You are the audit senior on the Pet Care Pty Limited (Pet Care) audit. Pet Care is a distributor of pet care products including shampoos, lotions and a small range of toys. Pet Care uses an on-line computer system. No goods are manufactured in-house; rather, Pet Care maintains a stock of raw materials and sub-contracts the manufacture of its products to third parties. Approximately 50 suppliers and sub-contractors are used and all have proven to be reliable. You have made the following notes about the inventory system: Procedures for raw materials • Separate systems, staff and warehouses are maintained for both raw materials and finished goods. • Purchase orders are automatically generated by the computer when stocks of any raw material fall below 70% of the prior month’s usage. The purchase orders contain the following details: date; supplier name and address; raw material needed. • Three copies of the purchase order are produced and distributed as follows: Copy 1—to warehouse to enable follow up of late orders. Copy 2—filed by accounts clerk in date order. Copy 3—sent to supplier. • When raw material stocks are received, the bar codes attached to the delivery boxes by the supplier are scanned into the system. A two-part Goods Received Note (GRN) is then produced: Copy 1—matched to warehouse copy of purchase order by stores staff. Copy 2—filed by accounts clerk. The scanning process is aborted if the codes do not match those on the masterfile. Procedures for finished goods • Production orders are automatically generated when finished goods fall below 60% of the prior month’s sales. The production orders contain the following details: date; sub-contractor’s name; raw materials required; finished goods needed. Asia Pacific College of Business & Law Semester 1 2020 Page 7 of 11 • Two copies of the production order are produced: Copy 1—to raw materials store for use as a picking slip, then it is packed with goods and sent to the supplier. Copy 2—filed by production controller in date order. • When the finished goods stocks are received, the bar codes attached to the delivery boxes by the supplier are scanned into the system. A two-part GRN is then produced: Copy 1—matched to production controller’s copy of production order. Copy 2—filed by accounts clerk. The scanning process is aborted if the codes to not match those on the masterfile. General notes • The computer automatically selects the supplier of both raw materials and finished goods based on: the latest price (as per their most recent invoice). their delivery times (based on the number of days between the date the purchase/ production order is raised and the date the goods are scanned by the warehouse). • Password access is as follows: Stores staff (raw materials): Purchase order printing for raw materials only. GRN printing for raw materials. Stores staff (finished goods): GRN printing for finished goods. Production controller: Production order printing, masterfile amendments. Accounts clerk: Masterfile amendments. Masterfile amendments • The stock masterfile contains details of: existing stock items including codes and warehouse location; approved suppliers and sub-contractors. • Orders will only be generated to suppliers and sub-contractors recorded on the masterfile. • Masterfile changes are made by the production controller for both raw materials and finished goods inventory. A masterfile amendment form is completed by the production controller as a record of the changes made. Asia Pacific College of Business & Law Semester 1 2020 Page 8 of 11 REQUIRED: (a) Identify six (6) weaknesses in the internal controls described. Discuss the implications of each of the weaknesses you have identified. (b) Assume your IT audit division is to perform testing of controls for the inventory systems described. Identify two tests that you would recommend they perform.

Chris and Donna are in the 37% tax bracket for ordinary income and the 20% bracket for capital gains (ignore the 3.8% additional tax on investment income for higher-income taxpayers.) They have owned several blocks of stock for many years. They are considering the sale of two blocks of stock. The sale of one block would produce a gain of $11,000. The sale of the other would produce a loss of $18,000. For purposes of this problem, ignore any restrictions on deductions or credits based on AGI. They have no other gains or losses this year.

a. How much tax will they save if they sell the block of stock that produces a loss?

b. How much additional tax will they pay if they sell the block of stock that produces a gain?

c. What will be the impact on their taxes if they sell both blocks of stock?

The relationship between "strength" and "fineness" of cotton fibers was the subject of a study that produced the following data. (Give your answers correct to two decimal places.)

(a) Draw a scatter diagram. (Do this on paper. Your instructor may ask you to turn in this work.)

(b) Find the 90% confidence interval for the mean measurement of fineness for fibers with a strength of 73.

(c) Find the 99% prediction interval for an individual measurement of fineness for fibers with a strength of 73.

When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he lived. The week after she died in 1962, a bunch of fresh flowers that the former baseball player thought appropriate for the star cost about $8. Based on actuarial tables, “Joltin’ Joe” could expect to live for 25 years after the actress died. Assume that the EAR is 8.9 percent. Also, assume that the price of the flowers will increase at 3.8 percent per year, when expressed as an EAR. Assume that each year has exactly 52 weeks, and Joe began purchasing flowers the week after Marilyn died. What is the present value of this commitment?

Researchers studying the effect of diet on growth would like to know if a vegetarian diet affects the height of a child. Twelve students are randomly selected that are all 6-years old. The average height of these kids is 42.5 inches with a standard deviation of 3.8 inches. The average height of all 6-year old kids is found to be 45.75 inches. Conduct a hypothesis test to determine if there is overwhelming evidence at alpha = .05 that 6-year old vegetarian kids are not the same height as other six year-old kids.

• A. alpha = .05, 1.96 , -3.0

• B. 2 tail, +/- 2.201, Reject Ho

• C. 2.33, alpha = .05, 1.645

• D. 1 tail, 1.645, 1.414

• E. 2 tail, 2.052, 2.963

Suppose you are an importer of olive oil from Greece to the Switzerland. You are preparing to import an olive oil shipment of 100,000 lbs that will require payment in Euro (€) in 3 months. The payment’s exact amount will depend on both the CHF/€ exchange rate, as well as the price for oil, which is a function of uncertain supply conditions in Greece. You project the following six scenarios with regards to the price of olive oil in 3 months:

Scenario Price (€/lb of oil)

1 2.1

2 2.3

3 3.8

4 1.8

5 3.0

6 2.8

a) What can you do today if your goal is to completely hedge this €-exposure?

b) Suppose that 3 months from now, scenario # 3 materializes. What will you do?

The coefficient of correlation ρ between these two assets is equal to .009, and the risk free rate is 3.8%.

1) If you wished to construct the optimal risky portfolio using these two assets, what percentage this portfolio would consist of Asset 1?

2) What is the expected return of the portfolio from question 1?

3) What is the standard deviation of the portfolio from question 1?

4) If Rachel has a coefficient of risk aversion of 4.9, what percentage of her money should she invest in the riskless asset if the only risky assets she can invest in are the ones described above?

The coefficient of correlation ρ between these two assets is equal to .009, and the risk free rate is 3.8%.

2A. If you wished to construct the optimal risky portfolio using these two assets, what percentage this portfolio would consist of Asset 1? (10 points)

2B. What is the expected return of the portfolio from 2A?

2C. What is the standard deviation of the portfolio from 2A?

2D. If Rachel has a coefficient of risk aversion of 4.9, what percentage of her money should she invest in the riskless asset if the only risky assets she can invest in are the ones described above?

coefficient of correlation ρ between these two assets is equal to .009, and the risk-free rate is 3.8%.

1. If you wished to construct the optimal risky portfolio using these two assets, what percentage this portfolio would consist of Asset 1?

2. What is the expected return of the portfolio from question 1?

3. What is the standard deviation of the portfolio from question 1?

4. If Rachel has a coefficient of risk aversion of 4.9, what percentage of her money should she invest in the riskless asset if the only risky assets she can invest in are the ones described above?