Case Study
You are the audit senior for the audit of Nirvana Produce Pty Ltd (NP), a large wholesale fruit and vegetable supplier. NP operates out of a warehouse and office near the fruit and vegetable markets and also sources product directly from organic growers. Your firm has recently been appointed as auditor of this business.
Discussions with George Bowles has revealed that George Bowles and Thomas Hayes started the business 30 years ago as equal partners. They later converted the partnership to a proprietary limited company, each owning 50% of the shares. When Thomas died last year, George’s brother Marcus and his sons, George Junior and Jason bought out 50% of Thomas’ share at a market value of $2m. Thomas’ widow, Anna, holds the remaining 25% of shares in the business. The company now wishes to buy back Anna’s 25% shareholding but needs to raise the funds for the buy back through a loan from their bank.
Key ratios include:
Ratio Unaudited 2016 Audited 2015 Industry Benchmark
Current ratio 1 1.89 1.8
Days in receivables 12 days 8 days 7 days
Inventory turnover 3 days 3 days 3 days
Debt to equity .50 .50 .20
Debt is in the form of a mortgage over the warehouse and offices. The total value of shareholders’ funds is relatively small as the past dividend policy has been to pay out 90% of after tax profits.
Additional information
NP uses basic accounting software which can import a bank statement but has no facility for generating a file of creditor payments to be uploaded into the NP bank account. The software, which comprises order/sales, purchases/creditors and payroll modules, is on a server that is accessed through a number of networked computers in the office. Passwords are required to access various modules and authorisation levels of the system.
There are two sales’ clerks who take phone and email orders and generate packing/buying slips through the sales order module of the accounting software. These slips are used by warehouse and buying staff to purchase produce on the following morning and pack the produce into boxes. The debtors’ clerk uses the completed packing/buying slips to generate invoices which are attached to the boxes to be collected by the purchaser or a courier later that morning.
Often when the customer arrives to collect their order they identify other produce that they want and take that with their order. These goods are then added to the original invoice in the system and the revised invoice is emailed to the customer. Payments on sales invoices are due within seven days of invoice date and are generally paid by electronic funds transfer (EFT). A brief review of debtors identified that there were a significant number of short payments on the invoices. The debtors’ clerk matches the EFT payments to the invoices and chases up outstanding payments.
George and his sons do the buying in the morning on the basis of the information on the buying slips. Purchases are often made in cash at the market and the details noted on slips of paper which are passed to the bookkeeper when all the purchasing for the day has been concluded. Purchases direct from contracted growers are paid for through EFT on receipt of the goods and the purchase invoice.
Warehouse staff agree the goods to the invoice and pass the signed purchase invoice to the bookkeeper. The bookkeeper maintains and reconciles the cash purchase float daily. The bookkeeper also maintains the creditors’ ledger, approves and makes payments to creditors and reconciles the bank account monthly.
Payments to creditors are made within 7 days of the date of the invoice through the bank’s online payment system and then entered into the accounting software. The invoice is then stamped as paid and the date of payment and the bookkeeper’s initials are entered on the invoice. A brief review of the creditors’ ledger revealed that there were a number of duplicate payments to creditors which were being resolved.
The payroll is completed by the bookkeeper on the basis of normal hours worked though George must authorise any holiday pay, paid sick leave and overtime. All holiday, sick pay and overtime authorisation is completed online.
Question 1 (6%)
Analyse the ratios in conjunction with the additional information and identify implications for the audit and any particular audit steps that need to be undertaken to reduce audit risk. For example, if there was a worsening inventory turnover, one of the audit steps would include a review for obsolete inventory. Ensure that you also identify any potential weaknesses in this ratio analysis and any additional information that you will need to make a judgement about the business risk facing the company.
Question 2 (10%)
Identify the strengths and weaknesses in the internal control system described above. For each control weakness, identify the financial report assertions that may not be met. Suggest a control to correct any of the deficiencies identified. Identify how this weakness will affect your audit, indicating the additional audit steps and audit evidence that you will need to collect to reduce audit risk.
Question 3 (4%)
Outline the audit approach that you would take with the networked personal computer based accounting software in this audit engagement. As part of this audit approach develop and justify the use of at least two CAATs that you would use in this audit.
Rationale
This assessment has been designed to assess your ability to:
• be able to demonstrate risk management methodologies and the role of internal controls in an audit context;
• be able to design an audit plan and select and apply appropriate audit procedures for a financial statement audit;
• be able to exercise critical and reflective judgment.
Marking criteria
Criteria
High Distinction Distinction Credit Pass
Question 1
Deep analysis of ratios demonstrating business risk assessment skills and critical and reflective Correct interpretation provided demonstrating a sophisticated Correct interpretation provided demonstrating a good understanding Most interpretations correct. Demonstrating a developing understanding of how the ratios can be Demonstrated understanding of some of the ratios and their use in identifying the
Criteria
High Distinction Distinction Credit Pass
judgement (2.5 Marks). understanding of how the ratios can be used to analyse the risks that a business faces. of how the ratios can be used to analyse the risks that a business faces. used to analyse the risks that a business faces. risks that a business faces.
