Assignment
Word Limit: 3000
Task
Question 1-
Critically evaluate the business risk audit methodology.
Question 2-
The following are the auditor's calculations of several key ratios for Mornington Field products. The primary purpose of this information is to understand the client's business and assess the risk of financial failure, but any other relevant conclusions are also desirable.
Ratio 2015 2014 2013 2012 2011
Current ratio 2.08 2.26 2.51 2.43 2.50
Quick ratio .97 1.34 1.82 1.76 1.64
Times interest earned 3.50 3.20 4.10 5.30 7.10
Debtors turnover 4.20 5.50 4.10 5.40 5.60
Inventory turnover 2.03 1.84 2.68 3.34 3.36
Net sales divided by tangible assets 0.68 0.64 0.73 0.69 0.67
Profit margin 0.13 0.14 0.16 0.15 0.14
Return on assets 0.09 0.09 0.12 0.10 0.09
Return on equity 0.05 0.06 0.10 0.10 0.11
Earnings per share $4.30 $4.26 $4.49 $4.26 $4.14
Required
1. What major conclusions can be drawn from this information about the company's future?
2. What additional information would be helpful in your assessment of this company's financial position? Explain why this information would be helpful in your assessment of the company's financial position.
3. Based on the above ratios, which aspects of the company do you believe should receive special emphasis in the audit? Explain why these aspects of the company should receive special emphasis.
Question 3-
Baker & Baker has become the auditor of Porcine Solutions Pty Ltd, a manufacturer of pig traps. One of the directors of Porcine Solutions Pty Ltd has asked Baker & Baker to perform a review of the internal controls within the purchases and payments cycle of the company's operations. Brian Baker the senior partner in the firm has asked Jane Leyland, a recent graduate to undertake the review. From Jane's discussions with management and staff she discovers that the company is a small operation with the following staff:
• Three directors (one of whom is the executive director and is responsible for the day-to-day operations of the company and has a keen focus on the marketing of the pig traps)
• A warehouse/fabrication manager
• An assistant to the warehouse/fabrication manager
• A secretary/receptionist who also does the banking
• A clerk who handles both accounts receivable and payable, and
• Two machinery operators who make the pig traps
All operations are contained in one location.
The warehouse/fabrication manager is able to order from any supplier and will usually telephone a number of suppliers to obtain quotes. The warehouse/fabrication manager will then order the materials from one of these suppliers by phone and confirm the order by email. The only documentation kept is a copy of the email which is kept by the warehouse/fabrication manager.
Once the order has been confirmed the warehouse manager gives a copy of the purchase order email to the clerk who files it in date order.
When the goods are received in the warehouse, the manager checks the goods to the delivery docket attached to the goods and signs the delivery docket as evidence of this check. The manager keeps one copy of the delivery docket and the other is kept by the person delivering the goods.
The manager gives a copy of the delivery docket to the clerk who posts a journal entry to the creditor's ledger for the amount shown on the delivery docket. The clerk then stamps the delivery docket as entered and files the delivery docket by supplier.
Required
a) Brian Baker wants to ensure that Jane understands the purpose of an internal control review to ensure that she will be able to effectively undertake this assignment. Brian has asked Jane to complete a memorandum explaining the purpose of an internal control review. Complete Jane's memorandum for Brian Baker.
b) Describe the strengths and weaknesses in Porcine Solutions Pty. Ltd internal control for the purchasing area
c) How will your assessment of the internal controls affect the audit approach taken by Baker & Baker.
Rationale
This assessment has been designed to assess your ability to:
• be able to demonstrate risk management methodologies and the role of internal controls in an audit context;
• be able to design an audit plan and select and apply appropriate audit procedures for a financial statement audit;
• be able to exercise critical and reflective judgement.