ACCT601 Auditing & Assurance: EasyFit Pty Ltd Financial Analysis

This assignment provides a comprehensive analysis of auditing and assurance principles through various case studies. It examines financial ratios of EasyFit Pty Ltd, including current ratio, receivables turnover, and net profit ratio, to assess the company's financial health and identify potential audit risks such as misstatements and detection risks. The assignment also details audit procedures for Herbert Manufacturing Ltd, focusing on the valuation of land, buildings, plant, and machinery, emphasizing the importance of independent valuation and adherence to accounting standards. Furthermore, it addresses the auditor's responsibilities regarding subsequent events, outlining appropriate actions for different scenarios to ensure an unqualified opinion can be issued. The analysis covers debtor liquidation, warehouse losses due to flooding, and the valuation of exploration licenses, ensuring thorough documentation and accurate financial reporting. Desklib offers students access to similar solved assignments and past papers to aid in their studies.

AUDITING AND ASSURANCE IN AUSTRALIA
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Table of Contents
Introduction......................................................................................................................................3
Case analysis 1:................................................................................................................................3
1.1 Explain the general meaning of each of the above ratios, discuss the conclusions that you can
draw about EasyFit’s financial position and identify potential audit risks to be investigated
further..............................................................................................................................................3
Case analysis 2:................................................................................................................................4
a) Describe the audit work you will carry out to check whether the value has provided an
accurate and independent valuation of the land and buildings........................................................4
b) Describe the audit work you will carry out to check the existence and completeness of plant
and machinery, as recorded in the company’s non-current asset register.......................................5
Case analysis 3:................................................................................................................................7
(a) Identify the periods during which the auditor is responsible for identifying subsequent
events and indicate the extent of the auditor’s responsibility..........................................................7
(b) For each of the above events (i) to (iv), state the appropriate action that the auditor would
require in order to issue an unqualified opinion for the situation and justify your response..........8
Conclusion.......................................................................................................................................9
Reference.......................................................................................................................................10
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Introduction
The assignment introduces a brief explanation over auditing and auditing skills that is applied for
providing varied analysis and verification of financial values of business entities. In the
assignment with different case scenarios usage, validity, assessment, significance and approach
of financial ratio and financial auditing system has been discussed.
Case analysis 1:
1.1 Explain the general meaning of each of the above ratios, discuss the conclusions that
you can draw about EasyFit’s financial position and identify potential audit risks to be
investigated further
The current ratio evaluates the financial liquidity of business to the capability of the firm to meet
short term obligations. In the case of EastFit’s, the current ratio has declined in the present year
of 2017 compared to the previous year which dictates company able to meet its short term debt
has declined in the present year. The efficiency of a business entity is to use its assets for
business performance in the market that is measured with the receivable turnover ratio (Easton
and Sommers, 2018). As per EastFit’s, the company has reduced the usage of assets in the
present year of 2017 in compare to 2016, which reflects the declining performance of the
organization. The inventory turnover describes the efficiency of a business entity to sell its
average inventory during a particular period in terms of dollar valuation. In EastFit’s, the sales of
product and services might have declined in the present year of 2017 compared to the previous
year, which has resulted in a decrease in inventory turnover of the company. The return on total
assets describes earnings before interest of an organization in the context of its total assets in the
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market (Damodaran, 2016). In the year of 2017, the return on assets of EastFit’s has increased
by 13% in comparison to 11% in 2016, which states the earnings of the company has increased
due to increase in revenue and profit margins. The net profit ratio analyses and measures the
profit of the business entity after covering all its business expenses. EastFit’s net profit has been
constant in these two years shows the company was able to maintained and sustain its profit
through managing its business expenses. As per the gross profit margin, it measures the revenue
of an organization after covering its cost of production (Zainudin & Hashim, 2016). As per the
analysis, EastFit’s has increased its sales in the present year of 2017, which has resulted in an
increase in its gross profit compared to the year of 2016. In the process of auditing and
investigation, one of the risk that could be the barrier in front is a misstatement of financial
values and financial records of the company and receiving incorrect or improper information
from sources. In addition to that, the detection risk is another potential barrier to the auditor in
which auditors might find issues with proper detection of in current or misstatement of financial
values presented by an organization.
Case analysis 2:
a) Describe the audit work you will carry out to check whether the value has provided an
accurate and independent valuation of the land and buildings.
