Designing Audit Procedures and Preparing Audit Workpapers Consider the following
ID: 2553758 • Letter: D
Question
Designing Audit Procedures and Preparing Audit Workpapers
Consider the following scenario and design the audit procedures for gathering, documenting and analyzing information on the client.
ABC Ltd is an established private company incorporated in Jamaica. It manufactures rubber flipflops for both the local and Caricom markets. Its operations include a factory, an administrative offce and two sale depots. It obtains its supply of rubber from RubberR-Us Ltd located in the United States. The company was started ten years ago when its primary shareholder, Mr. Jones saw a need for durable rubber slippers for both domestic and sporting wear. His idea took off and the business has been performing well but in recent times there have been some challenges. Mr. Jones has watched with great concern the development of Crosses Ltd which imports rubber shoes from China in bulk. Although he is aware that Crosses Ltd costs are less than his operations, he is relieved that there is no price war as they sell at basically the same price for similar products. Mr. Jones however boasts that the quality of his slippers is far superior to that of this main competitor.
Additionally, the recent episodes of economic down turns has been felt by ABC Ltd as business sales have slowed and the increasing rate of depreciation of the local currency has increased the costs of production. Mr. Jones has been considering merging his operations with Crosses Ltd but these discussions are still at an early stage.
XY and Associates have been their auditors for the past 3 years. You are the Senior Auditor assigned to the audit. The following is a draft of the fnancial statements for the current year with the prior year audited fgures.
ABC Limited
Income Statement for the year ended December 31,
ABC LImited
Balance Sheet as at December 31,
Current Assets
Inventory
Trade Accounts Receivable
133,000
240,000
67,000
91,000
Required:
i) Prepare the section of the Planning Memorandum for information on the client, including data provided above and using fctitious data based on assumptions you have made.
ii) Perform the analytical review and explain any risks of misstatements that you consider signifcant (hint: signifcant changes in ratios)
Explanation / Answer
Requirement (i):
Planning memorandum:
To: ABC Ltd.
From: Auditors of the company.
Subject: Planning memorandum for the audit of the company.
This memorandum is in relation to the above subject matter. Let us take a look at the planning and strategy for conducting the audit effectively.
Requirement (ii):
2012
2011
Sale
787,000.00
625,000.00
Cost of sales
(701,000.00)
(478,000.00)
Gross profit
86,000.00
147,000.00
Gross profit ratio (%)
10.93
23.52
Net profit
(9,000.00)
53,000.00
Net profit ratio
(1.14)
8.48
Current ratio
Current asset
373,000.00
158,000.00
Current liabilities
317,000.00
90,000.00
Current ratio
1.18
1.76
As can be seen that the changes in gross profit and net profit margin is quite abnormal thus, revenue and cost of revenue have to be checked thoroughly while conducting the audit. Hence, substantive audit procedures shall be directed towards the revenue and cost of revenue items.
2012
2011
Sale
787,000.00
625,000.00
Cost of sales
(701,000.00)
(478,000.00)
Gross profit
86,000.00
147,000.00
Gross profit ratio (%)
10.93
23.52
Net profit
(9,000.00)
53,000.00
Net profit ratio
(1.14)
8.48
Current ratio
Current asset
373,000.00
158,000.00
Current liabilities
317,000.00
90,000.00
Current ratio
1.18
1.76
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