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MAA 705 Auditing, T2 2014 Assessment 3: Group case analysis (15 marks) Due date: Week 8, Monday 8 September 2014 before 11.59 pm. Late submissions may be accepted only if the student has requested extension of submission date and the unit chair approved the request. Submission: Submit only online via CloudDeakin. Word limit: 1.500 (including references) Weight: This assignment is worth 15% of your final grade. Assessment Instruction: Group of maximum 3 students have to prepare a memorandum. Tasks are detailed in the case study.


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Beer Brewing Ltd. (BBL)
Introduction In March 2013, Curt Connors, an audit partner at XYZ Chartered Accountants (XYZ), has received an offer to participate in a tender for a potential audit client, Beer Brewing Ltd (BBL). XYZ is a medium sized auditing firm established in 2002 by three members of the Chartered Accountants Australia and New Zealand. XYZ has so far been dealing with small firms as audit clients. Following the firm’s growth over the past few years, the partners decided to bid for ASX-listed company audits. In making any client acceptance or continuance decision, XYZ undertakes evaluation of the (potential) client and assesses the XYZ’s independence and competence to properly complete the audit. BBL is an ASX listed company whose shares have been publicly traded over the past five years. In a routine independence assessment that is conducted as part of considering any new client, XYZ partners declared that they have no personal or business relationships with BBL. They also declared that their close family members neither hold BBL’s shares nor have any business relationships with the company. However, Otto Octavius, one of the audit managers at XYZ declared that he owns BBL’s shares with a current market value of $23,000. BBL is a beer manufacturer company, but XYZ did not conduct any audit of beer breweries earlier. However, XYZ has been conducting audits of manufacturing firms producing other types of drinks. BBL’s background BBL is a medium sized beer manufacturer based in regional New South Wales. The company was established as a family business in 1989 and has since grew in size. BBL has been operating as an ASX listed company since July 2008. BBL’s organizational structure shows that the company has board of directors with eleven members. Stephen Strange chairs the board and the

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board has an audit committee with three members. BBL also has an internal audit unit reporting to Stephen. The company operates with seven divisions, namely, Manufacturing, Warehouse, Sales, Shipping, Purchases, and Finance & Administration. BBL conducts sales to wholesale traders and retailers through its sales division. The Purchases division buys raw materials for the factory. BBL purchases most of the malted barley used in the manufacture of beer from Barleyfarm Ltd, which is wholly-owned by Stephen’s cousin. All the other materials needed for production are purchased from other suppliers in the market. Year 2013 audit of BBL Curt attended a meeting with Stephen on 15 March 2013 to discuss a possible audit engagement. Stephen explained to Curt that there was a disagreement with the previous auditor (in the 2012 audit), but he also assured Curt that this disagreement was not the reason for the change of auditor. Matt & Associates (M&A) audited BBL for the previous three years. M&A has merged with another mid-tier auditing firm and abandoned its manufacturing clients because it planned to specialize in the real estate audit market. Nonetheless, M&A had major disagreements with BBL’s top management and the board of directors regarding last year’s audit. The disagreement arose because M&A modified the auditor’s report on account of two reasons. First, M&A auditors recommended increasing the allowance for doubtful debts, which Stephen and BBL’s board of directors refused by arguing that BBL has strengthened its collection effort and thus they were optimistic about the recoverability of most of the receivables. Second, some brands of beer that BBL had in stock were assessed by the auditor as having lower value than reported on the balance sheet. While market competition over the past few years made the sales prospect of this inventory doubtful, the board and top management insisted that no loss be recorded in this area.
Curt requested permission to contact M&A before making a decision to accept BBL as a client. Initially, Stephen was not happy about this request

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but was finally convinced by Curt’s explanation of the purpose and importance of this communication for a proper audit of BBL‘s 2013 financial statements. Subsequently, Curt held a meeting with Matt Murdock, an audit partner at M&A, who explained to Curt why they resigned as auditors of BBL. The information that Matt disclosed to Curt was consistent with the information received from Stephen. Matt also explained that they don’t have any concerns regarding the integrity of BBL’s top management.
Financials
Curt conducted preliminary analytical review based on BBL’s financial information presented below.


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Exhibit 1: Statement of Financial position
Beer Brewing Ltd Statement of financial position At 30 June 2013 2013* ($'000) (Unaudited)
2012 ($'000)
2011 ($'000)
Current Assets Cash 5,600 5,040 6,345 Inventory 16,912 11,230 9,233 Trade Receivables 15,175 13,350 12,421 Total current assets 37,687 29,620 27,999 Non-current assets Property, plant and equipment 19,606 18,120 13,470 Long-term receivable 3,420 4,569 5,450 Total non-current assets 23,026 22,689 18,920 Total assets 60,713 52,309 46,919 Current Liabilities Trade Payables 5,653 4,650 5,421 Provisions 8,450 6,521 5,070 Total current liabilities 14,103 11,171 10,491 Non-current liabilities Long-term loan payable 6,711 5,085 4,084 Total liabilities 20,814 16,256 14,575 Net assets 39,899 36,053 32,344 Shareholder's equity Share capital 7,657 2,300 2,300 Retained earnings 32,242 33,753 30,044 Total Shareholders' equity 39,899 36,053 32,344

