Accounting Auditing Assessment 2 Case study analysis and reflection

Note:
1. This assessment task contains two parts: Part A is worth 20% and Part B is worth
10% of your final grade.
2. Late submissions without extended due date granted through especial consideration
(see Note 3 below) are subject to penalty deduction of 1 mark (i.e., 1% of your final
grade) per calendar day.
3. Late submissions may be accepted without penalty deduction only if you apply for a
special consideration (by e-mail) well in advance of the due date and the unit chair
approves your application. No submission is accepted once feedback is released to
other students.
4. Students must complete this task on their own.
Word limit: Maximum of 1000 words for part A and 500 words for Part B. (Note: Don’t
exceed the word limit.)
Relevant learning outcomes
This assessment task contributes to the learner’s achievement of the following unit learning
outcomes (ULOs):
LO2: Use professional and ethical judgment in applying relevant legal and professional
pronouncements to all stages of a given assurance engagement.
LO3: Apply the concepts and processes used by audit and assurance service providers to
plan and perform assurance engagements in a professional manner.
Part A – Audit planning case study (20%)
Medium Business Ltd. (MBL)1
Introduction
In September 2014, Michelle Jackson, an audit partner at XYZ Chartered Accountants (XYZ)—
a second-tier auditing firm based in Melbourne—evaluated and recommended accepting a new
audit client, Medium Business Ltd (MBL). MBL is a medium-sized business engaged in retail
trading in Melbourne. Michelle evaluated the MBL and XYZ’s independence from this client.
She also assessed XYZ’s competence to conduct the audit and considered the firm’s ability to
exercise due care in this engagement. XYZ issued an engagement letter and started MBL’s audit
for the year 2014. Alex Jones was assigned as an audit manager in charge of planning and
supervising the conduct of the MBL audit.
MBL’s background
MBL is a retailer of office equipment and supplies. Its inventories include computers, printers
and stationery products. The company was established as a family business in the 1990s by
Joseph and his wife, Melissa. A total of five family members owned all of MBL’s shares as of
30 June 2014. Joseph is MBL’s chief executive officer and chairman of the board of directors.
All other shareholders hold positions in the board. MBL is organised into six divisions, namely,
Sales & Stores (S & S), Purchases, Inventory, Shipping, Finance, and Information Systems (IS).
Each division is headed by a division manager reporting to Joseph. The S & S division conducts
sales both online and in MBL’s stores located in five suburbs in the Melbourne region.
Most of MBL’s sales are made on credit. Sales are also made in cash and by EFTPOS
(Electronic Funds Transfer at Point of Sale) to a range of customers. The Purchases division
buys inventory upon receipt of purchase requisitions from the S & S division. All transactions
of MBL are automated, and MBL’s IS staff regularly evaluate the system and upgrade it as
appropriate. The existing system, in which the activities of the six divisions are integrated, has been installed five years ago. According to the assessment of the IS division head, MBL’s

