Cloud 9 Auditing - Assignment Example

AUDITING – Cloud 9 Case 1. The current condition of the economy Originally founded in 1980 and acquired in 1993 by cloud 9 Inc. of the United States, cloud 9 pty limited operates in Australia. The company has been operating in the Australian economic environment which is one of the best in OECD countries. In other words, there has been a conducive economic condition for the company to thrive especially owing to the fact that recent global economic crisis did not have significant effects on the Australian economy. In addition, the demand for the products that the company deals with has been on the rise thus making the operating environment even better for the company. The company offers superior quality products in Australia making their brand to be among the most famous brand among players. In addition, the regulatory environment has been conducive for the companies operating in Australia thus giving them an opportunity to further their economic success (Spenser, 2006). As such, there are no issues pertaining to the current economic conditions that may have significant effect on the conduct of the company’s audit. 2. The business is affected by developments in other countries, foreign currency fluctuations or other global forces. The company is a subsidiary whose parent company is Cloud 9 Inc. of the United States. The parent company has subsidiaries in other countries including the United Kingdom, Germany, Brazil, china and Canada. This implies that the company is influenced by the parent company’s management decisions. In other words, an economic condition in all these countries may compel the owners to make decisions that may affect cloud 9 pty limited’s operations either positively or negatively. For instance, the operating system used by the company i.e Swift has been introduced to the company by the parent company in the USA. In addition, the company imports its stock from its China production plant while the rest of the stock comes from the United States. This means that any legal, economic or other changes in these countries that might affect shoes production or even shipping may in turn affect Cloud 9 pty limited’s business either positively or negatively. Furthermore, the currency of operations in these countries is not the same and hence fluctuations in one or more of the currencies involved will automatically affect the business. Furthermore, this being a business operated from an international level, any global forces that affect stability and economies may affect demand of the company’s products. 3. The industry is labour intensive owing to the fact that everything depends on labour. For instance, apart from the automated Swift system, the other processes are labor intensive. In addition, the company has employed 52 employees on fulltime basis. However, in a bid to reduce operating costs, the company mainly operates using part time employees and casual laborers during the company’s peak time. This means that when the sales are not high, the company only operates with a few employees. The company also seems to be dealing with the problem of theft. Some employees steal the company’s shoes from the stores thus compelling the company to install CCTVs in a bid to overcome this (Gray, 2011). In addition, although the procurement process is automated, it seems that the company needs to also employ physical measures of ensuring that the right quantities of stock are available in a bid to make sure that customers are satisfied. Furthermore, verification of stock is important in overcoming stock theft. However, apart from this, the company does not seem to have any other unusual relationship with its employees that may warrant the auditors’ attention. 4. The footwear industry in Australia had revenue of $2.5 billion in 2011 with a profit of $111.6 million. The annual growth rate for the industry has been 1.3% from the year 2011 to 2013. On the other hand, cloud 9 pty realised revenue of $32114278 in 2009 which grew to $34300042 in 2010. The profits grew from $1013014 in 2009 to $1051740 in 2010. This growth is comparable to the industry average of 1.3%. It should however be noted that the growth was affected by a number of factors some of which include stock theft which has compelled the company to install cameras in a bid to overcome the vice. In addition, the company has embarked on a serious expansion plan and marketing campaigns which have resulted in the company’s management to forecast a loss in the coming year. However, these changes should see the company perform even better in the future. 5. Analytical procedures Trend analysis 2010 2009 Revenue 106.8% 100% Borrowing costs 111.3% 100% Other expenses 107.2% 100% Profit before tax 97.6% 100% Income tax 83.6% 100% Profit after tax 103.8% 100% Cash assets 327.8% 100% Trade receivables 106% 100% Inventory 92.1% 100% Financial assets 48% 100% Prepayments and other assets 58.7% 100% Property P&E 282.8% 100% Deferred tax 85.1% 100% Payables 74.1% 100% Interest bearing liabilities 75.86% 100% Current tax liabilities 1677.8% 100% Provisions 94.4% 100% Deferred tax liabilities 124.5% 100% provisions 169.7% 100% Issued capital 100% 100% reserves -492.7% 100% Accumulated losses 133% 100% Ratio analysis 2010 2009 Net income margin 4.2% 4.6% Return on assets 5.8% 5.3% Return on equity 26.2% 26.9% Debt to assets 76.5% 81.7% Current ratio 1.4 1.2 Debt to equity ratio 3.2:1 4.5:1 From the analysis performed on the income statement and balance sheet, the audit should investigate the following areas The sharp increase in the company’s borrowing costs, The components of the item ‘other’ expenses should be investigated to determine its composition The sharp increase in cash assets should be investigated The decline in financial assets and prepayments and other assets should be investigated Investigate the decline in payables and interest bearing liabilities Investigate the sharp increase in current tax liabilities Investigate what constitutes provisions and the cause of their increase Investigate the changes in reserves and accumulated losses (Loeprick,2011) Business risk The following business risks may also affect the company’s audit and hence may warrant thorough investigations; i) There is a risk that ordered goods are invoiced without being shipped. There is also the risk that the revenue and receivables balances are overstated through failing to