I need help on Question 2 of theSubstantive tests of transactions and balances. The question is in the picture below and the case study is in the attachment. Please summary the RPL facts from the case study which relevant to the question 2 only before answering the question. Thank you so much for your help!

A1 APPENDIX: Continuous case study Background information You are the audit senior with Rogers & Brown and you have been approached to undertake the audit of Reliable Printers Ltd (RPL) for the year ended 30 June 2015, taking over from the small audit firm of Jones & Associates. RPL prints books, magazines and advertising material for the publishing, educational and advertising industries on a print-on-demand basis. Printing on demand means that publishers can print the exact quantities ordered by retail outlets, rather than estimating in advance how many books are required and often printing too few or too many. The average print turnaround time for RPL is two business days for small orders and five to ten business days for large orders. In addition, four years ago, RPL further expanded its earnings base by having publisher's titles available as searchable 'e-books' that could be downloaded directly by readers from RPL's web site. Purchases and inventory RPL purchases 50 per cent of its inventory requirements of paper, ink and binding materials from Australian sources and 50 per cent from Asia. When inventory is received at RPL's warehouse (whether it is purchased from Australia or Asia), the accounts payable clerk, Clare Kirby, records the arrival of the inventory and also its value and quantity in the accounts payable system. Inventory is paid for in the relevant currency of the country from which it is purchased. Raw materials have been valued at average cost and an allowance for inventory obsolescence has existed in previous years to cover the estimated decline in value from the effects of storage hazards. Work in progress is immaterial due to the quick turn-around time of printing jobs. Any work in progress is assessed at the cost of raw materials and labour and a proportion of manufacturing overheads based on normal capacity. At year end, the warehouse is closed from 28 to 30 June for stocktake, so sales must be invoiced in the system by close of business on 27 June. The stock must have been sent to the customer (that is, it must either be on a truck, ship or plane on its way to the customer, or it must already have arrived at the customer; it must no longer be in RPL's warehouse). 'Print on demand' revenue and receivables Each time a publisher wants to add a book to RPL's 'digital library' (a server storing all of the publisher's books in digital format, ready to print), it emails the book to RPL in PDF format. The digital library is backed up at the close of business every day, with the backup tapes kept off site. Once the book is stored in the digital library, the publisher can order copies to be printed as required. When the publisher confirms the order, the accounting system automatically retrieves details of the publisher's credit record and stops any orders from publishers that have exceeded their credit terms and limits. A printout of the transaction history of that publisher is generated and must be signed by both Amanda Payne, the head of publishing, and Jim Lane, the head of accounts at RPL, before the order can continue. After the transaction history has been signed and dated, accounts receivable staff file it. If there are no credit problems with the order, it is processed and printed by casual staff in the relevant warehouse, who then load the books onto pallets for shipping. When printing is finished, the sales clerk, Bob Watkins, prepares an invoice and dispatch docket and forwards them to the accounts receivable department. The accounts receivable clerk, Rebecca Chan, checks the prices and arithmetic accuracy of the invoices and signs the invoice as evidence of her check. Rebecca records the sale in both the accounts receivable subsidiary ledger and the general ledger and the books are shipped to the publisher's nominated destination (or the publisher will Gay_Appendix.indd 2 15/12/14 12:13 PM Appendix A3 A2 arrange pick up at the warehouse if it has its own distributors). The client accepts liability for the goods when they are received in accordance with the purchase order, and signs the dispatch docket as proof of delivery. 