KEELE UNIVERSITY
Keele Management School
The Audit Framework (MAN 30039) 2011/12
ASSIGNMENT
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You are the nior internal auditor at GHO plc, a manufacturer of machine tools. A draft t of financial statements for the year has been prepared and you have been assigned to examine the figures for reasonableness. At the same time, although it is acknowledged that your systems audit was carried out satisfactorily, you wish to identify significant areas which might require further audit examination. (GHO plc replaced its previous approach of transactions audit with systems auditing some time ago.)
The directors of the company are contemplating the issue of £2,000,000 15% debenture stock (redeemable in the year 2022) in order to assist the re-development of its production facilities. The majority of the directors are in favour of the issue; but some are more reluctant, citing the nature of the machine tools industry, which is subject to wide ranging fluctuations in sales and profits.
Abbreviated financial statements for GHO plc, together with some typical ratios for firms in the industry, are shown below:
Income Statements £000 2011
£000 £000
2010
£000
Sales 24,000 20,000 Cost of goods sold 16,000 14,000 Gross Profit 8,000 6,000 Selling Expens 3,000 2,500 Administration expens 2,000 5,000 2,000 4,500 Operating profit 3,000 1,500 Interest 500 300 Net Profit before tax 2,500 1,200 Taxation 750 350 Net Profit after tax 1,750 850 Dividends 1,250 700 Retained profit for year 500 150 Retained profit brought forward 6,000 5,850 Retained profit carried forward 6,500 6,000
Balance Sheets £000 2011
rejected£000 £000
2010
£000
Fixed Asts 7,000 6,000
Current Asts
Stocks 5,000 3,500
Debtors 3,000 2,000
Cash & Bank 500 500
8,500 6,000
Current Liabilities 3,500 5,000 2,500 3,500
金融英语考试12,000 9,500
Long Term Liabilities
泰语在线翻译
10% Debentures 2020 5,000 3,000
7,000 6,500special edition
Ordinary Shares 500 500
Retained Profit 6,500 7,000 6,000 6,500
Notes
1. Stocks @ 31st. December 2009 were £2,500,000.
2. Typical industrial average ratios for 2010 and 2011:
Gross profit percentage 35%
Net profit percentage 10%
Return on capital employed 20%
Current ratio 2.5:1
山雀科
Quick ratio 1.2:1
Stock period 75 days
Debtors period 30 days
Interest cover 8 times
Required
i) Explain what is meant by analytical review, systems audit and transactions audit. (20%) ii) Analy the financial statements above, utilising appropriate ratios and other calculations. (40%) iii) Comment on the significant features in your analysis which would require further investigation from an audit perspective. (20%) iv) Critically discuss the changing role of the auditor from one of verifying financial transactions to wider forma of assurance. (20%)
N.B.
Individual Assignment
Word limit: 3,000 words max.
Hand in: Between the hours of 10.00 am and 12.00 noon at the latest, on 23rd. April, 2012, at the School office in the Darwin Building.
N.B. Students must submit two copies of their assignment; one in electronic form. Failure to do so will be penalid.
Weighting of Asssment: 50% Assignment; 50% Examination. ASSESSMENT CRITERIA
1. Knowledge of relevant concepts and issues;
2. Understanding of concepts and critical application to relevant issues;
3. Structure of report, logic of argument and u of evidence;
4. Writing style, clarity of expression and prentation;
5. Evidence of reading, u of references.
6. Appropriate lection and computation of calculations.
APPENDIX
Definitions of Accounting Ratios
Return on Capital Employed Net Profit x 100两会翻译
Capital Employed%
Profitability Ratios
Net Profit Percentage Net Profit x 100
Sales %
matter of factGross Profit Percentage Gross profit x 100
考研视频网Sales %
Efficiency Ratios
Ast Turnover Sales
Capital Employed No. of times
Stock Turnover Period Average Stock x 365
Cost of Sales No. of Days
Debtors Collection Period Debtors x 365
(Credit) Sales No. of days
Creditors Payment Period Creditors x 365
(Credit) Purchas No.of days
Liquidity Ratios
Current Ratio Current Asts
Current Liabilities
As a factor
(i.e. :1)
Quick Ratio Current Asts – Stock
Current Liabilities
As a factor
(i.e. :1)
Capital Ratios
Gearing Fixed Interest Capital
Equity + Fixed Interest Capital %
Interest Cover Profit before Interest
Interest for Period No. of times
Investment Ratios
Dividend Cover Profit after tax
Ordinary Share Dividend No.of times
Return on Equity Profit after tax
Equity Capital %
Notes
1. There are a number of definitions of profit which can be ud in ratio
analysis. A commonly ud definition, which we shall apply, is earnings [i.e. profit] before interest and tax (EBIT). This has the virtue of aiding comparisons, as it eliminates any distortions caud by different capital structures or tax regimes between the business being compared. This definition of profit is also known as operating profit.
2. Sales may also be referred to as turnover, income or revenue; stocks
as inventory; debtors as receivables and creditors as payables.
3. The Net Profit Percentage and Gross Profit Percentage ratios are also
known as the Net and Gross Profit Margin ratios. U net profit after tax here.
4. The Ast Turnover ratio is also called the Capital Turnover ratio.
5. Stock Turnover can be calculated in terms of the number of times the
stock is turned over in the period. The ratio is then Cost of Sales/ Average Stock.
6. The Stock Turnover, Debtor Collection Period and Creditor Payment
Period ratios, together with the Current and Quick ratios, are sometimes known as the Working Capital ratios.
7. The Liquidity ratios are sometimes called the Solvency ratios. The
Quick ratio is also known as the Acid Test or Liquidity ratio.
8. There are a number of ways of calculating the Gearing ratio, but we
shall u this one.
9. Fixed interest capital means any long term source of funding on which
rachel nicholsa fixed rate of interest / dividend must be paid (e.g. preference shares,
debentures, long term loans). Equity capital is ordinary share capital plus rerves.
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