Question

You are a manager in the audit division at Miller Yates Howarth (MYH), an accounting firm...

You are a manager in the audit division at Miller Yates Howarth (MYH), an accounting firm with offices throughout the major regional centres of NSW and Queensland. Although a medium sized firm by national standards, MYH is the second largest regional accounting firm in Australia. Most of MYH’s audit clients are in the agriculture, mining, manufacturing and property industries. All of those industries are currently under pressure, either from a downturn in commodity prices or fierce competition from overseas competitors. You are gathering information to prepare the audit plan of Big Machine Limited (BML), a company that leases and services large mining machinery to several of the gold mines in the region. The following information has been gathered to date. Principle activities of BML: • mining machine leasing, mainly to gold, coal and iron ore miners. • machine maintenance, and • contracting machine operators to the mines. BML was incorporated as a private company in 1979 importing and maintaining mining equipment. It survived the downturn in mining in 1982/3 operating profitably as a private company until the current mining boom began in 2005. At that point the directors decided that the company needed an injection of funds enabling the company to capitalise on the need for extensive new machinery in the mining sector. A combination of share issue and bank finance provided the capital to expand and update the machines that BML could offer the industry. The directors are: • Mr. Matthew Collins, Chairman • Mr David Long, Chief Executive Officer • Ms Cynthia Brown • Mr Brent Allen • Mr Patrick Singh Mr Brent Allen and Mr Patrick Sing are independent, non-executive directors and have been directors since 2010. Mr David Long was recently hired as CEO, coming to the firm with extensive experience in the mining industry. The other two executive directors were employed by the company prior to its public share issue. MYH has placed reliance on most internal controls based on satisfactory results of extensive tests of control. Recent discussion with the client revealed that there have been changes to the systems and software used to record and pay contractors. No other changes to the internal control system have been made since the last audit when the permanent file was updated. In past audits reliance had been placed on the internal controls thus reducing the amount of substantive testing. Over the past 18 months there has been a decline in the demand for the machinery already owned and an increased demand for computer controlled equipment and for contract staff to maintain this equipment. As a result, BML has had to increase borrowings to finance the new equipment required. You have walked around the main warehouse and yard and noticed that there are several large used mining machines standing idle in the yard. Ms Leanne Hopkins, the audit partner for BML, has identified several areas she is concerned about and wants you to report back to her about these before you complete the audit program. She has advised you about a few changes in the metals market that may have an impact on BML’s operations. The metals market has fluctuated with: • gold dropping 24.95% since 2012 but has risen 9.25% over the past year • Iron ore dropping 43.78% since 2012 and dropping 9.71% in the past year • coal rising 9.99% since 2012 and rising 18.35% in the past year. The areas and accounts are: • Plant and equipment • Machinery Finance Liabilities • Accounts Receivable • Lease income Ratios extracted from an unaudited set of financial reports at 31 December 2017 together with audited comparatives for the year ended 31 December 2016 and the industry averages are set out below for your review. Ratio 2017 (Unaudited) 2016 (Audited) Industry average Return on equity % 15 22 26 Profit/lease income % 8 12 No data Return on total assets % 14 17 20 Gross margin % 25 25 30 Net profit margin % 14.5 18.5 20.27 Times interest earned 1.90 3.51 4.10 Days in accounts receivable 62 53 45 Current ratio : 1 1.02 1.54 1.66 Quick asset ratio : 1 0.70 0.78 0.82 Debt to equity ratio : 1 1.05 1.35 1.50 Internal Controls The Financial Controller for BML has provided you with the latest internal control manual which includes details of the controls over contract payments. As the system is new you also walk through the system checking that the walkthrough matches the information in the internal control manual. Details of the controls over contract payments your walkthrough are listed below: BML tenders for a contract to operate a set of machines at a set price over a certain period. When the contract is accepted an accounts receivable account is set up by the accountant responsible for the contracts and a payroll account set up for the employee who will do the work. The payroll clerk demonstrates the set up of the payroll account entering a supper user name and password specifically set up for the walk through. The menu screen appears and displays many functions. The clerk selects the ‘add new employee’ function. You are advised that the details can only be entered from a hard copy form signed by the employee and the contracts manager and a signed income tax instalment declaration form. The clerk then enters the following information: • employee name • employee number • contract number • employee address • employee phone