Accounting Practice

Accounting Practice

The greater the amount of operating cash flow, the better. There is no standard guideline for the operating cash flow/sales ratio, but obviously, the ability to generate consistent and/or improving percentage comparisons are positive qualities. It would be a concern to see Sac’s sales grow without a parallel growth in operating cash flow. Positive and negative changes in Sac’s terms of sale and/or the collection experience of its accounts receivable will show up in this indicator. B) The audit risk needs to be planned to a lower level based on the higher control risk.

Therefore, the detection risk has to be lower to reach the acceptable level of audit risk, which means more samples and substantive procedures need to be performed especially on payroll cycle and balances ND transactions related to cash flow. C) Potential ethical issues that might affect our audit plan: Integrity of Sac’s management: like mentioned previously, it is reasonable doubt for Sac’s management’s integrity due to the fact that they failed to collect income tax and other deductions for the employees worked in Canada and had their LISA parent company paid.

The management either intended to do so to try to hide the cash flow problem or lack the knowledge Of knowing their responsibility Of collecting income tax and pay THE when they make termination payment. Besides, when the time we did review of TTS, we were not told by the management the termination and payment from USA Company. Therefore, I would like to recommend to interview with the management first to understand what their intention was and interact with the higher level of management if necessary.

If no correction can be agreed upon or no cooperation from the company, then involve CRA and audit committee. Due care ‘competence of our audit team: based on the fact that several employees have been terminated and nothing has been found unusual during our TTS review, it seems that due professional care and competence of our audit team is also questionable. I would like to recommend that not only use more experienced auditors, but also remind the team that perform the job with due dare to avoid unnecessary undetected misstatements. Kook forward to discuss the details with you! Sincerely, Ray n Question 3 a. A Memo to Albert Dossiers: Feb.. 18, 2007 Albert Dossiers, Audit Manager, Morrison and Associates Wee Lieu, CA, Audit Manager, Morrison and Associates Us object: Assessment for financial position and audit at Prime Restaurant Suppliers Ltd (Prime) Dear Albert, Upon your request, I have analyzed Prime’s financial ratios and the balance whet and reviewed the audit work done by Paul. I would like to discuss the following issues with you: I.

After analyzed and evaluated Prime’s financial ratios and the balance sheet, the following are the problem areas that could impact the nature of the audit work required thus need our special attention: Inventory: it has increased significantly over the past two years, 27% in xx and 35% in xx. And inventory turnover has dropped 0. 6 from 3 in xx to 2. 4 in xx. It is an indication of either excessive inventories or ineffective buying or misstatements of valuation in inventory. Substantive reoccurred would be required to make sure the assertions of existence, valuation, ownership are fairly presented.

Performing test counts of inventory should be done more cautiously. Accounts receivable: It increased 8. 7% in xx and 43% in xx. And receivables turnover has dropped 0. 4 in xx and dropped 0. 6 comparing to industry average. Meanwhile, the average collection period has increased 16. 8 days, which increased 21 However, sales only increased 13% in xx. All of these indicated that the collection of accounts receivable is questionable and Prime’s credit policies might not be efficient or the allowance for bad debt is not adequate.

Therefore, more positive confirmation Of accounts receivable might be necessary to ensure the existence and valuation; review allowance for doubtful accounts to make sure whether it is adequate; review aged AR report; review credit and collection policies; perform cut-off procedures and so on. Sales: Even though sales have increased in xx by 13% and in xx, but net income dropped significantly by 47% in xx and 0. 3% in xx. And gross margin has dropped 4. 5% in xx and 8. 9% lower than industry average. Net margin has dropped by 2% in xx.

When interest expenses are lower than priors years due to lower bank loans and mortgage and term loans and other operating expenses has no signs of increase, the reason for higher sales but much lower net income (before tax) are focused to costs of goods sold. Again, we need to take extreme cautions to make sure that existences, valuation, ownership of inventory are fairly presented. On the other hand, more procedures need to be done to make sure the revenue recognition is reasonable. Cash flow/accounts payable-inventory: it has no balance recorded on the balance sheet for cash. Even though Primes current ratio is 1. 9, but kick ratio is only 0. 65. Even worse is that accounts receivable is not dependable due to potential collection problem or overstatement. Accounts payable-inventory has increased 37% in xx, plus other current liabilities, Prime is facing a serious cash flow problem. The significant increase in Accounts payable-inventory pointed out again the problem of inventory, either excessive inventory has been obtained or ineffective buying has been happening. Substantive procedures should be performed cautiously on accounts payable-inventory to make sure its valuation, existence.

Positive bank confirmation should be obtained. Income tax payable/future income tax liabilities: income tax payable has decreased 81% in xx but future income tax liabilities increased 4. 7%. In total, it decreased 40% while net income decreased 47%. Examining the computation is necessary to make sure fair presentation of these two figures. Ii. With respect to Pall’s recommendation regarding the audit report, I have the following different opinions: I don’t agree that Paul restricted subsequent evidence accumulation to Prime’s accounts receivable and inventory.

