Accounting: Cash vs Accrual Basis, Auditor's Responsibility, Interwood Worksheet

Running head: ACCOUNTING
Accounting
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ACCOUNTING
Table of Contents
Answer to Question 1:.....................................................................................................................2
Cash Versus Accrual Basis of Accounting..................................................................................2
Responsibility of an External Auditor.........................................................................................3
Opinion of the Auditor.................................................................................................................4
Analysis of Net profit and Net Cash Inflow from Operating Activities......................................4
Audit Committee of the Company...............................................................................................5
Contingent liability......................................................................................................................5
Answer to Question 2:.....................................................................................................................6
Worksheet of Interwood..............................................................................................................6
Balance Sheet and Income Statement of Interwood....................................................................7
Computation and Analysis of Net Working Capital....................................................................9
Workings:....................................................................................................................................9
Reference.......................................................................................................................................17

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ACCOUNTING
Answer to Question 1:
Cash Versus Accrual Basis of Accounting
Cash Basis of Accounting and Accrual Basis of Accounting are the two most widely used
method in accounting for the purpose of recording and recognizing accounting transactions. The
methods are popular and recognized for recording of accounting treatments (Newberry 2014,
p.283).
In cash basis of recording transactions, all entries are recognized on cash basis which
means that as and when cash is received or paid, the transactions are recognized (Ibanichucka &
Aca 2014, p.69). In the case of accrual basis of accounting, transactions are recorded when they
actually take place such as when the income is actually earned or when the expenses are actually
incurred even if there is no cash received or paid. In other words, accrual basis of accounting is
not dependent on the cash received or cash paid for recognizing and recording of transactions.
The main difference between cash basis accounting and accrual basis of accounting is that the
timing of transaction under both the methods are different (Libby 2017, p.42). The difference is
the timing of recognition of revenue is the main cause for the different value under cash basis
and accrual basis of accounting. In general, large business firms use accrual basis of recording,
for the methods recognize as and when the transactions take place and is necessary for the
matching principle of accounting (Collier 2015). In addition to this, large businesses have to get
their financial statements audited before the financial statements are published which can only
happen if the financial statements are prepared following accrual basis of accounting (Biondi &
Soverchia 2014, p.179). The auditor looks for the accrual system of auditing and whether the
financial statement is prepared on the same basis or not. On the other hand, cash basis of
accounting is used by small business who do not that much of a turnover and deal in small
profits. This helps to maintain simplicity in the accounting process. In general, however most of
the businesses nowadays use accrual basis of accounting even the smaller businesses.
The basic advantage of following cash basis of accounting is that the method of
accounting is very simple and easy to implement and follow. In addition to this, it is convenient
for the business to a keep a track of cash inflows and outflows of the business (Brusca,
Caperchione, Cohen & Rossi 2015, p.235). The method also has an implication which is
different for accrual system in the case of taxable income as tax is charged on the money which
is banked. On the other hand, accrual system of accounting is followed on the principle of

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ACCOUNTING
matching expenses and income as they occur which is the core advantage of following the
accounting system. The application of this method allows businesses to have a clear idea as to
how much profit or loss the business will be earning at the end of the year. The only limitation of
following this method is that the method is complex and consumes a lot of time.
In the case study which is provided in the question, the services which is provided by
Alpha ltd relates to online services to airline which is situated in New Zealand. The company
follows accrual basis of accounting and recording of transactions and the difference which arises
in the value which is obtained under cash basis and accrual basis is due to the difference in
accounting treatment of depreciation which is shown as $ 96,000 and also due to the difference
in treatment of unallocated revenue of $ 43,000. The main advantage due to which accrual basis
of accounting is followed is because it helps in matching the expenses and revenues of the
business (Penman 2016, p.106). The net profit of the company is calculated by following accrual
basis of accounting and the cash generated from operations is calculated by following cash basis
of accounting.
Responsibility of an External Auditor
The primary responsibility of an external auditor is to investigate the financial statement
of the company in order to form an opinion whether the financial statements is depicting true and
fair view or not. The role of the financial statement is to provide financial information to the
potential investors of the company on the basis of which investment decisions are to be taken.
The role of auditor is to form an opinion on the annual reports of the company which will be
based on effective presentation and preparation of financial statement and fairness of the items
which are presented in the financial statement (Klassen, Lisowsky & Mescall 2015, p.179). The
external auditor is also to comment on any frauds and errors which may be present in the
financial statements which the auditor comes across while conducting the audit. It is the
misconception of many companies that the primary role of an auditor is to detect frauds and
errors. The auditor is responsible for only forming an opinion and inspecting whether the
financial statement is showing true and fair view.
Therefore, from the above discussion it is clear that the auditor is responsible for
providing an opinion on the financial statements on the basis of which the potential investors of
the company decide whether or not to invest in the financial statements of the company