ACCTG456 Lecture : Chapter 9 In Class Question_solution.pdf

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violetchinchilla775

8 Apr 2014

School

University of Alberta

Department

Accounting

Course

ACCTG456

Professor

Trish Stringer

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Document Summary

In class #9. 1 persuasiveness of evidence from analytical procedures. Matthieu has the task of reviewing the evidence from analytical procedures conducted by the audit juniors on the audit of soleil services ltd. Are there any significant changes from last year? (3) what changes in personnel numbers have there been this year (i. e. , new employees or employees leaving?) Explain whether the evidence from each analytical procedure would be persuasive, corroborative, minimal, or general. In all cases, the results of the analytical procedures would be more persuasive if the underlying data has been audited and is consistent with other evidence obtained during the audit. Also, in all cases there are reasons to expect the relationship between the data to be consistent if the relevant conditions are similar to those in previous years. The most persuasive tests would be (1) and (2) because they involve more than a mere comparison with the previous year.

Related Questions

Uncorrected Misstatements and Performance Materiality. AaronRivers, CPA, is auditing the financial statements of ChargerCompany, a client for the past five years. During past audits ofCharger, Rivers identified some immaterial misstatements (most ofwhich relate to isolated matters and do not have commoncharacteristics). A summary of these misstatements follows. (Toillustrate, in 2012, the misstatements would have reduced netincome by $13,200 if corrected) Year Effect on Net Income Effect onAssets Effect on Liabilities Effect on Equity 2012 ($13,200)($20,000) ($6,800) ($13,200) 2013 5,000 12,000 7,000 5,000 2014(9,250) (11,000) (1,750) (9,250) 2015 (2,000) (5,500) (3,500)(2,000) 2016 1,000 1,000 0 1,000 During the most recent audit,Rivers concluded that sales totaling $11,000 were recognized as ofDecember 31, 2017, that did not meet the criteria for recognitionuntil 2018. When Rivers discussed these sales with Chris Turner,Charger Company's chief financial officer, Turner asked Riversabout the performance materiality level used in the audit, whichwas $25,000. Upon learning of this, Turner remarked, "Then there'sno need to worry . . . it's not a material amount. Why should webother with this item?" Required: a. How does the misstatementidentified in 2017 affect net income, assets, liabilities, andequity in 2017? (Assume a 35 percent tax rate for Charger.) b.Comment upon Turner's remark to Rivers. Is Turner's reasoningcorrect? c. Upon doing some research, Rivers learned of therollover method and iron curtain method for evaluating theperformance materiality of misstatements. Briefly define each ofthese methods. d. How would Rivers evaluate the performancemateriality of the $11,000 sales cutoff error in 2017 under therollover method and iron curtain method? e. Based on your responseto part (d), what adjustments (if any) would Rivers propose toCharger Company's financial statements under the rollover methodand iron curtain method? ? Subsequent Events, SubsequentlyDiscovered Facts, and Omitted Procedures. Jay Ralph completed theDecember 31, 2017, audit of Raider Company on February 3, 2018;Raider's financial statements and Ralph's reports on Raider'sfinancial statements and internal control over financial reportingwere released on February 12, 2018. During April 2018, Ralph's firmconducted a quality review over selected audits that had beencompleted during the most recent year, and the audit of RaiderCompany was randomly selected for review. The reviewer identifiedthe following matters that Ralph had not addressed during the auditof Raider: 1. On February 9, 2018, Ralph learned of the followingevents during his post-audit meeting with Raider's chief operatingofficer. a. A class-action lawsuit was brought against RaiderCompany by some of its former employees for workplacediscrimination. An attorney on behalf of a class of employees filedthe lawsuit on January 10, 2018. The letter from Raider's attorneysdid not identify this lawsuit. b. One of Raider's major customersis experiencing significant financial difficulties; this customer'saccount receivable balance on December 31, 2017, was $1.2 million,which represented 2 percent of Raider's total accounts receivableon that date. 2. Because of an important deadline for submittingthe financial statements to lenders for evaluation, Raider did notmodify its financial statements for the preceding events despitethe fact that they were material. Raider's justification was thatbecause the events occurred after the date of the financialstatements, they were not required to be disclosed in the financialstatements. Ralph acquiesced to Raider's wishes and did not modifythe report on Raider's financial statements. 3. On March 16, 2018,Ralph initially learned of the following events affecting RaiderCompany, neither of which was disclosed in Raider's financialstatements: a. Raider Company declared a significant dividendpayable to its shareholders. This dividend was declared on March14, 2018, to be paid to Raider's shareholders of record on May 16,2018. b. Raider Company activated a portion of its line of crediton February l, 2018, by borrowing $2.5 million. This additionalobligation increased Raider Company's longÂ¬-term liabilities by 10percent. 4. Reviewing Ralph's audit documentation, it does notappear that any tests were conÂ ducted to evaluate the need forimpairment of the carrying value of Raider Company's property,plant, and equipment. Required: For each of the preceding items,describe what actions Ralph should take after the firm's qualityreview identified these issues.

