Audit and Assurance: Procedures, Deficiencies, and Financial Ratios

This assignment solution covers key aspects of audit and assurance, including substantive procedures for machinery additions and disposals, inventory valuation, and going concern assessments. It also addresses control deficiencies within a company's order processing system, recommending improvements to enhance accuracy and efficiency. Furthermore, the solution analyzes financial ratios such as gross profit margin, interest cover, receivable days, and payable days to assess a company's financial performance and identifies potential audit risks related to new machinery purchases, training costs, changes in payable days, share issuances, and revenue recognition. Finally, it outlines procedures for addressing redundancy costs, including reviewing board minutes, obtaining redundancy calculations, and ensuring compliance with accounting standards. Desklib provides access to a wide range of solved assignments and study resources for students.

Audit and Assurance

TABLE OF CONTENTS
Q1...............................................................................................................................................3
a..............................................................................................................................................3
b..............................................................................................................................................3
c..............................................................................................................................................4
Q2...............................................................................................................................................4
a..............................................................................................................................................4
b..............................................................................................................................................5
Q3...............................................................................................................................................5
a..............................................................................................................................................5
b..............................................................................................................................................6
c..............................................................................................................................................7

Q1
a.
Five substantive procedures which auditors of Jack Co should perform in relation to the
machinery additions and disposals in order to obtain sufficient and appropriate audit evidence
are given below:
 Obtaining the breakdown of additions, derive the list and along with it agree to the
non-current asset register in order to confirm the completeness of the machinery.
 Select the sample of the additions made and match it with the agreed cost to supplier
invoice with the objective to confirm valuation.
 Review the board minutes to ensure that significant capital expenditure purchases
have been authorised by the board.
 Obtain a breakdown of disposals, cast the list and agree all assets removed from the
non-current asset register to confirm existence.
 Recalculate the profit/loss on disposal and agree to the income statement.
b.
Five substantive procedures which auditors of Charlie Co. should conducted for obtaining the
sufficient and appropriate audit evidence pertaining to the inventory of Charlie Co. are
described below.
 Obtaining the schedule for the raw materials, finished goods and the WIP inventory
and then cast to make a confirmation about the completeness and accuracy of the
balance and agree to trial balance and financial statements.
 Review aged inventory reports and identify any slow moving goods and also having a
discussion with the management why these items have not been written down or if an
allowance is required.
 In respect to quality issue in the products manufactured, discuss the same with the
management about their plans of disposing this off and reason they believe that the
goods are having the cost of $900,000. It should be supported with proper
documentation with breakdown of raw material cost, labour cost and any overheads
attributed to the cost.
 Confirm that the final adjustment for the goods is $200,000 and discuss with
management if this adjustment has been made; if so, follow through the write down to
confirm.

 Review the financial statements disclosures in regard to the inventory and WIP to
ensure they comply with relevant accounting standards.
c.
Audit procedures for assessing going concern
 Acquire the firm’s cash flow forecast and review the cash flows. Assess the
assumptions for reasonableness and discuss the findings with management to
understand if the company will have sufficient cash flows.
 Review any contract or agreement with the bank to determine whether any other
covenants have been breached, mainly in association with the bank overdraft
facilities.
 Review the company’s post year-end sales and order book to assess the levels of trade
and if the revenue figures in the cash flow forecast are reasonable.
 Carrying out the sensitivity analysis of the cash flows which will help in knowing the
margin of safety of the company pertaining to the cash inflows and outflows.
 Having a discussion with the finance director or CFO in order to know whether sales
director is being replaced or the new customer base is being generated.
Q2.
a.
Control deficiency Control Recommendations
The customer orders are basically recorded
in the 2 parts, so one copy is left with the
customer and other with the sales person.
The order form should be recorded into at
least 4 parts. The third part of the order
should be sent to the warehouse while the
4th should be sent to the finance department.
Sales staff can make changes to the
customer master data file, in order to record
discounts allowed and these changes are not
reviewed.
The sales staff should not be having an
access to the master data file to making
changes. Such changes should be restricted
to the sales director.
There is a risk that goods might not be
available and the customers not aware of
this prior to placing an order might lead to
unfulfilled orders and customer
dissatisfaction, which would impact the
company’s reputation.
Before the salesperson finalize the order, the
inventory system should be checked in order
to make sure the availability of goods to be
notified to the customers.
Customer orders are given a number
automatically by the system which is not
reviewed. In case of system error, it is
difficult for company to identify missing
orders and to monitor if all orders are being
despatched in a timely manner, leading to a
Thus, timely monitoring of the order
number should be implemented which will
help in finding out any missing orders.