record a sale when the customer has not yet received the goods ordered ii) There is a risk that the goods ordered may not be shipped after all since the whole process relies so much on the SWIFT system without physical controls. iii) The company is faced by business risk arising from any factors that affects the company’s operating environment which will make the company unable to achieve its objectives. The major objective that the company currently has is increasing its market share in the Australian footwear market and maximizing the company’s revenue by 3%. However, this objective is affected by the opening of new stores and sponsorship costs which makes the company to project a loss for the year. As such, there is a risk that the company may not achieve its objectives (Robert, 2010). iv) It is noted that the finance department’s executives are given bonuses and share options which are subject to their achieving set targets by the management. As such, there is a risk that the financial statements may be overstated in a bid to show the management that targets have been met and hence the need to pay the bonuses or issue the shares. v) The company imports its supplies from China and the USA. As such, there is need to investigate whether all transactions have been accurately recorded bearing in mind currency fluctuations. 6. Memorandum To: Suzie Pickering, Audit senior From: Joe Huntington, Graduate auditor Date: 7th August 2013 Subject: Audit planning M/s. Suzie This is to inform you of the areas that should receive special emphasis during our audit based on the analytical procedures I have carried out on the company’s financial statements and the business risk emanating from the company’s nature of business. The following areas will require special attention during the audit; i) The company’s borrowing costs, ii) Other expenses iii) Cash assets iv) Financial assets and prepayments and other assets v) Payables and interest bearing liabilities vi) Current tax liabilities vii) Provisions viii) Reserves and accumulated losses In addition, owing to the company’s nature of business, the following assertions will require special attention in a bid to minimize risk; i) Occurrence-There is need to ascertain whether goods invoiced are actually shipped ii) Completeness – There is need to gather evidence that all transactions are recorded by the company. iii) Accuracy –the company deals with more than one currency hence the need to ensure that all transactions are accurately recorded bearing in mind currency fluctuations. iv) Existence- there is need to verify existence especially bearing in mind that some assets may be in transit to avoid overstatement v) Valuation- There is need to establish that company’s assets and liabilities are correctly valued to avoid over/understatement. It is hoped that special attention will be paid to the areas above in a bid to ensure that all forms of risk are minimized as much as possible. Please let me know if there is any area of concern. Sincerely, Joe Huntington, Graduate auditor, W&S Partners. 7. The following is the process of engaging component auditors to perform work on the inventories in China and the United States; W&S Partners will need to understand the operating environment within which the inventories are located in order to determine the qualities required of the component auditors. The audit firm will then come up with the appointment criteria for the potential component auditor. The firm then acquaints itself with the chosen component auditor in order to determine his/her ability to audit the inventory (Aston, 2009). The firm will then come up with terms of engagement that will be agreed upon by the two firms. Once terms of engagement are agreed upon, the W&S partners will write the engagement letter that will be sent to the component auditor detailing the terms of engagement and the work the component auditor is expected to carry out. 8. Derivatives experts In engaging the derivatives experts, Suzie should ensure they have the required expertise to perform the valuation. The type of work and the scope of valuation should be identified. The firm should ensure that no conflict of interest exists between the expert and the company. It is important to ensure that the expert has sufficient resources to carry out the work required within specified timeframe before agreeing on terms of engagement and issuing letter of engagement. The expert then needs to provide his/her valuation report to the audit firm together with stock sheets as evidence that the inventory exists (Roger, 2010). The expert can do all the work on the derivatives but Suzie has to assure herself beyond reasonable doubt that they actually exist. 9. Audit working papers Component auditors W &S Partners 5072-North Street Sydney I&M Partners 1102 –Argwings New York Working paper for component auditing Period: The audit commences on 8th September 2013 to 15th September 2013 The subject matter: Your firm has been engaged to perform audit work that will provide evidence about inventory shipped to Cloud 9 pty limited Australia from Cloud 9 Inc. production plants in the United States. Number of items verified and the nature of tests carried out: Results: File reference: A45G101 Prepared by: JH Received on: Received by: Audit by: Reviewed by: Experts working papers W &S Partners 5072-North Street Sydney Emily Watson 1042 –Argwings New York Expert valuation working papers Period: The valuation should take place between 8th and 15th September 2013. The subject matter: You have been hired as an expert to undertake valuation of Cloud 9 pty limited’s goods in transit that will help in ascertaining the real value and existence of the goods for proper auditing process. Nature of valuation carried out: Results: Evidence of valuation: File reference: A45G102 Prepared by: JH Received on: Received by: Audit by: Reviewed by: References: Aston, J2009, Auditing fundamentals, New York, Light House Publishing. Gray, I2011, The audit process, London, Rutledge Loeprick, J2011, Risk based auditing: Approaches and experiences, Oxford, Oxford University Press. Robert, E2010, Effective auditing or corporate, Prentice Hall Sydney. Roger, D2010, Principles of Auditing: An introduction to internal standards on Auditing, Oxford, Oxford University Press. Spenser, N2006, A basic text book of Auditing principles, Nairobi, East African publishers. . References: Read More