Question 1 7.5% (1000 words)
The following are the auditor’s calculations of several key ratios for Wakefield Productions Ltd. The primary purpose of this information is to understand the client’s business and assess the risk of financial failure, but any other relevant conclusions are also desirable.
Ratio 2015 2014 2013 2012 2011
Current ratio 2.08 2.26 2.51 2.43 2.50
Quick ratio .97 1.34 1.82 1.76 1.64
Times interest earned 3.50 3.20 4.10 5.30 7.10
Debtors turnover 4.20 5.50 4.10 5.40 5.60
Inventory turnover 2.03 1.84 2.68 3.34 3.36
Net sales divided by tangible assets 0.68 0.64 0.73 0.69 0.67
Profit margin 0.13 0.14 0.16 0.15 0.14
Return on assets 0.09 0.09 0.12 0.10 0.09
Return on equity 0.05 0.06 0.10 0.10 0.11
Earnings per share $4.30 $4.26 $4.49 $4.26 $4.14
Required
• What major conclusions can be drawn from this information about the company’s future?
• What additional information would be helpful in your assessment of this company’s financial position? Explain why this information would be helpful in your assessment of the company’s financial position.
• Based on the above ratios, which aspects of the company do you believe should receive special emphasis in the audit? Explain why these aspects of the company should receive special emphasis.
Criteria HD/Distinction
37-50 Credit
32-36 Pass
25-31
Identifications of conclusions about the company’s future based upon the ratios provided (20 Marks) Identification of 3 or more conclusions about the company’s future based on the ratios provided. Each of the conclusions is supported by a sophisticated analysis of the situation. Identification of 2 or more conclusions about the company’s future based on the ratios provided. Each of the conclusions is supported by an analysis of the situation. Identification of 2 or more conclusions about the company’s future based on the ratios provided. Some support for each of the conclusions is provided.
Identification of additional information which will be helpful in the assessment of the company’s financial position. (10 Marks)
Identification of 3 or more pieces of additional information which will be helpful in the assessment of the company’s financial position. Sophisticated reasons provided as to why the information is helpful.
Identification of 2 or more pieces of additional information which will be helpful in the assessment of the company’s financial position. Reasons provided as to why the information is helpful.
Identification of 2 or more pieces of additional information which will be helpful in the assessment of the company’s financial position. Some attempt to provide reasons as to why the information is helpful.
Description and explanation of aspects of the company which should receive special emphasis in the audit (10 Marks) Sophisticated description and explanation of 3 or more aspects of the company which should receive special emphasis in the audit Description and explanation of 2 or more aspects of the company which should receive special emphasis in the audit Description with some attempt at explanation of 2 or more aspects of the company which should receive special emphasis in the audit
Professional communication
(Note: you are required to space between paragraphs; use Arial 10pt or TNR 12 pt; use 1.5 or double line spacing)
(5 Marks) Work contains distinct understandable statements with no errors.
Extremely well organised.
Content is structured in a manner that facilitates the reader’s understanding. Minor spelling, grammar and punctuation errors. Work shows evidence of proofreading.
Well-structured with one main idea or argument provided per paragraph arguments/ideas. Some spelling, grammar and punctuation errors found but the work is readable and structured.
Work may include
too many ideas in one
paragraph.
Appropriate resources and correct referencing
(5 Marks) Used two or more sources.
All work has been referenced correctly as per APA (6th edn) requirements. Used one or more sources.
All work has been referenced within the body of the answer and in the reference list, with some omissions or errors in terms No additional sources used.
