ACCG305 Auditing and Assurance Paper Editing Services

ACCG305 Auditing and Assurance Paper Editing Services

Introduction

The assignment is based on a case study of an Australian firm which has its offices located in various parts of the country. The name of the firm is W&S partners and the accounting firm has assigned an audit of cloud 9 Pvt Ltd. Cloud 9 is an organisation of Sydney and listed as a US company (Arens, et. al., 2012). The organisation deals in the manufacturing and retailing of basketball shoes and athletic shoes. It delivers durable and comfortable shoes to its customers. The organisation has various branches and subsidiaries in many countries of the world such as Germany, Canada, china, U.K, Brazil and other countries. In the assignment, there is a calculation of planning materiality and also there is a calculation of the ratios. The ratio analysis helps in comparison of the financial position of the company and identification of the risk. There is also a preparation of the common size statement from the data given in the case study (Gibson, 2012).

Part 1 Materiality

Calculation and analysis of the planning materiality

There are various assumptions which are required by the auditors in order to define the hard work which is done by the auditors in completion and making of the audit report. In order to calculate the planning materiality, there is a need to select various factors for the calculation to give effect (Kumbirai & Webb, 2010). The factors include the profit before tax, gross revenue, and the asset. The components are taken by the auditor in order to manage the risk prevailing in the organisation, changing the environment in which the entity exists. The data is required for the main purpose of determination and the calculation of the Planning materiality by the Accounting firm such as W&S partners, and in order to calculate the planning materiality, there is a requirement to also calculate the annualised projected figures. The calculations of both the planning materiality and the annualised turnover are shown in a tabular format as below:

Annualisedprojected figures from the given data are calculated as under:

Planning materiality is calculated as under:

From the above table, it is clearly shown that the profit before tax is in negative amount i.e.  -1527898. The profit before tax is generally required to be chosen as a base in order to calculate the materiality but because of the loss in the year, it cannot be taken as a base. After profiting before tax, there are two components left which are turnover and the total assets. There is a requirement to take any one component as a base (Flamholtz, 2012). Gross turnover and assets can be chosen as a base. The organisation has made a target which is required to be achieved by the organisation. The target is to enhance the turnover of the organisation by 3 % in comparison with the data of the last year.  The data calculated in the above tabular format depicts that there is a fall in the turnover of the organisation in comparison with the data of the previous year. Therefore, it is concluded that gross turnover is also cannot be taken as a base. The last base indicator left with the auditors is assets. The total of the assets is utilised by the auditing firm in order to prepare the balance sheet and other financials which results in the identification of the risk in the organisation (Kumbirai & Webb, 2010). The Asset in total is totally suitable as a base for the calculation of the materiality. The initial percentage of the asset calculated is 0.5 per cent. Further, the precentage is managed in accordance with the factors of the risk which are prevailing in the market (Flamholtz, 2012). The materiality of the assets in total would be approx. 80 per cent. Therefore the level of the materiality should be the multiplication of the both the digits i.e. 0.5 per cent with the 80 per cent. The result calculated id 0.4 per cent.  

Part 2: Financial position analysis

a. Analysis and evaluation of the financial position of cloud 9

According to Knechel & Salterio (2016),Analytical procedures are those procedures which are utilised by the auditing firm in order to evaluate the variations in the statement of finance by the organisation for a particular period of time. The actions and process highlight the risk the areas of high-risk situations. The process which is used by the auditing firm is an analysis of the ratio and the control in budgetary (Healy, et. al., 2012).  The analysis of the various ratios is used as a tool to compare the performance of the organisation in comparison to the previous year data available. The ratios are calculated with the data given in the case study of cloud 9. The ratio analysis is done with the available data in the income statement and the balance sheet of the organisation (Boeckx, et. al., 2014). The ratios are calculated by applying the formula of the ratios and the result gained by it is used in the analysis.

The ratios are calculated as shown in the above table and from its evaluation of the same are done as under:

Current ratio:The current ratio falls from 1.38 to 1.13 as shown in the table. It is not a good sign for the organisation. There is a large amount of cash which is held in the organisation. There is a much requirement by the organisation to work on this ratio.

The ratioof inventory turnover:Inventory turnover ratio of the organisation is also reduced in comparison with the data available from last year.  The inventory turnover ratio is reduced from 5.48 to 4.75 as shown in the above table (Kumbirai & Webb, 2010). The low inventory ratio is also not good indicator of the performance of the organisation as it depicts fewer sales and there is a requirement to enhance and work on this.

Debt to equity ratio:There is a decrease in the debt to equity ratio. The falls is from 0.26 to 0.04. This is a good indicator for the company also the organisation has repaid the loan in the existing year (Brigham & Houston, 2012).

Earning of times interest:There is a decrement in the earning of times interest ratio from 1.91 to -1.91 and there is a need to focus on the ratio by the organisation.

Return on Assets ratio:There is a decrease is in return on asset ratio as shown in the above table (Knechel & Salterio, 2016). There is a need to make some efforts by the organisation to work on this. This is not a good indicator for the company as it depicts a huge reduction in the ratio.

