The present company cloud 9 lays emphasis on revenue in determining the planning materiality. This approach has been considered the best approach for an auditor while panning audit of a particular entity. The overall process of audit can be planned on the basis of revenue of the company. The reason why this approach has been appreciated from other approaches is following:
In the present case company cloud 9 is the manufacturer as well as retailer dealing in customized basketball shoes. The company is listed on the stock exchange and is fulfilling all the obligations which are required for any listed company. Company cloud 9 has set the goal to increase the revenue by 3 percent and it has successfully achieved its goal through increasing its share in Australian footwear market. Due to opening of new stores in order to generate more revenue has lead to incur loss for the financial year otherwise company must have generated appropriate profit. Due to increase in loan $2 million in the financial year profit has been decreased due to regular repayment of loan over five financial years. It is necessary for the company to manage revenue appropriately to repay the loan properly. The vulnerability of high risk can be set by the management to an overall rate at 4%. The expected risk should be evaluated and should be segregated as per the degree of vulnerability and degree of occurrence to the organization (Emil, et. al., 2010).
The management of cloud 9 company group while observing the financial analysis statements is presently comparing the present financial performance with the past year financial data. This is to discover the financial and solvency soundness of the business organsiation (Raju, 2012). The cloud 9 has further option to compare the financial information with other groups trading in the similar industry. The below mentioned table showcase the financial efficiency of the business organsiation while measuring the business organsiation long term solvency and the profitability of the business organsiation.
Current Ratio |
30 September 2011 |
31 December 2010 |
Current Assets |
$ 22,303,997 |
$ 23,459,330 |
Current liabilities |
$ 10,483,051 |
$ 17,050,817 |
Current Ratio |
$ 2.13 |
$ 1.38 |
Quick Ratio |
30 September 2011 |
31 December 2010 |
Current Assets |
$ 22,303,997 |
$ 23,459,330 |
Less: Inventory |
$ (5,924,136) |
$ (6,263,242) |
Less: Prepayments |
$ (1,112,028) |
$ (666,054) |
Quick Assets |
$ 15,267,833 |
$ 16,530,034 |
Current liabilities |
$ 10,483,051 |
$ 17,050,817 |
Quick Ratio |
1.46 |
0.97 |
Debt – Equity ratio = Total Debt / Total equity |
2.41 : 1 |
0.30 : 1 |
While making the above analysis it has been observed that these proportionary analyses showcase the overall potential of the business firm. As observing the above financial proportionary analysis it has been observed that the condition of the business group has been improved over the period of time (Joldo?, et.al., 2010) . There has been substantial improvement witnessed in terms of solvency position of the Cloud 9 group. It shows that the capacity of the business group to meet out its current obligations has been improved. In the general scenario if the current assets can pay out the current liability on timely basis then the overall liquidity position is seemed satisfactory. The risk of the business can be reduced and the business firm is confident enough to raise funds as and when required. This is due to fact external parties like bankers, credits check for the liquidity position while making risk assessment analysis of the group before advancing of the credit. This group will extend the credit only if they are sure about the fact that the current asset or quick assets are sufficient enough to meet out the current liabilities. The solvency ratio in the present scenario while comparing the last year figures has shown the fact that not only these ratios are displaying the favorable position but also fulfilling the requirement of the relevant industry in which the firm is trading out (Tugas, 2012).
Debt equity as a part of solvency ratio of the group it has been analyzed that the long term solvency position of the group has been improved. From 2.41:1 the ratio has been improved to 0.30: 1. But too much of including the content of equity in the overall capital structure portfolio of Cloud 9 group enhances its overall cost of capital. Company has paid up major position of its long term debt out of its current year profitability. This also ensures margin of safety for long term creditors.