As per case information Herbert Manufacturing Ltd, the financial information of land and
building is analyzed $ 1 million in the year of 2004 during its purchase. In the present year of
2016, with a depreciated amount of $200000, the value of land and building after 12 years
requires to be nearly $300000. Thus, it is necessary for the auditor requires analyzing and
evaluating the proper value of land and building that is to be inputted or presented in the
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financial statement of the company in the year of 2016. On the other hand, the final valuation of
land and building in the year if 2016 has reported separately, although the information of specific
valuation of land and building separately during its purchase is not provided (Boiral et al. 2018).
Thus, it is necessary that auditor require \engaging brief observation of specific valuations of
these properties as there might be changes of misevaluation or presentation of properties amount
one another to provide an incorrect valuation to be presented in the financial statement.
As per Herbert Manufacturing Ltd, the depreciation analysis and assessment requirements to be
conducted by the auditor to ensure the amount provided by the organization to be instated in
financial statement need to be developed. In addition, case analysis also highlighted that the
valuation of land and building has stated by an individual who is not an employee for the
company. In this case, it could be possible that the land and building value might be incorrectly
analysed or measured. As the management and top financial executives of the organisation could
be able to evaluate and analyze the accurate and actual valuation of land and building (Chiu, Liu
& Vasarhelyi, 2018). The auditor requires re-examining the valuation of properties by checking
possible bills, data and financial valuation records of the building. The auditor could also require
and request for presenting ledger and books of accounts for analysis and evaluating the proper
valuation of the land and building of Herbert Manufacturing Ltd. In addition to that auditor could
also analyse and evaluate financial statements of previous years of business to investigate
changes, differences and variance of land and building value.
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b) Describe the audit work you will carry out to check the existence and completeness of
plant and machinery, as recorded in the company’s non-current asset register.
As per the analysis, Herbert Manufacturing Ltd plant and machinery existence and competence
could be evaluated and analysed through documents and records of the company. The auditor
could evaluate and investigate over local purchase order's supplier's invoice, approved budgets,
cash books for analysing existence and authentication of plant and machinery of the organisation.
As per case analysis, computerised books of accounts has introduces accumulated depreciation
and depreciation of all noncurrent assets of organisation (Louwers et al. 2015). The auditor
responsibility is to ensure the accounting policies and standard depreciation guidelines are
followed for evaluating the present valuation of plant and machinery. In most of the cases
reducing balanced method of depreciation is avoid due to its inaccuracy to analyse the values of
plant and machinery of the organisation. Thus, the auditor has to evaluate and assess the
straight-line depreciation method has applied by the firm for analysis of business plant and
machinery. In relation to evaluating the existence of plant and machinery of Herbert
Manufacturing Ltd, auditing individuals require to make a sequential investigation on the books
of accounts for these are existing physical assets of an organisation (Chan, Chiu & Vasarhelyi,
2018). However, as these are fixed assets auditing individual’s finds it difficult to dictate the
actual valuation of these assets are correct as per the financial records and financial balance sheet
reports of the company. The fixed assets register is another point of discussion that helps to
evidence the presence and existence of plant and machinery owned by the company in the
marketplace. As per the analysis, it is necessary for business entities to maintain fixed assets
registers which is an independent force of evidence that could be used by auditing individuals to
investigate validity and accuracy of fixed assets valuation in the financial statement presentation
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of the company (Glover, Taylor & Wu, 2016). According to Herbert Manufacturing Ltd case
analysis, it has observed that auditing individuals require observing the internal controlling
system of business entity for evaluating location, placement, working and performance level of
plant and machinery. Thus, the depreciation valuation and value of these fixed assets could be
justified properly in the market.
Case analysis 3:
(a) Identify the periods during which the auditor is responsible for identifying
subsequent events and indicate the extent of the auditor’s responsibility.
The case scenarios suggest that there are different events that have happened within the financial
period and after a financial period of different clients of the auditor. The prime time period for
auditing the financial statement and different events might be in September 2017. As all the
events have happened between the months of June to August including preparation of the
financial statement. It has observed that debtor's liquidation in August 2017 is required to be
evaluated and analysed by the auditor. As per this event, the rest amount of $300000 that is still
overpayment due for the company requires to be adjusted in the next financial year. The auditor
needs to be sure and evaluate that the specific amount to be presented as a comprehensive
expense for the entity which is not realised in the present year financial statement. (Simunic, Ye
& Zhang, 2017). The auditors responsible are to observe and check over the documentation and
records to be adjusted for rest of the count by the company. In another scenario, the auditor
requires to evaluate the event of July 2017, in which it is necessary to analyse and evaluate the
amount which is non-recoverable by the management which has lost in flood of warehouse
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required to be engaged in the financial records as bad debts. In case auditing the proper scenario
of the company, it has stated that auditor requires to ensure ablaut all possible insurance
documentation that is presented by management are genuine and proper, as well as the
information, is required to be presented in the financial statements of entity (Damodaran, 2016).