Question 1 (40 marks)

You are the audit manager of a medium-sized firm and have just received a package from Rachel Jones, the financial controller of KidSpace Ltd., an electronic toy manufacturer. This is your firmâs first year as auditor of KidSpace Ltd. The information below was prepared for a board meeting and Rachel, the acting Chief Financial Officer, felt it might be useful to you in preparation of the forthcoming audit for the year ended 30 June 2017.


KidSpace Ltd.
Statement of Financial Position $'000s

Current assets	2017	2016	2015
Cash	1,586	1,743	830
Accounts receivable and other receivables	13,734	11,200	9,623
Inventory	16,498	11,731	7,197
Total current assets	31,818	24,674	17,650
Non-current assets
Property, plant and equipment	14,606	12,840	9,572
Long-term loan receivable	5,200	3,600	3,300
Intangible assets	1,400
Total non-current assets	21,206	16,440	12,872
Total assets	53,024	41,114	30,222
Current liabilities
Trade payables and other payables	9,012	6,288	2,021
Provisions	4,875	3821	4577
Total current liabilities	13,887	10,109	6,598
Non-current liabilities
Long-term loan	20,000	16,000	12,000
Total liabilities	33,887	26,109	18,598
Net assets	19,137	15,505	11,624
Shareholder's equity
Share capital	2,000	2,000	2,000
Retained earnings	17,137	12,505	9,624
Total shareholder's equity	19,137	14,505	11,624

KidSpace Ltd.
Income Statement $'000s
	2017	2016	2015
Sales revenue	76,945	74,927	89,735
Cost of sales	51,840	51,765	63,066
Gross profit	25,105	23,162	26,669
Depreciation	5,595	4,332	2,796
Inventory obsolescence	990	1,173	670
Selling expenses	2,405	3,153	3,317
Administrative expenses	8,925	8,727	11,516
Finance costs	1,040	1,275	1,140
Total expenses	18,955	18,660	19,439
Profit before tax	6,150	4,502	7,230
Tax expense	1,518	1,621	2,386
Profit after tax	4,632	2,881	4,844

Notes:
Trade Receivables	12,034	10,655	9,300
Pre-paids	1,600	500	300
Other receivables	100	45	23
Total Trade & other receivables	13,734	11,200	9,623

Inventory
Raw Materials	6,599	5,866	3,845
WIP	4,333	2,588	1,550
Inventory held for sale	6,699	3,520	1,972
	17,631	11,974	7,367
Provision for Inventory obsolescence	(1,133)	(243)	(270)
Total inventory	16,498	11,731	7,197

Ratios	2017	2016	2015
Profit ratio	7.99%	6.01%	8.06%
Return on shareholder equity	24.20%	19.86%	41.67%
Quick Ratio	0.99	1.18	1.54
Times Interest Earned	6.91	4.53	7.34
Accounts Receivable Turnover (times)	6.78	7.51	9.33
Asset Turnover	1.45	1.84	2.94
Inventory Turnover (times)	3.50	5.35	8.76

During a brief telephone call with Rachel, you made the following notes:

1. One of the conditions of the long-term loan is that the company is not to exceed a debt-to equity ratio of 2:1 at any time and they must maintain a current ratio of 2:1. The loan is reviewed each year on 31 July.
2. Provision for obsolescence of finished inventory held for sale and work-in-progress is provided for at a flat rate of 10%. The amount provided in previous years was 20%. Rachel said that the company believes it has been overly conservative in previous years and 10% is a more realistic level, given the nature of its products.
3. To combat declining sales a senior management incentive scheme based on sales and profit levels was introduced in July 2016.
4. The long-term loan receivable is from a company involved in the development and production of computer software. It is owned by one of the directors.

Required:

a) Identify and explain what the inherent risks for KidSpace Ltd. that you will need to consider. (6 marks)
b) From the information provided, perform additional preliminary analytical procedures:
i) Simple comparison (3 marks)
ii) Current ratio (1 mark)
iii) Return on assets (1 mark)
iv) Gross profit ratio (1 mark)
v) Debt-to-equity ratio. (1 mark)

c) Drawing on information from a) & b), identify and justify:

i) Three key account areas that would require special attention during the audit of the 30 June 2017 financial statements. Also, indicate if those accounts are likely to be over or understated. (12 marks)
ii) Two key assertions at risk for each of those account areas. (12 marks)

d) Identify and discuss any going concern issues to be considered at this stage?. (3 marks)

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ACCTG456 Lecture : Chapter 9 In Class Question_solution.pdf

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