Net profitability ratio:There is a decrease in the net profitability ratio as it decreased from 3.07 to -6.41. It is also not a good indication for the company. The organisation needs to make some efforts to improve the ratio.

b. Common size statement and its evaluation

From the above calculations which are shown in the above table to give effect to the statement of common-size of the organisation. From the above calculations, there are various conclusions which have been made. Some of those conclusions have been discussed briefly as under:

Current Assets:the currents assets of the organisation have been reduced in comparison to the previous year data. In the above table, it is clearly shown that in the table. The cash assets of the company are reduced from 7.13% to 1.02%.  There are various reasons behind the reduction of the cash assets for e.g. the company has launched a new showroom recently as discussed in the case study. For this reason, the fixed cost of the organisation increases. The fixed expenses included all the expenses in relation to electricity, rent, advertisement, promotion and other expenses (Brigham & Houston, 2012). The auditing firm is also a requirement to investigate and identify the reason behind the reduction of the cash of the organisation.

Non- current Assets:There is an increase in the chance of mistakes and errors in the organisation as there is some difference which is occurred in comparing the accounting profit and the taxable profit (Kumbirai & Webb, 2010). There is a requirement by the auditing firm to access and check the physical assets of the company of Cloud 9.

Current Liabilities:The bearing of interest liability and deferred tax liability and other provisions involves the non-current liability of the cloud 9. There is a need to calculate the different warranties in comparison to the data of the previous year.

Equity:  There are various losses which have faced by the organisation recently. Due to the losses, there is a so much reduction in the assets of the organisation in the present year. The reduction in profit depicts that there are a high loss and so much risk in the operations of the organisation (Kumbirai & Webb, 2010).

c. Special concern areas

To the: Suzie Pickering.

Concern: Report of communication

There are various specific areas of which there are a need to focus upon by the auditing firm. Some of those areas have been discussed as under:

Expenses in relation to the insurance:the expenses of the insurance have been increased in comparison to the data of the previous year. The hike in the expenses is due to the launching of a new showroom.  The firm of auditing which is appointed by the organisation has to involve various principles and regulations in relation to the effective valuation of the outlays of the insurance.

Current ratio:there is a decrement in the current ratio as discussed above. The difference is about 1.25 as compared with the data of the previous year. This is a not a good sign for the organisation (Cannon & Bedard, 2016). There is a large amount of cash which is held in the organisation. There is a much requirement by the organisation to work on this ratio.

Quick ratio:There is a decrement in the quick ratio. It is not good for the organisation and the organisation has to make some efforts in order to balance the ratio (Brigham & Houston, 2012). The ratio shows that the company is incapable of paying off the debts.

Promotional expenses:The promotional expenses involved a big expenditure for the organisation. The expenses are in relation to the launching of a new showroom by the company. There is a huge expense on the promotion and advertisement and there is a need to manage the expenses of the organisation.

Fixed asset:The organisation has attained a new plant in the organisation in the existing year. There is a need to mainly focus on the cost of purchasing by the auditing firm and also needs to effective evaluate and analyse of the same (Brigham & Houston, 2012).

The balanceof the inventory:Inventory turnover ratio of the organisation is also reduced in comparison with the data available from last year.  The inventory turnover ratio is reduced from 5.48 to 4.75 as shown in the above table. The low inventory ratio is also not good indicator of the performance of the organisation as it depicts fewer sales and there is a requirement to enhance and work on this (Damodaran,2012). There is a need to make some efforts to balance the inventory by the Cloud 9.

Position in relation to liquidity and solvency:There is a reduction of debt I the organisation as compared with the previous year data as the organisation has also paid the loan in the existing year. There is also a reduction in the profitability. The auditing firm is required to find the reason behind the decrease in profits and involvement of such a huge loss in the organisation.

Conclusion:

In the above assignment, it has been concluded that there are various assumptions which are required by the auditors in order to define the hard work which is done by the auditors in completion and making of the audit report. In order to calculate the planning materiality, there is a need to select various factors for the calculation to give effect. There are various specific areas of which there are a need to focus upon by the auditing firm. Some of those areas have been discussed in the assignment. There is also a brief analysis of the ratios. The analysis of ratios has been done to evaluate the performance of the organisation in comparison to the data of the previous year. The ratio analysis is done with the available data in the income statement and the balance sheet of the organisation provided in the case study. There is also a preparation of the common size statement from the data given in the case study and the evaluation of the same is done in comparison with the data of the previous year.

References

1.Arens, A. A., Elder, R. J., & Mark, B. (2012). “Auditing and assurance services: an integrated approach”. Boston: Prentice Hall.

2.Boeckx, J., Dossche, M., & Peersman, G. (2014). “Effectiveness and transmission of the ECB's balance sheet policies”. Cengage Learning.

3.Brigham, E. F., & Houston, J. F. (2012). “Fundamentals of financial management. Cengage Learning”. The Accounting Review.

4.Cannon, N., & Bedard, J. C. (2016). “Auditing challenging fair value measurements: Evidence from the field”. The Accounting Review.

5.Damodaran, A. (2012). “Investment valuation: Tools and techniques for determining the value of any asset”. (Vol. 666). John Wiley & Sons.

6.Flamholtz, E. G. (2012). “Human resource accounting: Advances in concepts, methods and applications”. Springer Science & Business Media.

7.Gibson, C. (2012). “Financial reporting and analysis”. Nelson Education.

8.Healy, P. M., & Palepu, K. G. (2012). “Business analysis valuation: Using financial statements”. Cengage Learning.

9.Knechel, W. R., & Salterio, S. E. (2016). “Auditing: assurance and risk”. Routledge.

10.Kumbirai, M., & Webb, R. (2010). “A financial ratio analysis of commercial bank performance in South Africa”. African Review of Economics and Finance, 2(1), 30-53.