ACC331 Auditing And Assurance Services

Answer:
Question 1
Part 1

Variance analysis of the financial statements

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This analysis provides a comparison between financial statements of two years by making calculations of change in financial figures from one year to another (Marshall, McManus, & Viele, 2004). It also calculates the percentage change in the financial figures from one year to another.

Variance analysis for income statement

 

2017

2016

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Variance $

Variance %

 

 

 

Increase or (decrease)

Sales

 $  3,080

 $  2,660

 $     420

15.789%

Cost of Goods Sold

 $(2,350)

 $(2,010)

 $    (340)

-16.915%

Gross Profit

 $     730

 $     650

 $       80

12.308%

Other Expenses

 $   (350)

 $   (390)

 $       40

10.256%

Interest

 $   (300)

 $   (120)

 $    (180)

-150.000%

Net Profit

 $       80

 $     140

 $      (60)

42.857%

Variance analysis for financial position

 

2017

2016

Variance $

Variance %

 

 

 

Increase or (decrease)

Assets

 

 

 

 

Current assets

 

 

 

 

Trade and other receivables

 $     772

 $     660

 $     112

16.970%

Inventory

 $     680

 $     510

 $     170

33.333%

Total current assets

 $  1,452

 $  1,170

 $     282

24.103%

Non-current assets

 

 

 

 

Property, plant and equipment

 $  1,810

 $  1,500

 $     310

20.667%

Intangible assets

 $       40

 $       –   

 $       40

∞ %

Total non-current assets

 $  1,850

 $  1,500

 $     350

23.333%

Total assets

 $  3,302

 $  2,670

 $     632

23.670%

Liabilities and equity

 

 

 

 

Liabilities

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables

 $     835

 $     795

 $       40

5.031%

Current borrowings – Bank Overdraft

 $       52

 $       40

 $       12

30.000%

Total current liabilities

 $     887

 $     835

 $       52

6.228%

Non-current liabilities

 

 

 

 

Non-current borrowings – Secured loan

 $  1,500

 $  1,000

 $     500

50.000%

Total liabilities

 $  2,387

 $  1,835

 $     552

30.082%

Net Assets

 $     915

 $     835

 $       80

9.581%

Equity

 

 

 

 

Share capital

 $     300

 $     300

 $        –   

0.000%

Retained earnings

 $     615

 $     535

 $       80

14.953%

Total Equity

 $     915

 $     835

 $       80

9.581%

This variance analysis raise various concerns related to the significant variance

  1. Organization’s revenue increased by the 15.79%, on the other hand, this increase is not reflected by an increase in gross profit. Gross profit of the organization shows increase on by12.31% due to a significant increase in the cost of goods sold by 16.92%.
  2. Inventory and receivables of the organization both showing a significant increase of 33.33% and 16.97% respectively. These balance sheet balances do not have a tendency for such significant increase.
  3. Increase in Plant, property, and equipment and bank liabilities is because of new investment by the way of bank liabilities.

Trend analysis is the financial analysis of calculating trends of historical financial balances (Guay, Samuels, & Taylor, 2016). Under this analysis, any significant change in such trend is observed by the auditor of the organization.

Trend analysis for income statement

 

2017

2016

2015

2014

Sales

100.00%

100.00%

100.00%

100.00%

Cost of Goods Sold

-76.30%

-75.56%

-76.02%

-73.97%

Gross Profit

23.70%

24.44%

23.98%

26.03%

Other Expenses

-11.36%

-14.66%

-13.11%

-10.69%

Interest

-9.74%

-4.51%

-3.40%

-0.15%

Net Profit (Loss)

2.60%

5.26%

7.48%

15.19%

Trend analysis for financial position

 

2017

2016

2015

2014

Assets

 

 

 

 

Current assets

 

 

 

 

Trade and other receivables

23.38%

24.72%

25.38%

39.92%

Inventory

20.59%

19.10%

20.56%

21.42%

Total current assets

43.97%

43.82%

45.95%

61.34%

Non-current assets

 

 

 

 

Property, plant and equipment

54.82%

56.18%

54.05%

38.66%

Intangible assets

1.21%

0.00%

0.00%

0.00%

Total non-current assets

56.03%

56.18%

54.05%

38.66%

Total assets

100.00%

100.00%

100.00%

100.00%

Liabilities and equity

 

 

 

 

Liabilities

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables

25.29%

29.78%

28.55%

41.80%

Current borrowings – Bank Overdraft

1.57%

1.50%

1.23%

1.67%

Total current liabilities

26.86%

31.27%

29.79%

43.47%

Non-current liabilities

 

 

 

 