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Beer Brewing Ltd Income Statement For the Year ended 30 June 2013* 2013 $'000 (Unaudited)
2012 $'000
2011 $'000 Sales 112,330 120,839 135,073 Cost of sales 80,321 85,919 87,930 Gross profit 32,009 34,920 47,143 Depreciation Expense 8,422 6,521 4,209 Inventory obsolescence 2,484 3,531 2,166 Marketing expense 2,025 2,980 3,835 Administrative expense 13,434 13,136 17,334 Interest expense 1,565 1,919 1,716 Total expense 27,930 28,088 29,261 Profit before tax 4,079 6,832 17,882 Tax expense 1,428 2,391 6,259 Profit after tax 2,651 4,441 11,624 * The audit team obtained financial information for the year ended 30 June 2013 in July 2013. Financials for the years 2012 and 2011 were obtained during the tender. Curt calculated key financial ratios for BBL and collected corresponding industry average ratios, presented on Exhibit 2. Exhibit 2: Financial ratios Key financial ratios Beer Brewing Ltd Industry Averages 2013 2012 2011 2013 2012 2011 Current ratio 2.67 2.65 2.67 2.01 2.03 2.11 Quick ratio 1.47 1.65 1.79 1.15 1.01 1.1 Debt to equity ratio 0.52 0.45 0.45 0.85 0.78 0.76 Times interest earned 3.61 4.56 11.42 4.00 5.00 6 Average Collection period (days) 49.31 40.32 33.56 45.00 35.00 32 Accounts Payable (Days) 25.69 19.75 22.50 30.00 22.00 22 Gross profit Margin (%) 28 29 35 24.00 25.00 30 Net profit Margin (%) 2 4 9 6 7.5 9.2


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Required:
Assuming that your group is the team of auditors assigned in this engagement, write a memo to Curt Connors to:
a) Explain whether this client should be accepted; b) Discuss risk factors present in this audit engagement and determine major transaction cycles and/or accounts that warrant increased audit effort; c) Make an assessment of the RMM (risk of material misstatement); and d) Recommend and justify the overall audit strategy appropriate for this engagement.
Relevant learning outcomes This assessment task contributes to your achievement of the following unit learning outcomes (ULOs): • ULO 2: Use professional and ethical judgement in applying relevant legal and professional pronouncements to all stages of a given assurance engagement. • ULO 3: Apply the concepts and processes used by audit and assurance service providers to plan and perform assurance engagements in a professional manner. Marking Criteria The following will be used in making this assignment:
Marks will be deducted if your answers contain large amounts of text copied from textbooks or any other reference material. If you are unsure about this please refer to the section on plagiarism in the unit guide.
Criterion* Weight (%) DGLO 1: Discipline-specific knowledge and capabilities 40% DGLO 2: Communication 20% DGLO 5: Problem solving 40% Overall 100% * Refer to the detailed marking rubric.

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Marking Rubric Criteria Unsatisfactory Less than satisfactory Satisfactory Good Very good Excellent DGLO 1: Discipline- specific knowledge and capabilities - This assessment task assists the student to demonstrate the ability to apply discipline- specific knowledge to solve real-world type audit problems. 0 16 23 27 31 40 Did not use auditing knowledge. Did not adequately use auditing knowledge. Used some auditing knowledge. Used an adequate amount of auditing knowledge. Used an almost exemplary amount auditing knowledge. Used an exemplary amount of auditing knowledge. DGLO 2: Communication - This assessment task helps the student to demonstrate the ability to effectively communicate in writing and further develop written communication skills. 0 8 11 13 14 20 Is unable to justify and correctly interpret theoretical propositions, methodologies, conclusions and professional decisions to specialist and non- specialist audiences. Is very little able to justify and correctly interpret theoretical propositions, methodologies, conclusions and professional decisions to specialist and non- specialist audiences. Acceptably justifies and interprets theoretical propositions, methodologies, conclusions and professional decisions to specialist and non- specialist audiences. Justifies and interprets theoretical propositions, methodologies, conclusions and professional decisions to specialist and non- specialist audiences. Justifies and interprets a wide range of theoretical propositions, methodologies, conclusions and professional decisions to specialist and non- specialist audiences. Justifies and interprets a wide range of theoretical propositions, methodologies, conclusions and professional decisions to specialist and non- specialist audiences. DGLO 5: Problem solving - A case study to be used in this assessment simulates real-world auditing issues and problems. 0 16 23 27 31 40 Proposes no or inadequate solutions that indicate obvious lack of comprehension of the problem. Solutions do not reflect any intellectual independence. Proposes few solutions that indicate very little comprehension of the problem. Solutions reflect very little intellectual independence. Proposes one or more acceptable creative solutions that indicates satisfactory comprehension of the problem and reflects a proficient level of judgement of the pros and cons of the various options and independence of thought. Solutions reflect basic intellectual independence. Proposes one or more good creative solutions that indicates comprehension of the problem and reflects a generally sound level of judgement of the pros and cons of the various options and independence of thought. Solutions reflect reasonable intellectual independence. Proposes one or more very good creative solutions that indicates a deep comprehension of the problem and reflects a mostly high level of judgement of the pros and cons of various solutions and factors impacting on decision making within a professional context. Solutions reflect a high level of intellectual independence. Proposes one or more exemplary creative solutions that indicates a deep comprehension of the problem and reflects a consistently high level of judgement of the pros and cons of various solutions and factors impacting on decision making within a professional context. Solutions reflect a exceedingly high level of intellectual independence. Total 0 40 57 67 76 100 Zero Below 50% 50 - 59% 60 - 69% 70 - 79% 80% and over