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Questions:

1.Using the 30 September 2011 Trial Balance Calculate Planning Materiality and Include the Justification for the basis that you have used for your Calculation.

2.Discuss the Ratios Indicating a Significant or an Unexpected Fluctuation.

3.Prepare a Common-Size Statement for the Balance Sheet of Cloud 9, use Total Assets as the basis for the Balance Sheet. Comment on any Audit Implications revealed by your statement.

4.Which Specific Areas do you Believe should receive Special Emphasis during your Audit? Consider your discussion of the Analytical Procedures Results, Comments on the Common-Size Statement and as well as your preliminary estimate of Materiality.
 
 

Answers:

1. As per the statement given in the ninth paragraph, the auditor should include the materiality during making the decisions based on audit procedure, extent, nature and timing. It has been further seen that the materiality needs to be taken into account for the various types of the effect, which is seen to be associated to the misstatement (Garg and Bawa 2016) . The 12th Paragraph of the ASA 320 provided the auditor whit the necessary information for the preliminary assessment of the materiality. It further considers both the qualitative and the quantitative aspects (Nawal Kasim and Zuraidah Mohd Sanusi 2013).

Statement for Planning Materiality

Particulars

Amount (31-12-2011)

Percentage (%)

Planning Materiality

PBT

 $        (3,315,804.00)

5%

 $           (165,790.20)

Total Turnover

 $        37,554,250.67

5%

 $          1,877,712.53

Total Assets

 $        24,100,296.00

0.50%

 $             120,501.48

Equity

 $          3,314,193.00

1%

 $               33,141.93

Table 1: Materiality Planning

(Source: Created by Author)

The computations shown above are able to select the appropriate auditor. However, the company has incurred losses during the period and hence the level of materiality cannot be based on the PBT (Rikhardsson and Dull 2016). There have been several reasons identified to select the revenue for reflecting the proper data for the large organizations and showing their scale of operations in the materiality level. In the given case the materiality level has been able to be selected based on 5% of the turnover that comes to $1877712.53. This further shows that the auditor will be able to depict the misstatement, which is higher than the materiality level. On the contrary, in case the materiality is seen to be higher in compare to the selected procedures then the audit process will be state on the truth and assure fairness in the financial statement (Ye and Simunic 2013)

2.The various types of the analytical aspects of the study is able to show the financial information which are seen to be related to the non-financial and the financial data. It has been further seen that the various types of the considerations made in the report has been shown with the risk assessment based on the financial ratios(Messier 2014).

Statement showing significant financial Ratios

Particulars

Formula

9/30/2011

12/31/2010

Liquidity Ratio

 

 

 

Current Ratio

Current Assets /Current Liability

2.02

1.38

Quick ratio

(Current Assets- Inventory- prepaid Expenses) /Current Liability

1.38

0.97

 

 

 

 

Solvency Ratio

 

 

 

Debt to Equity Ratio

Debt/Equity

2.72

1.68

Times Interest earned

Income before interest & expenses/interest earned

-1.77

2.91

 

 

 

 

Profitability Ratio

 

 

 

Net Profit Ratio

Net Profit/RevenueX100

-9%

3%

ROE

Net Profit/ Share holders Equity

-0.75

0.18

Table 2: Significant financial Ratios

(Source: Created by Author)

The table shown above is able to show the relevant calculations, which are seen to be related to the different factors, associated to the depiction made in the financial statement of the company. The various types of the evaluation of the report has been seen to based on the different ratios shown in form of profitability ratio, solvency ratio and the liquidity ratios(Jans, Alles and Vasarhelyi 2013).

 


The table shown above is able to determine the ability of the company to generate profit from the various types of the operations. It has been further seen that the company has been able to earn a positive net profit during 2010, while on the other hand it has incurred loss in 2011. The various types of the depictions made in the form of the financial statement has been further able to show that the company has been able to make the significant amount of the profit based on the various type the considerations made in form of the amount of profit earned by the investment made by the shareholders (Semer 2013).

3.

Common Size Balance sheet

Particulars

2010

Percentage

2011

Precentage

Current Assets

 

 

 

 

Cash

 $   1,753,765.00

7%

 $      245,965.00

1%

Trade Rceivables

 $ 10,701,064.00

44%

 $ 10,552,109.00

44%

Inventory

 $   6,263,242.00

25%

 $   5,924,156.00

25%

Financial Assets

 $   4,075,205.00

17%

 $   4,469,759.00

19%

Prepayment and other assets

 $      666,054.00

3%

 $   1,112,028.00

5%

Total Current Assets

 $ 23,459,330.00

95%

 $ 22,304,017.00

93%

Non Current Assets

 

 

 

0%

PPE

 $      852,965.00

3%

 $   1,449,330.00

6%

Deffered Tax Assets

 $      277,559.00

1%

 $      346,949.00

1%

Total Non current Assets

 $   1,130,524.00

5%

 $   1,796,279.00

7%

Total Assets

 $ 24,589,854.00

100%

 $ 24,100,296.00

100%

Current Liabilities

 

 

 

 

Payables

 $   8,413,818.00

45%

 $ 10,323,185.00

50%

Interest Bearing liability

 $   8,240,091.00

44%

 $      149,354.00

1%

Current tax liability

 $      207,893.00

1%

 $      159,866.00

1%

Provisions

 $      189,015.00

1%

 $      401,658.00

2%

Total Current Liability

 $ 17,050,818.00

91%

 $ 11,034,063.00

53%

Non Current Liability

 

 

 

 