Non-current borrowings – Secured loan

45.43%

37.45%

29.38%

0.00%

Total liabilities

72.29%

68.73%

59.17%

43.47%

Net Assets

27.71%

31.27%

40.83%

56.53%

Equity

 

 

 

 

Share capital

9.09%

11.24%

17.63%

31.35%

Retained earnings

18.63%

20.04%

23.21%

25.18%

Total Equity

27.71%

31.27%

40.83%

56.53%

This trend analysis raise various concerns related to significant trend variance

  • Operating expenses showing a decline in the present year however in all other three years it is having increasing trend.
  • Interest expenses showing a significant increase due to increase in bank liabilities.
  • Plant, property, and equipment are showing declining trend even after having a significant investment in this asset.

Ratio analysis is the analysis which shows profitability, liquidity, solvency etc. relationship between various financial figures (Weygandt, Kimmel, & Kieso, 2015).

Year ending

2016

2017

Profitability ratios

 

 

Net Profit margin

5.26%

2.60%

Operating Profit Margin

9.77%

12.34%

Return on common stock equity

16.77%

8.74%

Return on Total Assets

5.24%

2.42%

Efficiency ratio

 

 

Accounts receivable turnover ratio

4.09

4.04

Average collection period ratio

87.97

89.06

Accounts Payable turnover ratio

3.58

3.85

Accounts Payable turnover in days ratio

100.69

93.39

Fixed asset turnover ratio

1.77

1.66

Total asset turnover ratio

1.00

0.93

Long-term solvency ratio

 

 

Debt Ratio

68.73%

72.29%

Times interest ratio

2.17

1.27

Liquidity ratio

 

 

Current ratio

1.40

1.64

This ratio analysis raises various concerns
  • Operating profit ratio showing an unexpected increase
  • Accounts payable ratio shows an unexpected decline
  • Asset turnover ratios are also showing decline due to new investment in assets
  • The debt ratio is showing an increase due to increase in debt liabilities
  • A current ratio showing an unexpected increase
Part 2

Going concern is a significant accounting assumption. As per this assumption, every analyst for the economic business assumes that such business will continues till the end of unforeseeable future period (Amin, Krishnan, & Yang, 2014). Every organization prepares financial statements using historical values due to this concept. The organizations which are not expected to remain going concern in future will make their financial statements by using realization values in place of historical value.

Moreover, if an organization shows some indicators effecting going concern assumption adversely for the organization then such organization does not expect to remain going concern. Such indicators can be accumulated losses, nonpayment of dues, loss of market etc.

Furthermore, in the present case, the organization is having additions in the long term as well as short-term liabilities. Additionally, net income generated by the organization is showing a significant decline hence it can assume that organization may have some going concern issues.

Part 3

Following Account, balances have a potential risk of misstatement

Account balance

Justification

Net income

a. Significant negative variances

b. The significant declining trend is a risk for going concern

Receivables

a. Significant increase in variance,

b. significant increase in current ratio

Total liabilities

a. Increase in debt ratio,

b. continually increasing trend is a risk for going concern

Noncurrent assets

a. Significant variance,

b. Significant increasing trend,

c. on the other side, asset turnover ratios have declining trend

Part 4

Following assertions are of primary interest

Account balance

Justification

Net income

 

    Operating expenses

Unexpected declining trend and unexpected increasing operating margin ratio emerge the risk of understatement of operating expenses.

    Income expenses

a. A significant increase in variance and trend

b. Percentage Variance change for interest balances is higher than the percentage variance change in debt liabilities

Receivables

 

    Gross account balance

A significant increase in variance and current ratio hence doubt of overstatement of the account balance

    Provision for doubtful receivables

A significant increase in the variance of gross amount and current ratio hence doubt of  underestimation of provisioning

Total liabilities

 

    Bank liabilities

The significant increasing trend, increasing debt ratio emerges the doubt regarding the utilization of funds from such external funding

    Payables

Payables have an unexpected declining trend and declining payable turnover ratio hence emerges doubt of payment for payables by an increase in bank liabilities

Noncurrent assets

 

   Plant property and equipment

Showing a declining trend even after having a huge investment in this asset

   Intangibles

This asset emerges from the current year hence need to make extensive procedures regarding this

Question 2
Part 1

Key control

Segregation of duties

The organization required this internal control for the execution of the transaction. Single-handed execution of cash transaction emerges the risk of cash theft and cash fraud (Kobelsky, 2014). In the present case receipts of cash cheques is made by office assistant and recoding is done by the bookkeeper.

Policies and procedure identification

The organization needs to identify policies and procedures for the significant financial transaction. Service charge calculation is the significant procedure for the organization. In the present case, the organization defined the procedure for making calculations of service charges i.e. 300% of hourly rates. This control helps in fairly and accurate service revenue calculation.

