Case Study 2 – Auditing ACCT3000 (Semester 2, 2019)
You are an Audit Senior currently planning the 30 June 20X9 audit of Technology Limited, an Australian-owned company that produces and exports computer chips to China. At a recent planning meeting with Technology Limited’s senior staff, you obtained the following overview of this year’s operations:
Tight checks by Australian custom officials have delayed several shipments of computer chips. These delays have angered Chinese customers who are threatening to deduct 20% from the amounts owing as compensation for lost production time.
One of Technology Limited’s customers, Blue Chip Limited, is claiming that the latest batch of computer chips it received was found to be faulty. Blue Chip Limited is refusing to pay its account, which is allegedly seven months overdue. Technology Limited has claimed to have launched an investigation into the allegations, but as yet not been able to substantiate them. Technology Limited has suffered significant cash flow problems because another major customer, Creative Limited (Creative), is experiencing financial difficulties. As a result, Creative is taking well over 120 days to pay outstanding amounts, despite Creative’s terms of trade being payment within 30 days. Creative makes up 40 per cent of Technology Limited’s sales and the board has been reluctant to take any action that might adversely affect those sales. Consequently, Technology Limited has had to increase its dependency on its line of credit, and this has caused it to temporarily breach the debt to equity ratio required in its loan covenant with Big Bank Limited.
One of Technology Limited’s major suppliers went bankrupt one month ago, causing major product shortages. To overcome the problem, Peter James, the husband of the finance director, Natalie James, provided electronic components used in the production of computer chips to Technology Limited through his private company Norton Limited. Norton Limited demands payment in $US prior to the electronic components being supplied. There is no formal agreement in place with Peter James, however, the goods are being provided at competitive prices. You are concerned about the electronic components that Peter James’ company is supplying, because his products are new to the market and you have heard some of Technology Limited’s staff complaining that they are of poor quality.
Due to increased competitive pressure, Technology Limited has recently moved the manufacture of some of its computer chips to Bangladesh. Technology Limited saves around 25 per cent in costs compared to the equivalent Australian made items. However, the manufacturing process takes longer and on a few occasions late delivery from Bangladesh has resulted in lost sales.
Last month, a protester suffered a broken leg, allegedly because he was hit by a company truck. The protester is now suing Technology Limited for damages, claiming the contractor was in fact an employee of Technology Limited at the time of the accident, and was acting on Technology Limited’s instructions. Technology Limited is fighting the case and appears to have a reasonable chance of winning; however, the adverse publicity being generated is making the company nervous about its sales in the future.
During the period, the Australian dollar has remained steady against the Chinese Yuan, although it fell by about 3% against the US dollar. Debtors are invoiced in $US at the time of shipment, and payment is received in $US one month after the shipment is delivered. It takes around six weeks for the charter vessels to travel from Technology Limited’s shipyard at Bigmantle Bay to China. A recent downturn in the Chinese economy is affecting forward orders, which have fallen by 15%.
Required:
Prepare a memorandum to the audit manager, outlining your risk assessment relating to Technology
Limited. When making your risk assessment:
(a) Identify two (2) balance sheet accounts from the information provided that are subjected
to an increase in audit risk. Briefly explain what factors increase the audit risk associated
with the two (2) account balances identified. In your explanation, please mention the key
assertion(s) at risk of material misstatement and the components of the audit risk model
affected for each account balance identified.
(b) Identify how the audit plan will be affected and recommend specific audit procedures to
address the risks associated with each account balance identified.
(Please Note – Maximum Word Limit: 800 Words excluding references)

Decision on Accepting Additional Business

Brightstone Tire and Rubber Company has capacity to produce 162,000 tires. Brightstone presently produces and sells 124,000 tires for the North American market at a price of $103 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 19,000 tires for $86.55 per tire. Brightstone's accounting system indicates that the total cost per tire is as follows:

Brightstone pays a selling commission equal to 5% of the selling price on North American orders, which is included in the variable portion of the selling and administrative expenses. However, this special order would not have a sales commission. If the order was accepted, the tires would be shipped overseas for an additional shipping cost of $6 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost $104,500.

a. Prepare a differential analysis dated January 21 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors. If an amount is zero, enter zero "0". If required, round interim calculations to two decimal places.