Weakness in analytical review and additional information identified. This demonstrates the ability to use business risk analysis in a novel situation and to use critical and reflective judgment. (1 Marks). All additional information taken into consideration when developing correct interpretation of ratios. Further demonstrating the high level of understanding of business risk analysis. Most of the additional information taken into consideration when developing correct interpretation of ratios demonstrating a good level of understanding of business risk analysis. Much of the additional information taken into consideration when developing correct interpretation of ratios demonstrating a moderate level of understanding of business risk analysis. Some additional information taken into consideration when developing correct interpretation of ratios. This demonstrates a basic level of understanding of business risk analysis.
Identification of audit tests that will need to be completed to minimise audit risk identified through the analysis of the ratios and the additional information. This demonstrates the ability to design an audit plan (2.5 Marks). All appropriate audit tests identified with a clear statement as to how these will minimise audit risk. This demonstrates a sophisticated level of audit planning.
Most appropriate audit tests identified. Evidence of some understanding as to how these will minimise audit risk. Many appropriate audit tests identified. Evidence of some understanding as to how these will minimise audit risk. Some appropriate audit tests identified.
Basic understanding of how these will minimise audit risk.
Question 2
Identification of absent or weak and strong controls. This demonstrates the level of
understanding of the role of internal controls (4 Marks). Identification of all absent or weak and strong controls demonstrating a deep understanding of the role of internal controls. Identification of most of the absent or weak and strong controls demonstrating a good level understanding of the role of internal controls. Identification of some of the absent or weak and strong controls demonstrating a moderate level understanding of the role of internal controls. Identification of only a few of the absent or weak and strong controls demonstrating a very basic level understanding of the role of internal controls.
Identification of financial report
assertions not met. (1
Mark) Identification of all unmet financial report assertions demonstrating a sophisticated understanding of the development of an audit plan. Identification of most unmet financial report assertions demonstrating a good level of understanding of the development of an audit plan. Identification of some of the unmet financial report assertions demonstrating a moderate level of understanding of the development of an audit plan. Identification of a few unmet financial report assertions demonstrating a basic level of understanding of the development of an audit plan.
Identification of the control to correct the deficiency (1 Mark). Identification of all of the controls to correct the deficiencies, demonstrating critical and reflective thinking and a deep understating of the role of internal controls. Identification of most of the controls to correct the deficiencies, demonstrating critical and reflective thinking and a good understating of the role of internal controls. Identification of some of the controls to correct the deficiencies, demonstrating a moderate level of critical and reflective thinking and understating of the role of internal controls. Some attempt to identify the controls to correct the deficiencies, demonstrating a basic level of critical and reflective thinking and understating of the role of internal controls.
Criteria
High Distinction Distinction Credit Pass
Development of a series of audit steps to overcome the audit risk resulting from the weak controls (4 Marks). Development of a comprehensive
series of audit steps designed to overcome the audit risk. This demonstrates a deep understanding of the audit process. Development of most of the audit steps designed to overcome the audit risk. This demonstrates a good understanding of the audit process. Development of some of the audit steps designed to overcome the audit risk. This demonstrates a moderate level understanding of the audit process. Some attempt to develop the audit steps designed to overcome the audit risk. This demonstrates a moderate level understanding of the audit process.
Question 3
Identification of the audit approach to be used on a networked personal computer accounting system (2 Marks). Identification and discussion of the factors which indicate the audit approach to be used on a networked personal computer accounting system demonstrating a deep understanding of the audit process. Identification and discussion of most of the factors which indicate the audit approach to be used on a networked personal computer accounting system demonstrating a good understanding of the audit process. Identification and discussion of one of the factors which indicate the audit approach to be used on a networked personal computer accounting system demonstrating a sound understanding of the audit process. Identification and discussion of one of the factors which indicate the audit approach to be used on a networked personal computer accounting system demonstrating some understanding of the audit process.
Development and
justification of the use of CAATs in this audit (1 Marks). A complex and highly detailed
development and
justification of the
use of CAATs in this audit, identifying how CAAT’s can be used in at least 3 ways. A logical attempt to develop and justify the use of CAAT’s identifying how CAAT’s can be used in at least 2 ways in this audit. A good attempt to explain the use of CAATs identifying how CAAT’s can be used in at least 1 way in this audit. Some attempt to explain the use of
CAAT’s in this audit.
These last two criteria relate to the whole of the case study. 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.
Work contains distinct understandable statements with minimal errors. Answer is 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. Wellstructured with one main idea or argument provided per paragraph.
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 a range of sources. All work has been referenced correctly as per APA
(6th edn) requirements.
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 other than the text. Others’ work is not always acknowledged and there are a number of errors or noncompliance with the APA (6th edn).
Requirements
Assignments must be submitted through Turnitin. It is recommended that your name, student ID and page number be included in the header or footer of every page of the assignment. Further details about submission are provided in Appendix 1.