6 auditing questions - Assignment Example

Assignment Question 4 Company Ratios Industry Ratio Averages 20XX 20XX 20XW Current Ratio 27,076 ÷ 7,082 = 3.82 3.82 4.9 4.7 Accounts Receivable Turnover 21,945 ÷ [(5,241 + 4,816) ÷ 2] = 4.36 4.36 4.42 4.30 Average Days to Collect Accounts Receivable 365 ÷ 4.36 = 83.72 83.72 82.58 84.88 Inventory Turnover 11,543 ÷ [(15,593* + 14,309) ÷ 2] = 4.36 * Includes production and finished goods 0.77 0.67 0.80 Days in Inventory 365 ÷ 0.77 = 474 474 545 456 Assets to Equity 42,029 ÷ 27,718 = 1.52 1.52 1.99 2.

14 Debt to Equity Ratio 14,311 ÷ 27,718 = 0.52 0.52 0.99 1.14 Times Interest Earned 3,386 ÷ 360 = 9.41 9.41 6.91 7.29 Return on Assets (1,997 + 360) ÷ [(42,029 + 38,322) ÷ 2] = 5.9% 5.9 % 5.56 % 7.61 % Return on Equity 1,997 ÷ [(27,718 + 25,721) ÷ 2] = 7.5 % 7.5 % 5.92 % 10.76 % An analysis of the ratios calculated from the financial statements of Chateau Americana indicates that the ratios are favorable when compared to industry ratios. For example, the company generates more return on profits and equity than the industry.

This is indicated by the high return on assets and equity ratios. Other factors that require more investigations include the fact that the company’s current ratio is below the industry average at 3.82 compared to 4.9% for the industry. However, the accounts receivables and inventory ratios are better than the industry averages. The other factor is that the company’s asset to equity and debt to equity ratios are below the industry averages. Question 5 Based on the information above, the best recommendation is that the firm should accept Chateau American as a potential client.

The ratios calculated above indicate that the company is profitable and does not pose a significant risk for a CPA, which is one of the factors to be considered when evaluating a potential client. This recommendation is from the fact that the company has a strong trend in sales and the profitability for the last years of analysis. The sales for the company have been increasing and the turnover ratios have also been favorable. Question 6 The main factors that should be included in the engagement factors include the objective of the audit being conducted on the company.

The other factor that should be included in the audit is the responsibility of management concerning the audit factors that include the preparation of financial statements in a true and fair manner, compliance with relevant laws, availing all pertinent records to the auditor and a statement of the auditor’s plan of action in the audit. Question 7 This part will compare the current ratio and the accounts receivable turnover for Chateau Americana with the corresponding ratios for Willamette Valley Vineyards, which is a similar company.

Chateau Americana Willamette Current Ratio 4.95 8.11 AR Turnover 5.54 11.43 From the table, it is evident that Willamette is a better performance in terms of both ratios. The better current ratio displayed by Willamette shows a better ability to settle short-term obligations and the better Accounts receivable turnover indicates a superior credit policy. Assignment 2 Question 1 Business and Industry: The two main factors in this section are that the winery is a family owned business, and as such, is mainly controlled by the family, and that the wines industry is a very competitive business area.

Operations: From an analysis of the information provided, it is evident that the company’s operations are below the available capacity, and the company operates in a location with readily available labor. Management and Corporate Governance System: As already indicated, the company ios mainly family owned, therefore, major control is held by the family. Objectives and Strategies: The main objective identified is that the company is not reliant on single customers, who do not represent more than five percent of annual sales.

Performance measurement system: The Company recently implemented a new accounting information system. Question 3 Sales might fall due to a reduction in the economic condition, which would reduce consumption. Unpredictable events like floods or earthquakes might destroy the company’s vineyards or production centers, which would affect overall production. Cash management strategies could also be affected by deteriorating economic conditions, which would increase bad debts. Question 4 Business risk involves the possibility that a company fails to achieve its operational objectives, while the risk of o material misstatements refers to the possibility of management reporting false financial information to the different stakeholders.

Accounts with a high risk of material misstatement include accounts receivables and payable, while those with a low risk include investments and long-term loans. Assignment 3 Question 7 Potential tests of control for purchases and cash disbursements Purchases Observe accounts for proper classification Review purchases journal for proper indication of purchases journal Cash Disbursements Review preparation of bank reconciliation statements Follow the checks received and issued to determine their recording in appropriate journals Question 8 Substantive tests of transactions Ensure purchase returns, allowances and discounts are recorded in appropriate journals Confirm that all transactions in journal recorded in general ledger Analytical tests Find unusual transactions in the end-of-year ledgers and trace their origins Find unusual cash disbursements and find their cause and origin.

Tests of balances related to non-payroll expenditure cycle accounts Examine the payable vendor ledgers and confirm the amounts with the general ledger. Examine documents relating to purchases discounts, allowances and returns and determine if proper accounting principles were followed when recording them.