General and Industry Specific Economic Trend and Condition - Assignment Example

Name: Lecturer: Course name: Course code: Date An auditor should be able to understand business environment in audit planning according to ASA: 300 in order to reduce chances of material misstatement. This misrepresentation may be brought by relying on information gathered from the internal audit department without taking into concern whether the company internal control system is effective and efficient General and industry specific economic trend and condition Q1a). Current economic condition From the general business perspectives, the economic condition of the company is favorable because the company is making profit as compared to previous year in which a loss was depicted. The company borrowed loan of $ 2 million from Oz bank in the year October 2011 to finance purchase of more delivery van. b).is the business affected by external environment Yes actually the business is facing external pressure from its competitor and thus it will affect the business operation and strategy as well. c). are there any unique labor relation related issues if the business is labor intensive. The company is currently in good terms with its employees besides; there is a reduction in salaries and wage by $ 1,028,998from the year 2010. d). comparison of company growth and the statement of financial performance and the industry. What is the reason for their difference? We made a trend analysis of the company for two years of 2010 and 2011 in order to gain further understanding as to whether the company is making profit or whether the goals set is achieved as well the cross sectional study of the company performance with other company in the similar market to determine whether the company is performing better as compared to others. It was observed that the company made a profit of $600, 658 as compared to the previous year in which the company made loss of $ 451,082. e) Volume and type of business transaction The company majorly deals with manufacture and supply of basketball shoes .it earns 20 % of its revenue from manufacture of heavenly 456 walking shoes. From the income statement it can be depicted that the company earned more income from stores totaling $ 640.7892 in the year 2011.there is a decline of revenue by of $ 6,732178 from ware warehouse. f).centralization or decentralize of client There is centralization of client operation in which the company has different department (stores and warehouse) who are managed by different directors. Also it can be observe that the company decentralizes progression because it gives loan to more than one director signifying the number of director who practices the duty individually. g) Nature of company business cycle and whether it is natural or influenced by seasonal fluctuation. The nature of the business cycle is majorly influenced by external factors such as closer of customer’s warehouse unexpectedly or delay by staff truck driver, this would lead to goods being undelivered and thus affecting the revenue of the company. H).susceptibility to fraud or theft The internal control systems of the company seem efficient because the company practice segregation of duties in which the transaction will follow a series of stages before it can be approved for payment. The billing method is different for the stores and the warehouse. This is considered efficient because a chance of theft or fraud is minimal. Competitive Environment i).Company Product brands and any significant changes The company majorly sells basket shoes as well as 456 walking shoes. There has been a change in the sales strategy. Introduction of 456 walking shoes led to revenue generation of 20% from the same as well as the remaining 80% from basketball shoes. This strategy led to an increase in sale by $ 2,185,764from the year 2010 t0 2011 j) Major client competitor and share they hold in the market The company spends heavily on promotional strategy .this can be observed from the fact that the company increased the funds for promotion on TV to $ 809,430 and sponsorship by $ 1284,756.this imply that the market for the product is highly competitive. K). any different between the client and the competitor merchandise There is no clear similarity between the competitor and the company. Product information m).any specific product lifecycle There is no product cycle at the moment; in fact the company added a new (heavenly 456 walk shoe). Product in to the market n) Is the product depended on style or trends? The company product depends on style. In the year 2009, the company launched a new style called heavenly 456 walk shoe. Customer information o). are highly dependent customer The company majorly relies on two categories of customers. p). overall profile of the client customer, any significant influence on customer base. The client customer profile is promising. there is significant change in customer base since introduction of a new product and change in promotional strategy. Supplier information q)). who are the supplier The major suppliers of the company are the china production plant and remainder from the United States. r). are material subject to significant price movement or affected by external forces. The prices of the material are subject to changes by external forces such as the competitors effects and the legislation. Technological advance and effect of internet, s). how does industry use technology The company majorly uses technology in making