Overview:
The purpose of this assignment is for audit students to demonstrate an understanding of the basic principles of audit planning and financial statement analysis. You will be given a simulated company (Aquatic Biotechnology) that has some audit and accounting issues.
You will assume the role of auditor at Linkletter & Cormier Chartered Accountants CPA firm and will prepare an individual report to address these issues (details below). The details for the memo mentioned in the case are broken down in the directions below.
Your report should be no longer than 5 pages. There will be an additional page to include the marking rubric and the honesty statement.
Individual assignment: This assignment will be discussed in class. You are expected to complete this assignment on your own.
Assessment will be as follows:
Pan 1
Pan 2
Formatting requirements:
Reports must be typed, using Arial 12-point font, double-spaced, and with 1 inch margins. Your report should be no longer than 5 pages. Also, additional formatting of responses will be required as outlined below. Your assignment will not be marked if you fail to follow these requirements, including being no longer than 5 pages in length.Part 1 -Audit risk assessment
Prepare an overall risk assessment for the October 31, 2001 audit of Aquatic Biotechnology. Your risk assessment should include:
1. An assessment using the audit risk model
a. An assessment of inherent risk
b. An assessment of control risk
c. An assessment of audit risk
d. PDR
e. Remember to include an overall conclusion
2. A discussion of the audit approach that should be taken
3. A discussion of materiality, the various levels of materiality and the users Pan 2 - Financial statement analysis
From an audit planning perspective, prepare a financial statement analysis of Aquatic Biotechnology Inc. The analysis could include:
1. Trend analysis
2. Common size analysis
3. Ratio analysis
4. calculations and assumptions must be shown.
After completing the calculated analysis you will then identify any issues, the risk and impacted account(s) and the audit assertion affected. Remember to consider case facts in your analysis. Also remember that you want to present the material from highest risk to lowest risk.
Your analysis and discussion should include 5 items. Please use the following format for your discussion: Issue:
Risk:
Impacted accounts and assertions:
For example:
Issue Accounts receivable turnover ratio has decreased by 3 times in 2001 compared to 2010
Risk: The Company is not collecting their accounts as fast. Increased risk of bad debts.
Impacted accounts and assertions: Accounts Receivable (Valuation); Bad debt expense (Completeness)
Aquatic Biotechnology Inc.
Aquatic Biotechnology Inc. (ABI) is a medium-sized, public company operating an aquaculture business in eastern Canada. The company has been in operation since the mid-1 980s, and during the latter half of the 1990s it grew at a rapid pace through both increased sales and the acquisition of minor competitors. ABA has an October 31 year end. It is now November 15, 2001 and you, CA, are working on the 2001 audit. Your firm. Linkletter & Cormier Chartered Accountants, has conducted the audit of ABI for several years and has always considered it to be a routine audit engagement. The audit senior on the engagement recently resigned from the firm, and you have been asked to act as senior on the audit. All October 31 inventory counts and routine confirmations have been dealt with, and you have been provided with the audit planning files. These files are summarized in Exhibit I.
The corporate structure of A131 is based on management's philosophy that vertical integration will allow this growth-oriented business to achieve its objectives. AM controls nearly all aspects of the supply chain, from growth of the product to processing and delivery to the customer. AB1 operates the hatchery, where each of the three major products (salmon, trout, scallops) are hatched, the fish farms where growth takes place, and the processing plant where smoking and packaging occur. ABI also owns Marine Tech Limited (MTL), a supplier of boats, nets, and gear to the Canadian market. MTL provides nearly all supplies, repairs. and maintenance for the corporate group.
Scallop farming is a relatively new area of aquaculture, in which ABI has invested a substantial amount of capital for research and development. Scallops are grown in a "cage" which sits on the ocean floor in an area that does not experience problems such as strong tides and bacteria which could destroy the crop. As with many other aquaculture products, scallops can take from 24 to 30 months to reach a marketable size. ABI has yet to earn any revenue from scallop farming, but it is confident that its new system will be successful.
ABI has been working on scallop farming technologies for about five years. Previous years' audit files indicate that the costs related to scallop farming had been expensed, as the company lost much of its stock during the winter months. AB1 is confident that its new cage style. developed in 2000, will result in a tremendous crop ready for harvest in 2002. At year end, the scallop stocks were checked by the company and by an aquaculture expert hired by your firm, and it was determined that the stock is at 75% of its marketable size. However, the aquaculture expert would not comment on the likelihood that the stock would reach full maturity. At maturity, it is estimated that the crop will be 500,000 kilograms.
Costs to date related to the 2002 harvest have been $1.425 million, of which $1.2 million has been incurred in fiscal 2001 Salmon and trout farming are major divisions of ABI. Both have been successful for a number of years, although the selling price of salmon decreased slightly in 200 I. The salmon division has provided substantial cash flow to the company, due to the perfected method of growth and the low marketing costs associated with the product. Trout farming is a relatively new division of the company and has been moderately successful for the past two years.
Despite the positive cash flows generated by the salmon division, ABI has had difficulty in managing its cash flows due to its substantial investments in scallop farming. In August 2001, ABI decided to refinance much of its debt to consolidate loans. The Business Development Bank, a federal government agency, agreed to consolidate most of ABI's debt and loaned ABI an additional $5 million for five years, with the first year to be interest-free. The bank further agreed to extend the interest-free period for each fiscal year that ABI is able to maintain net income at $1 million or more. A loan arrangement fee of $500,000 was paid in order to cover the bank's costs to consolidate the debt. The bank requires ABI to maintain a current ratio above 1, given the current level of debt. The new debt structure has allowed ABI to improve its cash situation.
You have just reviewed the working paper files and have met with ABI's controller, Jim Gibbins, to gather information related to the audit (Exhibit II) and a set of draft financial statements (Exhibit III). The engagement partner has asked you to prepare a memo summarizing the relevant accounting and audit planning Issues in preparation for her meeting with ABI to discuss the ongoing audit.
Required:
Prepare the memo.
Attachment:- Assignment.rar