Practical Approach to Auditing at Cloud 9 Pty ltd - Case Study Example

Cloud 9 Pty Ltd Student’s Name Institution Cloud 9 Pty Ltd PART ONE Cloud 9 Pty ltd is a company that deals in footwear and is based in Australia. It however manufactures its products in China and in USA. Cloud 9 did not have a good year in 2011 albeit having a goal to increase their revenue for the fiscal year of 2011. As a matter of fact it had a very poor year when compared to the previous one; the cash they handled in 2010 was way more than what they did in 2011. This is because they opened a new store and increased costs related to sponsorship deals. Also they had a lot more inventory that year than they did 2011 this means they manufactured more products that year. They were also taxed higher than they were in 2010. They however sold more in 2011 than they did in 2010. They have also invested in the welfare and compensation of the employees and this could be the reason for the increased number of sales. At the time of the audit the economy of the company is not doing as well as it did in the previous financial year. This can be seen in the trial balance. When compared to the previous year, both the cash at hand and that in the savings account reduced significantly. Also the inventory did not have as much items as it did the previous year. Cloud 9 manufactures its products in other countries like China and the United States. This means that they are controlled by the government of the said countries. If the tax levied on exports is increased then cloud 9 cannot argue. The foreign currency fluctuations will not affect the company’s spending budget. This is because the two parties had agreed on the exchange rate way before they started doing business. There are labor relation issues which are not really negative. On the contrary they are positive. For one the rate at which leaves are provided for has increased since the previous year. Also the loyalty service provision has been introduced in the year 2011. The effect of this can be seen in the improved amount paid in sales commissions in 2011. The company is growing slowly in terms of asset ownership. It acquired more delivery trucks and vans in 2011. However, there were external and internal factors that blocked the improvements of the company in terms of finances. For one there was an increase in the costs of operation and they also took long term loans which introduced expenses they could not handle at the time. The volume of the business transaction is of fairly small scale. This is clear if you look at their assets and cash flow in the two years. The inventory was also more than the amount of money they handled in either of the two years. This is proof that their dealings are of a voluminous nature. The goods are of low value. The operations of the company are centralized. If they were not there would be records from other branches in the city. Their records all come from one source. The business is fairly regular. This is because the company had more creditors in 2011 eleven than it did in the previous year. The increase in creditors means many people did not have the cash in hand for the goods and thus many might have passed the opportunity of purchasing the items. Also the purchases were higher than those of the previous year. For the items to be stolen and benefit the thief it has to be in large quantities. This is because according to the balance sheet the number of items in the inventory is significantly more than the money that was dealt with in the whole year. This means that each item does not have a significant profit margin and the company gets their profit from large sales. The client company deals in footwear. There has been a change in the kind of strategy they use in selling their products. They introduced loyalty points which gave the consumers the ability to earn redeemable points with every $10 they spent. Although this worked it did not bring about any significant profit. They also paid more in sales commission in 2011 than they did in 2010. This means the sales were more. However the sales/gross margin has reduced. This can be seen in the reduced number of items in the inventory for that year. The reduction means they did not manufacture as many goods as they did in 2010. This means that the supply was lower. The major competitors for the company are other international shoe companies. The differences between the merchandise from the other company are that they target a different age group and gender. The main competitor majors in the manufacture of basket ball shoes for men of all ages. The market is generally open and ready to accept new entrants. This is because the majority of the main producers are not in Australia. The main producers own about two thirds of the market share. On average the lifecycle of the product is not specific but generally lasts for almost three years. The least that one shoe can last for is one year because of the warranty given by the company. Shoes dependent on style and fashion and if it is not the in thing chances are it will not sell as much as it would when it was not in style. The company has various market targets for its products. It targets women, men and children of all ages and gender. They do not target any particular audience per se. The client base of the company has increased due to the opening of the new store. The key suppliers of the raw materials are China and the US. This is where the products are transited from. The materials are not affected by price changes in any way. This is because the company already negotiates the price before any business is done. The time span from negotiating to doing business is long enough for price changes. External market forces do not affect the company directly; these include extreme weathers and global warming. The industry does not depend on technology that much. The amount of money spent on IT and technology as a whole in 2010 is less than what is used in 2011. The industry is relying more on technology. If the company focused more on investing in buying top notch equipment their products would be of better quality and also more. Also unnecessary problems like forgetting to import the inventory can be avoided by embracing this. The operations of the clients are affected by local and foreign registration significantly. If the US or China increases their taxes on exported goods the company will have no other option but to comply with the new rules and regulation, otherwise they will not get their raw material. The same applies to the local grounds. The increase of taxes for entry into the country will greatly affect the cash flow of the company. Also an increase in the interest rates of loans from the bank. Although the company has not achieved or come close to its revenue target for the specific fiscal year it is not impossible to turn around. The management has to focus on maintaining the existing client base and increasing the demand for the products. Also increase in the use of technology should be encouraged so as to make the products high quality and a lot. PART TWO The Australian elections were preceded by campaigns which were full of promises to change the personal finances of its citizens and of the country as a whole. Both