its product style as well in promotional campaign and the method of receiving payment. t). technological trend that impact the industry. Use of electronic money is majorly impacting on the company general operation and financial transaction. Laws and regulatory requirement u). are the client operation affected by foreign or local laws. The client is majorly affected by local legislation in which the company is bound to comply with tax authority, Australian accounting and auditing guideline on group account and joint auditing. v).recent laws enacted that may have significant impact on the company. The new legislation on transfer pricing that was recently passed on multinational companies. Question two Analysis of cloud 9 financial performance In our audit planning, we performed a trend analysis of the company financial performance using some analytical procedures such as ratio analysis and audit trail review. Ratio analysis During our audit process we performed some few ratio analysis such as the current ratio, stock turnover and the net profit margin, this is because we deemed this as the area in which it is susceptible to fraud and thus care more attention should paid on. Current ratio Current ratio is expressed inform of total asset against the current liability. This ratio is vital as it aids in determining the liquidity position of the company and whether there is fictitious entries. In the year ended 31ist December 2011, the company had current ratio of 1.4 as compared to preceding year in which it was 1.2.it can be depicted that there is an increase in the ratio implying that company working capital is at risk. Stock turnover This ratio indicates the frequency with which the stocks are dispatched from the stores and thus it can be used to depict the level of sales and possibility of fraudulent entries in the books of account. In the year ended 31ist December 2011, stock turnover was 1.96 times while in the year 31st December 2010, it was 2.5 times. It can be observed that there is a decline in the amount of good sold. Net profit margin ratio This ratio will indicate how much of the sale revenue were consumed by the operating expense. From the income statement it can be observed that in the year 31st December 2011, the net profit margin was 3.06 % as compared to the pervious year which was 3.15 % .this means that net profit was consumed further by the operating expense or there might be a fraudulent transaction in which the directors could be perpetrating fraud. From the general trend analysis, it can be observed that the company is facing a business risk in which the competitor may take advantage of. Generally, the company trend in its performance is declining and some effort should be undertaken in order to rescue the company from being outsmart by other emerging competitors. Also the going concern of the company is at jeopardy because the financial information depicts a decline trend in its performance as well as the working capital funding. (Mourik, 2007) Q2B). Memorandum Suzie Pickering Audit seniors, W $ S partners Sydney. 31st December 2011 Dear sir/ madam I am pleased to inform of the potential areas to fraud that we deem necessary for investigation. The letter is intended to set out our terms of audit and to simplify our responsibility. I did my examination as per the institute of certified charted accountant Australia and act in accordance with guidelines of Australian standard on auditing. .Purpose and scope of Audit memorandum International standard on audit 260 requires that a practitioner should communicate to those charged with governing matters concerning the operation of the business. This report will be able to provide information regarding the intended audit strategy and the Planned means of communication all through the audit. . This report is for internal use for the reasons of planning and discussing the audit of the financial statement as at 31st December 2011. The independence I performed the audit procedure without undue influence while adhering to international standard on audit and hence the report gives a true and fair view of the company position and reflection of the current books of accounts. In my audit process, I adopted the risk based audit strategy to examine the company books of account. First, I identified the key concern and risk facing the company. This includes an assessment of the strength and weakness of ICS .this was achieved by understanding the client business prior to an exhaustive audit. Some of the factors I deemed necessary for action were. The going concern It has come to our attention that the going concern of company is compromised because the company financial statement depicts a declining trend in liquidity position as well as the profitability ratio. We recommend that the company should consider improving its internal control system and have well planned strategy that will help the company mitigate its risks. Management Assertation According to ASA 315, we are required to use the assertation when evaluating the risk of material misstatement as well as scheming audit practice. I gathered sufficient and appropriate information necessary for our audit opinion. In our opinion, an audit trail needs to be undertaken on the financial asset of the company because there is a big decline in the value ($ 4, 412905). We believe a material misstatement might exist or the management assertion is not fully adhered All information in the books of account are accurately