Assessment item 3 back to top Case B Value: 20% Due Date: 12-May-2019 Return Date: 04-Jun-2019 Length: 3,000 words Submission method options: Alternative submission method Task back to top Background...

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auditing assignment for 3000 words


Assessment item 3 back to top Case B Value: 20% Due Date: 12-May-2019 Return Date: 04-Jun-2019 Length: 3,000 words Submission method options: Alternative submission method Task back to top Background You are an experienced audit manager at Samway Baker Fitzgerald (SBF), an accounting firm with offices in Orange, Wagga Wagga, Tamworth, Port Macquarie and Albury in NSW, Toowoomba in Queensland and Ballarat in Victoria. In the next 18 months, you hope to be promoted to partner at the Orange office. Although a medium sized firm by national standards, SBF includes Australia’s largest regionally based auditing practice. Most of SBF’s audit clients are in the mining, manufacturing, and agriculture industries. For various reasons all of those industries are currently under pressure—mining from a downturn in commodity prices, manufacturing from fierce overseas competition and agriculture from a devastating drought that continues to grip Eastern Australia.  It’s just before Christmas and you are meeting with your audit senior, Wayne Wiadrowski, to finalise planning the audit of Always Precise Instruments Pty Limited (API), a manufacturer and supplier of small arms military equipment (i.e., rifles, machine guns, ammunition) with factories in Wagga Wagga and Toowoomba and warehouses in Sydney, Brisbane, and Perth. Using the company’s financial report, its budget for 2018 and industry benchmarks, as well as your 5 years of experience on the API assignment, Wayne has compiled the following information: Ratio 2018 (Unaudited) 2018 Budget 2017 (Audited) Industry benchmark Current ratio: 1 1.64 1.54 1.54 1.84 Quick asset ratio: 1 0.91 0.87 0.87 1.1 Return on equity % 14.7 18.4 16.6 17.3 Return on total assets % 12.5 16.0 14.9 16.3 Gross margin % 6.5 10.8 10.3 10.8 Marketing expense %  4.4 3.6 3.8 4.0 Admin expenses/sales % 3.4 3.4 3.6 3.8 Times interest earned 3.6 6.3 4.6 4.2 Days in inventory 34.9 32.2 32.9 31.8 Days in accounts receivable  53.0 49.8 51.5 46.9 Debt to equity ratio: 1 0.61 0.43 0.52 0.50 The business environment    Although API is one of only a few military equipment manufacturers and suppliers in Australia, the Australian Government is seeking to control defence budget costs and has recently awarded some contracts to overseas manufacturers. Consequently, API has been trying to cut costs to remain competitive and profitable. The company did not reach industry benchmarks with regard to profitability in the previous year and budgeted to do better in the current year. It thought that it could do so by keeping its costs down in relation to sales while allowing its gross margin to drop, evidently planning to generate a larger volume of sales. The company also planned to improve its working capital management by reducing levels of inventory and accounts receivable. It budgeted for a drop in debt levels, indicating that it expected to produce a healthy cash flow to enable it to do so.  Inventory system  API relies heavily on a range of sub-contractors to supply raw materials for the approximately 160 inventory items it produces, as well as suppliers for the 25 finished goods (mostly ammunition) inventory items it resells. 45 sub-contractors and suppliers are used and all have proven to be reliable. Separate systems, staff, and warehouses are maintained for both raw materials and finished goods.  Procedures for raw materials  Purchase orders are automatically generated by the computer when stocks of any raw material fall below 70% of the prior month’s usage. The purchase orders contain the following details:  · date  · supplier name and address  · raw material needed  Three copies of the purchase order are produced and distributed as follows:  · Copy 1—to warehouse to enable follow up of late orders  · Copy 2—filed by accounts clerk in date order · Copy 3—sent to supplier When raw material stocks are received, the barcodes attached to the delivery boxes by the supplier are scanned into the system. A two-part Goods Received Note (GRN) is then produced:  · Copy 1—matched to warehouse copy of purchase order by stores staff  · Copy 2—filed by accounts clerk The scanning process is stopped if the codes do not match those on the Masterfile.  Procedures for finished goods  Production orders are automatically generated when finished goods fall below 60% of the prior month’s sales. The production orders contain the following details:  · date · sub-contractor’s name · raw materials required · finished goods needed.  Two copies of the production order are produced:  · Copy 1 - to raw materials store for use as a picking slip · Copy 2 - filed by production controller in date order.  When the finished goods stocks are received, the barcodes attached to the delivery boxes by the supplier are scanned into the system. A two-part GRN is then produced:  · Copy 1 - matched to production controller’s copy of production order.  · Copy 2 - filed by accounts clerk.  The scanning process is stopped if the codes do not match those on the Masterfile.  General notes  The computer automatically selects the supplier of both raw materials and finished goods based on:  · the latest price (as per their most recent invoice).  · their delivery times (based on the number of days between the date the purchase/ production order is raised and the date the goods are scanned by the warehouse).  Password access is as follows:  Staff Password access to Stores staff (raw materials) Purchase order printing for raw materials only. GRN printing for raw materials. Stores staff (finished goods) GRN printing for finished goods. Production controller Production order printing, Masterfile amendments. Accounts clerk Masterfile amendments. Masterfile amendments  The stock Masterfile contains details of:  · existing stock items including codes and warehouse location;  · approved suppliers and sub-contractors.  