Audit Analytical Procedures: QUESTIONS 2A and 2B PART 5 ASSIGNMENT QUESTION Audit Analytics Example 2A J SKILLING started an energy trading business: The owner invested cash into the business Bought a Pipeline Contract financed by Bank Loan Paid expenses by cash Cash Sales (from Sale of Gas Energy) KD 000s 49 450 56 601 2A KD 000s Balance Sheet KD 000s LIABILITIES Bank Loan ASSETS Cash KD 000s 49 -56 450 + 60 49 53 EQUITY Equity Introduced 450 add: Net Profit Total Equity Pipeline Contract + 4 53 Total Assets (TA) 503 503 2A KD 000s EXPENSES PROFIT & LOSS A/C (Income Statement) KD 000s INCOME Sales (of Gas) 56 60 Total Expenses 4 Net Profit (Balancing or missing figure) [Transferred and added to Equity] 60 60 Audit Analytics Example 2A Worksheet Ref Ratio Formula Result (0) Return on Equity x 100 PAT Equity x 100 (ii) Net Margin x 100 PAT Sales x 100 (iii) Debt to Equity Long-Term Loans Equity (iv) Gearing x 100 Long-Term Loans (Equity + LT Loans) x 100 ) (v) Asset Turnover Sales TA 2B Manipulation Example Same scenario as 2A above, but J SKILLING thinks that his profits are too small. He decides to change the accounting policy of asset valuation from using the Historic Cost basis to Mark to Market (M2M). He hires a team of consultants who find that, due to future anticipated favourable trading conditions, the market value of the pipeline asset is KD 780,000 , i.e. an increase of KD 330,000 KD 000s The owner invested cash into the business Bought a Pipeline Contract financed by Bank Loan Paid expenses by cash Cash Sales (from Sale of Gas Energy) 49 450 56 60 Please note that this is a simplified illustrative example intended to demonstrate how figures can be 'massaged' to produce the desired effect. 2B KD 000s Balance Sheet KD 000S LIABILITIES Bank Loan ASSETS Cash KD 000s + 49 -56 + 60 450 53 EQUITY Equity Introduced add: Net Profit Total Equity 49 334 + Pipeline Contract Original Cost Increase from M2M Total Value of Pipeline Contract TOTAL ASSETS KD 000s 450 330 383 780 833 833 KD 000s 2B PROFIT & LOSS A/C (Income Statement) KD 000s EXPENSES INCOME Sales (of Gas) Total Expenses 56 add: Sales from Contract Trading (Increase from M2M) Net Profit (Balancing or missing figure) 334 Total Reported Sales [Transferred and added to Equity] 390 60 330 390 390 Manipulation Example 2B Worksheet Ref Ratio Formula Result (0) Return on Equity x 100 PAT Equity x 100 (ii) Net Margin x 100 PAT Sales x 100 Debt to Equity Long-Term Loans Equity (vi) Gearing x 100 Long-Term Loans (Equity + LT Loans) x 100 ) ( (v) Asset Turnover Sales TA SUMMARY TABLE 2A and 2B Ref Ratio Result Result Industry Before Adjustment Before Adjustment Average 2A 2B SAME AS 1A AND 1B (0) Return on Equity (ii) Net Margin Debt to Equity (vi) Gearing (v) Asset Turnover SPECIFICATIONS FOR DECIMAL PLACES Greater Than or Equal to Less Than No of Decimal Examples or Equal to Places 2 0.99 0.786 0.784 0.79 0.78 1.1 9.9 1 4.28 4.23 4.3 4.2 10 0 19.6 19.4 WA 20 19