Others’ work is not always acknowledged and there are a number of errors or non-compliance with the APA (6th edn)
Question 2 5% (700 words)
Hedley & Hedley has become the auditor of Sorting Solutions Pty Ltd, a manufacturer of fruit sorting machinery. One of the directors of Sorting Solutions Pty Ltd has asked Hedley & Hedley to perform a review of the internal controls within the purchases and payments cycle of the company’s operations. Brian Hedley the senior partner in the firm has asked Amos Andrews, a recent graduate to undertake the review. From Amos’s discussions with management and staff he discovers that the company is a small operation with the following staff:
• Three directors (one of whom is the executive director and is responsible for the day-to-day operations of the company and has a keen focus on the marketing of the pig traps)
• A warehouse/fabrication manager
• An assistant to the warehouse/fabrication manager
• A secretary/receptionist who also does the banking
• A clerk who handles both accounts receivable and payable, and
• Two machinery operators who make the sorting machinery
All operations are contained in one location.
The warehouse/fabrication manager is able to order from any supplier and will usually telephone a number of suppliers to obtain quotes. The warehouse/fabrication manager will then the materials from one of these suppliers by phone and confirm the order by email. The only documentation kept is a copy of the email which is kept by the warehouse/fabrication manager.
Once the order has been confirmed the warehouse manager gives a copy of the purchase order email to the clerk who files it in date order.
When the goods are received in the warehouse, the manager checks the goods to the delivery docket attached to the goods and signs the delivery docket as evidence of this check. The manager keeps one copy of the delivery docket and the other is kept by the person delivering the goods.
The manager gives a copy of the delivery docket to the clerk who posts a journal entry to the creditor’s ledger for the amount shown on the delivery docket. The clerk then stamps the delivery docket as entered and files the delivery docket by supplier.
Required
a) Brian Hedley wants to ensure that Amos understands the purpose of an internal control review to ensure that he will be able to effectively undertake this assignment. Complete Amos memorandum for Brian Hedley.
b) Describe the strengths and weaknesses in Sorting Solutions Pty. Ltd internal control for the purchasing area
c) How will your assessment of the internal controls affect the audit approach taken by Hedley & Hedley?
Criteria HD/Distinction
37-50 Credit
32-36 Pass
25-31
Explanation of the purpose of an internal control review (15 Marks) Sophisticated explanation of the purpose of an internal control review. Clear attempt to provide an explanation of the purpose of an internal control review. Some attempt to provide an explanation of the purpose of an internal control review.
Identification of strengths and weaknesses in the purchasing area of the company’s processes. Reasons provided as to why each is a strength or weakness. (15 Marks)
Identification of 3 or more strengths and weaknesses in the purchasing area of the company’s processes. Sophisticated reasons provided as to why each is a strength or weakness. Identification of 2 or more strengths and weaknesses in the purchasing area of the company’s processes. Clear reasons provided as to why each is a strength or weakness. Identification of 2 strengths and weaknesses in the purchasing area of the company’s processes. Some attempt to provide reasons as to why each is a strength or weakness.
Identification of the impact of the internal control review on the audit approach (10 Marks) Identification of the impact of the internal control review on the audit approach with clear reasoning as to why this approach should be adopted. Identification of the impact of the internal control review on the audit approach including some reasoning as to why this approach should be adopted. Some attempt to identify the impact of the internal control review on the audit approach including some reasoning as to why this approach should be adopted.
Professional communication in the form of a memorandum in part a
(Note: you are required to space between paragraphs; use Arial 10pt or TNR 12 pt; use 1.5 or double line spacing)
(5 Marks) Memorandum format appropriately used. Work contains distinct understandable statements with no errors.
Extremely well organised.
Content is structured in a manner that facilitates the reader’s understanding. Memorandum format used. Minor spelling, grammar and punctuation errors. Work shows evidence of proofreading.
Well-structured with one main idea or argument provided per paragraph arguments/ideas. Some attempt to use the memorandum format. Some spelling, grammar and punctuation errors found but the work is readable and structured.
Work may include
too many ideas in one
paragraph.
Appropriate resources and correct referencing
(5 Marks) Used two or more sources.
All work has been referenced correctly as per APA (6th edn) requirements. Used one or more sources.
All work has been referenced within the body of the answer and in the reference list, with some omissions or errors in terms No additional sources used.
Others’ work is not always acknowledged and there are a number of errors or non-compliance with the APA (6th edn)