documented and presented in accordance with Australian accounting standard and the auditing standard. My judgment was based on corroborative evidence and I believe that the information I provide will be relied upon in making decision as to whether the company overall performance strictly adheres to Australian accounting and auditing standards and if there is any material misstatement or fraudulent entries. Yours faithfully Michael Certified public accountant Q3). Procedure for engaging the component auditor Before the principle auditor decides on engaging the component auditor, he ought to asses the materiality of inventory in china and the United States as well as the relevance of the components the auditor will examined relative to the company as a whole. This is because the principle auditor will rely on this information in making an overall opinion as to whether the company consolidated books of accounts portray a true and fair of the company position and also minimizing auditor’s liability. (Gupta, 2004) After the principle auditor is satisfied with verdict of using the component auditor, he then considers whether to make reference in his report where the audit was carried out by another practitioner or just to conclude as the whole audit process was done by the principle auditor and to disregard mentioning the component auditor in his report. Therefore whether to make reference or not, the principle auditor is suppose to asses the competency, reputation, independence and integrity of the component auditor. The joint practitioners should agree on how to conduct the audit work as well as the audit opinion and content of any management letter. The principle auditor should then consider whether to accept the departure form home accounting and auditing standards if the departure is of the character and consequence relative to financial statement on which the principle practitioner is reporting that it would require acknowledgment in his personal report and to consider the materiality for their departure. (Hinchman, 1998) Q3b). Placing reliance on the work on expert Placing reliance on the work of an expert will pose risk on the audit report because the auditor will not be in an exact position to determine method of valuation the expert used or whether the expert had sufficient and relevant knowledge in the respective field. Therefore it is considered necessary for the auditor to assess the level of education, skills and competency an expert have before accepting is engagement. Some of the qualities an expert should portray are. (Knapp, 2011) A).Competency and integrity. An expert is a person with unique skills of doing something and thus an auditor require him his profession in valuing assets. Any expert must observe competency and integrity in the duty and thus an auditor should employ person with such attributes in order to reduce chances of material misstatement that will affect the company report as well as minimizing auditor’s liability. B). evaluating the work of expert. The auditor should consider appraising the work of other expert so as to conclude on the degree to which he can rely on the work of the professional as well as assessing, evaluating and review whether the work of an expert as part of the examination and concluding the scope of placing confidence on the same. After considering this attributes and whether the expert portrays, then Suzie would consider the engagement by sighing a memorandum, of understanding between both parties. The signing will give an expert the scope of work, timing requirement and the quality assurance of the work. Q3C). The working papers of component auditors and the derivative expert plotter W $ S partners CLIENT Cloud 9 PTY ltd PRARED BY Michael DATE 31.12.011 PERIOD 31st December 2011 REVIEDWED BY audit senior Suzie P DATE SUBJECT Audit of inventory REVIEDWED BY manager Sharon G DATE YEAR 31.12.010 opening inventory 6,796,990 √ ∞ Addition during the year 12,286,884 √ b sold 12, 820,632 √ b closing inventory -6,263,242 √ b NOTE, W $ S partners CLIENT Cloud 9 PTY ltd PRARED BY Michael DATE 31.12.011 PERIOD 31st December 2011 REVIEDWED BY audit senior Suzie P DATE SUBJECT derivative asset REVIEDWED BY manager Sharon G DATE YEAR 31.12.010 opening inventory 3,592,899 √ b Addition during the year 384,554 √ b closing inventory 3,987,453 √ b Ticks (√) are used to mean that the transduction as been traced from the original source document while beta (b) is used to denote an agreement in larger balance while an infinite (∞) denote an agreed to prior years. From this simple working paper, it can be depicted that inventory is accurately documented and that there is no any fraudulent entries that might affect the true and fair position of the company statement of financial position. Also the financial derivative asset is properly valuated and documented. This transaction was traced from their original source document and hence no suspicious source was found. (Hinchman, 1998) Reference Gupta. (2004). In Contemporary Auditing (p. ppg 1143). Hinchman, J. F. (1998). In Financial Audit: 1997 Consolidated Financial Statements of . (p. ppg 27). Knapp, M. C. (2011). In Contemporary Auditing, 9th ed.: Real Issues and Cases (p. ppg 489). Lawrence, S. (1995). In International Accounting (p. ppg 125). Mourik, C. v. (2007). In Globalisatie en de Rol Van Financial Accounting Informatie (p. ppg 74). States, U. (2005). In Financial audit process for preparing the consolidated (p. ppg 10). Read More