External Audit Case

Toys in a Bungle Limited (TBL) is a 100% subsidiary of Varieties Mega Stores and specializes in the manufacturing and distribution of games and toys. TBL employs on average 100 employees and operates in various states in the U.S. Varieties Mega Stores operates in the UK and uses IFRS to prepare its financial statements. TBL has been in operation for fifty years (50) and consists of three core business operations: toys, video games, and scooters. Product sales to business customers - toys stores, games stores, and megastores. The company was started as a local family business and has received additional funding over the years before being acquired by Varieties Mega Stores. The company experienced significant sales growth during its history and continues to rapidly expand. TBL newest line is the video games line. Despite its diversification, TBL has lately seen real growth in the level of competition that it faces in its market. In addition, the company has spent funds since the start of the year to acquire more technologically advanced equipment.

You are an audit senior working with Phillip Smith, a junior at Serious Audit Business & Associates. You have been assigned to complete a review for TBL Limited. The review work will be considered for the final audit at the end of the year.The other members of the review team are John Johnson the Audit Manager and Partner Flan Glory. Your firm has been conducting audits and reviews for TBL for the past 3 years. TBL operates in a medium-sized city in the USA where your audit firm is the largest. It is now 15 April 2017, and you are ready to start the review for the January to March quarter of 2017. In conducting his review Phillip primarily worked with Roger Russell the financial officer. The following information was provided to Phillip:

The following draft of financial information has been provided to you to perform preliminary analytical procedures for the Month of March.

March 2017 March 2016

Revenue 280,924.50 222,500.00

Gross profit 61,900.00 39,000.00

Receivables 240,924.50 16,500

Payables 12,500 8,500

BALANCESHEET AS AT MARCH 31
	2016				201	7
	$	$	$		$	$	$
Non-Current Assets	COST	DEPN	NBV		COST	DEPN	NBV
Goodwill			100,000				50,000
Building	260,000		260,000		260,000		260,000
Equipment	210,000	15,000	195,000		290,000	35,000	255,000
	470,000	15,000	555,000		550,000	35,000	565,000
Current Assets
Stock		22,000				20,000
Short Term Investment	15,000				30,000
Debtors		22,000				13,000
Bank		10,000				0
Cash		12,000	81,000			9,000	72,000
			636,000				637,000
EQUITY & LIABILITIES
Capital & Reserves
ShareCapital( $1OrdShares)		220,000				200,000
SharePremium		15,000				15,000
GeneralReserves		37,000				47,000
RetainedEarnings		121,000	393,000			257,000	519,000
Non-Current Liabilities
10% Debenture			202,000				47,000
Current Liabilities
Creditors		17,000				24,000
Bank overdraft		0				6,000
TaxPayable		14,000				20,000
Dividends		10,000	41,000			21,000	71,000
			636,000				637,000

CONDENSEDINCOMESTATEMENT					MARCH 31 201	7
								$
Sales								1055,000
GrossProfit							750,000
Profit beforeTax							245,000
Tax								(61,250)
ProfitAfterTax for Quarter*							183,750
								=======
Dividends	$34000
Reserves Transfer $10,000

During the month of March, TBL signed contracts with some of its customers to supply toys of 300 or more per month. The contract with the supermarket chain allows a credit period of 60 days compared with 30 days for all other customers. Phillip believes that he needs to conduct extensive analytic procedures on accounts payable, receivables, and revenue for March because of the new contract. He obtained the financial statements and transactions for March to conduct the analysis. The materiality level for the income statement account is $15,000 and tolerable error as a percentage of the materiality level is 50%. Based on Phillip's extensive knowledge of the client, he believes that the internal control systems established by management have been deteriorating as there have been several changes to key management personnel during the period under review.The company's controller resigned in March so Phillip knows that he will have to conduct an extensive trend analysis for March.

Requirements:

Conduct of review of the interim financial statements

1. Prepare engagement letter for the interim financial statements (5%)
2. Prepare audit plan (15%) maximum 5 pages
3. Prepare internal controls and risk assessment questionnaires (5%)
4. Prepare working papers for the review (analytical procedures/inquiries). Maximum 5 pages
5. Conduct analytical procedures and other adequate procedures (30%)
   1. Histogram and map of sales
   2. Calculate the ratios
6. Identify misstatements in the financial statements for the period and recommend adjustments (10%)
7. Document deficiencies in the internal control system and risk assessment analysis (10%)
8. Prepare management representation letter (5%)