system is currently considered adequate for the company’s needs.
Over the past few years, demand for some of MBL’s inventories declined because of
environmental awareness of customers and the increasing adoption of more environmentfriendly
office practices. As a result, the company introduced new products during the current
accounting period. In addition, competition has increased in the industry in which MBL
operates. To maintain its slightly declining market share, MBL extended its standard credit
period from 30 days to 40 days.
The accounting division of MBL has experienced high staff turnover during the past three years
although MBL has been offering competitive salary and benefits to attract and retain wellqualified
accounting staff.
Financials
Alex and his team of three staff auditors formulated the audit plan during the first half of
November 2014. This task involved conducting risk assessment, determination of the overall
audit strategy, setting a materiality threshold and identification of key areas of audit attention.
Exhibits 1 and 2 below present information extracted from the working paper for MBL’s audit
for 2014.
Exhibit 1. Comparative financial statement information
Medium Business Ltd
Statement of financial position
At 31 December 2014
2014
($’000)
2013
($’000)
2012
($’000)
Current Assets
Cash 1,360 1,375 1,150
Inventory 6,996 5,867 3,317
Prepayments 749 620 250
Trade Receivables 3,016 2,320 1,928
Total current assets 12,121 10,182 6,645
Non-current assets
Property, plant and equipment 10,011 4,125 3,231
Long-term receivable 3,168 4,205 4,947
Total non-current assets 13,179 8,330 8,178
Total assets 25,300 18,511 14,823
Current Liabilities
Trade Payables 4,893 3,966 4,192
Provisions 1,014 1,500 750
Total current liabilities 5,907 5,466 4,942
Non-current liabilities
Long-term loan payable 10,518 4,305 3,792
Total liabilities 16,425 9,771 8,734
Net assets 8,875 8,740 6,088
Shareholder’s equity
Share capital 3,846 3,846 3,846
Retained earnings 5,029 4,894 2,242
Total Shareholders’ equity 8,875 8,740 6,088
Medium Business Ltd
Income Statement
For the Year ended 31 December 2014
2014
($’000)
2013
($’000)
2012
($’000)
Sales 25,282 29,750 30,383
Cost of sales 20,144 20,952 23,862
Gross profit 5,138 8,798 6,522
Depreciation Expense 2,422 2,521 2,209
Inventory obsolescence 484 531 166
Marketing expense 25 80 35
Administrative expense 1,434 1,136 1,334
Interest expense 565 450 650
Total expense 4,930 4,718 4,394
Profit before tax 208 4,080 2,128
Tax expense 73 1,428 745
profit after tax 135 2,652 1,383
Exhibit 2: Key ratios identified by the audit team
MBL key financial ratios* Industry Averages
2014 2013 2012 2014 2013 2012
Current ratio (Note 1) 2 2.01 2.12
Quick ratio (Note 2) 1.01 1.15 1.11
Debt-to-equity ratio (Note 3) 0.64 0.6 0.49
Times interest earned (Note 4) 3 4.5 5
Ave. Coll. period (days) (Note 5) 32 31 30
Ave. pay. period (days) (Note 6) 30 22 22
Days to sell inventory (Note 7) 48 45 40
Gross profit Margin (Note 8) 25 23 27
Net profit Margin (Note 9) 5 6.5 8
* Note that MBL’s ratios are intentionally omitted. You are expected to calculate
and interpret them as necessary, using formulas provided below.
Notes:
1. Current ratio = (Total current assets/Total current liabilities )
2. Quick ratio = (Cash + trade receivable)/(total current liabilities)
3. Debt to equity ratio = (Total liabilities)/total shareholders’ equity
4. Times interest earned = (profit before interest and tax)/ interest expense
5. Ave. Collection period (days) = 365/[(Net sales)/(Trade receivables balance)]
6. Ave. payment period (days) = 365/[(Cost of Goods sold)/(Trade payables balance)]
7. Days to sell inventory = 365/[(Cost of Goods sold)/(inventory balance)]
8. Gross profit Margin = (Gross profit)/Net Sales
9. Net profit Margin = (profit after tax)/Net sales
Required: Assuming that you were in the position of Alex Jones, prepare an audit planning
memo addressed to Michelle Jackson. Your memo should include:
a) A discussion of audit risk indicators present in this audit engagement and how these
factors affect your assessment of the risk of material misstatement.
(If sufficient information is not provided in the case study, indicate possible sources of
information and how you could have used such information in the risk assessment.)
b) A recommendation of overall audit strategy appropriate for this engagement (with
justification);
c) Identification of key accounts (or transaction classes) that merit special audit attention
(with justifications);
d) Your preliminary quantitative materiality threshold (at the financial statement level),
and explanation of how you will use the calculated materiality threshold in planning the
audit.
Part B – Evidencing Critical Thinking and Problem Solving (10%)
Objective
The objective of Part B of this assessment is to consider, justify and then evidence your development
of Critical Thinking and Problem Solving Skills in relation to Auditing, based on what you have done
to address complete Part A of the assessment task.
Task
You are required to consider and provide evidence of how the work you completed through the case
study analysis in Part A demonstrates your Critical Thinking and Problem Solving skills. Complete
this task as a narrative.
Consider you are applying for a Graduate Auditor position and you would like to demonstrate your
Critical Thinking and Problem Solving skills by citing as evidence what you have done in completing
Part A of this assessment.
Critical Thinking: is defined in the Oxford Dictionary as an objective analysis and evaluation of an
issue in order to form a judgment. This involves distinguishing between fact and opinion and
evaluating the validity of information, theory and sources of information.
Within the Accounting Profession, Critical Thinking is defined as exercising judgment to solve
problems using social, ethical, economic, regulatory and global perspectives (altc, 2010).
Resources – https://www.youtube.com/watch?v=6OLPL5p0fMg#t=139
Problem Solving: is defined in the Oxford Dictionary as the process of finding solutions to difficult or
complex issues. It is the process of working through the details of a problem, in order to reach a solution,
in a systematic way. To read more, access http://www.businessdictionary.com/definition/problemsolving.
html#ixzz3CsrSNims
Identify parts of your case study responses that provide evidence you have developed skills in Critical
Thinking and Problem Solving.
Provide a brief background to the excerpt selected so your audience understands the situation.
Justify why you have selected these examples as evidence of your Critical Thinking and Problem
Solving learning. How do you think that these excerpts showcase your Critical Thinking and Problem
Solving skills?
Often students can find reflective writing challenging and are unsure of how to do this and why it is
important. Before attempting this section it is recommended that you review the resource available at:
http://www.powtoon.com/show/dN8w6Vy9RAS/critical-thinkng/#/
Submission requirements
Each student will need to submit both Part A and Part B in one document, via the submission dropbox
by the due date. This will be available in the Assessment area of CloudDeakin
Reference
Hancock, P, Freeman, M and Associates 2010, Learning and Teaching Academic Standards
Project Business, Management and Economics. Learning and Teaching Academic Standards
Statement for ACCOUNTING, Australian Learning and Teaching Council, Australia,
<http://www.olt.gov.au/resource-accounting-ltas-statement-altc-2010>.

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