the coalition and Labor parties made these promises and let the people decide on what they want and who they trust. The promises that regarded personal financing in the official election related to superannuation. This is a pension plan that is created by a company to benefit their employees. Also promised is the supreme Guarantee. This is a guarantee that would see to it that employers contributed a certain amount for their employees in some sort of super fund. The low income super contribution is also another personal finance promise made by the government. Targets families who earn less than $37000 per year; they are legible to receive an LISC payment. There is also the new tax on pension earnings above $100,000, a ‘super’ tax freeze for 5 years. This should help the individuals save the money they would have otherwise paid. There is the indexation of the Seniors Health card which would give retirees who are self funded access to cheaper medicine. Another promise was changes to the company tax rate and the associated dilution of franking credits on dividend income. Before the elections the economy was not doing well. As a matter of fact the promises used by the two parties were the most positive action the economy had got in some time. However it was good 2 to 3 years prior. The growth of the country is slowing and there is an increasing number of unemployment in the country. The budget runs on a deficit that will blow out to much more in the following fiscal year. Although it was not in a good shape both parties had strategies that could be used effectively. These strategies would not only ensure the GDP is good but also that the personal finance of the different individuals is upraised. PART THREE The process of engaging component auditors does not only involve looking at their education, training and experience but also one should consider their reputation. This includes determining their reliability, integrity and objectivity. The component auditor should also be free of conflicts of interest, the expertise and resources necessary to perform the work on inventory in China and United States. Below are steps that the W&S Partners should undertake to engage the component auditors. Identifying the type of work that the component auditors will perform including its scope. This will involve identifying the type activities to be carried out by the component auditors Determining the auditors training and experience. W&S Partners should identify whether the component auditor has the required competence and experience to perform the requested work of inventory in the two countries. The auditor should be able to understand the operations to be carried out and the problems involved with the operations. The auditor should have gone through a comprehensive training and experience about the process. They should also satisfy the required national legal requirements. One should consider whether the component auditor has conflict of interest. A conflict of interest may arise if the component auditor has a relationship with the member of W&S Partner’s management or board. This can undermine the work being carried out. Indentify whether the component auditor has sufficient and the required resources to perform the Cloud 9 audit. This is necessary in order to ensure that the work is performed in time and in accordance to the audit standards. Evaluating the scope of work to be carried out and any other issue. This will include coming up with a proposed plan for payment of fees and other expenses incurred. Making sure that the component auditors understand that the W&S Partners are the owners of the operations. The W&S Partners should also understand that the component auditors are working on their behalf and they should be fully cooperative with any information requested. Determining the criteria that will be used to measure the auditors work. This criterion should be documented in an agreement. Any changes on the criteria should be communicated to all. Question b a) On engaging the derivative expert Suzie should perform the following steps Assess the professional qualification, experience and objectivity of the expert. This will involve considering the experts professional certification, licensing or membership of an appropriate body. Suzie should also assess the expert’s reputation in the field Qualities of an expert An expert needs to be capable, competent and objective if their services should be deemed adequate and efficient in audit Capability-this refers to the ability of the expert to exercise competence during audit engagement. The expert for example must have the required resources and time to perform the task at hand. Competence- this refers to the nature and the level of expertise and experience of the expert. Any expert to be employed should have a wide recognition of their expertise in stated field. Objectivity- this relates to any possible effects that would arise on the judgment of the expert. This includes bias, conflict of interest or the influence that the expert might have on others. For example, if an expert has vested interest in expressing other matters other than the objective opinion in relation to the subject matter, their opinion will not be of any value to the auditor. b) Suzie should provide a number of instructions and information to the expert on how to conduct the engagement. This includes The objectives and the scope of the experts work An outline on matters the experts report should cover Information regarding the methods to be used by the expert The extent to which the expert should access the required records. c) The expert must provide the following information to ensure that the expert’s work is sufficient and appropriate. The source of the data that the expert used The methods and assumptions used The date when the expert carried out the work The reasons for any amendments in the methods and assumptions used compared to those used before. d) Besides the work of the expert Suzie must review the expert’s working papers. Suzie must access of all the experts work. In reviewing the expert’s working papers, Suzie should carry out a sufficient audit work to ensure that the expert’s work was properly planned, supervised and documented. Suzie should assess whether the expert’s work is adequate and complete. Question c Working paper Cloud 9 Pty Ltd, China and United States, 9/9/2013 Engaging the Component Auditor Assignment planning phase - Stating the scope of work for each component auditor -Planning memo Review phase Assessing of the experience and competence of the component auditor Evaluation phase -Verification of procedures in engaging component auditor -Summary of engaging a component auditor, conclusions and recommendations Reporting phase -Draft audit report -Supervisory Review -Final audit report -Management response Cloud 9 Pty Ltd, China and United States, 9/9/2013 Engaging Derivatives Experts Assignment phase -Background information Review phase -Control Questionnaires -Predetermined control model -summary of control weaknesses Evaluation phase -Plan and procedures to be carried out in engaging an expert -Summaries, conclusions and recommendations of audit observations Reporting phase -Briefing notes -Draft and final audit report Read More