Determine whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors.

b. What is the minimum price per unit that would be financially acceptable to Brightstone? Round your answer to two decimal places.
$per unit

Steering Company estimated the following annual hours and costs:

Determine the cost of the following job (number 253) using each of the four overhead allocation rates: (Round answers to 0 decimal places, e.g. 125.)

Prescott Football Manufacturing had the following operating results for 2019: sales = $30,874; cost of goods sold = $21,992; depreciation expense = $3,610; interest expense = $614; dividends paid = $905. At the beginning of the year, net fixed assets were $20,452, current assets were $1,797, and current liabilities were $5,330. At the end of the year, net fixed assets were $23,287, current assets were $4,601, and current liabilities were $3,301. The tax rate for 2019 was 25 percent.

a. What is the net income for 2019?

b. What is the operating cash flow for 2019?

c. What is the cash flow from assets for 2019?

d. Assume no new debt was issued during the year. What is the cash flow to creditors for 2019?

e. Assume no new debt was issued during the year. What is the cash flow to stockholders for 2019?

***negative answers should be indicated by a minus sign.

which steps of the 5 stages of strategy making, strategy executing process is most Important and why

Vast Spirit

Calendars imprints calendars with college names. The company has fixed expenses of

$1,125,000

each month plus variable expenses of

$4.50

per carton of calendars. Of the variable​ expense,

75​%

is cost of goods​ sold, while the remaining

25​%

relates to variable operating expenses. The company sells each carton of calendars for

$19.50.

Read the requirements

LOADING...

.

Requirement 1. Compute the number of cartons of calendars that

Vast Spirit

Calendars must sell each month to breakeven.  

Begin by determining the basic income statement equation.

Using the basic income statement equation you determined above solve for the number of cartons to break even.

Requirement 2. Compute the dollar amount of monthly sales

Vast Spirit

Calendars needs in order to earn

$338,000

in operating income.  

Begin by determining the formula.

​(Round the contribution margin ratio to two decimal​ places.)

Requirement 3. Prepare the​ company's contribution margin income statement for June for sales of

485,000

cartons of calendars.

Requirement 4. What is​ June's margin of safety​ (in dollars)? What is the operating leverage factor at this level of​ sales?

Begin by determining the formula.

What is the operating leverage factor at this level of​ sales? Begin by determining the formula.

​(Round the operating leverage factor to three decimal​ places.)

Requirement 5. By what percentage will operating income change if​ July's sales volume is

13​%

​higher? Prove your answer. ​(Round the percentage to two decimal​ places.)

Prove your answer. ​(Round the percentage to two decimal​ places.)

P company owns 70% of the outstanding stock of S company. On January 1, 2011, S company sold land to P company for $280,000. S had originally purchased the land on March, 20, 2007, for $330,000.

P company plans to construct a building on the land bought from S in which it will house new production machinery. The estimated useful life of the building and the new machinery is 20 years.

To Solve: Prepare all journal entries for P and S (from initial purchase of land from 3rd parties to sale between the related parties). In addition, prepare the w/p entry to eliminate the intercompany sale of land.

Net Present Value-Unequal Lives

Daisy’s Creamery Inc. is considering one of two investment options. Option 1 is a $69,000 investment in new blending equipment that is expected to produce equal annual cash flows of $21,000 for each of seven years. Option 2 is a $79,000 investment in a new computer system that is expected to produce equal annual cash flows of $27,000 for each of five years. The residual value of the blending equipment at the end of the fifth year is estimated to be $14,000. The computer system has no expected residual value at the end of the fifth year.

Assume there is sufficient capital to fund only one of the projects. Determine which project should be selected, comparing the (a) net present values and (b) present value indices of the two projects, assuming a minimum rate of return of 12%. Use the present value tables appearing above.

a. Determine the net present values of the two projects.

b. Determine the present value indices of the two projects. If required, round the present value index to two decimal places.

Which project should be selected? (If both present value indices are the same, either project will grade as correct.)

“In my opinion, we ought to stop making our own drums and accept that outside supplier’s offer,” said Wim Niewindt, managing director of Antilles Refining, N.V., of Aruba. “At a price of $19 per drum, we would be paying $5.45 less than it costs us to manufacture the drums in our own plant. Since we use 85,000 drums a year, that would be an annual cost savings of $463,250.” Antilles Refining’s current cost to manufacture one drum is given below (based on 85,000 drums per year):

A decision about whether to make or buy the drums is especially important at this time because the equipment being used to make the drums is completely worn out and must be replaced. The choices facing the company are:

Alternative 1: Rent new equipment and continue to make the drums. The equipment would be rented for $255,000 per year.

