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MAA303 Auditing Trimester 3, 2018 Assessment 2, Part B– Case study DUE DATE AND TIME:Week 8, 10/1/2019, before 11:59PM PERCENTAGE OF FINAL GRADE:20% WORD COUNT:1000-1200 words (maximum) without calculations and appendices, if any Relevant Learning Outcome Details Unit Learning Outcome (ULO) Graduate Learning Outcome (GLO) ULO3: Apply the concepts and processes used by audit and assurance service providers to plan and perform assurance engagements in a professional manner. GLO1: Discipline-specific knowledge and capabilities GLO4: Critical thinking GLO5: Problem solving Assessment Feedback: Students who submit their work by the due date will receive their marks and feedback on CloudDeakin in fifteen working days. Note on referencing: The nature of this assessment does not call for extensive referencing and citations. However, students are expected to determine when citation and referencing are necessary and must correctly apply the Harvard style of referencing. Submission Instructions You must keep a backup copy of every assignment you submit, until the marked assignment has been returned to you. In the unlikely event that one of your assignments is misplaced, you will need to submit your backup copy. Any work you submit may be checked by electronic or other means for the purposes of detecting collusion and/or plagiarism. When you are required to submit an assignment through your CloudDeakin unit site, you will receive an email to your Deakin email address confirming that it has been submitted. You should check that you can see your assignment in the Submissions view of the Assignment dropbox folder after upload, and check for, and keep, the email receipt for the submission. Notes · Penalties for late submission: The following marking penalties will apply if you submit an assessment task after the due date without an approved extension: 5% will be deducted from available marks for each day up to five days, and work that is submitted more than five days after the due date will not be marked. You will receive 0% for the task. 'Day' means working day for paper submissions and calendar day for electronic submissions. The Unit Chair may refuse to accept a late submission where it is unreasonable or impracticable to assess the task after the due date. · For more information about academic misconduct, special consideration, extensions, and assessment feedback, please refer to the document Your rights and responsibilities as a student in this Unit in the first folder next to the Unit Guide of the Resources area in the CloudDeakin unit site. · Building evidence of your experiences, skills and knowledge (Portfolio) - Building a portfolio that evidences your skills, knowledge and experience will provide you with a valuable tool to help you prepare for interviews and to showcase to potential employers. There are a number of tools that you can use to build a portfolio. You are provided with cloud space through OneDrive, or through the Portfolio tool in the Cloud Unit Site, but you can use any storage repository system that you like. Remember that a Portfolio is YOUR tool. You should be able to store your assessment work, reflections, achievements and artefacts in YOUR Portfolio. Once you have completed this assessment piece, add it to your personal Portfolio to use and showcase your learning later, when applying for jobs, or further studies. Curate your work by adding meaningful tags to your artefacts that describe what the artefact represents. Description / Requirements Case Study – Beautiful Products Limited You are the audit manager of Beautiful Products Ltd (Beautiful), a company that designs and manufactures beauty and cosmetic products. You are planning the audit for the financial statements for the year ending 30 June 2018. You have just attended a planning meeting with the Chief Financial Officer (CFO), Christian Fior, where she gave you the projected results for the financial year. Below is a summary of the projected financial information, as well as the notes taken at the meeting by yourself: Notes from the meeting with Christian Fior: Business update: Beautiful Products is facing difficult trading conditions. Consumer spending has declined due to a recession in the economy. The beauty and cosmetic market is a very competitive industry and a major competitor launched a very successful new cosmetics range during the year, which led to an overall decline in sales across Beautiful Product’s brands. Financial matters: Cash flow has also been a problem this year, largely due to the cash spent on developing a new product range. To help to reduce cash outflows, some new assets were acquired and an extension to the company’s bank loan was negotiated. Human resources: In December 2018, the internal audit department of Beautiful Products performed a review of the operation of controls over processing of overtime payments in the human resource department. It was found that the company’s specified internal control procedures in relation to the processing of overtime payments were not be adhered to and followed. Ongoing litigation: Beautiful enjoys a good reputation, though this has been tarnished somewhat by a complaint by a famous actor who claimed that, following the use of one of Beautiful’s products, the product contained a chemical which damaged his skin. A court case is on-going and is attracting media attention. Lawyers estimate that damages of $500,000 are probable to be paid. No adjustment has been made