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AC2104-Financial Statement Assertions and Audit Evidence

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AC2104-Financial Statement Assertions and Audit Evidence

Nanyang Technological UniversityNanyang Business SchoolAC2104/AC3101 – ASSURANCE & AUDITINGSemester 1, 2016-17Outline for Seminar 6:Financial Statement Assertions and Audit Evidence IIILearning ObjectivesExplain the objectives, use and limitations of analytical proceduresPerform analytical procedures and evaluate resultsRequired ReadingsEMGP: Ch 5 (LO 9-10)SSA 520Pre-seminar ActivityMcGraw-Hill Connect Pre-seminar ActivitySeminar Requirements1. Mini-group presentation (Team 5a)Required:(i) Explain the main purposes of analytical procedures. What factors affect the usefulness ofanalytical procedures as substantive procedures?(ii) Refer to the case details in EMPG, 5-25. Perform a substantive analytical reviewprocedure to assess the reasonableness of the ‘Reserve for returns’. Your answer shouldtake the form of a calculation and a resulting conclusion on the reasonableness of thereserve (provision) amount.End of Mini-group presentation2. You are the audit senior responsible for the audit of Toys4Kids Ltd (T4K). T4Kspecializes in designing, manufacturing and selling its own range of education productsfor children. T4K owns three factories with manufacturing and warehousing facilities inMalaysia. Besides cash sales at its retail outlets, T4K also sells its products to distributorson a consignment basis and to third-party retailers on a 30-day credit term. A large bankin Singapore provides T4K with an overdraft facility of S$1.5 million at 12% interest rateper annum, and a 10-year term loan of S$9 million, which is secured on T4K’s property,plant and equipment, at 3% interest rate per annum.T4K’s research and development (R&D) centre in Singapore has, in the past three years,designed and brought to commercial production an average of fifty new educationproducts a year. However, only a handful of these new education products are eventuallypatented. “As a matter of fact, most of our education products are not patented. Theeducation products industry is very fast-moving and we would be left behind if we wereto wait for patent approvals for all our products. In any case, the demand for mosteducation products is short-lived. Thus, it is more crucial for us to have fresh ideas tocreate new education products that quickly hit the market every year,” said Pearlie, theCEO of T4K.Pearlie, a double-degree graduate in engineering and marketing, holds 70 percent ofT4K’s shares. Her vision is to develop T4K to be the leader in the educational productbusiness in the region. Despite keen competition, especially from low-cost producers inChina and India, T4K managed to achieve an impressive annual sales growth rate of 30%since its incorporation in May 2001. Francis, who recently joined T4K as its FinanceDirector, was an auditor with one of the Big Four international accounting firms. BothFrancis and Pearlie are T4K’s executive directors. Other members of T4K’s boardinclude the CEO of a local trading company, a school principal and a partner of a lawfirm. These three non-executive directors comprise T4K’s Audit Committee.T4K’s largest factory was completely destroyed in a flood in February 2015. Pearlie isnot optimistic about T4K’s ability to raise additional funds to build a new factory.T4K’s financial statements are provided below:Statement of Profit or Loss forThe year ended 31 DecemberCash SalesCredit SalesTotal SalesCost of salesGross profitOverheadsInterestNet profit before taxTaxationProfit after tax2015S$’000(Unaudited)16,25015,17531,425(25,900)5,525(1,875)(1,125)2,525(500)2,0252014S$’000(Audited)12,70011,12523,825(19,550)4,275(1,700)(1,000)1,575(300)1,2752Statement of Financial Position as at31 DecemberNon-current assetsProperty, plants and equipmentIntangibles – patentsCurrent assetsInventoriesTrade receivablesCashCurrent liabilitiesTrade payablesBank overdraftTaxationOther payablesNet current assetsTotal assets less current liabilitiesBank loansShareholders EquityPaid-up share capitalRetained earnings20152014S$’000(Unaudited)S$’000(Audited)10,7001,70012,40011,3501,40012,7502,4503,2251,3006,9751,7502,6251,8756,2505,0752754505756,3756004,1751,0633504376,02522513,00012,9755,1257,8755,5007,4752,5005,3757,8752,5004,9757,475Required:Perform an analytical review of T4K’s financial statements and identify significant auditissues. Discuss the financial statement assertions affected by the audit issues identified.3

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