Common size statement and audit implication of auditor
|
Balance Sheet |
|||
|
30 September 2011 |
% of Total Assets |
31 December 2010 |
% of Total Assets |
Current Assets |
||||
Cash |
$ 245,965 |
1% |
$ 1,753,765 |
7% |
Trade Receivables |
$ 10,499,174 |
44% |
$ 10,701,064 |
44% |
Inventories |
$ 5,924,136 |
25% |
$ 6,263,242 |
25% |
Financial Assets |
$ 3,987,453 |
17% |
$ 4,075,205 |
17% |
Prepayments |
$ 1,112,028 |
5% |
$ 666,054 |
3% |
other assets |
$ 535,241 |
2% |
||
Total Current Assets |
$ 22,303,997 |
93% |
$ 23,459,330 |
95% |
Non-current assets |
||||
Property, plant and equipment |
$ 1,449,330 |
6% |
$ 852,965 |
3% |
Deferred Assets |
$ 346,949 |
1% |
$ 277,559 |
1% |
Total Non-current assets |
$ 1,796,279 |
7% |
$ 1,130,524 |
5% |
Total assets |
$ 24,100,276 |
100% |
$ 24,589,854 |
100% |
Current liabilities |
||||
Payables |
$ 10,023,185 |
42% |
$ 8,413,818 |
34% |
Interest bearing liabilities |
$ 8,240,091 |
34% |
||
Current tax liabilities |
$ 159,866 |
1% |
$ 207,893 |
1% |
Provisions |
$ 300,000 |
1% |
$ 189,015 |
1% |
Total current liabilities |
$ 10,483,051 |
43% |
$ 17,050,817 |
69% |
Non-current liabilities |
||||
Deferred tax liabilities |
$ 198,647 |
1% |
$ 170,284 |
1% |
Loan |
$ 9,021,836 |
37% |
||
Interest bearing liabilities |
$ 1,500,000 |
6% |
||
Provisions |
$ 401,658 |
2% |
$ 79,567 |
0% |
Total non-current liabilities |
$ 9,622,141 |
40% |
$ 1,749,851 |
7% |
Total liabilities |
$ 20,105,192 |
83% |
$ 18,800,668 |
76% |
Net Assets |
$ 3,995,084 |
17% |
$ 5,789,186 |
24% |
Stockholders’ equity |
||||
Issued Capital |
$ 5,448,026 |
23% |
$ 5,448,026 |
22% |
Reserves |
$ (247,638) |
-1% |
$ (259,498) |
-1% |
Accumulated Losses |
$ (1,205,304) |
-5% |
$ 600,658 |
2% |
Total stockholders’ equity |
$ 3,995,084 |
17% |
$ 5,789,186 |
24% |
On reviewing the above comparative financial statement auditor of Cloud 9 groups commented on too much of infuse of money towards the working capital of the organisation through short term asset route. Company has financed this by the last year profitability and decreasing the share of long term asset out of total asset share (Masoud & Badugu, 2015). Auditor is worried about this act of the company as it is difficult to assess the accuracy of current asset as compared to the fixed asset proportion. Infusing too much of wealth in working capital while selling of the fixed asset is a risk venture. As per the discretion of the stakeholders of Cloud 9 group auditors apart from the normal seeking of accuracy of financial statements they must be cautious in the following areas –
Comments on the common-size statement and as well as your preliminary estimate of materiality
To,
Suzie Pickering
Memorandum defining the problems that are needed to be disclosed while reporting on the overall financial statements of group company cloud 9
The financial statements and profitability statements of the company provided by the management depict true & and fair view. There are certain areas which need to be emphasized in reporting on the overall performance of the company. These issues are important and need to be taken care of while performing audit procedures. Some of the issues are reported below which are required to be considered by the management:
Overall we can say that the performance of the company has been improved from the previous financial year. Although profit could not be earned but there has been increase in revenue from the previous year which shows good performance by the company. Company is appropriately following the relevant accounting standards and policies. The ratios concluded from the financial statements are showing high performance and there are good sign for liquidity and solvency of the company. As all the assets are shown at their historic values therefore it can be seen that the company is duly fulfilling going concern assumption. Necessary steps have been taken to check the reason behind the changes in accounting policies followed by the company during the financial year. It is also very important that the company should adhere to every legal requirement applicable to the company during the financial year. This also includes adherence to the standards and procedures related to the financial statements and the internal control system of the organization.
Company has to work within the ethical and legal requirements and these requirements should be fulfilled while reporting on the overall performance of the company in the financial statements.
References
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 – https://www.oeconomica.uab.ro/upload/lucrari/1220101/27.pdf
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 – https://upet.ro/annals/economics/pdf/2010/20100221.pdf
Tugas, F.C., 2012, “A Comparative Analysis of the Financial Ratios of Listed Firms Belonging to the Education Subsector in the Philippines for the Years 2009-2011”,International Journal of Business and Social Science. Available at –
https://ijbssnet.com/journals/Vol_3_No_21_November_2012/19.pdf
Masoud, U.M.A. and Badugu, D., 2015. Financial Statement Analysis of National Bank for Agriculture and Rural Development (NABARD). J. of Multidisciplinary and Current research. Available at – https://ijmcr.com/wp-content/uploads/2015/02/Paper11-55-60.pdf
Raju, S., 2012.Comparing and Analyzing Financial Statements to Make an Investment Decision. M(Doctoral dissertation, thesis). Available at – https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.840.7999&rep=rep1&type=pdf
McKee, T.E. and Eilifsen, A., 2000. Current materiality guidance for auditors. Available at –
https://brage.bibsys.no/xmlui/bitstream/handle/11250/166032/A51_00.pdf?sequence=1
Zuber, G.R., Elliott, R.K., Kinney Jr, W.R. and Leisenring, J.J., 1983. Using materiality in audit planning. A practical way to relate the auditor’s materiality estimate to the design of audit procedures.Journal of Accountancy. Available at –
https://raw.rutgers.edu/docs/Elliott/28usingmater.pdf
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