Background information for the continuous case study, Reliable Printers Led (RPL), is contained in the Appendix of the textbook. If you do not have the textbook at hand, please check OUT library where the e-textbook is freely available for QUT students. Q1 - Comprehensive Case Q1.a As part of your planning process, you are considering whether you will need to use the services of an expert in the audit of RPL. Based on the background information contained in the case, write a note to the audit partner to explain whether it will be necessary to use the work of an expert in the audit of RPL. +Olb You are conducting your preliminary analytical procedures based on the background information for R.PL. Based on the ratios you completed as below, write a note to explain how your results influence your planning decisions for the audit for the year ending 30 June 2018. Ratios 2016 2017 2018 Current ratio 1.42 1.4 1.50 Quick usset ratio 0.83 1.85 Receivables timover ratio 10.79% 9.124 4 Days in receivables 33.83 days 40.02 days*= Inventory turnover ratio 12.26 10.56 Return on total assets 0.267 0.211 0.148 Return on shareholders' equity 0.258 0.212 0.179 Times interest earned 40.94 times 40.13 times 4.79 times Debt Equity 0.10 0.093 0.68 Gross profit ratio 0.176 0.161 0.152 Net profit ratio 0.069 0.061 0.050 Q1.c As part of your audit of RPL, you are considering the risk that fraud may have occurred. Based on the background information, write a note to identify and explain key fraud risk factors relating to misstatements arising from fraudulent financial reporting to which RPL may be susceptible. Explain how the risk factors identified would affect the conduct of the audit. Q1.dAs part of your audit of RPL, you are reviewing internal controls over RPL's print-on-demand business. Based on the background information, Write a note to: identify and explain two key internal control weaknesses where control activities should be present in order to prevent material misstatements being undetected and or uncorrected, but are not present For each control weakness identified, identify the key account balance and key assertion at risk and explain why it is at risk. Q1.e During the current year, RPL has expanded its carnings base by having titles available as searchable c- books that can be downloaded directly by readers, and by acquiring Medical Books Lid (MBL) to access the copyright that MBL held over printing a large range of specialised medical textbooks. Based on the background information, write a note to: identify the key assertion at risk for each of deferred c-book storage revenue and the medical book copyright book copyright Design appropriate substantive tests of details for deferred c-book storage revenue and the medical Q1.f You are now at the completion stage of the audit of RPL, with the auditor's report to be signed on 15 August 2018. On 10 August, while finalising the audit file, the following additional information has come to your attention. (i) On 10 June 2018, RPL placed an order with one of its Asian suppliers for $50 000 worth of high-quality paper for a glossy publication to be printed in July 2015. The order of paper was shipped on 15 June but, due to severe storms, the ship carrying the paper ran aground in Indonesia. On 30 June, salvage experts were still unable to say when the ship could be removed or its cargo unloaded, although it was expected that the paper would have suffered severe water damage, and it was uninsured. Based on the background material and the information above, write a note to identify and explain whether this situation will require adjustment or disclosure in the 2018 financial report, or require no amendment to the financial report. Q1.g You are in the process of finalising the audit of inventory of RPL for the year ended 30 June 2018. You are concerned that during the year the balance of the allowance for stock obsolescence has been written back into profit. As part of your audit procedures, you researched companies in the same industry as RPL to determine whether they make an allowance for stock obsolescence as a matter of practice. Your research has revealed that it is common for entities undertaking similar printing activities to make a provision for the effects of storage hazards, as paper is subject to deterioration during storage of between 4 per cent and $ per cent. Accordingly, you have formed the view that an allowance for obsolescence should be reinstated, for inventory to be recorded at its true and fair value, and that the amount now required is $188 000. You have approached William Jackson with a view to RPL reinstating the allowance for obsolescence at $188 000. William has advised you that the board is satisfied with their decision to no longer providefor the effects of storage hazards and that they have no intention of reinstating the allowance for obsolescence. You have set the materiality level for the audit at 5 per cent. There is no other material misstatement identified in your audit. You have made your audit opinion accordingly. REQUIRED Based on the background information contained in the Appendix and the information provided above, draft a brief auditor's report. The auditor's report should include: Title Addresscc Opinion Basis for Opinion Key Audit Matters (if any) Other Information (if