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Inventory turnover analysis auditing procedure can be employed by the auditors to establish whether obsolete or slow moving items are included in the physical inventory. This will involve assessing the inventory turnover in the past period and comparing it with the current inventory. The auditors can also compare the inventory balances with the anticipated sales volume. Comparing the depreciation expense for the current year with the previous year’s depreciation expense audit procedure will help to determine whether the retired property plant and equipment is recorded in accounting records. The importance of this audit procedure is to ascertain that all the property plant and equipment that have been depreciated to zero value have been indicated in the account books as retired or as revalued (Whittington & Pany, 2015).
There is inadequate information provided which renders a justifiable reason as to why the sales and inventory remain unchanged yet accounts payable have decreased. The decrease in cost of goods sold and accounts payable could have been affected by the merchandise, which was received when the year was approaching the end, and it was not documented in the accounts payable (Whittington & Pany, 2015). This could have caused an understatement of accounts payable and cost of goods sold, which can as well explain the increase in gross profit. Given that Star Corporation dos do not use the perpetual inventory method, there is a higher risk of having unrecorded shipments of the inventory to the accounts payable. With the increased control risk from the internal control weakness, the likelihood of management fraud in the company cannot be ignored.
The total annual sales of Traders Restaurant can be verified using the substantive sales tests. This test will help to find out any misstatement or error or the documentation that is associated with sales. These tests will include checking the trial balance that has been created by the owner, who is an accountant, at the end of sales cycle, confirming the receivable amounts with the party that owes the money to the restaurant and looking at the accuracy of the allowance for the uncollectible accounts by looking at the history of the restaurant. The procedure will also include vouching, performing the cutoff test, tracing, and evaluating the internal controls. The internal controls will include looking at the persons that accept and approve sales, the separation of duties and sales recording and documentation.
The paragraph on audit performance shows one deviation from the appropriate nonpublic company audit report. According to the report in this paragraph, the auditors are not supposed to issue their opinion on the internal control measures of the company. The auditors are supposed to verify the trustworthiness, fairness and transparency of the financial report. In spite of this, they have a responsibility of disclosing any relevant information that might affect the users of the financial report (Whittington & Pany, 2015).In this case, they are supposed to indicate in their report in case they find out that the company has weak internal control. Thus, it is a deviation from appropriate nonpublic entity audit report for the auditors to give their opinion on the effectiveness of the internal control.
Procedure: inquiries as to the accounting principles and practices used by the company. Purpose: this is intended to understanding the assumptions and method of accounting, and, therefore, various treatments of financial report items (Whittington & Pany, 2015).
Procedure: evaluation of management’s responsibility in the company over the internal control. Purpose: the main purpose of this procedure is to ascertain the extent to which the management has adopted all the applicable measures to ensure that there is a sound, strong, and reliable internal control.
Whittington R., & Pany K., (2015), Principles of Auditing & Other Assurance Services. Business & Economics 20th Edition…………….