ACG 5637 Chapter Notes - Chapter 12: Trend Analysis, Accounts Payable, Trial Balance
Document Summary
Get access
Related Documents
Related Questions
You have obtained the following information:
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR TO 31 DECEMBER
20X8 | 20X7 | |||
Note | Draft ($m) | Actual ($m) | ||
Revenue | (1) | 645.5 | 606.5 | |
Other income | (2) | 15.6 | 14.4 | |
Changes in inventories | 3.8 | (16.4) | ||
Cost of materials | (334.1) | (286.8) | ||
Employee benefits expense | (91.0) | (83.9) | ||
Depreciation | (3) | (29.8) | (23.6) | |
Other expenses | (4) | (116.3) | (100.6) | |
Interest income, net | (5) | 12.3 | (20.9) | |
Profit before tax | 106.0 | 130.5 | ||
Income tax expense | (44.4) | (47.7) | ||
Profit for the year | 61.6 | 82.8 |
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER
20X8 | 20X7 | |||
Note | Draft ($m) | Actual ($m) | ||
Assets | ||||
Non-current assets | ||||
Intangible assets | (6) | 47.8 | 40.5 | |
Property, plant and equipment | (7) | 124.5 | 102.5 | |
172.3 | 143.0 | |||
Current assets | ||||
Inventories | (8) | 30.3 | 27.9 | |
Trade receivables | 73.1 | 50.3 | ||
Cash and cash equivalents | 111.4 | 86.0 | ||
Total assets | 387.1 | 307.2 | ||
Equity and liabilities | ||||
Equity | 5.8 | 5.8 | ||
Share capital | 15.3 | 15.3 | ||
Share premium | 112.1 | 80.1 | ||
Retained earnings | 133.2 | 101.2 | ||
Non-current liabilities | ||||
Provisions | (9) | 160.1 | 121.4 | |
Current liabilities | ||||
Trade payables | 33.5 | 31.8 | ||
Tax | 50.4 | 44.3 | ||
Other liabilities | 9.9 | 8.5 | ||
Total equity and liabilities | 387.1 | 307.2 |
Notes
(1) Revenue from business activities:
Revenue from business activities | ||
20X8 ($M) | 20X7 ($M) | |
Vehicles | 588.0 | 526.0 |
Parts and accessories | 39.6 | 36.8 |
Other | 17.9 | 43.7 |
645.5 | 606.5 |
Other income includes gains on the disposals of tangible assets and income from the reversal of provisions.
Average number of employees:
20X8 (Draft) | 20X7 (Actual) | |
Wage earners | 484 | 499 |
Salaried employees | 483 | 477 |
Apprentices and trainees | 36 | 37 |
1,003 | 1,013 |
Other expenses include costs for warranties, administration and distribution, maintenance and insurance.
Interest income, net:
20X8 (Draft ($m) | 20X7 (Actual $m) | |
Interest and similar income | 16.8 | 25.1 |
Interest and similar expenses | (4.5) | (4.2) |
12.3 | 20.9 |
Intangible assets include development costs, also franchises and industrial rights and licenses. During the year, $12.7 million (20X7 - $6.3 million) was spent on developing a new sports model, the Fox.
Property, plant and equipment:
Land and Buildings | Equipment | Assets under construction | Total | |
$m | $m | $m | $m | |
Cost | ||||
1 January 20X8 | 61.8 | 212.1 | 19.0 | 292.9 |
Additions | 5.0 | 28.9 | 9.4 | 43.3 |
Disposals | 0.0 | (4.5) | 0.0 | (4.5) |
Reclassification | 3.0 | 8.9 | (11.9) | 0.0 |
31 December 20X8 | 69.8 | 245.4 | 16.5 | 331.7 |
Depreciation | ||||
Current year | 1.9 | 18.4 | 0.0 | 20.3 |
Accumulated | 28.7 | 178.5 | 0.0 | 207.2 |
Net book value | ||||
31 December 20X8 | 41.1 | 66.9 | 16.5 | 124.5 |
31 December 20X7 | 34.9 | 48.6 | 19.0 | 102.5 |
(8) Inventories comprise:
20X8 (Draft $m) | 20X7 (Draft $m) | |
Raw materials, consumables and supplies | 8.3 | 7.3 |
Work-in-progress | 6.8 | 4.8 |
Finished goods | 15.2 | 15.8 |
30.3 | 27.9 |
(9) Provisions mainly cover manufacturing warranty, product liability and litigation risks. Also, provisions have been established for deferred maintenance and IT reorganization.