to include it in the statement of financial position or the statement of profit or loss. Required: (a) Define the materiality concept and explain why it is important. Using the materiality benchmarks and thresholds (provided below), calculate the planning materiality figures that should be used in the audit of Beautiful Products Limited for both Income Statement and Balance Sheet items. Justify your calculation and the percentages used. (b) Perform an analytical review of the company’s performance using the financial information provided below (2018 Projected & 2017 Actual); (c) Based on the results of the analytical review, identify and evaluate the inherent and control risks to be considered in planning the audit of the financial statements. Hints: Use ratio analysis technique to perform analytical review, including, but not limited to the ratios given below. When calculating the materiality figures to be used, the auditor will use specific benchmarks and thresholds. The benchmarks and percentages are as follows: Total Sales/Revenue: 0.5% -1% Total Assets: 1% - 2% Net Profit: 5% - 10% Depending on the risk assessment performed, the auditor would decide whether to use the lower end of the percentage range or the higher end of the percentage range. The higher the risk assessed by the auditor, the lower the materiality figures need to be. Guideline for ratio calculation: Ratio Formula 2018 Projected 2017 Actual Profitability Ratios Gross margin * 100 Net Profit margin * 100 Return on Assets * 100 Return on Equity * 100 Return on Investment * 100 Liquidity Ratios Current Ratio Quick Ratio Inventory turnover Accounts (Trade) receivable turnover (in days) *365 Accounts (Trade) payable turnover (in days) *365 Debt to Equity ratio 1 FINANCIAL RESULTS AND PROJECTIONS Beautiful Products Limited Statement of Financial Position as at 30 June 2018 Projected 2017 Actual $ '000 $ '000 Assets Current assets Cash - 1,000 Trade receivables 900 800 Inventories 2,600 2,165 Total current assets 3,500 3,965 Non-current assets Property, plant and equipment 21,500 19,400 Intangible Assets 2,250 - Total non-current assets 23,750 19,400 Total assets 27,250 23,365 Liabilities Current liabilities Trade payables 1,340 850 Taxation 50 450 Bank overdraft 900 - Provisions 500 200 Other payables 860 685 Total current liabilities 3,650 2,185 Non-Current Liabilities Bank Loan 3,800 2,600 Other long-term liabilities 8,025 7,125 Total liabilities 15,475 11,910 Equity Share Capital 8,000 8,000 Reserves 2,500 2,000 Retained earnings 1,275 1,455 Total Shareholders’ Equity 11,755 11,455 Total Equity and Liabilities 27,250 23,365 Beautiful Products Limited Income Statement for the year ended 30 June 2018 Projected 2017 Actual $ $ '000 '000 Sales Revenue 8,000 9,500 Cost of sales (5,700) (6,000) Gross Profit 2,300 3,500 Operating expenses (1,500) (1,650) Operating Profit 800 1,850 Finance costs (150) (120) Profit before income tax expense 650 1,730 Income tax expense (195) (520) Profit for the year 455 1,210 Marking criteria: Your work will be assessed based on the following marking rubric: Needs further development Satisfactory Well done Exceeds expectations Exceedingly high standard Evaluation of Information (10 %) Information is used with some interpretation/evaluation, but not enough to develop a coherent analysis or synthesis. Analyses and evaluates information to complete a limited range of activities. Analysis and evaluation reflect little expert judgment, intellectual independence, rigour and adaptability. Selects relevant information to address the issues in the case. Identifies logical flaws in the information provided in the case. Analysis and evaluation reflect acceptable level of intellectual independence, rigour, authoritative judgment and adaptability. Selects relevant information to address the issues in the case. Identifies and rectifies logical flaws in the information provided in the case. Information is often selected with interpretation/evaluation to develop a comprehensive critical analysis or synthesis. Evaluates available information, identifies missing information. Analysis and evaluation reflect good intellectual independence, rigour, authoritative judgment and adaptability. Systematically selects relevant information to address the issues in the case. Identifies and rectifies logical flaws in the information provided in the case. Information is often selected with a high level of interpretation/evaluation to develop a comprehensive critical analysis or synthesis. Thoroughly evaluates available information, identifies missing information and makes reasonable assumptions to fill gaps in evidence. Analysis and evaluation reflect a high level of intellectual independence, rigour, authoritative judgment and adaptability. Systematically selects relevant information to address the issues in the case. Identifies and rectifies logical flaws in the information provided in the case. Information is selected with a high level of interpretation/evaluation to develop a comprehensive critical analysis and/or synthesis. Very thoroughly evaluates available information, identifies missing information and makes reasonable assumptions to fill gaps in information needed to address issues in the case. Analysis and evaluation reflect a consistently very high level of intellectual independence, rigour, authoritative judgment and adaptability. Use of Existing Knowledge (50%) Often employs knowledge not relevant to the issues in the case, or representing limited points of view/ approaches