In addition to that, it is the responsibility of auditor to ensure and assess the interests, and
premium payment values for insurance are documented and recorded by the management of the
business entity. In addition to that the Outback Mining Limited report to be analysed And
evaluated in August 2017, in this case scenario it is required to assess and observe the recording
and validity of exploration licence to analyse and evaluate its worthiness and valuation of the
licence with proper documents to be ensured by auditor for observing its accuracy and valuation
(Zainudin & Hashim, 2016). The events of Bird Pty Limited require proper suggestion and
advisory fro auditing committee. In this situation the business policies and laws to be
reinvestigated by the auditor to ensure the act of business entity are valid or not. On the other
hand, the coverage of expected loss in future selling could be reduced if there are more product
and services to be introduced in the market.
(b) For each of the above events (i) to (iv), state the appropriate action that the auditor
would require in order to issue an unqualified opinion for the situation and justify your
response.
In the case of Galaxy Ltd, the auditor requires to take action over evaluating the documentation
and assessment of the debtor rest values $300000 to be claimed by the management of company
during the time of liquidations. The auditor required to recommend and mention in the report
about the worth of amount to be input and adjusted in the financial statement of the company
before making liquidation report and signed by the management for the organisation. The auditor
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needs to prepare a report over the non-recoverable amount of SuperSpring Ltd, which was
unable to recover due to flood. The documentation and records to be checked and the receivable
amount required to be adjusted by the organisation in the next financial report as well. As per the
assessment, the report to be prepared by auditor also needs the proper justification of its decision
making over adjustment of the recoverable amount due to the financial statement for the present
year is already presented and the event occurred after that (Chiu, Liu & Vasarhelyi, 2018). In
case of Outback Mining Limited, thru auditor requires to initial analysis over the licensing and
land claiming issue, as well as to check over the validity and accuracy of licence and land
claimed by evaluating licence agreement. In case of Outback Mining Limited, the auditor
required to take action over investigating the reliable loss to be expected by the company and
different options to be provided by the auditor over maintenance of governmental notice over
limitations on a number of birds that are allowed to be kept in suburban areas. The auditor also
requires making an assessment of the financial reports to investigate the valuation and financial
records of the company to be accurate and précised.
Conclusion
The particular assignment has increased brief explanation over different roles responsibilities and
decision-making skills of an auditor by assessing different case scenarios. In this study, the
proper extended role and responsibilities of an auditor and their justifications of decision making
have also been highlighted.
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Reference
Boiral, O., Heras-Saizarbitoria, I., Brotherton, M.C. & Bernard, J., (2018). Ethical Issues in the
Assurance of Sustainability Reports: Perspectives from Assurance Providers. Journal of
Business Ethics, pp.1-15.
Chan, D.Y., Chiu, V. & Vasarhelyi, M.A. eds., (2018). Continuous Auditing: Theory &
Application. Emerald Publishing Limited.
Chiu, V., Liu, Q. & Vasarhelyi, M.A., (2018). The Development & Intellectual Structure of
Continuous Auditing Research 1. In Continuous Auditing: Theory & Application (pp. 53-
85). Emerald Publishing Limited.
Damodaran, A. (2016). Damodaran on valuation: security analysis for investment & corporate
finance (Vol. 324). John Wiley & Sons.
Easton, M. & Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e.
Glover, S. M., Taylor, M. H., & Wu, Y. J. (2016). Current practices and challenges in auditing
fair value measurements and complex estimates: Implications for auditing standards and
the academy. Auditing: A Journal of Practice & Theory, 36(1), 63-84.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing
& assurance services. McGraw-Hill Education.
Michelon, G., Patten, D.M. & Romi, A.M., (2018). Creating Legitimacy for Sustainability
Assurance Practices: Evidence from Sustainability Restatements. European Accounting
Review, pp.1-28.
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Simunic, D. A., Ye, M., & Zhang, P. (2017). The joint effects of multiple legal system
characteristics on auditing standards and auditor behavior. Contemporary Accounting
Research, 34(1), 7-38.
Zainudin, E. F., & Hashim, H. A. (2016). Detecting fraudulent financial reporting using financial
ratio. Journal of Financial Reporting & Accounting, 14(2), 266-278.
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