'E-book' revenue The proceeds from each e-book sale are paid to the publisher net of a 5 per cent commission. Proceeds are sent to publishers automatically upon download (the commission is withheld by RPL). Revenue from the commission is recognised when it is withheld from payment to the publisher. RPL also charges publishers an annual 'storage' fee, payable 12 months in advance, for keeping the e-book on RPL's website. Publishers are invoiced on the date the first download of a title occurs. As new books are downloaded on an ongoing basis, the storage fees are invoiced at different times of the year. Revenue from the storage fees has been recognised in the month the fees are invoiced, notwithstanding the fact that the fees are charged 12 months in advance. In September 2014, RPL acquired Medical Books Ltd (MBL). The main rationale behind this lay in the value of the copyright MBL held over a large range of specialised medical textbooks. Although the potential print run for the textbooks was not large, each textbook had a high profit margin and had been used in universities across the world for many years. RPL acquired the business operations of MBL (not the shares), paying for net assets (including the right to the copyright). However, in June 2015 an article was published in a medical journal about a new theory that could result in MBL's medical textbooks becoming obsolete. If the new theory is valid, the textbooks are unlikely to be reprinted or used as textbooks at universities in the future, effectively making them unviable as e-books. Cash receipts Some payments from accounts receivable are received by cheque through the mail, and the cashier, Carly Barnes, records these in an inwards remittance register when the mail is opened. She then banks the cheques and forwards the payment advices to Rebecca for posting to the accounts receivable ledger. Most payments, however, are received by electronic funds transfer (EFT). Each day, Carly downloads the previous day's receipts from online banking and provides a copy to Rebecca for posting. Carly then reconciles the total of the batch postings to accounts receivable to the amount banked for the day. The assistant accountant, Terry Graham, prepares a bank reconciliation at the end of each month. Fixed assets Since RPL's incorporation, depreciation on assets has been calculated using the straight-line method to allocate their cost over their estimated useful lives, as follows: printing presses up to 20 years other production equipment up to 15 years other equipment up to 10 years. Finance During 2015, RPL has entered into a $7.5 million loan from Trim Finance Ltd (Trim Finance). The loan has debt covenants requiring RPL to maintain a current ratio of at least 1.5 and a debt to equity ratio of less than 1. Gay_Appendix.indd 3 15/12/14 12:13 PM A3 Appendix Failure to maintain these key financial ratios under the specified benchmarks would result in Trim Finance having the right to recall the loan. Appointment of new CEO and internal audit William Jackson was appointed the new chief executive officer (CEO) of RPL in January 2015. William has extensive experience in the printing business. The previous CEO, Rebecca Styles, who is now semi-retired, will remain on the board as a non-executive director. A component of William's remuneration package is a performance bonus based on RPL achieving an annual growth of 10 per cent in total revenue and 10 per cent in net profit after tax. Based on William's recommendation, the board also established a new internal audit department headed up by Cody Baines, an ex-audit manager with a Big Four audit firm and two other recently qualified chartered accountants. Cody reports directly to the board. New IT system During 2015, RPL decided to invest in a new IT system that would fully computerise and integrate all the current accounting processes across the organisation, including integration into the general ledger system. Under extreme pressure from the board, the IT department at RPL managed to get the new accounting system installed in June, although the IT Manager, Andy Rogers, complained several times about how the installation was handled. Andy claimed that excess pressure had been placed on staff to get the system installed and that there was simply not enough staff to do the proper reconciliations and testing before the new system went live