Question

Manuke has drafted an audit plan for a new client. The client is Marquee Starshine, a
party-hire business. Marquee Starshine earns 80 per cent of its revenue from hiring
marquees, tables and chairs, lights and other party equipment and 20 per cent from
sales of disposable crockery, cutlery, napkins and table cloths. Manuke’s plan shows
that audit time is divided to reflect this revenue pattern (that is, 80 per cent of the audit
time is spent on the hire business and 20 per cent of the time is spent on the retail
business). Manuke believes that the significance of the revenue activities should be the
only driver of the audit plan because the client has no related parties and a simple,
effective corporate governance structure.
Required
List three (3) questions that you would ask Manuke before accepting his audit plan?
a) ________________________________________________________________
________________________________________________________________
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b) ________________________________________________________________
________________________________________________________________
________________________________________________________________

c) ________________________________________________________________
________________________________________________________________
________________________________________________________________

Question 1

Preliminary analytical procedures are performed as part of the planning process to
assist the auditor in gaining an understanding of the entity and its environment (ASA
315 ‘Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment’).
Required:
From the three rows of data shown below for Georgie Manufacturing Pty Ltd:
(a) what conclusions would you draw from the ratio analysis (i.e. interpret any
movement in the ratio and discuss the audit risks that could be present); and
(b) what areas would you then emphasise in conducting the audit in relation to
the risks identified in your conclusions.
Millicent Manufacturing Pty Ltd
2016 2015 2014 2013 Industry 2016
1. Inventory Turnover 3.40 3.21 4.66 5.64 4.88
2. Current Ratio 1.65 1.69 2.08 2.31 2.00
3. Days Sales in Receivables 99 86 90 62 60

a) Inventory Turnover
Conclusions:
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Audit Emphasis:
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b) Current Ratio
Conclusions:
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Audit Emphasis:
_____________________________________________________________________
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c) Days Sales in Receivables
Conclusions:
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_____________________________________________________________________
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Audit Emphasis:
_____________________________________________________________________
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Answer 1

As per policy, only one question is allowed to answer at a time, so answering Q1:

Q1 :The three (3) questions that we would ask Manuke before accepting his audit plan are :

a) Is it correct to take the revenue pattern as deciding the audit time because it could be that disposable crockery, cutlery, napkins etc. possesses higher volume of the business than party-hire equipments.

b) The audit plan of Marquee Starshine is different from other firms in the industry. This is because Manuke has not picked-up the routine audit plan and drafted a new one for the company.

c)How it is possible that Marquee Starshine do not possess any related parties and its corporate governance structure is one of the best in the industry. This is because every company do have its relatives as the shareholder’s of the firm and there could not be any perfect corporate governance structure.

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