number • employee email • start date • employee date of birth • employee tax file number • hourly rate • general exemption from tax Y/N The fictitious employee is now set up in the system. The clerk goes back to the main screen and clicks the item ‘enter hours’ and explains that the employee can enter their own hours but that this must be approved by the contracts manager before the pay-run can be processed. The clerk then approves the hours. Then the clerk selects ‘process pay-run’ and explains that the system automatically calculates the monthly payments based on hourly rate and the current tax rate. The system also calculates the superannuation accrual for the employee. The system then generates a standard report entitled ‘monthly pay-run’ that lists the employees, their payments and the total tax paid. This report is then approved by the contracts manager who then, in a live pay run, uploads the Australian Bankers Association (ABA) file to the bank. The pay-run is automatically posted to the general ledger on approval by the contracts manager. The contracts manager's bank login gives him the rights to approve processing of payments on the bank website. The bank account is reconciled monthly by the accountant who also has a bank login that gives him the right to approve processing of payments on the bank website. Other regular payments through the bank account occur on a weekly basis when the accountant uploads the ABA creditors payment file to the bank and apporves it for processing. You note that the contracts payroll can be checked to the contracts accounts receivable by deducting from the accounts receivable amount the standard mark-up on the contracts. Required: Write a report, including a brief executive summary, to your managing partner that address the questions below. Where indicated use the following format to answer the question. Question 1 A 8% Analyse the ratios and the additional information associated the with four accounts listed by your audit partner, Ms Leanne Hopkins. Identify the potential audit risks and any related audit steps that need to be undertaken to reduce audit risk. Respond to this part of the assignment using this format: Account Analysis Audit Risk Audit steps to reduce risk Plant and Equipment Machinery Finance Liabilities Accounts Receivable Lease income Question 1B 2% Analyse the ratios and additional information to outline the business risks that BML faces. Question 2A 7% Identify the internal controls in the system that are potentially effective, the risk that the control could alleviate and one test of control for each of the identified potentially effective controls. Answer this question using the following headings in a table format: Control Risk alleviated Test of control Question 2B 2% List and identify the weaknesses in internal control for contract payroll.

Homework Answers

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Background You are a manager in the audit division at Miller Yates Howarth (MYH), an accounting...
Background You are a manager in the audit division at Miller Yates Howarth (MYH), an accounting firm with offices throughout the major regional centres of NSW and Queensland. Although a medium sized firm by national standards, MYH is the second largest regional accounting firm in Australia. Most of MYH’s audit clients are in the agriculture, mining, manufacturing and property industries. All of those industries are currently under pressure, either from a downturn in commodity prices or fierce competition from overseas...
You are an audit manager of PY and have been assigned to the audit of TT...
You are an audit manager of PY and have been assigned to the audit of TT Co (TT), a company which is planning to list on a stock exchange within six months. The listing rules of the stock exchange require compliance with corporate governance principles, and the directors are unsure whether they are following best practices in relation to this. They have asked the audit engagement partner for their view on this matter. TT’s board is comprised of six executive...
You are the internal audit senior responsible for conducting an assurance engagement of the XYZ Company payroll process.
You are the internal audit senior responsible for conducting an assurance engagement of the XYZ Company payroll process. This process has not been audited for three years and, as such, is due in the normal audit cycle. There have been no significant changes since the previous audit, that is, there were no system changes, no reorganization of personnel, and no substantive procedural changes. However, during the last assurance engagement, the internal audit function identified several observations, some of which were...
You are part of the independent CPA staff planning the audit of Tivell Inc., an e-commerce...
You are part of the independent CPA staff planning the audit of Tivell Inc., an e-commerce company.  Tivell is a non-issuer small-business corporation. You are the newly appointed staff on the engagement to audit the financial statements of the company as of December 31 20x6.  The audit engagement team has completed their understanding of Tivell’s internal control as part of the identification of the risks of material misstatements. Based on your discussions with the audit engagement manager, you learned that Tivell’s system...
Essay Question #1 Suppose that the accounting manager of a firm you are auditing is suspected...
