Auditing and Assurance A Case Studies Approach A C PDF

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Chapter 1 Audit Planning, Understanding the Entity and Risk Assessment

7.

DETAILED CONTROL PLANNING (Mitigating Controls)

7.1

Account at Risk: Trade and other payables Key Assertion: Completeness Identify controls that would address the key assertion:

7.2

Account at Risk: Employee Benefits Expenses — Wages (Casual employees) Key Assertion: Occurrence Identify controls that would address the key assertion:

CASE 1-13

BEANBAG PTY LIMITED

Source: This case was developed by the authors.

SUBJECT MATTER

STANDARDS

Copyright © 2016. LexisNexis Butterworths. All rights reserved.

R

ISA/ASA 520

R R

LEVEL OF DIFFICULTY

R

Risk assessment

Easy

Analytical procedures

You are the audit senior on the audit of BeanBag Pty Limited (BB), a large manufacturer of comfortable Bean Bag Chairs. BB has a wide range of Bean Bag styles, including single and double Bean Bags, and an extensive choice of fabric, including denim and fur. Their main market lies with 18- to 24-year-olds. This year, 2017, is the second year in which your firm has performed the audit. As part of the planning work, you have performed analytical procedures in order to compare the unaudited results for the current year with last year’s audited financial information, as well as with the relevant industry averages. The results are provided below: INDUSTRY AVERAGE

BB Audited

Unaudited

Ratio

2016

2017

2016

2017

1

Current ratio

2.84

2.97

2.89

3.44

2

Receivables turnover ratio

4.9

4.6

5.5

4.3

3

Inventory turnover ratio

3.8

3.7

4.5

3.2

Martinov-Bennie, Nonna, et al. Auditing and Assurance : A Case Studies Approach : A Case Studies Approach, LexisNexis Butterworths, 2016. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/mqu/detail.action?docID=6237166. Created from mqu on 2021-03-23 01:29:07.

35

Auditing and Assurance: A Case Studies Approach

INDUSTRY AVERAGE

Ratio

BB Audited

Unaudited

2016

2017

2016

2017

7%

5%

9%

11%

4

Return on total assets

5

Net profit ratio

0.06

0.06

0.07

0.09

6

Gross margin

0.21

0.20

0.22

0.26

7

Times interest earned

3.4

3.3

3.5

4.2

In addition, you note the following: (i)

Informal discussions with the production manager revealed that the initial interest in the revival of the bean bag chair has declined during the year.

(ii)

Management has bulk-purchased a supply of leopard-print fabric to attempt to re-ignite demand for their product.

(iii)

A review of lifestyle magazines has indicated renewed interest in cane furniture.

(iv)

During the last few months of the financial year, a growing number of items were returned due to faulty zipper components.

(v)

Additional loans were negotiated during the year.

REQUIRED

Copyright © 2016. LexisNexis Butterworths. All rights reserved.

1. Using the analytical procedures results and additional information noted above, identify four (4) key accounts that the auditor might assess to be at risk of material misstatement. 2. For each account noted in 1. above, explain the impact on the risk of material misstatement with reference to both the ratios and the additional information provided.

36 Nonna, et al. Auditing and Assurance : A Case Studies Approach : A Case Studies Approach, LexisNexis Butterworths, 2016. ProQuest Ebook Central, Martinov-Bennie, http://ebookcentral.proquest.com/lib/mqu/detail.action?docID=6237166. Created from mqu on 2021-03-23 01:29:07....