MAA303 Auditing
Trimester 3, 2018
Assessment 2, Part B– Case study
DUE DATE AND TIME: Week 8, 10/1/2019, before 11:59PM
PERCENTAGE OF FINAL GRADE: 20%
WORD COUNT: XXXXXXXXXXwords (maximum) without calculations and appendices, if any
Relevant Learning Outcome Details
Unit Learning Outcome (ULO)
Graduate Learning Outcome (GLO)
ULO3: Apply the concepts and processes used by audit and assurance service providers to plan and perform assurance engagements in a professional manner.
GLO1: Discipline-specific knowledge and capabilities
GLO4: Critical thinking
GLO5: Problem solving
Assessment Feedback:
Students who submit their work by the due date will receive their marks and feedback on CloudDeakin in fifteen working days.
Note on referencing: The nature of this assessment does not call for extensive referencing and citations. However, students are expected to determine when citation and referencing are necessary and must co
ectly apply the Harvard style of referencing.
Submission Instructions
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Notes
· Penalties for late submission: The following marking penalties will apply if you submit an assessment task after the due date without an approved extension: 5% will be deducted from available marks for each day up to five days, and work that is submitted more than five days after the due date will not be marked. You will receive 0% for the task. 'Day' means working day for paper submissions and calendar day for electronic submissions. The Unit Chair may refuse to accept a late submission where it is unreasonable or impracticable to assess the task after the due date.
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Description / Requirements
Case Study – Beautiful Products Limited
You are the audit manager of Beautiful Products Ltd (Beautiful), a company that designs and manufactures beauty and cosmetic products. You are planning the audit for the financial statements for the year ending 30 June 2018. You have just attended a planning meeting with the Chief Financial Officer (CFO), Christian Fior, where she gave you the projected results for the financial year. Below is a summary of the projected financial information, as well as the notes taken at the meeting by yourself:
Notes from the meeting with Christian Fior:
Business update:
Beautiful Products is facing difficult trading conditions. Consumer spending has declined due to a recession in the economy. The beauty and cosmetic market is a very competitive industry and a major competitor launched a very successful new cosmetics range during the year, which led to an overall decline in sales across Beautiful Product’s
ands.
Financial matters:
Cash flow has also been a problem this year, largely due to the cash spent on developing a new product range. To help to reduce cash outflows, some new assets were acquired and an extension to the company’s bank loan was negotiated.
Human resources:
In December 2018, the internal audit department of Beautiful Products performed a review of the operation of controls over processing of overtime payments in the human resource department. It was found that the company’s specified internal control procedures in relation to the processing of overtime payments were not be adhered to and followed.
Ongoing litigation:
Beautiful enjoys a good reputation, though this has been tarnished somewhat by a complaint by a famous actor who claimed that, following the use of one of Beautiful’s products, the product contained a chemical which damaged his skin. A court case is on-going and is attracting media attention. Lawyers estimate that damages of $500,000 are probable to be paid. No adjustment has been made to include it in the statement of financial position or the statement of profit or loss.
Required:
(a) Define the materiality concept and explain why it is important.
Using the materiality benchmarks and thresholds (provided below), calculate the planning materiality figures that should be used in the audit of Beautiful Products Limited for both Income Statement and Balance Sheet items.
Justify your calculation and the percentages used.
(b) Perform an analytical review of the company’s performance using the financial information provided below (2018 Projected & 2017 Actual);
(c) Based on the results of the analytical review, identify and evaluate the inherent and control risks to be considered in planning the audit of the financial statements.
Hints:
Use ratio analysis technique to perform analytical review, including, but not limited to the ratios given below.
When calculating the materiality figures to be used, the auditor will use specific benchmarks and thresholds. The benchmarks and percentages are as follows:
Total Sales/Revenue: 0.5% -1%
Total Assets: 1% - 2%
Net Profit: 5% - 10%
Depending on the risk assessment performed, the auditor would decide whether to use the lower end of the percentage range or the higher end of the percentage range. The higher the risk assessed by the auditor, the lower the materiality figures need to be.