From part I analysis of financial ratio and the balance sheet, we know that Prime has a gig control risk in accounts receivable and inventory, therefore, we can not restrict subsequent evidence accumulation. Controversially, sufficient evidences need to be collected to allow the audit risk lower to an acceptable level. Paul concluded from what he could observe that internal control were present and appeared to be operating as intended. This is not correct. First Of all, internal control has to be tested whether we rely on it or not. Secondly, Prime only did review engagement for prior years and never be audited.

And an audited financial statement is needed for Prime’s loan approval process hush the management has the motive to manipulate the statements to get the loan. Plus concerns showed from their financial ratios and balance sheet, including high increased inventory, AR, AP, cash flow problems, all of these facts indicates that we are facing a client with high control risk and inherent risk. Internal controls have to be tested. Paul concluded that changing of LIFO accounting from FIFO has no big impact on income statement and balance sheet due to consistent inventory cost over the year.

That is wrong. The inventory was increased significantly over two years, which means the cost of inventory in xx could e very different comparing to xx. More importantly, if LIFO is allowed used in xx, a retroactive procedure need to be done for previous years financial statements. Paul instructed the other assistant to ensure that goods shipped in the last few days of the year Were recorded in sales. The shipped goods to customers is not the only criteria that we can recognize the sales.

We need to make sure other criteria also presented, such as the amount can be measured and collection is reasonable assured or an allowance of bad and doubtful accounts is properly set up. 10 confirmations for AR have been sent out. I am not quite sure what this number are based on. But if it is just a random number, no sample size and materiality was put into consideration, it is not appropriate number. Paul believed that testing was sufficient for him to issue unqualified audit opinion. Based on all above mentioned disagreement, this conclusion is certainly too early to make.

More substantive procedures need to be done. Evidences collected so far is not enough to make conclusion. Iii. Other issues: Without permission from Mrs… Orenstein, who is the owner of Godhood Manufacturing, Paul showed Marvin a copy of Godhood’s uncial statements and advised him about Mrs… Runniness’s plan to retire. This is violation of confidentiality policy. I think we should advise Paul and inform Goods as soon as possible and explains the situation. Even though it might benefit the both parties, we still need to prepare for Godhood’s complain/lawsuit. Kook forward to hear from you and discuss more in details. Wee Lieu b. Prime should consider the acquisition of Godhood mainly based on the They are in the same industry but focus on different customers. By acquiring Godhood, Prime can expand its business into larger restaurant market. Prime’s strong sales team has been successful in generating leads to attract new customers. Therefore, it meets Mrs… Runniness’s desire to invest additional effort to build up sales levels. Good Food has plenty of excess capacity that can compensate Prime’s shortage Of cash flow and other capacity.

The concerns about financing the purchase: Prime might have difficulty to obtain a long term loan to finance its purchase based on its current financial position. Even though Prime has increased sales in xx and xx, but net income has dropped 47% in xx. It has large and increased current liabilities UT has no reliable cash flow to depend on. Inventory is excessive, and Ear’s average collection period is dropped. Return on total equity has dropped to 6. 7% from 13. 6% due to big drops in net income. All financial information is negative and can not support its financing request.

However, if Prime can conquer the storage constraints and change back to FIFO accounting, it might be a big difference. Its cost Of goods sold would dropped and net income would be Increased! Question 4: A Letter to Board of Directors: Wee Lieu, CA Xx Audit and consulting Firm Board of Directors, Thiensville Recreation Centre (TRY) Date: December xx, 2009 Dear Board members, It is my great pleasure to be in the position of providing my opinions regarding the creation of TRY and upcoming transfer of the recreational facilities from the municipality to TRY.

The following you will find the discussions related to that and other issues requested by you, including the proposal for the social media site. Creation of TRY and transfer of the recreational facilities from the municipality: o As what we all understand, the purpose of creating another independent legal entity, TRY, is to getting better information for decision asking; to offer a wider range of lessons and activities on a cost-effective basis.

It is agreed that Thiensville would transfer not only all existing properties of the recreational centre operations and any related debt, but also all employees of the recreational centre. Therefore, from the financial perspective, TRY will record all transferred properties at fair value, record all related debt for remaining balance per bank’s confirmation, including unpaid accrued interests.

A deferred capital contribution would be used to reflect the funding from Thiensville. As for all employees being assured that they would till be eligible for pensions as well as health and insurance coverage, the board need to make sure the details of the pension plans need to be discussed and prepared to accommodate old employees and new employees and make sure the pension policies and procedures as well as health and insurance coverage policies and procedures are in place.

Please follow and like us:
Haven’t found the essay you want?