CUSTOM CABINETS Harvard Case Solution & Analysis

CUSTOM CABINETS CASE SOLUTION

Indicate which CAS requires you to perform analytical procedures. Perform the planning analytical review for the financial statements of Custom, analysing the key movements. Include supporting calculations. (10 marks)
CAS 520 requires an auditor to perform the analytical procedures in order to identify the plausible relationship between financial and non-financial data. In addition to this, the auditor is required to perform the analytical procedures at

• The start of the audit.
• During the audit
• End of the audit.

At the start of the audit:

The auditor is required to perform the analytical procedures at the start of the audit in order to gain the comprehensive understanding of the entity and its environment. Moreover, analytical procedures at the beginning of the audit would also allow the auditor to identify the significant fluctuations in the financial data as well as it would also assist the auditor in identifying material areas in the financial statements of the company. Thus, this would allow the auditor to make effective audit plan accordingly.

These analytical procedures include ratio analysis, comparing financial information with the non-financial information, and comparing prior year’s information with the financial data of the current year.
During the audit:

According to CAS 520, the auditor may use the analytical procedures as substantive procedures in order to obtain sufficient and appropriate audit evidence on which to base his audit opinion.
At the End of the Audit:

The auditor may also use analytical procedures at the end of the audit in order to ensure that the audit evidence obtained during the audit isconsistent with the report as well as with the financial data.

Planning Analytical Review for the Financial Statements of Custom

In order to identify the unusual fluctuation in the financial data of the company, the balance sheet data of the financial year 2014 is compared with the balance sheet of financial year 2015(interim) in exhibit 1. The calculations in the exhibit show that the cash and cash equivalent of the company has been decreased by approximately 55% in the financial year 2015.
On the other hand, the account balance of property plant and equipment and retained earnings havebeen increased by 59% and 64% respectively. Thus, the auditor is required to focus on these account balances as these account balances reflect highest fluctuations and they may contain material misstatement.

Using the audit notes that you took, identify the audit risks and explain how each audit risk could result in a material misstatement in the financial statements. Design the audit approach for each significant audit risk identified. Present your answer in a table with column one identifying the risk and column two explaining the risk. (20 marks)

AUDIT RISK EFFECT ON FINANCIAL STATEMENT CONTROL PROCEDURES

Since the property plant and equipment are fully depreciated, therefore, there is a risk that the company may have recorded such assets in its financial statements. The amount of property plant and equipment would be overvalued. The auditor should ensure that the fully depreciated PPE should not be included in the financial statements of the company by reviewing the supporting documents of the PPE appearing in the F/S of the financial year 2015.

Since there are no inventory counting procedures, therefore, there is a risk that the inventory would be overvalued. Inventory would be overvalued. The auditor should do inventory counting on atimely basis.

Since two of the major customers of the company havegone into bankruptcy, therefore, there is a risk that the company has not recorded bad debt of such amount Accounts receivable would be overvalued. Moreover, the net profit of the company would also be overvalued. The auditor should verify that such amount is not included in the account balance of A/c Rec through dispatching external confirmation. In addition to this, the auditor should also verify that such amount is included in the bad debts of the company by recalculating the amount of bad debts.

Since there is no cost and NRV testing, therefore, there is a risk that the inventory would be overvalued.

Inventory would be overvalued. The auditor should appoint an expert in order to determine the NRV of the inventory and should ensure that the inventory is valued at the lower of cost or NRV.
Reduction in warranty provision implies a risk that the revenue would be overvalued.
Revenue would be overvalued and expenses would be undervalued. The auditor should compare the warranty provision of the company with the similar industry and make appropriate adjustments accordingly
Custom’s planer was damaged as a result of overheating during extensive operations. However,the equipment was insured the insurance company is disputing the claim because the company did not fulfil preventive maintenance requirements. This poses a threat that the amount of Custom’s planers is overvalued.

 The amountof Custom’s planer is overvalued. The auditor should go for legal advice as well as review the results of similar events in the previous years (if any) and make adjustments accordingly.......................

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