Orders will only be generated to suppliers and sub-contractors recorded on the Masterfile. Masterfile changes are made by the production controller for both raw materials and finished goods inventory. A Masterfile amendment form is completed by the production controller as a record of the changes made. Stock listing To support stocktakes, the inventory system can produce a complete stock listing at any time showing: · stock code · quantity held by location · total quantity held · cost per unit · total cost per stock item  The inventory system also produces a stock sheet report for each location, which lists a description and the stock code of each item held at that location, matching the perpetual records. Quantities are not included, as these are completed by the count teams. Required Write a memo to Wayne Wiadrowski that addresses the questions below. Use the required format to answer each question. Question 1 8% Using the additional information provided, analyse each ratio provided to identify a potential audit risk. For each potential audit risk, outline an audit procedure that could be undertaken to reduce that audit risk. Answer this question using the following headings in a table: Ratio Analysis  Audit risk Audit procedure to reduce risk Question 2 8% Identify the internal control weaknesses in the inventory system outlined above and the potential audit risk. For each potential audit risk, outline an audit procedure that could be undertaken to reduce that audit risk. Answer this question using the following headings in a table:  Internal control weakness Audit risk Audit procedure to reduce risk  Question 3 4% Wayne will perform test counts at API’s year-end stocktakes. From which population should he select samples to address the completeness assertion and from which population should he select samples to address the existence assertion? In addition, advise Wayne on how he should select the actual samples to test the existence and completeness assertions at each location. Justify the methods suggested. Answer this question using the table:  Assertion Which population? Sample selection method Justification for the sample selection method Completeness Existence Online submission via Turnitin is required for this assignment. Details will be provided by your subject lecturer. Rationale back to top Subject learning outcomes This assessment task will assess the following learning outcome/s: · be able to demonstrate risk management methodologies and the role of internal controls in an audit context. · be able to design an audit plan and select and apply appropriate audit procedures for a financial statement audit. · be able to exercise critical and reflective judgement and appreciate the value of ethical practice. Graduate learning outcomes This task also contributes to the assessment of the following CSU Graduate Learning Outcome/s: · Academic Literacy and Numeracy (Application) - CSU Graduates consider the context, purpose, and audience when gathering, interpreting, constructing, and presenting information. · Professional Practice (Knowledge) - CSU Graduates possess the knowledge and understanding of the discipline and the nature of professionalism required for the given profession or discipline in contemporary societies. · Professional Practice (Skill) - CSU Graduates demonstrate discipline-specific technical capabilities and self-appraisal required for a beginning practitioner or professional. Marking criteria and standards back to top Criteria High Distinction Distinction Credit Pass Question 1 Analysis of ratios and other information demonstrating audit risk assessment skills and critical and reflective judgement  (4 marks). Comprehensive and articulate interpretation of all ratios and other provided information, synthesising an understanding of the ratios with an insightful analysis of the audit risks. Accurate interpretation of all ratios and other provided information, demonstrating a thorough understanding of how the ratios can be used to analyse the audit risks. Most interpretations of ratios and other provided information accurate, demonstrating an understanding of how the ratios can be used to analyse the audit risks. Most interpretations of ratios and other provided information accurate but a limited demonstrated understanding of their usefulness in identifying the audit risks. Identification of audit procedures that minimise audit risk identified through the analysis of the ratios and the additional information  (4 marks). All appropriate audit procedures identified with a comprehensive statement as to how these will minimise audit risk, demonstrating an insightful level of audit planning.     All appropriate audit procedures identified. Demonstrates a thorough understanding of how these audit tests minimise audit risk. Most appropriate audit procedures identified, Demonstrates an understanding of how these audit tests minimise audit risk. Most appropriate audit procedures identified. Demonstrates a limited understanding of how these audit tests minimise audit risk. Question 2 Appraisal of the client's internal control environment and application to the audit risk model  (4 marks) Comprehensive, and coherent explanation for the choice of internal control weaknesses,  demonstrating an insightful understanding of those that most significantly impact audit risk Comprehensive explanation for the choice of internal control weaknesses that most significantly impact audit risk. Coherent explanation for the choice of internal control weaknesses that most significantly impact audit risk. Limited explanation for the choice of internal control weaknesses that most significantly impact audit risk. Development of a series of audit steps to overcome audit risk resulting from weak internal controls (4 marks). Development of a comprehensive series of audit steps designed to overcome the audit risk of weak internal controls. This demonstrates a deep understanding of the audit process. Development of a series of high-quality audit steps designed to overcome the audit risk of weak internal controls. This demonstrates a clear understanding of the audit process
Answered Same DayMay 10, 2021ACC568Charles Sturt University

Answer To: Assessment item 3 back to top Case B Value: 20% Due Date: 12-May-2019 Return Date: 04-Jun-2019...

