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About Auditing and Assurance, how to justifying the materiality?




Question;Prepare a report for the audit;manager Sharon Gallagher of W&S Partners with the following requirements;Using the 30 September 2014;trial balance (in the appendix of the text p. 471), calculate the planning;materiality using total revenues as the basis and provide two reasons;justifying the use of total revenues as the basis for your calculation.;As a part of the risk assessment phase of;the audit of Cloud 9 the audit team has gained an understanding of Cloud;9?s structure and business environment. From researching the retail and;wholesale footwear industry a number of inherent risks have been;documented and recorded in the additional information provided with the;assignment. In your report include the documented risks and description;with an additional heading ?Risk Assessment?. Under this heading for each;of the inherent risks documented consider Cloud 9?s operations with;reference to the information provided in the case study and identify the;associated financial accounts that would be affected. For each of the;financial accounts identified provide an assessment of ?high?, ?medium?;or ?low? in relation to the likelihood and materiality of the risk;occurring in respect of Cloud 9 with reasons for your assessment and identify;the relevant ?assertion/s? which could be affected.;In;undertaking the risk assessment of Cloud 9 the analytical procedure of;ratio analysis has been completed and documented in the additional;information provided with the assignment. Discuss the results of the;analytical procedures outlining potential problem areas (that is, where;possible material misstatements in the financial reports exist) and any;other special concerns (for example, going concern). Specify the account;balances and related assertions that would require particular attention in;the audit.;Include a final conclusion recommending the areas of;audit focus based on the risk assessment processes undertaken in the;previous sections.;Additional;Information;The following inherent;risks have been identified in respect of Cloud 9;Growth of revenues;given industry outlook and management incentive;Risk Description;Consumer discretionary spending is low and;expected to grow by only 2% for the year.;Management receive bonuses based on revenue targets, which was set at;3%. General economic conditions will;also impact retail businesses with their recoverability of debt and the;valuation of assets.;Risk Assessment;??..;Use of IT for;inventory management system;Risk Description;Retail businesses are reliant on a smooth supply;chain process. Where a business uses products with a long lead time, there is;significant pressure to ensure that the correct type and quantity of stock is;ordered to meet the requirements of customers.;Level of;competition;Risk Description;Most sectors of retailing are relatively mature;and continue to compete on the traditional basis of price, brand strength and;level of market power. Price remains;important in most high volume areas of retailing.;Merchandise cycle;and fashion trends;Risk Description;Rapidly changing fashion trends can result in;obsolete stock.;Misappropriation of;stock and cash;Risk Description;Retail business selling highly desirable and;moveable products will be exposed to a risk of theft. In addition, employees handling cash at store;locations increase the risk of theft of cash.;Rebates/Discounts;to retailers;Risk Description;For the wholesale business, there is;significant pressure from retailers to receive generous rebates or volume;discounts. Retailers are heavily influenced;by landlords and consumers, therefore they control their profits through the;supply chain, thus impacting the wholesaler.;Ratio Analysis;(treating all provisions as CL;and all interest bearing liabilities as NCL);(annualising all P&L items);(averages used for current year;only - not available for previous year);Liquidity;ratios;2015;2014;Current ratio;CA/CL;2.05;2.64;Quick ratio;Liquid assets/CL;0.99;1.40;Inventory turnover;COS/Ave Inventory;2.81;2.62;Accounts receivable;Credit sales/Ave Receivables;3.50;5.43;Solvency;ratios;Debt to equity;Liabilities/equity;5.03;3.25;Times interest earned;Op profit bf interest and;tax/interest expense;-0.91;2.91;Profitability;ratios;Gross profit ratio;Gross profit/sales;0.54;0.52;Net profit ratio;Net profit/sales;-0.06;0.03;ROA;Net profit/ave total assets;-0.10;0.04;Return on Shareholder funds;Net profit/ave common;shareholders equity;-0.49;0.18


Paper#41506 | Written in 18-Jul-2015

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