Audit Planning and Financial Analysis: Morris Ltd Case Study

This case study focuses on the financial analysis and audit planning for Morris Ltd, a company recently listed on the Australian Securities Exchange. The assignment requires an analysis of the company's financial statements, including the application of analytical procedures to identify and assess material misstatement risks. It emphasizes the importance of professional skepticism throughout the audit process and the determination of materiality. The case study includes ratio analysis, comparing key financial figures from 2018 and 2019 to evaluate profitability, liquidity, and solvency. The student analyzes the financial ratios, identifying trends and potential risks such as declining gross profit margins, negative net profit margins, and changes in liquidity ratios. The analysis concludes with an assessment of potential material misstatements in the financial statements, specifically highlighting risks related to total liabilities, cost of sales, and inventory valuation.

Running head: CASE STUDY-MORRIS LIMITED
Case study-Morris Limited
Name of the Student
Name of the University
Author Note

CASE STUDY-MORRIS LIMITED
Table of Contents
Answer to requirement 1:...........................................................................................................2
Answer to requirement 2:...........................................................................................................2
Answer to requirement 3:...........................................................................................................3
Answer to requirement 4:...........................................................................................................3
Answer to requirement 5:...........................................................................................................5
References list:...........................................................................................................................7

CASE STUDY-MORRIS LIMITED
Answer to requirement 1:
One important aspect of the procedure of risk management is performing analytical
procedure which assist the auditors in the identification of the facts which they are not
conversant with and are able to assess the material misstatement risk. Such process forms the
basis of implementation and designing of the risk assessed. The prevalence of any events that
is not usual such as any events, transactions, trend, ratios and amounts and all such matters
might have implication on audit in one way or the other. The risk of material misstatement
can be identified by such unexpected or unusual relationship such as the material
misstatement risk due to theft and fraud. Auditors are provided with the wider initial
implications using such analytical procedures on the existence of any material misstatement
(Canning et al. 2019). However, in the event of identification of material misstatement risk,
other information’s gathered using the results of analytical procedures are also accounted.
For the auditing plan of the smaller entities, it is required by the auditors to plan to
perform the analytical procedures as the auditors can perform such procedures in a limited
way. It is because the smaller entities lacks monthly and interim financial information
needed for performing analytical process. In the process of risk assessment, financial as well
as non-financial information is incorporated in the analytical procedure such as the
association between volumes of goods sold selling space measured in square footage
(Iwanowicz and Iwanowicz 2019).
Answer to requirement 2:
Professional scepticism refers to the behaviour and attitude of auditors which makes
them conscious of any conditions resulting in deviation, evidence not consistent with what
has been obtained. At the planning stage, materiality is set by the auditors for the financial
statements as a whole with the overall objective of identifying the performance materiality.

CASE STUDY-MORRIS LIMITED
It is important for the audit practitioner to maintain the professional scepticism
through the entire audit engagement, while it is of utmost importance to have such attitude
during the planning stage of audit. It is so because planning forms the foundation of the entire
audit process and assist in assessing the evidence critically. Professional scepticism during
the planning stage of audit would help in identifying the existence of the statuses that make
the financial information presented in the financial statement materially misstated. It is
required by ISA 200 that professional scepticism should be used by the auditors is it
represents the ethical considerations of independence and objectivity of auditors. It is said
that the quality of audit is low if the auditor has not performed the audit by imbibing
professional scepticism attitude (Icaew.com 2020). The application of professional scepticism
provides assurance of the fact that the matters of significant importance and any unusual
circumstances have not been neglected by the auditors while performing the audit.
Furthermore, in the event of performing analytical procedures at the stage of planning the
audit, it is important for the auditors to be sceptical. This can be explained with the help of an
example, in the event of auditor discussing with the management about the analytical
procedures results, the explanation of management at face value should not be accepted by
the auditor and for any explanations offered by the management, corroboratory evidence
should be obtained by the auditor (Choudhary et al. 2019). Nonetheless, overemphasis should
not be placed on the requirement of professional scepticism and it is the personal and
professional responsibility of every auditors to apply and adopt a sceptical mindset.
Answer to requirement 3:
The overall materiality is set by the auditor at the planning stage of audit with the
objective of identifying performance materiality. For determining the appropriate
benchmark, it is essential for the auditors to exercise their professional judgement and they

CASE STUDY-MORRIS LIMITED
should be able to clearly justify the chosen benchmark. In the case of Morris limited, it is
considered suitable to take sales revenue as the appropriate benchmark. This increase in the
sales revenue in year 2019 is not expected to be repeated in year 2018. In addition to this, it is
concluded that the sales revenue would be the appropriate benchmark due to the fall in the
profit before tax. Therefore, the appropriate basis of the benchmark is 1% of total sales
revenue. In this regard, total amount of materiality is 1% of sales revenue (Lakis and
Masiulevičius 2017).
Particulars 2019 2018
Sales revenue 18325 6351
1% of revenue 183 64
Materiality has been determined at the benchmark of 1% of revenue that is
For 2019- 1% of 18325= 183
For 2018- 1% of 6351= 64
Total amount of materiality for the year 2019 and 2018 is 183 and 64 respectively.
Answer to requirement 4:
R
a
ti
o
Formula 2
0
1
9
2
0
1
8
Profitability Ratios

CASE STUDY-MORRIS LIMITED
G
r
o
s
s
p
r
o
fi
t
m
a
r
g
i
n
Gross Profit
Sales
* 100
19.18 23.59
N
et
P
r
o
fi
t
m
a
Net Profit After Tax
Sales
* 100
-39.22 -112.72