Guideline for ratio calculation:
Ratio
Formula
2018 Projected
2017 Actual
Profitability Ratios
Gross margin
* 100
Net Profit margin
* 100
Return on Assets
* 100
Return on Equity
* 100
Return on Investment
* 100
Liquidity Ratios
Cu
ent Ratio
Quick Ratio
Inventory turnover
Accounts (Trade) receivable turnover (in days)
*365
Accounts (Trade) payable turnover (in days)
*365
Debt to Equity ratio
1
FINANCIAL RESULTS AND PROJECTIONS
Beautiful Products Limited
Statement of Financial Position as at 30 June
2018 Projected
2017 Actual
$ '000
$ '000
Assets
Cu
ent assets
Cash
-
1,000
Trade receivables
900
800
Inventories
2,600
2,165
Total cu
ent assets
3,500
3,965
Non-cu
ent assets
Property, plant and equipment
21,500
19,400
Intangible Assets
2,250
-
Total non-cu
ent assets
23,750
19,400
Total assets
27,250
23,365
Liabilities
Cu
ent liabilities
Trade payables
1,340
850
Taxation
50
450
Bank overdraft
900
-
Provisions
500
200
Other payables
860
685
Total cu
ent liabilities
3,650
2,185
Non-Cu
ent Liabilities
Bank Loan
3,800
2,600
Other long-term liabilities
8,025
7,125
Total liabilities
15,475
11,910
Equity
Share Capital
8,000
8,000
Reserves
2,500
2,000
Retained earnings
1,275
1,455
Total Shareholders’ Equity
11,755
11,455
Total Equity and Liabilities
27,250
23,365
Beautiful Products Limited
Income Statement for the year ended 30 June
2018 Projected
2017 Actual
$
$
'000
'000
Sales Revenue
8,000
9,500
Cost of sales
(5,700)
(6,000)
Gross Profit
2,300
3,500
Operating expenses
(1,500)
(1,650)
Operating Profit
800
1,850
Finance costs
(150)
(120)
Profit before income tax expense
650
1,730
Income tax expense
(195)
(520)
Profit for the yea
455
1,210
Marking criteria: Your work will be assessed based on the following marking ru
ic:
Needs further development
Satisfactory
Well done
Exceeds expectations
Exceedingly high standard
Evaluation of Information
(10 %)
Information is used with some interpretation/evaluation, but not enough to develop a coherent analysis or synthesis. Analyses and evaluates information to complete a limited range of activities. Analysis and evaluation reflect little expert judgment, intellectual independence, rigour and adaptability.
Selects relevant information to address the issues in the case. Identifies logical flaws in the information provided in the case. Analysis and evaluation reflect acceptable level of intellectual independence, rigour, authoritative judgment and adaptability.
Selects relevant information to address the issues in the case. Identifies and rectifies logical flaws in the information provided in the case. Information is often selected with interpretation/evaluation to develop a comprehensive critical analysis or synthesis. Evaluates available information, identifies missing information. Analysis and evaluation reflect good intellectual independence, rigour, authoritative judgment and adaptability.
Systematically selects relevant information to address the issues in the case. Identifies and rectifies logical flaws in the information provided in the case. Information is often selected with a high level of interpretation/evaluation to develop a comprehensive critical analysis or synthesis. Thoroughly evaluates available information, identifies missing information and makes reasonable assumptions to fill gaps in evidence. Analysis and evaluation reflect a high level of intellectual independence, rigour, authoritative judgment and adaptability.
Systematically selects relevant information to address the issues in the case. Identifies and rectifies logical flaws in the information provided in the case. Information is selected with a high level of interpretation/evaluation to develop a comprehensive critical analysis and/or synthesis. Very thoroughly evaluates available information, identifies missing information and makes reasonable assumptions to fill gaps in information needed to address issues in the case. Analysis and evaluation reflect a consistently very high level of intellectual independence, rigour, authoritative judgment and adaptability.
Use of Existing Knowledge
(50%)
Often employs knowledge not relevant to the issues in the case, or representing limited points of view/ approaches