any) . Auditor's Signature & DateSuggested Key Points If writing a note, completed sentences are required. If writing a report, appropriate report format is required. If writing an auditor's report, auditing standards provide detailed guidance on the format of an auditor's report. The textbook also provides examples in related chapters. Ql.a The audit team is likely to need to engage an expert in two areas: I The change in the depreciation of the printing presses from 20 years to 30 years on a straight line basis suggests that it will be necessary for the audit team to engage an expert to determine the useful life of the printing presses. Rogers and Brown are not experts in assessing the expected life of printing presses and there appears to be some diversity in the expected useful life of such assets. Accordingly, for the purpose of forming a view on the board's resolution to change the depreciation of the printing presses from 20 years to 30 years on a straight-line basis, it will be necessary to use the work of an expert. 2 The valuation and allocation of intangibles is at risk. An article published in a medical journal could cause the medical textbooks that RPL acquired the rights to during the year to become obsolete. As a result, the valuation of the copyright attached to the medical textbooks is at risk of being impaired and would require an expert to value it. QLL An analysis of these ratios and the financial report indicates that: The inventory turnover ratio has deteriorated from 12.26 to 10.56. This indicates the possibility of obsolete or slow-moving inventory. Further, while inventory has increased significantly in 2018 by $1 383 262 or 49%, the allowance for obsolescence of $125 876 has been written back as no longer being required. Therefore, extra audit attention will need to be given to the accuracy, valuation and allocation of inventory, particularly as the accounting method has also changed during the year from average cost to FIFO The receivables turnover ratio has decreased significantly, with days in receivables going out from 33.83 days to 40.02 days, indicating possible collection problems, resulting in possible bad or doubtful debts. Further, while accounts receivable has increased significantly in 2018 by $783 309 or 17%, the allowance for doubtful debts has increased by only $30 000. Therefore, extra audit attention will need to be given to the accuracy, valuation and allocation of accounts receivable. The gross profit ratio has decreased, indicating a possibility that some inventory is obsolete or slow-moving and can only be sold at discounted prices, supporting the conclusion drawn from the inventory turnover ratio. The reduction in the net profit ratio is in line with the drop in the gross profit ratio and so does not indicate any unexpected movements in operating expenses. The significant drop in the return on total assets and the return on equity is due to the significant increase in property, plant and equipment of $7 177 312 or 85.5%, partly financed by an increase in equity of $1 466 841 or 13.6%, but a slight decrease in net profit after tax of $103 171. Audit attention will need to be given to verifying the significant amount of fixed asset additions and also investigating why this investment in property, plant and equipment has not generated additional profit. The debt/equity ratio has increased significantly to finance the investment in property, plant and equipment, but is still at a relatively low level, being less than 1, and meets the loan covenant requirements. The times interest carned has dropped due to the significant increase in interest expense of $724 375 related to the increase in long-term debt of $7 500 000. Audit attention will need to be directed at confirming the long-term debt and interest charge. However, there is no indication of any problems relating to debt dependence.The current ratio has improved slightly, but this is due to the build-up in inventory discussed above. It is slightly below the usual benchmark of 2, but also only just meets the loan covenant requirement of 1.5. Therefore, additional audit attention will need to be given to potential manipulation of the current ratio to meet the loan covenant, particularly based on the possible overstatement of receivables and inventory discussed above and the change in accounting method for inventory from average cost to FIFO, which is likely to have contributed to part of the increase in the value of inventory. The quick asset ratio has decreased slightly and is slightly below the usual benchmark of I for this ratio. Therefore, it needs to be monitored as any further decline could indicate problems with paying creditors and hence potential going-concern problems. In addition, the ratio may actually be worse given the possible overstatement of receivables discussed above. Therefore, audit attention should be given to cash flows. Deferred revenue of $697 500 has been recognised for the first time. This is due to a change in accounting method and so will require additional audit attention. Intangible assets of $975 000 have been recognised for the first time and will require audit attention to ensure that they meet the recognition requirements of the accounting standards. An article published in a medical journal could cause the medical textbooks that RPL acquired the rights to during the year to become obsolete. As a result, the valuation of the copyright attached to the medical textbooks is at risk of being impaired. Q1.c (a) Fraudulent financial reporting is a key fraud risk for the following reasons: The remuneration package of the CEO, William Jackson, includes a performance bonus based on RPL achieving two key performance indicators (KPIs): annual growth of 10% in total revenue and annual growth of 10% in net profit after tax. These key performance indicators create an incentive for fraudulent financial reporting in relation to sales and net profit, so that William can achieve his bonus. RPL's debt covenants require RPL to maintain a current ratio of at least 1.