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7102AFE - Corporate Auditing - Semester 1, 2010 Group Assignment - Core information and Requirements SUMMIT PROPRIETARY LIMITED. Background...

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7102AFE – Corporate Auditing – Semester 1, 2010 Group Assignment – Core information and Requirements SUMMIT PROPRIETARY LIMITED. Background Information One of the partners of the accounting firm you work for has engaged a new audit client, Summit Pty Ltd, for the year ended 31 December 20X4. Summit Pty Ltd is a medium-sized corporation, with its headquarters located in Sydney, NSW. Summit Pty Ltd has not been audited previously. The company is made up of three divisions. The first division, West, has been in existence for 35 years and creates powerful diesel engines for boats, trucks and commercial farming equipment. The second division, Sunnydays, was recently acquired from a high-tech manufacturing firm based in Melbourne, Victoria. Sunnydays produces state-of- the-art, solar-powered engines. The solar-powered engine market is relatively new, and Summit’s top management believes that the Sunnydays division will be extremely profitable in the future when highly anticipated Environment Protection Authority (EPA) regulations make solar-powered engines mandatory for certain public transport vehicles. Finally, the third division, Matrix, engages in a wide variety of machine service and repair operations. This division, also new to Summit Pty Ltd, is currently in its second year of operations. Summit’s board of directors has recently considered selling the Matrix division in order to focus more on core operations- engine manufacturing. However, before any sale will be made, the board has agreed to evaluate this year’s operating results. Excellent operating results may have the effect of keeping the division a part of Summit Pty Ltd for the next few years. The chief executive officer of Matrix is committed to making it profitable. Part I The purpose of this Part is to perform preliminary analytical procedures. You have been asked to focus your attention on two purposes of analytical procedures: assess going concern, and indicate where there is an increased likelihood of misstatements. You are to use the file which was emailed separately to your group. a Calculate at least five ratios that are good indicators of the likelihood of misstatement using Summit’s financial statements, as shown above. Document the ratios in a format similar to the following: Ratio 20X4 20X3 20X2 Current Ratio Quick asset ratio etc. b Based on your calculations, assess the likelihood (high, medium, or low) that Summit Pty Ltd will fail financially in the next 12 months. Page 1 of 9
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c Use the income statement information above to prepare a common-size income statement for all three years. Use the information to identify accounts for which you believe there is a concern about material misstatements. Use a format similar to the following: Account balance Estimate of $ amount of potential misstatement d Your ageing analysis of accounts receivable and discussions with management indicate that collections of accounts receivable have been somewhat slower than in the previous year. Evaluate whether or not you believe the allowance for doubtful debts is fairly stated. If you believe the account is misstated, calculate the potential misstatement. Assume the gross accounts receivable as at 30/6/20X4 = $10,300,000, and as at 30/6/20X1 = $7,582,000. Part II In Part I of the case, you performed preliminary analytical procedures for Summit Pty Ltd. The purpose of Part II is to identify factors influencing risks and the relationship of risks to audit evidence. During the planning phase of the audit, you met with Summit’s management team and performed other planning activities. You encounter the following situations that you believe may be relevant to the audit. 1 Your firm has an employee who reads and saves articles about issues that may affect key clients. You read an article in the file ‘EPA Regulations Encouraging Solar- Powered Engines Postponed?’. After reading the article, you realise that the regulations management is relying on to boost sales of this division might not be put into effect for at least 10 years. A second article, ‘Stick to Diesel Summit!’, claims that although Summit Pty Ltd has proven itself within the diesel engine industry, it lacks the knowledge and people necessary to perform well in the solar-powered engine industry. 2 You ask management for a tour of the Sunnydays facilities. While touring the warehouse, you notice a section of solar-powered engines that do not look like the ones advertised on Summit’s website. You ask the warehouse manager when those items were first manufactured. He responds by telling you: ‘I’m not sure, I’ve been here a year, and they were here when I first arrived.’ 3 You also observe that new computerised manufacturing equipment has been installed at Sunnydays. The machines have been stamped with the words ‘Product of West Manufacturing, Sydney’. 4 During a meeting with the facilities director, you learn that the board of directors has decided to raise a significant amount of debt to finance the construction of a new manufacturing plant for the Sunnydays division. The company also plans to make a considerable investment in modifications to the property on which the plant will be built. Page 2 of 9
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