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    1. QUESTION

    ASSIGNMENT – Using Excel as Audit Software

     

     

    You work for the audit firm of Check and Recheck CAs. One of your newest clients is Griffith Thermometers Limited.  The company is only 3 years old. You are planning the audit for the year ending 30 June 2015. The client’s Finance Director provides you with the preliminary (draft) balance sheet and income statement information which includes the comparative figures for 2014, which your firm audited last year. (The Excel file “Ass3102152Qs.xlsx” has the data.)

     

     

    Required

     

    (A)  You decide to perform some preliminary analytical review on the information provided by the Finance Director, in order to help with the planning of this year’s audit.

     

    • Prepare a common-size (vertical) analysis of both the Balance Sheet and Income Statement for both years. Use “Total Assets” as your base figure for the Balance Sheet and “Sales” as your base figure for the income statement.

     

    • Prepare a trend (horizontal) analysis for 2015, comparing all figures to the prior year and noting the % change in each.

     

    • For both years, calculate:

     

    2 liquidity ratios (current ratio and quick ratio);

     

    4 activity ratios (accounts receivable turnover, days to collect, inventory turnover, days to sell);

     

    2 long term solvency ratios (debt/equity, tangible net assets/equity); and

     

    2 profitability ratios (net profit and return on total assets).

     

                    Use Excel to answer all three parts.  Produce working sheets (these will show the formulae you used) to calculate the ratios. (12 marks).

     

    (B)          Write a brief (1 page only) memo to your audit senior, cross reference your comments to the appropriate spreadsheets. (2 marks).

     

    The memo should list four areas of possible concern (overall issues and/or specific account balances) based on your findings in part (A) above. (6 marks).

 

Subject Computer Technology Pages 3 Style APA

Answer

Memo

                                                                                                                                                8th October 2015

From Senior Auditor: Paul Young                                                   

To Finance Director

Ref: Griffith Thermometer Limited Audit

The following are the findings from the audit conducted on Griffith Thermometer Limited for the year ending 30 June 2015.

The total turnover for the year ended 30 June 2015 amounted to $87,989,862 compared $64,516,030 in the previous year. It indicates an increase of 36%. The cost of sales increased to 75% compared to 59% in the previous year representing an increase of about 27%. The gross profit for the year 2015 increased by 50% compared to the previous year. The gross profit increased from $26,451,572 in 2014 to $39,595,438 in 2015.

The earnings before taxes increased by almost 139% in 2015 compared to the year 2014 while the earnings after tax increased by 180% for the same period. The total assets increased by 43% while the liabilities 14% compared to the year 2014. The net assets turnover increased from 0.19 to 0.29 in 2015 from 2014 (Williams, Haka, Bettner & Carcello, 2008).

The debt to equity ratios indicate that Thermometer limited paid some of debts in 2015 as the ratios decreased from 1.02 in 2014 to 0.43 in 2015. The debts are still very high compared to company’s equity. The net profit margin also doubled in 2015 compared to 2014. The ratios increased from 0.07 to 0.14. The profit margin is still very low the company should improve on its profitability ratios.

The financial ratios for the year 2015 were relatively much better than those of the year 2015. The liquidity of Griffith Thermometer Limited improved from 1.18 to 1.84 for the current ratio while the quick ratio improved from 0.42 to 0.83 in 2015 compared to 2014. The efficiency of the company’s sales department improved as the cost of inventory increased from 4.53 in 2014 to 10.70 in 2015. The shelf life of the products stocks also improved from 80.64 in 2014 to 34.10 in 2015. However, the liquidity is still below the standard 2:1 and 1:1 requirement for both current and quick ratio.

To conclude, the performance of Griffith Thermometer limited improved considerably in the year 2015 compared to the year 2015.


References

Williams, J. R., Haka, S.F., Bettner, M.S. & Carcello, J.V. (2008) Financial & Managerial Accounting, McGraw-Hill Irwin, p. 40.   

 

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