$ and a debt to equity ratio of less than I. Failure to maintain these key financial ratios would result in Trim Finance having the right to recall the loan. This creates an incentive to manipulate figures affecting these two ratios to ensure that the loan covenants are not breached. (b) The audit would need to concentrate on accounts susceptible to manipulation, particularly those involving management estimates and accounts that directly affect either the performance KPIs or the debt covenant ratios, such as sales, inventory and allowance for doubtful debts. As the CEO has an incentive to manipulate the results, the risk of management override of controls is increased and so a more substantive audit approach may be required for the accounts subject to high fraud risk. Q1.d *You answer will address the information in the below table but will be expressed in a more professional approach(b) Control weakness Account Why account balance is at risk (d) Assertion at balances at risk risk An accounts payable clerk Inventory Clerks are manually entering Accuracy, does all the calculations for their calculations of purchases of inventory stock and inventory stock with multiple valuation and accounts payable and their currencies. Without an allocation work is not confirmed or independent party checking their checked by an independent calculations, inventory stock and party Accounts accounts payable may be payable recorded at incorrect values Accuracy, valuation and allocation General and accounts Accounts s may lead to inaccurate Existence receivables ledgers are receivable general and receivables ledgers, updated prior to the dispatch as sales are recorded before the of books to customers, with Sales sales order is dispatched. If print | Occurrence no check that the order is orders are incorrect, this may lead | Cut-off correct to sales being recorded in the incorrect period, as the customer does not accept liability until the goods are received and are accepted as being in accordance with the purchase order *You answer will address the information in the below table but will be expressed in a more professional approach Assertion Substantive test of details Deferred Completeness Select a sample of invoices and check that the correct amount c-book of uncared revenue has been included in the balance of the storage deferred revenue account. This would be based on the total revenue amount of revenue attributable from balance date to the end of the period to which the amount of storage has been charged Copyright Accuracy, Obtain an opinion of an expert in the area of medical valuation and textbooks concerning the likelihood of MBL's medical allocation textbooks becoming obsolete. Undertake an evaluation of the future value of income expected to be derived from the medical textbooks and ensure that it exceeds the value attributable to its copyright. QL.f *You answer will address the information in the below table but will be expressed in a more professional approachIssue Consequence for (b) Explanation financial report of each independent issue Logs of No amendment required The damage to the paper is 1.6% of net profit before tax shipment of to financial report ($50 000/$3 059 299) and 1.2% of inventory ($50 000/$4 paper 180 500) or 0.52% of current assets ($50 000/$9 600 929), (inventory which would likely be considered to be immaterial. stock) Although the event relates to the current financial year, as the effect is not material, there is no need to adjust the financial report or to disclose the event. Q1.4 *You answer will address the information in the below table but will be expressed in a more professional approach *As the question requires you to write an auditor's report, you should follow the example of an auditor's report from the textbook - sec Exhibit 12.2, 12.4, 12.5, and 12.6 in the textbook. (Otherwise you could find examples by accessing the AUASB auditing standard ASA700, ASA705, ASA570 cle_! Qualified opinion based on the following ground: The required allowance for obsolescence of inventory of $188 000 represents 4.5% of inventory ($188 000 / $4 180 000), 1.96% of current assets ($188 000 / $9 600 929) and 6.15% of net profit before tax ($188 000 /$3 059 299). Therefore, as it is above the set materiality level of 5%, it will be considered material to net profit before tax. It is a material disagreement with management concerning the accuracy, valuation and allocation of inventory and would require a qualified auditor's opinion, as it is material but not pervasive, as it only affects inventory and profit