The following additional information is available:
(i) Pavia has achieved record sales in 20X8 with the delivery of 10,153 vehicles (20X7 â 7,642 vehicles).
(ii) Although some sales are direct to individual customers the majority are ordered through dealers who take new vehicles on consignment.
(iii) Since 1 January 20X8 Pavia has offered 0% finance for three years on new vehicle sales in its most competitive markets.
(iv) The launch of the Fox has been postponed from late 20X8 to early 20X9 as internal trials have revealed that the doors are not sufficiently secure at high speeds.
(v) A car part required for the Cipeta model is bought-in exclusively from an overseas manufacturer. Deliveries of supplies have been unpredictable in 20X7 causing disruption to the Cipeta model assembly schedules.
1. Evaluate how you might use analytical procedures to provide audit evidence and reduce the level of detailed substantive procedures.
N.B these are pointers are for this question:
Analytical Procedures - Examples: o Receivables - Receivables - Compare gross margin % with previous years (by product line). (Possible misstatement â Over/understatement of sales and accounts receivable). This analytics will reduce the detailed substantive procedure because we have identified that there may be a possible over/understatement of sales so now we need to perform additional audit procedures on sales/revenue. For example by selecting a sample of invoices generated throughout the year and comparing to the General Ledger to ensure completeness and accuracy. Note: Use the information in the case to calculate the analytical procedures you have identified. Also, explain how the analytical procedures will provide audit evidence and help to reduce the level of detailed substantive procedures.
A424
Homework #3
Due Tuesday, February 28
Worth 100 Points
Note: Students are expected to work independently (i.e., on your own) on all homework assignments. Please type and post to Canvas.
Part I. Risk Assessments
1. For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. (10 points, 1 point each). |
Components: Inherent Risk (IR), Control risk (CR), or Detection Risk (DR) |
a. A client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly.
b. Cash is more susceptible to theft than an inventory of coal.
c. Confirmation of receivables by an auditor fails to detect a material misstatement.
d. Disbursements have occurred without proper approval.
e. There is inadequate segregation of duties.
f. A necessary substantive audit procedure is omitted.
g. Notes receivable are susceptible to material misstatement, assuming there are no related internal controls.
h. Technological developments make a major product obsolete.
i. The client is very close to violating debt covenants.
j. XYZ Company, a client, lacks sufficient working capital to continue operations.
2. Read Case 1.6, Nextcard, Inc. from our Casebook. Pretend you are the auditor for Nexcard, Inc. in the planning phase of the audit for FY 2000 and perform the following risk assessment procedures. That is, just focus on the information in the case prior to the discovery of the fraud (pages 83-86). (50 points total)
a. Perform a risk assessment as part of your audit plan for fiscal year 2000. Set or assess each component/factor of the audit risk model. Describe in detail how you set or assessed each factor (i.e., include specific risk factors from the case and explain how they influenced your assessment). (25 points)
b. Perform a fraud risk assessment for the risk of material misstatement due to fraudulent financial reporting. That is, identify and briefly describe specific fraud risk factors (i.e., more than 1) for each of the three components of the fraud risk triangle, specific to fraudulent financial reporting. (15 points)
c. Identify and describe one significant pervasive risk present during the Nextcard audit. In doing so, explain how the pervasive risk affects the risk of material misstatement. Then, describe how the auditor could respond to that pervasive risk (how could they change the audit plan to address that risk). (5 points)
d. Identify and describe one significant specific risk present during the Nextcard audit. In doing so, explain how the specific risk affects the risk of material misstatement. Then, describe how the auditor could respond to that specific risk (how could they change the audit plan to address that risk). (5 points)
Part II. Evidence and Management Assertions
1. For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. (10 points, 1 point each)
a. sending a written request to the entityâs customers requesting that they report the amount owed to the entity
b. examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period.
c. agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account.
d. discussing the adequacy of the allowance for doubtful accounts with the credit manager.
e. comparing the current-year gross profit percentage with the gross profit percentage for the last four years.
f. examining a new plastic extrusion machine to ensure that this major acquisition was received.
g. watching the entityâs warehouse personnel count the raw materials inventory.
h. performing test counts of the warehouse personnelâs count of the raw material.
i. obtaining a letter from the entityâs attorney indicating that there were no lawsuits in progress against the entity.
j. tracing the prices used by the entityâs billing program for pricing sales invoices to the entityâs approved price list.
2. For each of the audit procedures listed above in Part II. 1. (a-j), identify the category (assertions about classes of transactions and events, or assertions about account balances) and identify the primary management assertion being tested. (30 points, 3 points each)