Assignment 9 : Risk Assessment (Through Figures)

Q.1 In the planning phase of the audit of Dynamic Limited for the year ending 30 June 2012, you have calculated the following ratios
from the management accounts of the company for the eight months ended 29 February 2012:

Eight months period

Year ended Year ended
ended
30 June 2011 30 June 2010
29 February 2012
Gross profit percentage 35% 40% 40%
Inventory turnover days 120 105 78
Current ratio 1.5 2.3 2.6
Quick asset ratio 0.78 1.6 1.7
Times interest earned 0.91 1.67 2.1
Debtors turnover days 132 86 68

Required:
Identify the prospective audit risks which the auditor should consider while planning the audit.
(09 marks)
(CA Inter, Spring 2012)

Q.2 You are beginning your first audit of a local retailer of computers and other electronic items. The
company was previously audited by another reputable public accounting firm, which was replaced
following a disagreement over the audit fee. A condensed income statement for the current year,
prepared by the client, together with audited amounts from the previous years financial statements,
are shown below:
(Unaudited) (Audited)
Year 2010 Year 2009
Sales $ 12,500,000 $ 5,000,000
Cost of sales 10,000,000 4,500,000
Gross profit 2,500,000 500,000
Selling expenses 1,100,000 600,000
General and administrative expenses 900,000 350,000
Income (loss) before taxes 500,000 (450,000)
Income taxes 200,000
Net income (loss) $ 300,000 $ (450,000)

Selected amounts taken from the companys ending balance sheet and other accounts follow:
(Unaudited) (Audited)
December 31, 2010 December 31, 2009
Total assets $ 20,000,000 $ 15,000,000
Total liabilities 15,000,000 10,000,000
Inventories 3,000,000 2,000,000
Accounts receivable 5,000,000 1,500,000
Interest expense 300,000 200,000

Required
Discuss what you learned about the companys operations from your analysis of the financial statement and selected account
amounts, and explain which accounts appear to warrant further investigation and emphasis in testing during the audit.
5
(CGA Canada, External Auditing 2, December 2010)

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Q.3 You are the Audit Manager of Mustafa and Company, Chartered Accountants, responsible for the audit of Standard Home
Appliances Limited, a listed company.

Extracts from the companys financial statements are presented below:

30-Sep-2012 30-Sep-2011
Income statement ----------Rs. in million---------

Revenue 1,190 1,174

Gross profit 509 537
Operating profit 242 227
Finance charges (77)

(69)
Profit before tax 165
158

Statement of financial position

Property, plant and equipment 1,054 833

Intangible assets 140 100
Inventory 423 260
Trade receivables 417 250
Cash and bank balances 29 54
Total assets 2,063 1,497

Equity and liabilities

Share capital 1,000 1,000
Retained earnings 218 233
Long-term borrowings 277 50
Liabilities against assets subject to finance lease 180 -
Bank overdraft 185 52
Trade and other payables 203 162
Total equity and liabilities 2,063 1,497

During the year, the company has introduced various products based on latest technologies. These new
products are being manufactured on a new plant which has been acquired under a lease agreement for a period
of four years. The plant commenced operations on 01 January 2012. The useful life of the plant is 5 years.

Intangible assets represent cost of software installed and designs which have been acquired from a renowned
multinational company.

Required:
Identify and evaluate the audit risks in the above situation. (12)
(CA Final, Winter 2012)

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Q.4 You are planning the audit of Marhaba Limited for the year ended June 30, 2005. The principal activity of the company is the
sale of bricks and paving products to building companies and the general public. All products are purchased from three major
manufacturers in the country. Two years ago, the company diversified into the manufacture and sale of fiberglass chimney
stacks which are also sold to building companies and its sales have grown steadily and now amount to 10% of total turnover.

You have been provided with the following information from the financial statements of Marhaba Limited in respect of the years
ended June 30, 2004 and 2005:
Extracts from the profit and loss account
2005 2004
Rs. in 000
Revenue 24,863 22,659
Cost of sales (21,334) (20,045)
Gross profit 3,529 2,614
Operating expenses (3,220) (2,469)
Operating profit 309 145
Financial charges (114) (27)
Profit on ordinary activities before taxation 195 118
Extracts from the balance sheet
Fixed assets tangible 384 429
Current assets
Stocks 1,760 1,899
Trade debts 6,101 5,092
Prepayments and accrued income 26 23
Cash at bank and in hand 2 4
7,889 7,018
Total assets 8,273 7,447
Less: Current liabilities
Bank overdraft 2,464 1,702
Trade creditors 3,816 3,926
Other creditors 316 305
Accruals and deferred income 216 217
6,812 6,150
Net Current Assets 1,461 1,297
Long term liabilities (93) (97)
Net Assets 1,368 1,200
Required: -
Prepare planning notes on matters which you wish to discuss, in respect of the information above, at the audit planning meeting
with the Finance Director of Marhaba Limited. Your notes should refer to analytical procedures and other general procedures
where relevant. (09)
(CA Final, Winter 2005)

Q.5 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 Zaks 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:
Income statement
31 March 2008 31 March 2007
$000 $000
Revenue 7,482 6,364
Cost of sales (3,520) (4,253)
Gross profit 3,962 2,111
Operating expenses
Administration (1,235) (1,320)
Selling and distribution (981) (689)
Interest payable (101) (105)
Investment income 145
Profit/(loss) before tax 1,790 (3)
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)
(ACCA F8 June 2008)

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