loss of customer goodwill.
There is a risk that the insufficient details
may be recorded by the sales person and this
could result in incorrect orders being
despatched, orders being despatched late or
orders failing to be despatched at all,
resulting in a loss of revenue and reputation
of the company.
A pick list should be generated from the
main order and the warehouse team should
be check the quantities along with the
product descriptions are being dispatched.
Also reviewing the quality of goods.
The sales person is given responsibility to
chase customers directly for payment once
an invoice is outstanding. Aged receivable
report is created and reviewed by the chief
accountant.
A credit controller should be appointed and
it should be their role, rather than the
salesperson, to chase any outstanding sales
invoices.
The sales department of the company is not
handled centrally and thus, might not be
able monitor it if orders are not fulfilled
within time.
The copy the sales person has should be
stored centrally in the sales department.
Upon despatch, the goods despatch note
should be aligned with the order; a periodic
review of unmatched orders should be
undertaken by the sales department to
identify any unfulfilled orders.
The changes made to the master file data
might not be correct leading to loss of
revenue.
An exception report of changes required to
be generated and reviewed by a responsible
official.
b.
The internal audit department of Warner’s World Co. can include the assignments like the
matching the order placed with the delivery due date along with ensuring the stages within
which the order is. This will help in ensuring that whether the order will be delivered on time
or not. In case of discrepancy, having a discussion with the responsible person for each task.
Checking the details of the customers and the orders placed for ensuring accuracy.
Q3.
a.
Gross profit = Gross profit / Net sales
GP for 2020 = 20150 / 54750 = 36.8%
GP for 2021 = 20600 / 58000 = 35.5%
Interest cover ratio = EBIT / Interest
for 2020 = 19400 / 750 = 25.8
for 2021 = 19730 / 870 = 22.6

Receivable days = 365 /(Cost of sales / Account receivables)
for 2020 = 365 / (34600/7800) = 82 days
for 2021 = 365 / (37400/1125) = 10 days
Payable days = 365 / (Cost of sales / account payables0
for 2020 = 365 / (34600/3951) = 42 days
for 2021 = 365 / (34600/2825) = 30 days
b.
Audit risk Audit response
The company incurred the cost of 2m in
purchasing the new machinery which
actually cost 5.3 m and the remaining
amount will be paid later on. The machinery
will not be received till August 2021.
The auditor should review a breakdown of
these costs to ascertain the split of capital
and revenue expenditure, and further testing
should be undertaken to ensure that the
classification in the financial statements is
correct.
Training has been provided to the staff
member as without it, machinery cannot be
used by them.
The auditor should check the cot incurred in
providing training.
The payable days will be reduced from 42 to
30 days which will affect the cash flow of
the company.
The auditor should check the implication it
can have on the company.
The right issue of shares in the ratio of 1:5
for $1 each share. This might affect the
capital structure of the company and also
increase it liability in paying dividend.
The auditor is required to undertake detailed
cut-off testing of the implication it can have
on the profits or the retained earnings of the
company.
There is a risk that receivables will be
overvalued; some balances may be
irrecoverable and so will be overstated if not
provided for.
Discuss with the finance director the
rationale for not maintaining an allowance
for receivables and releasing the opening
provision.
Revenue is possibly overstated if the sales
returns are not completely and accurately
recorded.
Review the breakdown of sales of damaged
goods, and ensure that they have been
accurately removed from revenue.
Control account reconciliations provide
comfort that accounting records are being
maintained completely and accurately. At
the year end, it is important to confirm that
balances including bank balances are not
under or overstated.
Discuss this issue with the finance director
and request for the reconciliation of the
same.
The gross profit is good which might be
because of the overstatement of the revenue
or understatement of the cost of sales.
Auditor should breakdown the cost and
assumptions of revenue for in-depth
analysis.

c.
 Discussing with the Directors as to whether they have announced about their idea to
incur redundancy cost.
 Review the board minutes to determine whether it is chances that the redundancy
payments will be paid.
 Obtaining a breakdown of the redundancy calculations by employee and cast it to
make sure about its completeness.
 Review the disclosure of the redundancy provision to ensure compliance with the
accounting standards.
 Review supporting documentation to verify that the decision has been formally
announced by the Director.