prior to year end. Andy's preliminary testing showed that some transactions conducted around year end were not being allocated to the correct period. The problem appeared to be the interface between the new accounting system and one of the existing software systems. A software 'patch' had to be written to fix the problem. Board year-end reporting discussions At a board meeting held in June 2015, issues relating to the forthcoming year end were discussed. William stated that he believed that the valuation of raw material inventories at average cost was no longer appropriate as the current cost of paper was substantially above the average cost. Further, he argued that the allowance for obsolescence of inventory to cover the estimated decline in value from the effects of storage hazards was unnecessary, as such a loss was unlikely. William also stated that based on his experience in the printing industry he believed that RPL's printing presses had a potential maximum life of 30 years, although he noted that another leading entity in the printing industry adopted the policy of depreciating its printing presses over a 20-year period on a straight-line basis, similar to what RPL had done in the past. After much discussion, the board resolved that the allowance for obsolescence of inventory be written back and that raw materials be valued based on a first-in, first-out (FIFO) basis. Further, it was resolved to change the depreciation of the company's printing presses from 20 years to 30 years on a straight-line basis. In addition, following a review of the e-book facilities by internal audit, Cody recommended in a report to the board that RPL change the method it used to account for its revenue from e-book publications to ensure compliance with the applicable accounting standard. The board agreed that the revenue from e-books would be recognised in accordance with the stage of completion of each transaction (i.e. percentage of completion method). Gay_Appendix.indd 4 15/12/14 12:13 PM Appendix A4 Financial information Extracts from the financial reports of RPL for the last three years are as follows: Statement of financial position Note Current assets Cash Accounts receivable Inventories Non-current assets Property plant & equipment Intangible assets Total assets Current liabilities Accounts payable Deferred revenue Interest-bearing liabilities Provisions Accruals Non-current liabilities Interest-bearing liabilities Total liabilities Net assets Equity Shareholders' funds Retained profits Total equity Gay_Appendix.indd 5 1 2 3 2013 $ 2014 $ 2015 unaudited $ 647 250 2 482 500 2 256 188 5 385 938 517 788 4 320 000 2 671 362 7 509 150 347 120 5 073 309 4 180 500 9 600 929 7 544 062 - 7 544 062 12 930 000 8 394 750 - 8 394 750 15 903 900 15 572 062 975 000 16 547 062 26 147 991 1 950 000 - 937 500 810 000 82 500 3 780 000 3 035 250 - 862 500 1 125 000 97 500 5 120 250 3 525 000 697 500 787 500 1 267 500 120 000 6 397 500 - - 3 780 000 9 150 000 - - 5 120 250 10 783 650 7 500 000 7 500 000 13 897 500 12 250 491 2 250 000 6 900 000 9 150 000 2 250 000 8 533 650 10 783 650 2 250 000 10 000 491 12 250 491 15/12/14 12:13 PM A5 Appendix Income statement Revenue from operations Cost of sales Gross profit Allowance for inventory obsolescence written back Commission income E-book storage fees Income from operating activities Expenses Advertising Audit fees Bad debts Depreciation Discounts allowed Legal fees Foreign exchange loss Rates Repairs and maintenance Salaries Telecommunication costs Total expenses Net income before interest and tax Interest expense Profit before tax Income tax Profit after tax Gay_Appendix.indd 6 2013 $ 2014 $ 34 212 000 28 207 500 6 004 500 37 699 500 31 620 000 6 079 500 2015 unaudited $ 43 459 500 36 855 000 6 604 500 - - 155 588 108 000 667 500 123 000 1 027 500 130 500 1 417 500 6 780 000 7 230 000 8 308 088 83 725 112 500 150 000 249 375 195 000 74 000 38 500 98 500 224 000 1 965 000 134 750 3 325 350 115 923 127 500 195 000 274 312 285 000 111 500 49 750 106 000 276 500 2 190 000 141 478 3 872 963 125 778 135 000 210 000 472 688 335 500 137 000 - 113 500 306 500 2 445 000 159 785 4 440 751 3 454 650 3 357 037 3 867 337 84 379 3 370 271 1 011 081 2 359 190 83 663 3 273 374 982 012 2 291 362 808 038 3 059 299 871 116 2 188 183 15/12/14 12:13 PM Appendix A6 Notes to the financial report Note 1 Accounts receivable Allowance for