Question

You are the manager responsible for the audit of Aspersion, a limited liability company, which mainly provides national cargo services with a small fleet of aircraft. The draft accounts for the year ended 30 September 2001 show profit before taxation of Kshs2·7 million (2000 ñ Kshs2·2 million) and total assets of Kshs10·4 million (2000 ñ Kshs9·8 million). The following issues are outstanding and have been left for your attention:

(1) The sale of a cargo carrier to Abra, a private limited company, during the year resulted in a loss on disposal of Kshs400,000. The aircraft cost Kshs1·2 million when it was purchased in October 1992 and was being depreciated on a straight-line basis over 20 years. The minutes of the board meeting at which the sale was approved record that Aspersionís finance director, Iain Jolteon, has a 30% equity interest in Abra.                          

(2) As well as cargo carriers, Aspersion owns two light aircraft which were purchased in 1998 to provide business passenger flights to a small island under a three year service contract. It is now known that the contract will not be renewed when it expires at the end of March 2002. The aircraft, which cost Kshs450,000 each, are being depreciated over fifteen years.

                                                                                                                                

(3) Deferred tax amounting to Kshs570,000 as at 30 September 2001 has been calculated relating to tangible non-current assets at a tax rate of 30% using the full provision method (IAS 12 ëIncome Taxesí).   On 1 December 2001, the government announced an increase in the corporate income tax rate to 34%. The directors are proposing to adjust the draft accounts for the further liability arising.                                                                 

Required:

For each of the above points:

(i) Comment on the matters that you should consider; and

(ii) State the audit evidence that you should expect to find, in undertaking your review of the audit working papers and financial statements of Aspersion.                   

Answer 1

To solve this question just input those variables which are to be used in logistic regression, as the question talks about using two variables only that is total loans and leases to total assets & total expenses/ total assets, so we will not input total cap/assets as an input variable in our excel, here we go

As one can see, we have taken only two variables , total exp/assets and total lns & leases/ assets in calculation, follwing steps have been followed to construct the above table

1. Assume logit= b0+ b1* independent variable1+ b2* independent variable 2 , take values of b0=0.1, b1=0.1, b2=0.1, note that these values of b0, b1 and b2 are just taken for calculation, one could assume any values here for bo , b1 and b2

2. Calculate exponential of logit in the next column by using exp (value in previous column)

3. Calculate probability by using formula, probability= exp (logit)/ { 1+ exp(logit)} in the next column

4. In next column, calculate log likelihood by using formula : financial condition value (i.e. 1 or 0) * LN( probability calculated in previous column) + (1- financial condition value)* LN( 1- probability calculated in previous column)

5. take the total of the column values of log likelihood

6. use solver function in excel to change this total by putting max value of 0 and changing the variable cells containing assumed values of b0, b1 and b2 , by clicking on solve, you will get actual values of b0, b1 and b2

which comes out to be b0=-14.72, b1=89.83, b2= 8.37

therefore you will get logit as

-14.72+ 89.83* Total exp/assets+8.37*Total lns & lsses/ assets

With values given in the question as total exp/ assets= 0.11 and total loans & leases/ assets= 0.6 , we get

logit as -14.72+ 89.83* 0.11+ 8.37*0.6= 0.1833

exp (logit) = 1.20

Probability= 0.546

Loglikelihood= 1*LN(0.546)+0*LN(1-0.546)= LN(0.546)= -0.605