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Part 1- Materiality
a.Using the 30 September 2011 trial balance calculate planning materiality and include the justification for the basis that you have used for your calculation
In the present case study organsiation cloud 9 is taken for the research purposes which lay accentuation on the revenue approach rather than accounting for the income approach evaluating the planning materiality into account. The overall approach of planning materiality has been viewed as the best technique for an internal evaluator while panning review of a specific substance in Cloud 9 organsiation. The general procedure of review can be moved and shifted toward the premise of sales generated during an accounting period. As per Emil, et. al. (2010), the main motivation behind why this approach has been acknowledged and taking into planning materiality process rather than taking income approach has been described as follows-
It is conceivable that Cloud 9 group organization couldn't create proper benefit in a specific year because of a few conditions however overall revenue of the group has been expanded considerably. As represented by the financial statements of the year ending December 31st 2011 there do sustain certain cases which occurred with the organization cloud 9 there has been certain misfortune as spoke to through budgetary plan articulations. Overall revenue of the organization from earlier year has been expanded while reviewing the past performance, in this way it can be the reason to take revenue approach into account for arranging materiality by the evaluator.
As revenue of the group represents the complete database therefore total revenue of the cloud 9 group including all the segments (wholesale & retail) should be taken into account. All the immaterial incomes generated from various other investment sources are irrelevant for current materiality considerations.
1.Appropriate procedure is designed as the part of audit materiality and well disclosed by the auditor in the audit assignment.
2.It refers to duties, obligations and responsibilities of the auditor as well as management of the Cloud 9 organsiation.
In the case study referred above the organization cloud 9 is producer and also retailer managing in modified ball shoes. As in the case it has been observed that the company is a listed organisation in recognised stock exchange, therefore it has to follow all the audit norms and guidelines prescribed by the relevant authorities. Apart from the audit materiality it has been witnessed that the company Cloud 9 met out its desired target of enhancing the overall group revenue by 3 % and it has comfortably achieved the same by grabbing substantial portion of footwear market of Australia. As observed by the comparative financial Statements Company is reducing the external debt proportion to a great proportion, this in turn affected the organisational liquidity and profitability due to payment of interest costs. Because of opening of new stores to create more income has prompt bring about misfortune for the money related year generally organization more likely than not produced suitable benefit (Kristensen, 2015). Because of increment in advance $2 million in the budgetary year benefit has been diminished because of standard reimbursement of advance more than five monetary years. It is vital for the organization to oversee income fittingly to reimburse the credit appropriately. The helplessness of high hazard can be set by the administration to a general rate at 4%. The normal hazard ought to be assessed and ought to be isolated according to the level of weakness and level of event to the association. While preparing the risk assessment report and making vulnerability analysis auditor of the group has set a rate of 4 % for planning materiality. Company should work out in a manner that both external and internal risk is managed in acceptable business appetite. Certain procedures should created to manage the expected risk and these processes are needed to be documented in appropriate business manual (Joldo?, et.al., 2010).
Part 2- Analytical Procedures Required
a.Using analytical procedures and the information provided in the appendix, perform an analysis of Cloud 9’s financial position and its business risks. Discuss the ratios indicating a significant or an unexpected fluctuation.
There has been improvement witnessed in the overall financial position of the Cloud 9 group. Internal management has reshuffled the capital sources. Cloud 9 management is working out effectively and efficiently in the process of improving the risk position of the group. The changes are being witnessed by the comparative financial statements and comparative proportionary analysis prepared by the analyst using two years financial data of Cloud 9. Certain changes are being made at a considerable level to meet out the standard requirement of the industry in which the organisation is trading. As taking in reference to the above financial statement for the year 2010 and 2011 it has been observed that the liquidity position of Cloud 9 group showcases the upward trend. Though there is increase witnessed in both current asset and current liability proportion but proportionate increase in current liability is comparatively lower than that of current asset. This might be due to the fact company has incurred paid out its current liability proportion against the current year profitability. Though reducing the external debt is good approach but substantial variations from the last year data must be scrutinised in an appropriate manner by the external auditor and to be reported accordingly. .
The current ratio of the company has been improved over the period of time which reduces the vulnerability of the short term creditors. As due to this impact, the capacity of the company to meet out its current liability on timely basis has been improved. This case has been similarly viewed in the case of quick ratio where the ultimate cash portion represented by the quick asset has turned out higher than the proportion of current liability. From 0.97: 1 data of the 2010 the company quick ratio has been improved to 1.46: 1.
While considering the debt equity ratio in the present approach the company is working out to reduce its debt proportion as in comparison to the equity capital proportion. From 2.41: 1 debt equity ratio there has been substantial reduction in debt resulted out in dent equity proportion of 0.30:1. Too much of dependence on the equity capital will raise the overall cost of the business in paying out dividends and there is enhancement of dilution of business control.