Essay Question #1 Suppose that the accounting manager of a firm you are auditing is suspected of manipulating sales and collection transactions to make earnings and receivable payments look higher than they are. What kinds of evidence will your audit look for? Suppose that this accounting manager wanted sales to appear lower in order to reduce tax expenses. What kinds of evidence will your audit look for in this case? Essay Question #2 When deciding how large a sample size...
Your review of the accounting system at your audit client, Western Plains Ltd, identified the following...
Your review of the accounting system at your audit client, Western Plains Ltd, identified the following procedures: The accounts payable clerk prepares all cash payment vouchers, which are then approved by the chief financial officer and then posted to the ledger by the accounts payable clerk. The sales clerk prepares all invoices for customers, which are then approved by the credit officer once supporting documentation has been provided for the orders and amounts. All mail is opened by the company...
CASE 1 You are the internal audit senior responsible for conducting an assurance engagement of the...
CASE 1 You are the internal audit senior responsible for conducting an assurance engagement of the XYZ Company payroll process. This process has not been audited for three years and, as such, is due in the normal audit cycle. There have been no significant changes since the previous audit, that is, there were no system changes, no reorganization of personnel, and no substantive procedural changes. However, during the last assurance engagement, the internal audit function identified several observations, some of...
Mr. Zen is the sole owner and manager of Beal Hypermarket. You are the internal auditor...
Mr. Zen is the sole owner and manager of Beal Hypermarket. You are the internal auditor of Beal Hypermarket. Mr. Sam is working as a supervisor in Beal Hypermarket. Beal Hypermarket sells consumer goods to individual customers and has branches spread across the country. There are nearly ten cashiers operating different cash machines of the hypermarket. Recently Ms. Mary was recruited asone of the cashiers in the hypermarket. Her references and declaration were not checked properly. Mary is sister of...
Betty and Tony Abscond have hired you to overview their Enterprise Resource Planning (ERP) system for...
Betty and Tony Abscond have hired you to overview their Enterprise Resource Planning (ERP) system for their business Looking for Love? (LFL), an online dating site. They have requested this review as a result of a recent media release they read on the Australian Competition and Consumer Commission (ACCC) website titled "Scams cost Australians half a billion dollars": https://www.accc.gov.au/media-release/scams-cost-australians-half-a-billion-dollars Betty and Tony are concerned that clients may be potential targets for internal and external fraud based on this media release....
You are an audit senior of Charania & Amlani CPA’s and you are planning the audit...
You are an audit senior of Charania & Amlani CPA’s and you are planning the audit of your client, Bravo Bags Inc. (BBI) which manufactures backpacks and luggage. The year end for BBI was December 31, 2020. Bravo Bags Inc. purchases most of its raw materials from suppliers in China and these goods are shipped directly to the company’s warehouse and the goods are usually in transit for up to four weeks. During the year, BBI spent $1.3 million on...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT
Active Questions
  • The college Physical Education Department offered an Advanced First Aid course last summer. The scores on...
    asked 6 minutes ago
  • Researchers hypothesized that increasing a woman's level of arousal would increase her perceptions of attractiveness of...
    asked 40 minutes ago
  • Equation 37-14b in the textbook gives the energy emitted by Hydrogen when electrons transition between states...
    asked 40 minutes ago
  • Theory of Computation Please provide explanation too on how it works a. Give an NFA recognizing...
    asked 40 minutes ago
  • Question 1 A sequential pattern detection circuit (state machine) has input A and output Y, which...
    asked 43 minutes ago
  • Natural Foods Inc. is planning to invest in new manufacturing equipment to make a new garden...
    asked 1 hour ago
  • Explain why a callable bond's price would be expected to decline less than an otherwise comparable...
    asked 1 hour ago
  • . What are the three types of pricing strategies services that services employ? Using a real...
    asked 1 hour ago
  • Given a search problem where some elements are searched more than others, it is more important...
    asked 2 hours ago
  • Suppose a consumer views two goods, X and Y, as perfect complements. Her utility function is...
    asked 2 hours ago
  • Describe how propinquity can perpetuate and increase perceived similarity in our friendships. Describe how similarity can...
    asked 2 hours ago
  • For explaining the pressure / stress phenomenon, analyze three cases given below: (also include a sketch...
    asked 2 hours ago