Approval for contract cancellation

Every organization must have approval policies for the significant transactions. A service contract is a significant business activity for the clinic.  In the present case acceptance and cancellation of any service contract is made by managing director. Hence it seems that organization is having control of policies and procedures.

Recording and reconciling cash

Real-time recording of cash transaction and periodical reconciliation of cash transaction results in a reduction in a misstatement of cash. In the present case, such recording and reconciliation are made by the bookkeeper.

Part 2

Test of controls

Test of controls are the procedures which performed by the auditor for testing actually the internal control is working appropriately or not (Auditing and Assurance Standards Board, 2013).

Observation

Segregation of duties can be tested by the auditor by making an observation. Under this auditor needs to observe how activities and operations are performed in the organization. In the present case, the auditor will observe how cash receipts and recoding of such receipts is actually performed in the organization. Are the receipts actually have control of segregation of duties or not?

Analytical review procedure

Analytical review procedures are ratio calculations, trend calculations and another financial number crunching (Auditing and Assurance Standards Board, 2009). In the present case service fee is charged at 300% of hourly rates. The auditor can make check service charge calculation by making analytical review procedures.

Inspection

In the present case acceptance and cancellation of any service contract is made by managing director. The auditor should check whether all cancellations of service contract and acceptance of service contracts have the approval of managing director or not. Hence for this test of control auditor should make an inspection of service contract file.

Re-calculations

In the present case, cash recording and reconciliation are made by the bookkeeper. The auditor needs to check whether such reconciliation is free from error or misstatement or not. Thus, for making this check auditor needs to make re-computation of the reconciliation statement.

Part 3

Concerns about the controls

  1. Segregation of duties for cash receipts and cash recording exists, however, cash depositing, reconciliation preparation, and cash transaction recording are under the control of the bookkeeper. Hence there is concern that improper segregation of duties may result in cash frauds or misstatements.
  2. Revenue recording is done by the organization on the cash basis, however; the organization is following accrual basis system of accounting. Hence there is a concern that revenue account balance of the organization will show wrong balances.
Question 3
Part 1
Concerns for relevant control

Nonperformance parallel test

Parallel test refers to the parallel running of the old and new system and makes identification of errors, wrong outputs, and bugs created by the new system. In the present case, the organization does not make this test hence new system have expectations of inefficient output.

Inefficient access control

In system implementation, access controls are most significant control. In the present case, the organization does not provide access to transaction file to the supervisor, the only master file can be accessed by supervisor. If a supervisor needs to access transaction file for making rechecking of any master file assertion then such access is denied by the system.

Part 2
Application controls

Existence control for the occurrence of a transaction

Organization’s application system should have an existence for all employee data which are currently working. Such data must be updated on each new recruitment and termination. Such data existence will help in the occurrence of payroll transactions for all current employees.

Input controls for the accuracy of transactions

The system must have input controls so that accuracy of transaction processing and output can be ensured. The organization can implement input controls of format check, check digit and reasonableness check. Such control helps in making an accurate input to the application system.

Part 3

The appropriate test of control for the application system is test data. Under this control auditor of the organization put some dummy data and observes the output from such dummy inputs. If such dummy inputs become eligible to provide expected correct output then it is concluded that application system is eligible to provide correct output otherwise not. In addition to this auditor can put some unacceptable input to check input controls.

References

Amin, K., Krishnan, J., & Yang, J. S. (2014). Going concern opinion and cost of equity. Auditing: A Journal of Practice & Theory , 33 (1), 1-39.

Auditing and Assurance Standards Board. (2013, November 11). Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. Retrieved April 30, 2018, from https://www.auasb.gov.au: https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_315.pdf

Auditing and Assurance Standards Board. (2009, October). Auditing Standard ASA 520 Analytical Procedures. Retrieved April 26, 2018, from https://www.auasb.gov.au/admin/file/content102/c3/ASA_520_27-10-09.pdf

Guay, W., Samuels, D., & Taylor, D. (2016). Guiding through the fog: Financial statement complexity and voluntary disclosure. Journal of Accounting and Economics , 62 (2-3), 234-269.

Kobelsky, K. (2014). A conceptual model for segregation of duties: Integrating theory and practice for manual and IT-supported processes. International Journal of Accounting Information , 15 (4), 304-322.

Marshall, D., McManus, W., & Viele, D. (2004). Accounting: What the numbers mean. McGraw-Hill/Irwin.

Weygandt, J., Kimmel, P., & Kieso, D. (2015). Financial & managerial accounting. John Wiley & Sons.