ACCA AA Syllabus B. Planning And Risk Assessment - Analytical Procedures in Planning - Past Papers ^{4 / 5}

Which TWO of the following statements regarding the use of analytical procedures during the PLANNING stage of the audit are correct?

(1) Analytical procedures are useful when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the company

(2) Analytical procedures can be used to obtain relevant and reliable audit evidence

(3) Analytical procedures can assist in identifying the risks of material misstatement

(4) Analytical procedures can assist in identifying unusual transactions and events

A. 1 and 2
B. 2 and 3
C. 3 and 4
D. 2 and 4

You are the audit senior of Holtby & Co and are planning the audit of Walters Co (Walters) for the year ended 31 December 2014. The company produces printers and has been a client of your firm for two years; your audit manager has already had a planning meeting with the finance director. He has provided you with the following notes of his meeting and financial statement extracts.

Walters’s management were disappointed with the 2013 results and so in 2014 undertook a number of strategies to improve the trading results. This included the introduction of a generous sales-related bonus scheme for their salesmen and a high profile advertising campaign. In addition, as market conditions are difficult for their customers, they have extended the credit period given to them.

The finance director of Walters has reviewed the inventory valuation policy and has included additional overheads incurred this year as he considers them to be production related.

The finance director has calculated a few key ratios for Walters; the gross profit margin has increased from 44·4% to 52·2% and receivables days have increased from 61 days to 71 days. He is happy with the 2014 results and feels that they are a good reflection of the improved trading levels.

Financial statement extracts for year ended 31 December

Required:
(a) Using the information above:

(ii) From a review of the above information and the ratios calculated, describe SIX audit risks and explain the auditor’s response to each risk in planning the audit of Walters Co. (12 marks)

You are the audit senior of Rhino & Co and you are planning the audit of Kangaroo Construction Co (Kangaroo) for the year ended 31 March 2013.

Kangaroo specialises in building houses and provides a five-year building warranty to its customers. Your audit manager has held a planning meeting with the finance director. He has provided you with the following notes of his meeting and financial statement extracts:

Kangaroo has had a difficult year; house prices have fallen and, as a result, revenue has dropped. In order to address this, management has offered significantly extended credit terms to their customers.

However, demand has fallen such that there are still some completed houses in inventory where the selling price may be below cost. During the year, whilst calculating depreciation, the directors extended the useful lives of plant and machinery from three years to five years. This reduced the annual depreciation charge.

The directors need to meet a target profit before interest and taxation of $0•5 million in order to be paid their annual bonus. In addition, to try and improve profits, Kangaroo changed their main material supplier to a cheaper alternative.

This has resulted in some customers claiming on their building warranties for extensive repairs. To help with operating cash flow, the directors borrowed $1 million from the bank during the year. This is due for repayment at the end of 2013.

Financial statement extracts for year ended 31 March

Required:

Using the information above:

(i) Calculate FIVE ratios, for BOTH years, which would assist the audit senior in planning the audit; and (5 marks)

(ii) Using the information provided and the ratios calculated, identify and describe FIVE audit risks and explain the auditor’s response to each risk in planning the audit of Kangaroo Construction Co.
(10 marks)

Explain the three stages of an audit when analytical procedures can be used by the auditor. (3 marks)

You are the audit senior of White & Co and are planning the audit of Redsmith Co for the year ended 
30 September 2010. The company produces printers and has been a client of your firm for two years; your audit manager has already had a planning meeting with the finance director. He has provided you with the following notes of his meeting and financial statement extracts.

Redsmith’s management were disappointed with the 2009 results and so in 2010 undertook a number of strategies to improve the trading results. This included the introduction of a generous sales-related bonus scheme for their salesmen and a high profile advertising campaign. In addition, as market conditions are difficult for their customers, they have extended the credit period given to them.

The finance director of Redsmith has reviewed the inventory valuation policy and has included additional overheads incurred this year as he considers them to be production related. He is happy with the 2010 results and feels that they are a good reflection of the improved trading levels.

Required:

Using the information above:

(i) Calculate FIVE ratios, for BOTH years, which would assist the audit senior in planning the audit; and (5 marks)

(ii) From a review of the above information and the ratios calculated, explain the audit risks that arise and describe the appropriate response to these risks. (10 marks)

Zak Co sells garden sheds and furniture from 15 retail outlets. Sales are made to individuals, with income being in the form of cash and debit cards.

All items purchased are delivered to the customer using Zak’s own delivery vans; most sheds are too big for individuals to transport in their own motor vehicles. The directors of Zak indicate that the company has had a difficult year, but are pleased to present some acceptable results to the members.

The income statements for the last two financial years are shown below:

Required:

As part of your risk assessment procedures for Zak Co, identify and provide a possible explanation for unusual changes in the income statement. (9 marks)