CASE STUDY-MORRIS LIMITED
r
g
i
n
R
et
u
r
n
o
n
A
s
s
et
s
Net Profit After Tax
Average Total assets
* 100
-37.59 -67.15
R
et
u
r
n
o
n
E
q
Net profit after tax
Total Equity
* 100
-161.87 -167.03

CASE STUDY-MORRIS LIMITED
u
it
y
Liquidity Ratios
C
u
rr
e
n
t
R
at
i
o
Current Assets
Current Laibilities
1.39 3.70
Q
u
ic
k
R
at
i
o
Current Assets−inventories
Current Laibilities
0.97 3.29

CASE STUDY-MORRIS LIMITED
I
n
v
e
n
t
o
r
y
t
u
r
n
o
v
e
r
r
at
i
o
Cost of Sales
Average Inventory
7.17 6.22
T
r
a
d
Average trades receivable
Sales
*365
10.8 8.07

CASE STUDY-MORRIS LIMITED
e
s
r
e
c
ei
v
a
b
le
t
u
r
n
o
v
e
r
(i
n
d
a
y
s)

CASE STUDY-MORRIS LIMITED
T
r
a
d
e
s
p
a
y
a
b
le
t
u
r
n
o
v
e
r
(i
n
d
a
y
Average Trades payable
Purchases
*365 4.28
2.74

CASE STUDY-MORRIS LIMITED
s)
D
e
b
t
t
o
E
q
u
it
y
r
at
i
o
Total Liabilities
Total Equity
3.31 1.49
E
a
r
n
i
n
g
s
p
Net profit after tax
Number of shares outstanding
at the end of the year
-0.01 -0.01

CASE STUDY-MORRIS LIMITED
e
r
S
h
a
r
e
(
E
P
S
)
Answer to requirement 5:
The analytical review of the company is carried out by the computation of different
ratios that helps in identifying and assess the reasonable of various accounts balances. With
the help of computation of ratios, auditors would be able to identify the difference between
reported and expected values and investigate the reason for any such deviation (Moroney and
Trotman 2016). Value of gross profit margin has declined due to a significant rise in cost of
sales that has impacted the gross profit figure. This difference is notable as the figure of cost
of sales has increased to a greater extent in the current year making the item material. Morris
limited has incurred loss consecutively, however, the situation has worsened in the current
year owing to increase in overall expenditure compared to sales. Return on assets is also a
negative figure implying that the company is not able to utilize the assets for generating

CASE STUDY-MORRIS LIMITED
income. However, total value of assets possessed by Morris limited has increased in the
current year. It is also observed that return on equity is also negative implying that money of
investors are not used effectively to generate income (Auasb.gov.au 2020).
Next, it is also important to evaluate the liquidity position of Morris limited by
analysing the figures of various ratios. There has been fall in the current ratio value in the
current year and this has the implication about current assets inadequacy in clearing off some
current obligations. Value of quick ratio on other hand has fallen in the current year
indicating the inadequacy of quick ratios in meeting the current obligations. This is due to
increase in value of inventories. Turnover of inventory has increased which is considered
desirable as this implies that inventories are highly movable. In addition to this, trade
receivables has increased which is a positive sign as it implies improving efficiency of the
company in collecting receivables. Trade payable on other hand has increased which has the
implication that bills are regularly and frequently paid by the business. In addition to this, it is
observed that there has been increase in the reported figure of debt to equity ratio which
implies that the business is risky to the investors. The earnings generated per share is negative
which implies that investors are not being paid for the amounts invested. From the overall
analysis of the financial figures, it is inferred by the auditors that there is a risk of material
misstatement in the accounts balances of total liabilities, cost of sales and increase in value of
inventories (Messier and Schmidt 2017).

CASE STUDY-MORRIS LIMITED
References list:
Auasb.gov.au., 2020. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf
[Accessed 16 Jan. 2020].
Canning, M., O’Dwyer, B. and Georgakopoulos, G., 2019. Processes of auditability in
sustainability assurance–the case of materiality construction. Accounting and Business
Research, 49(1), pp.1-27.
Choudhary, P., Merkley, K.J. and Schipper, K., 2019, March. Auditors’ Quantitative
Materiality Judgments: Properties and Implications for Financial Reporting Reliability.
In 28th Annual Conference on Financial Economics and Accounting.
https://www.accaglobal.com, A., 2020. Professional scepticism | P7 Advanced Audit and
Assurance | ACCA Qualification | Students | ACCA Global. [online] Accaglobal.com.
Available at:
https://www.accaglobal.com/hk/en/student/exam-support-resources/professional-exams-
study-resources/p7/technical-articles/scepticism.html [Accessed 16 Jan. 2020].
Icaew.com., 2020. [online] Available at:
https://www.icaew.com/-/media/corporate/files/technical/iaa/materiality-in-the-audit-of-
financial-statements.ashx [Accessed 16 Jan. 2020].
Iwanowicz, T. and Iwanowicz, B., 2019. ISA 701 and Materiality Disclosure as Methods to
Minimize the Audit Expectation Gap. Journal of Risk and Financial Management, 12(4),
p.161.
Lakis, V. and Masiulevičius, A., 2017. ACCEPTABLE AUDIT MATERIALITY FOR
USERS OF FINANCIAL STATEMENTS. Journal of Management, 2(31).

CASE STUDY-MORRIS LIMITED
Messier Jr, W.F. and Schmidt, M., 2017. Offsetting misstatements: The effect of
misstatement distribution, quantitative materiality, and client pressure on auditors'
judgments. The Accounting Review, 93(4), pp.335-357.
Moroney, R. and Trotman, K.T., 2016. Differences in auditors' materiality assessments when
auditing financial statements and sustainability reports. Contemporary Accounting
Research, 33(2), pp.551-575.