Deffered tax Liabilities

 $      170,284.00

1%

 $      198,647.00

1%

Interest bearing liabilities

 $   1,500,000.00

8%

 $   8,872,482.00

43%

Provisions

 $        79,556.00

0%

 $      680,911.00

3%

Total Non Current liability

 $   1,749,850.00

9%

 $   9,752,040.00

47%

Total Liabilities

 $ 18,800,668.00

100%

 $ 20,786,103.00

100%

Net Assets

 $   5,789,186.00

 

 $   3,314,193.00

 

Equity

 $   5,448,026.00

94%

 $   5,448,026.00

164%

Reserves

 $    (259,498.00)

-4%

 $    (247,638.00)

-7%

Accumulated Profit/ loss

 $      600,658.00

10%

 $ (1,886,195.00)

-57%

Total Equity

 $   5,789,186.00

100%

 $   3,314,193.00

100%

Table 3: Common Size Statement

(Source: Created by Author)

The depictions made in the table shown above has bee able to state the viability of the balance sheet of the company. It has been further seen that the common size of the statement has been able to measure the various types of the factors, which are seen to be based on the various considerations made in terms of 2% decrease in the noncurrent assets of the company from 2010 to 2011. The various type of the analysis made in noncurrent asset has shown an increase from 2010 to 2011. The various types the considerations made in the report is further able to show the different types of the factors of the evaluation has stated a decrease in the total current liability from 2010 to 2011(Hardy and Laslett 2015). On the contrary, it has been seen that the company has been able to show decreased proportion of the non-current liability from 2010 to 2011. The above table shows the areas in which the auditors need to make the necessary improvements (DeFond and Zhang 2014). 

4.To

Suzie Pickering,

Audit Senior,

RE: Problems areas and other concern

Sir,

The memorandum is aimed to show the material misstatement, which is present in the financial statement of the company. In the analysis process of the financial statement, it can be seen that the company has been able to increase the total revenue. This is identified as a positive development of the company. Despite of the increasing revenue, it can be seen that the overall profit of the company has declined. Based on the various analysis it can be discerned that the main reason for the decline in the profit has been identified that due to the increasing amount of the other expenses and the borrowing cost. It has been further seen that the expenses based on the ordinary activity has been seen to be related to the various types of the activity in terms of the by 42% and 23% respectively. Hence, it can be said that the audit procedure should provide special emphasis on the relevant area of expenses. It has been further seen that the auditor should be able to apply the appropriate method to determine the misstatement consistently. The evaluation of the overall depictions made in form of the increasing expenditure has been shown below as follows:

Thanking You

Regards

Statement for Profit/Loss

Particulars

Amount

Amount

Amount

Change %

12/31/2010

9/30/2011

12/31/2011

 

Revenue

 $    34,300,042.00

 $ 28,165,688.00

 $   37,554,250.67

9%

Cost of Borrowings

 $         748,106.00

 $      798,611.00

 $     1,064,814.67

42%

Expenses from ordinary activity

 $    32,122,122.00

 $ 29,575,856.00

 $   39,434,474.67

23%

PBIT

 $      1,429,814.00

 $ (2,208,779.00)

 $    (2,945,038.67)

-306%

IT Expenses

 $         378,074.00

 $      278,074.00

 $        370,765.33

-2%

Profit available to the members of the company

 $      1,051,740.00

 $ (2,486,853.00)

 $    (3,315,804.00)

-415%

Table 4: Statement of Income

(Source: Created by Author)

 

References

DeFond, M. and Zhang, J. (2014) ‘A review of archival auditing research’, Journal of Accounting and Economics, 58(2–3), pp. 275–326. doi: 10.1016/j.jacceco.2014.09.002.

Garg, N. and Bawa, S. (2016) ‘Comparative analysis of cloud data integrity auditing protocols’, Journal of Network and Computer Applications, pp. 17–32. doi: 10.1016/j.jnca.2016.03.010.

Hardy, C. A. and Laslett, G. (2015) ‘Continuous Auditing and Monitoring in Practice: Lessons from Metcash’s Business Assurance Group’, Journal of Information Systems, 29(2), pp. 183–194. doi: 10.2308/isys-50969.

Jans, M., Alles, M. and Vasarhelyi, M. (2013) ‘The case for process mining in auditing: Sources of value added and areas of application’, International Journal of Accounting Information Systems, 14(1), pp. 1–20. doi: 10.1016/j.accinf.2012.06.015.

Messier, W. F. (2014) ‘An approach to learning risk-based auditing’, Journal of Accounting Education, 32(3), pp. 276–287. doi: 10.1016/j.jaccedu.2014.06.003.

Nawal Kasim & Zuraidah Mohd Sanusi (2013) ‘Emerging issues for auditing in Islamic financial institutions?: empirical evidence from Malaysia’, Journal of Business and Managment, 8(5), pp. 10–17. doi: 10.9790/487X-0851017.

Rikhardsson, P. and Dull, R. (2016) ‘An exploratory study of the adoption, application and impacts of continuous auditing technologies in small businesses’, International Journal of Accounting Information Systems, 20, pp. 26–37. doi: 10.1016/j.accinf.2016.01.003.

Semer, L. (2013) ‘Auditing the Byod Program.’, Internal Auditor, 70(1), pp. 23–27. Available at: https://ezp.waldenulibrary.org/login?url=https://search.ebscohost.com/login.aspx?direct=true&db=iih&AN=85845555&scope=site.

Ye, M. and Simunic, D. A. (2013) ‘The economics of setting auditing standards’, Contemporary Accounting Research, 30(3), pp. 1191–1215. doi: 10.1111/j.1911-3846.2012.01191.x.

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