1.Though there is overall improvement in the financial positioning of the group but substantial changes during the course of a year need material reporting requirements by the management and auditor of the group (Masoud & Badugu, 2015).
b.Prepare a common-size statement for the balance sheet of Cloud 9, use total assets as the basis for the balance sheet. Comment on any audit implications revealed by your statement.
Comparative financial statements are prepared with a view of making the comparison of financial resources and liabilities in terms of past year performance or making basis of particular element in case of common sixe statement. In the present case total asset is taken as base for creation of proportionate analysis on the basis of total assets (Raju, 2012).
On checking on the above relative monetary proclamations of Cloud 9 financial statement of year 2010 and 2011, it has been watched that there is increment in working capital among the total asset of the business as the extent of current resources is expanding over the timeframe. The company is investing more in current asset as in comparison to the settled resources of the group. There is huge deviations witnessed in the debt proportion of the group, an external auditor must investigate the matter and discover the purposes behind the deviations. The obligation extent of the organization has been diminished because of unreasonable payouts of the external debt liability. According to the review suggestion is generated as according to the legitimate laws and consistence of the important tradition that must be adhered to. At present there are a few rules and regulations which are should have been examined by the external auditor. The auditor has certain audit implications which makes sense about the duties and responsibilities performed by the audit professional during the course of audit –
1.The primary objective of an auditor is to generate an audit report for the external stakeholders while following the principal approach of integrity and non- biased behaviour.
2.Substantive approach has been taken into consideration during the course of audit procedures.
3.All the material items which need segment reporting and that might affect the going concern of the firm must be analysed properly (Chiang, et. al., 2010)..
4.The vouching and verification techniques should be utilised while auditing the overall financial statements of Cloud 9 Pty Ltd.
Which specific areas do you believe should receive special emphasis during your audit?
Potential issues and concerns that needs to be addressed by the audit professional during the course of audit while taking into reference financial statement of Cloud 9 group for the year 2010- 2011.
As per the audit assignment the task to be performed during the course of audit is as per normal compliance and procedures which are accepted at general. The job of the auditor is to present true and fair view on the financial statements presented by the company. No doubt your firm will perform the job with great efficiency but there are certain items which are needed to be addressed and taken care of with additional effort. There are certain elements which has issues in past and areas of vulnerabilities to external risk are described as follows –
1.Employee position and the areas which can adhere to frauds and errors must be checked and reported accordingly. The activity of the staff involved in payments and sanctioning of external debts must be scrutinised.
2.Discussion of overall audit plan with the Cloud 9 management group must be made to improve the overall efficiency and effectiveness of the audit procedures.
3.As there is substantial deviation witnessed in the credit segment of the financial statement the auditor must work out to attain the appropriate reasons for the same and should report accordingly.
4.All the relevant items which might affect the going concern of the business organsiation must be disclosed as the part of Auditor’s report.
5.Any lacking in the legal and compliance requirement as per the relevant law of the land must form part of auditor report presented to the stakeholders of the cloud 9 group.
Though there is improvement witnessed in the financial structure of the firm while analysing the comparative financial statement and proportionary analysis, still there is adequate focus required to maintain the overall integrity of the firm. Any amended made by the Cloud 9 group in its policy structure should be taken care of. It is the duty and responsibility of an external auditor to update its skills and learning’s according to the changes made in the external environment.
1.Raju, S., 2012, “Comparing and Analyzing Financial Statements to Make an Investment Decision. M (Doctoral dissertation, thesis)”. Available at -http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.840.7999&rep=rep1&type=pdf
2.Masoud, U.M.A. and Badugu, D., 2015, “Financial Statement Analysis of National Bank for Agriculture and Rural Development (NABARD). Int. J. of Multidisciplinary and Current research. Available at -http://ijmcr.com/wp-content/uploads/2015/02/Paper11-55-60.pdf
3.Emil, P.I., Ancuta, S.G. and Timea, F.M., 2010, “Qualitative factors of materiality-a review of empirical research”, Annales Universitatis Apulensis: Series Oeconomica. Available at -http://www.oeconomica.uab.ro/upload/lucrari/1220101/27.pdf
4.Joldo?, A.M., Stanciu, I.C. and Grejdan, G., 2010, “Pillars Of The Audit Activity: Materiality And Audit Risk”, OF THE UNIVERSITY OF PETRO?ANI~ ECONOMICS. Available at -http://upet.ro/annals/economics/pdf/2010/20100221.pdf
5.Kristensen, R.H., 2015, “Judgment in an auditor's materiality assessments”, Danish Journal of Management and Business. Available at -https://www.djoef-forlag.dk/services/djm/ledelsedocs/2015/2015_2/DJoMB_vol79_no2_5.pdf
6.Chiang, C.K.H., Prescott, S. and Northcott, D., 2010, “The challenges of auditing environmental matters in financial reports”. Available at -http://apira2010.econ.usyd.edu.au/conference_proceedings/APIRA-2010-144-Chiang-Auditing-environmental-matters.pdf