Essays on Auditing and Assurance Issues Assignment

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

Works cited

Besley Scott & Brigham Eugene. Essentials of Managerial Finance. New York: Cengage

Learning, 2007.

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