Ankita answered on May 13 2021
132 Votes
2
INTERNAL CONTROL AND AUDIT RISK
Answer 1
    Ratio
    Analysis
    Audit risk
    Current ratio
    Current ratio refers to the ratio between current assets and current liabilities. It shows the short-term liquidity position of the company. The short-term creditors are interested about the ability of the firm to pay its short-term obligations. The ratio tells how much current assets there for each dollar of current liabilities are. The budgeted ratio and actual ratio for 2018 are 1.54 and 1.64. The current ratio has increased from the year 2017 and it move towards the industry benchmark wh
ich depicts improvement.
    Customer service: Proper management of inventory would enhance customer satisfaction, as situations like, no fulfillment of customers’ orders due to lack of stock can be avoided.
    Quick ratio
    It is more stringent measure of short term liquidity position of the firm. In deriving the quick ratio, inventory is deducted from current assets. Current assets refer to those assets which can be converted into cash in a short time without impairment of its value. Inventory cannot be easily sold in the market. There is a time lag in converting inventory into cash, more over the market value of the inventory may fall at the time of sales. Hence inventory is deducted from the current assets. The budgeted and the actual ratios of the company for 2018 are 0.87 and 0.91 respectively. The quick ratio has increased from the year 2017 and depicts betterment.
    
    Return on equity
    Return on equity, also called return on net assets is the ratio between sales and net assets or shareholders’ equity. Shareholder’s equity is company’s assets minus its debt. It measures the efficiency of the management in utilizing the net assets in generating sales and profit. The budgeted and actual returns for the company are 16% and 12.5% respectively. The ROE has fallen down from the previous year and is relatively very less when compared to the industry benchmark.
    ROE is a measure of efficiency of the usage of shareholder’s funds. Low ROE will reduce the reliability of the firm in public’s view.
    Gross margin
    Gross margin is the profit pool that remains after deducting the cost of goods sold from the revenue. The ratio shows the competitiveness of the firm. The gross margin number represents the portion of each dollar of revenue that the company retains as gross profit. Companies use gross margin to measure how their production costs relate to their revenues. [6] Businesses may also use gross margins to forecast how much money they have left over from sales to cover other operating expenses. The budgeted and actual ratios for the firm for 2018 are 10.8% and 6.5% respectively.
     Liquidity ratios, asset management and debt management showed a part of business enterprise as limited and showed a partial view of business enterprise performance and profitability ratios defined the accumulative liquidity effects, asset management and debt management in business enterprises (Cornett et al. 2008). The change of profitability, the ratio of return on equity, the investment return ratio, earnings before tax deduction and interest to gross earnings, net earnings to gross earnings ratio, gross earnings ratio to sale and net earnings to sale ratio are included in this classification.
    Marketing expenses
    Marketing expenses refer to the expenses a firm incurs for marketing the products. It is showed as percentage of sales. It involves a wide range of expenses including advertising and promotion. The budgeted and actual expenses of the firm for 2018 are 3.6% and 4.54% respectively.
    
    Administrative expenses/sales ratio
    Administrative expenses/sales ratio is an efficiency ratio that measures how well a company is able to manage its non-operating expense and generate sales during the normal course of operations and to estimate future expenses. [7] The budgeted and the actual Administrative expenses/sales ratio is 3.4% against the industry benchmark of 3.8%
    
    Times interest earned
    Times interest earned is used to measure a company's ability to meet its debt obligations. The formula is calculated by taking a company's earnings before interest and taxes (EBIT) and dividing it by the total interest payable on bonds and other contractual debt. [8] It indicates how many times a company can cover its interest charges on a pretax earnings basis. The budgeted Times interest earned for 2018 is 6.3 whereas the achieved is only 3.6 which is very less compared to the budget and it indicates credit risk.
    
    Days in inventory
    Days in inventory also called as the inventory period is the average number of days the company holds the inventory before selling it. Generally, minimum days in inventory is preferred. In the year 2018 the actual days are 34.9 which is way above the budgeted days of 32.2. The industry benchmark is 31.8 which depicts that the company should take steps to reduce the inventory.
    Productions begins automatically when the finished goods fall below 60% and Purchase orders gets automatically generated by the computer when stocks of any raw material fall below 70% which should be monitored and corrected to improvise this factor.
    Days in accounts receivable
    Days in accounts receivable also known as Days Sales Outstanding is the average number of days that it takes a company to collect payment after a sale has been made. In a running business it is really important to collect the outstanding as early as possible for the effective use of working capital. [9] The budgeted days in accounts receivable for 2018 is 49.8 but the actual days in accounts receivable for 2018 is 53. The number of days is way higher than the industry benchmark of 46.9 days which shows that a company is selling its product to customers on credit and taking longer to collect money.
    
    Debt to equity ratio
    The Debt to equity ratio is calculated by dividing a...
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