit: Select one of the organization’s business objectives and create an audit plan of the organization’s financial statements. Use the information from your preliminary review and auditing standards to support your plan. A. Using your selected business objective, create an audit plan of the organization’s financial statements that addresses the following, and support each with the appropriate auditing standards: 1. Business risks 2. Management assertions 3. Audit risk 4. Internal controls 5. Effect on audit procedures B. Determine materiality by conducting a preliminary risk assessment, and explain which factors were used in making this determination.
Milestone II: Audit Plan
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Milestone II: Audit Plan
Willis & Adams CPA must create an efficient audit plan for EarthWear Clothiers after developing a robust audit approach through engagement planning. An audit plan provides a thorough overview of the scope, timeframe, and depth of the audit operations to be carried out (Messier Jr et al., 2021). As Willis & Adams' lead auditor, our organization must create a strong audit plan that evaluates the various risks and claims and their general effect on the auditing processes that need to be conducted. To lure younger customers, EarthWear Clothier has started a new business goal for the business in which they are attempting to grow their clientele by launching a new extreme sports merchandise. As a result of the addition of this new merchandise to EarthWear, our company will be obligated to create an audit plan that considers the impact on internal control, risks, and necessary processes.
Business Risks
To uncover business risks that could lead to material misstatements, our audit team members must have a thorough grasp of the firm and the environment in which it operates. The auditors must consider many business risks because EarthWear launched an innovative line of merchandise to appeal to a younger clientele. One of the commercial risks that EarthWear can encounter when adding new merchandise is that the item for the new extreme sport may not perform as well as anticipated. To detect business risks that could lead to material misstatement, the PCAOB (2023) emphasizes that it is critical to have an in-depth knowledge of the nature of the business and its goals. That is following AS 2110.14. Since EarthWear is launching a new product line, there is a likelihood that the inventory valuation may be inaccurate.
Management Assertions
Assertions are crucial to the audit preparation process to assess the accounting records' accuracy. According to Audit Standard No. 15, leadership makes implicit or explicit claims about the identification, measurement, presentation, and disclosure of every aspect of the accounting records and related reports to ensure that the financial information is disclosed correctly and in compliance with the financial reporting framework (PCAOB, 2023). Valuation and Allocation are crucial claims that should be examined when considering the newly developed product line. When adding a new item, multiple new accounts and inventory valuations are created; thus, the right values must be appropriately assigned to the right accounts. According to Audit Standard No. 15, the valuation and allocation assertion guarantees that all expenditure, revenue, liability, and asset accounts must be accurately captured in the financials (Graham, 2019). Existence or Occurrence is another crucial management assertion since we must ensure the new inventories exist by the deadline. According to Audit Standard No. 15, the assertion of existence or completeness guarantees that the business's financial assets or obligations exist at a particular date and that documented transactions occurred during a certain period. When introducing an additional item, a number of new accounts are created, in addition to new inventory valuations. It is crucial that the correct amounts are appropriately allocated to the relevant accounts and that such inventory exists. By doing this, we can better recognize any potential risk of major misstatements in important accounts.
Audit Risk
Audit risk is the possibility that an auditor will produce inaccurate financial statements. The auditor's job is to guarantee that the business's accounting records are free of serious misstatements and to gain adequate conf...