You are the audit senior on the audit of EasyFit Pty Limited, a large manufacturer of shoes. EasyFit Pty Limited’s main market lies with 18 to 24 year olds.
This is the first year in which your firm has performed the audit. As part of the planning work, you have performed analytical procedures on an annualised basis and compared the results to industry averages and last year’s audited financial information. The results are given below:
Industry average | EasyFit Pty Limited | ||||
Ratio | 2017 | 2016 | 2017 | 2016 | |
1 | Current ratio | 2.84 | 3.27 | 1.89 | 2.24 |
2 | Receivables turnover ratio | 4.9 | 4.6 | 6.3 | 7.0 |
3 | Inventory turnover ratio | 3.7 | 3.8 | 5.0 | 5.5 |
4 | Return on total assets | 7% | 5% | 13% | 11% |
5 | Net profit ratio | 0.06 | 0.06 | 0.04 | 0.04 |
6 | Gross margin | 0.20 | 0.26 | 0.20 | 0.18 |
Explain the general meaning of each of the above ratios, discuss the conclusions that you can draw about EasyFit’s financial position and identify potential audit risks to be investigated further.
Your firm is auditing the financial statements of Herbert Manufacturing Ltd for the year ended 30 June 2016. You have been assigned to the audit of the company’s property, plant and equipment, which includes freehold land and buildings, plant and machinery, fixtures and fittings and motor vehicles.
The freehold land and buildings were purchased 12 years earlier (in July 2004) for $2 million. At the date of purchase, a valuer estimated that both the land and the buildings each had a value of $1 million. Depreciation has been charged since 2004 on the buildings at 2% per year on cost. At June 2010 the accumulated depreciation is $200,000 before the revaluation.
A qualified valuer, who is not an employee of the company valued the land and buildings at $5 million ($2.9 million for the land and $ 2.1 million for the buildings). These values will be incorporated into the financial statements as at 30 June 2016.
The partner in charge of the audit is concerned at the large increase in the value of the land and buildings since they were purchased. She has asked you to check the reliability and accuracy of the valuation. She suggested that ASA620 Using the work of an expert (ISA 620) could help you when carrying out this work.
In addition, you have been asked to verify the existence and completeness of plant and machinery recorded in the company’s computerised non-current asset register, which records the description of each of non-current asset, the original cost, the depreciation charge and the accumulated depreciation.
Consider each of the following independent and material situations. In each case:
(a) Identify the periods during which the auditor is responsible for identifying subsequent events and indicate the extent of the auditor’s responsibility.
(b) For each of the above events (i) to (iv), state the appropriate action that the auditor would require in order to issue an unqualified opinion for the situation and justify your response.
Do you need high-quality Custom Essay Writing Services?