Alternative 2: Purchase the drums from an outside supplier at $19 per drum.

The new equipment would be more efficient than the equipment that Antilles Refining has been using and, according to the manufacturer, would reduce direct labor and variable overhead costs by 30%. The old equipment has no resale value. Supervision cost ($85,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment’s capacity would be 125,000 drums per year.

The company’s total general company overhead would be unaffected by this decision.

Required:

1. Assuming that 85,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

2. Assuming that 100,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

3. Assuming that 125,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

Zachary Moran manages the cutting department of Greene Adams Company. He purchased a tree-cutting machine on January 1, 2018, for $500,000. The machine had an estimated useful life of 5 years and zero salvage value, and the cost to operate it is $104,000 per year. Technological developments resulted in the development of a more advanced machine available for purchase on January 1, 2019, that would allow a 20 percent reduction in operating costs. The new machine would cost $290,000 and have a 4-year useful life and zero salvage value. The current market value of the old machine on January 1, 2019, is $260,000, and its book value is $400,000 on that date. Straight-line depreciation is used for both machines. The company expects to generate $285,000 of revenue per year from the use of either machine.

Required

1. Recommend whether to replace the old machine on January 1, 2019.

2. Prepare income statements for four years (2019 through 2022) assuming that the old machine is retained.

3. Prepare income statements for four years (2019 through 2022) assuming that the old machine is replaced.

Will you show me a horizontal analysis of the assets portion of this comparative balance sheet?

Munoz Company is a retail company that specializes in selling outdoor camping equipment. The company is considering opening a new store on October 1, 2019. The company president formed a planning committee to prepare a master budget for the first three months of operation. As budget coordinator, you have been assigned the following tasks:

Required

1. October sales are estimated to be $400,000, of which 45 percent will be cash and 55 percent will be credit. The company expects sales to increase at the rate of 20 percent per month. Prepare a sales budget.

2. The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale. Prepare a schedule of cash receipts.

3. The cost of goods sold is 70 percent of sales. The company desires to maintain a minimum ending inventory equal to 20 percent of the next month’s cost of goods sold. However, ending inventory of December is expected to be $13,900. Assume that all purchases are made on account. Prepare an inventory purchases budget.

4. The company pays 80 percent of accounts payable in the month of purchase and the remaining 20 percent in the following month. Prepare a cash payments budget for inventory purchases.

5. Budgeted selling and administrative expenses per month follow:

*The capital expenditures budget indicates that Munoz will spend $180,600 on October 1 for store fixtures, which are expected to have a $39,000 salvage value and a two-year (24-month) useful life.

Use this information to prepare a selling and administrative expenses budget.

6. Utilities and sales commissions are paid the month after they are incurred; all other expenses are paid in the month in which they are incurred. Prepare a cash payments budget for selling and administrative expenses.

7. Munoz borrows funds, in increments of $1,000, and repays them on the last day of the month. Repayments may be made in any amount available. The company also pays its vendors on the last day of the month. It pays interest of 2 percent per month in cash on the last day of the month. To be prudent, the company desires to maintain a $31,000 cash cushion. Prepare a cash budget.

8. Prepare a pro forma income statement for the quarter.

9. Prepare a pro forma balance sheet at the end of the quarter.

10. Prepare a pro forma statement of cash flows for the quarter.

Hygeia Health expects to sell 500 units of Product A and 400 units of Product B each day at an average price of $18 for Product A and $30 for Product B. The expected cost for Product A is 41​% of its selling price and the expected cost for Product B is 61​% of its selling price. Hygeia Health has no beginning​ inventory, but it wants to have a five−day supply of ending inventory for each product. Compute the budgeted cost of goods sold for the next ​(seven−​day) week.​ (Round the answer to the nearest​ dollar.)

A. 72,870

B. 105,000

C. 55,050

D. 77,070

Identify a company that has implemented, Lean and report a significant quantitative measure of improvement.

Identify a company that has implemented, Six Sigma and report a significant quantitative measure of improvement.

Identify a company that has implemented, Lean Six Sigma and report a significant quantitative measure of improvement.