Q1 Cloud 9 Ltd. December 31, 2020 Setting materiality Users Users Financial statement area of most concern
Question:
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Q1
Cloud 9 Ltd.
December 31, 2020
Setting materiality
Users Users Financial statement area of most concern to the user
Cloud 9 company Concerning of growing marketing and Reflected by revenue
Bank Concerning of the company repay borrow fund
Management Concerning primarily with revenues as this is the basis for their bonuses.
Base selected for planning materiality (PM): Revenue:55633918___________________________________
Justification for selection:
____as normally PBT is used to calculate planning materiality but this year, firm has incurred loss rather than profit due to we did not select PBT. As the company is a service provider so the shareholder are more likely to concerned about revenue . as the revenue is based on njmber of subscription which is less volatile.
______________________________________________________________________
___Base threshold revenue:0.5%
As we are taking the base threshold as a percentage to apply on revenue As we are not making any adjustment in the threshold as there is no such risk which lead to us to modify the threshold there is annualization adjustment as all years of revenue are consistent and there is not any event occurred which lead to us to make annualization adjustment._______________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
Calculation of PM
Current Year Prior Year
20202019
Trial balance amount: ____83,817,576_______76,657,825___________________
Normalizing adjustments
(that is, non-recurring items) _______________________ _______________________
Annualized (if required): _______________________ _______________________
Benchmark applied _______________________ _______________________
Calculated materiality: ___55633918*0.5%=278169.59____________________ _______________________
Conclusion: PM materiality is _____278000_____.
Performance materiality: 70% __278000=194600_______.
Conclusion: Performance materiality is ___194600_______.
Discussion points
Consider how you will use the planning materiality in your audit. What factors might lead you
to increase or decrease the planning materiality amount? Are there qualitative factors that
could impact your materiality decision?
10 Cloud 9 Ltd. - An Audit Case Study
Q2
Assertions
Learning objective
extend your knowledge gained in assignment 1 by taking the
significant risks you have already identified and then conducting further analysis on their
likelihood and materiality.
Risks identified from gaining an understanding of the client's business are referred to as
inherent risks. These risks are considered in the audit-risk formula. The auditor needs to
identify which financial statement assertions may be affected by these inherent risks.
Identifying these risks will help determine the nature of the audit procedures to be performed.
Management implicitly or explicitly makes assertions regarding the recognition,
measurement, and presentation of the various elements of the financial statements and related
disclosures. Auditors use assertions for account balances to form a basis for the assessment of
risks of material misstatement. That is, assertions are used to identify the types of errors that
could occur in transactions that result in the account balances. Consequently, breaking down
the financial statement accounts into these assertions will direct the audit effort to those areas
of higher risk.
Assertions direct the audit, and audit procedures are designed so that they are responsive to
the assessed risks. Broadly, these assertions can be classified in the following categories:
existence or occurrence
completeness
valuation and allocation, or accuracy
rights and obligations
cut-off
classification
presentation, disclosure, and understandability
Required
Using the risks identified in assignment 1 on working paper A1-1, complete the following
information in the relevant columns of the working paper.
Identify the associated financial account (if you haven't done so already) and assertions that
would be affected.
Give an assessment of "high," "medium," or "low" in relation to the likelihood and
materiality of the risk occurring.
A risk should be classified as "high" if it is highly likely to be present and material. A risk
should be classified as "medium" if it may be present and material. Risks should be classified
as "low" if they are unlikely to be present and/or not material.
Discussion points
Did you have any significant risks that could not be linked to an account in the financial
statements and an assertion? Is it still a significant risk?
Given your analysis?for this client?is the overall level of inherent risk "low," "medium,"
or "high"?
Assignment 3 11
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