Auditing and Assurance Issues - Assignment Example

The paper 'Auditing and Assurance Issues' is a great example of a Finance and Accounting Assignment. Profit before tax materiality = 5% of total revenue = 5/100*27,319 1,365,970.95 this refers to the amount exposed to risk and if caution is not taken, the possibility of losing it through inherent or control risk is high. It is an extra amount of revenue that the company can earn within the next one year because possible for the company to generate this amount, however, this is exposed to a substantial level of loss from untrustworthy staff and other exposures in the company (Besley and Brigham 15).

Equity materiality

Total share capital 5,448,026

Level of materiality = 1% of total share capital

= 1/100 * 5,448,026

= 54,480.26 this is the amount of possible gain to the company from invested shares. In addition, this amount has not been earned already, and the necessary procedures to avoid inherent and control risks should be taken to ensure that it is possible to achieve.

Asset materiality

Inventory 5,888,922

Goods in transit453,002

Furniture and equipment1,768,954

Leason improvement1,324,875

Total assets 9,435,753

Asset materiality = 0.5% of total assets

= 0.5/100 * 9,435,753

= 47,178.765 this is the expected increase in return from the company’s assets excluding depreciation within one year. The risk here is that accountants may not bear in mind that this figure does not exclude depreciation. However, if they note that this has not to include depreciation, they may go-ahead to increase the level of depreciation leading to defrauding the company or overvaluation of depreciation amount.

Turnover materiality

Cost of stock in: stores480,586

Warehouse12,340,046

Total costs12,820,633

Cost materiality = 5% of total costs

= 5/100 * 12,820,633

= 641,031.65 this refers to the extra cost to incur if the company aims at increasing the amount of revenue. The accountants expose this amount to the risk of overvaluation. Therefore, the auditor should be careful in on this amount while conducting his audit work.

All these amounts have been calculated based n the percentages shown in the case that the company aims at achieving after a year. These percentages are approximations by the company’s management. The totals were obtained from the company’s trial balance for 30 September 2011.

Part 2 Analytical procedures

• An analytical procedure involves the computation of ratios in a company to determine its efficiency or liquidity, solvency, and profitability.

Efficiency ratios show how much the company is efficient in returning their sales, assets, inventory, accounts payable, and accounts receivable. In addition, this ratio incorporates the company’s ability to meet both long term and short-term obligations (Besley and Brigham 15).

2011 inventory turnover ratio = cost of sales/inventory

= 1,429,814 / (6,263,242/2)

= 0.4566

2010= 1,465,078 / (6,796,990/2)

0.4311

2011 Current ratio = current assets/current liabilities

= 23,459,329/17,050,818

= 1.3758

2010 =27,046,502/22,427,671

= 1.2059

2011 Quick ratio = liquid assets/ current assets

= 4,075,205/1,130,524

= 3.6047

2010 =8,488,110/22,427,671

=0.3785

2011 Accounts receivable = credit sales/accounts receivable

= 0/10701064

= 0

2010 = 0/10091048

=0

Profitability ratio refers to the way a company is successful in generating returns from investments made. In most case, it is assumed that if a business is efficient, and liquid, then the business is profitable. In the case of this company, the profitability ratio to use is the profit margin ratio.

2011 Net Profit margin = net profit/sales*100

= 1,429,814-378,074/34,300,042 * 100

= 3.0663%

2010= 1,465,078-452,064/32,114,278*100

= 3.154%

2011Gross profit margin = gross profit/sales * 100

= 1,429,814/34,300,042*100

=4.1685

2010=1,465,078/32,114,278*100

=4.5621

2011 Return on assets = net profit/average total assets

= 1,429,814-378,074/ (24,589,854/2)

=0.0855

2010=1,465,078-452,064/ (27,674,387/2)

=0.0732

2011 Return on equity = net profit / average equity

=1,429,814-378,074/ (5789186/2)

                        =0.3633

2010                            = 1,465,078-452,064/ (5,063,032/2)

                                    = 0.400

Solvency ratios

2011 Debt to equity = liability/equity

                                  = 18,800,667/5,789,186

                                    = 3.2475

2010                            =22,611,355/5,063,032

                                    =4.46597

2011 earned interest = profit before tax/ total interest

                                               =1,429,814 / (8240091+1500000)

                                               =0.1468

2010                                       = 1,465,078/ (10860940+0)

                                               0.1348

B.

CLOUD 9 PTY LTD

Balance sheet

Description

Notes

30/09/2011

2011- %

31/12/2010

2010-%

Comments

Current Assets

Cash assets

1,315,324

1.33

1,753,765

31.25

there was a decline

Trade receivables

8,025,790

1.33

10,701,064

20.00

there was an increase

Inventory

4,697,432

1.02

6,263,242

6.30

there was a decline

Financial assets

3,056,404

1.20

4,075,205

11.30

there was a decline

Prepayments and other assets

49,541

1.50

66,054

14.26

there was a decline

All current assets

17,144,491

6.38

22,859,330

83.11

there was a decline

Non-Current Assets

Property, equipment, and plant

639,724

80.00

852,965

6.89

there was a decline

Deferred tax assets

208,169

2.42

277,559

4.00

there was a decline

Total Non-Current Assets

847,893

10.00

1,130,524

5.00

there was a decline

Total Assets

17,992,384

100.00

23,989,854

100.00

Current Liabilities

Payables

6,310,364

13.00

8,413,818

10.00

there was a decline

Interest-bearing liabilities

6,180,068

30.00

8,240,091

10.00

there was a decline

Current tax liabilities

155,879

20.00

207,839

20.00

there was a decline

Provisions

141,761

16.00

189,015

15.00

there was a decline

Total Current Liabilities

12,788,072

10.00

17050763

20.00

there was a decline

total noncurrent liabilities

862,422

11.00

1,149,905

25.00

The sum of all liabilities

13,650,494

100.00

18,200,668

100.00

Net Assets

4,341,890

1.20

5,789,186

1.00

there was a decline

the equity

Issued capital

4,086,020

11.10

5,448,026

1.33

there was a decline

Reserves

-194,624

0.58

-259,498

15.00

there was an increase

Accumulated losses

450,494

4.90

600,658

7.21

there was a decline

The sum of all equity

4,341,890

24.13

5,789,187

24.13

there was a decline

1. Specific areas for audit attention

1. The company's current and noncurrent assets should be subject to investigation due to continuous decline.                                  
2. The liabilities of the company are declining, therefore, the source of funds to cater for the liabilities should be investigated                                  
3. The equities of the company are declining; therefore, it is necessary to investigate where such funds are directed.
4. It is necessary to investigate the management strategy employed in the company that makes its ratios to be in accordance with the requirement.