doubtful debts 2 Inventory Allowance for obsolescence 3 Gay_Appendix.indd 7 Property plant & equipment Land Plant & equipment Accumulated depreciation 2013 $ 2014 $ 2 647 500 (165 000) 2 482 500 2 362 500 (106 312) 2 256 188 4 530 000 (210 000) 4 320 000 2 797 238 (125 876) 2 671 362 2015 unaudited $ 5 313 309 (240 000) 5 073 309 4 180 500 - 4 180 500 2 775 000 5 250 000 (480 938) 7 544 062 3 375 000 5 775 000 (755 250) 8 394 750 3 375 000 13 425 000 (1 227 938) 15 572 062 15/12/14 12:13 PM A7 Appendix Sales documents The following are some of the documents inspected by the auditor as part of the tests of controls for sales. Reliable Printers Ltd 35 Cannon Street Bankstown NSW 2200 Date: 14 September 2014 Invoice # 13236 TAX INVOICE To: Serenity Publishers Ltd 16 Gratton Street Robina Qld 4226 Quantity Description Unit Price 150 copies Sea Life $50 Total Price $7500 GST 750 $8250 Payment due: 14 October 2014 THANK YOU FOR YOUR BUSINESS Prices and arithmetic accuracy checked: Signed: Rebecca Chan Reliable Printers Ltd 35 Cannon Street Bankstown NSW 2200 Date: 14 September 2014 DN # 13236 DISPATCH NOTE Ship to: Serenity Publishers Ltd 16 Gratton Street Robina Qld 4226 Description Quantity Sea Life 150 copies I declare that all goods were received and no damage noted. Customer Signature: Amy Graham Date: 15 September 2014 Gay_Appendix.indd 8 15/12/14 12:13 PM Appendix A8 Reliable Printers Ltd 35 Cannon Street Bankstown NSW 2200 Date: 5 December 2014 Invoice # 15326 TAX INVOICE To: Fictional Publishers Ltd 135 Ryan Street Melbourne Vic 3000 Quantity Description Unit Price Total Price 200 copies 100 copies The Last Man Alive The Lost Astronaut $55 $43 $13 750 4 300 100 copies The Flash $45 4 500 GST 21 550 2 155 $23 705 Payment due: 5 January 2015 THANK YOU FOR YOUR BUSINESS Prices and arithmetic accuracy checked: Signed: Rebecca Chan Reliable Printers Ltd 35 Cannon Street Bankstown NSW 2200 Date: 5 December 2014 DN # 15326 DISPATCH NOTE Ship to: Fictional Publishers Ltd 135 Ryan Street Melbourne Vic 3000 Description Quantity The Last Man Alive 200 copies The Lost Astronaut 100 copies The Flash 100 copies I declare that all goods were received and no damage noted. Customer Signature: Bob Thomas Date: 6 December 2014 Gay_Appendix.indd 9 15/12/14 12:13 PM A9 Appendix Reliable Printers Ltd 35 Cannon Street Bankstown NSW 2200 Date: 19 January 2015 Invoice # 15768 TAX INVOICE To: Home Press Pty Ltd 16 Grace Street Artarmon NSW 2064 Quantity Description Unit Price 250 copies 320 copies Star Monthly Daily Magazine $10 $8 500 copies Celebrity Talk $7 Total Price $2500 2460 3500 GST 8460 846 $9306 Payment due: 19 February 2015 THANK YOU FOR YOUR BUSINESS Prices and arithmetic accuracy checked: Signed: Rebecca Chan Reliable Printers Ltd 35 Cannon Street Bankstown NSW 2200 Date: 19 January 2015 DN # 15768 DISPATCH NOTE Ship to: Home Press Pty Ltd 16 Grace Street Artarmon NSW 2064 Description Quantity Star Monthly 250 copies Daily Magazine 320 copies Celebrity Talk 500 copies I declare that all goods were received and no damage noted. Customer Signature: Geoff Ainsworth Date: 20 January 2015 Gay_Appendix.indd 10 15/12/14 12:13 PM Appendix A10 Reliable Printers Ltd 35 Cannon Street Bankstown NSW 2200 Date: 25 March 2015 Invoice # 17524 TAX INVOICE To: Blockbuster Publishers Ltd 65 Albert Street Melbourne Vic 3000 Quantity Description Unit Price 500 copies 100 copies The Greatest Battle Hero $55 $50 Total Price $27 500 5 000 GST 32 500 3 250 $35 750 Payment due: 25 April 2015 THANK YOU FOR YOUR BUSINESS Reliable Printers Ltd 35 Cannon Street Bankstown NSW 2200 DISPATCH NOTE Ship to: Date: 25 March 2015 DN # 17524 Blockbuster Publishers Ltd 65 Albert Street Melbourne Vic 3000 Description Quantity The Greatest Battle 500 copies Hero 100 copies I declare that all goods were received and no damage noted. Customer Signature: Sam Ronaldson Date: 26 March 2015 Gay_Appendix.indd 11 15/12/14 12:13 PM A11 Appendix Reliable Printers Ltd 35 Cannon Street Bankstown NSW 2200 Date: 25 April 2015 Invoice # 18015 To: TAX INVOICE Nature Lovers Pty Ltd 160 James Street Richmond Vic 3121 Quantity Description Unit Price 500 copies The Gardening Magazine $12 Total Price GST $6000 600 $6600 Payment due: 25 May 2015 THANK YOU FOR YOUR BUSINESS Prices and arithmetic accuracy checked: Signed: Rebecca Chan Reliable Printers Ltd 35 Cannon Street Bankstown NSW 2200 Date: 25 April 2015 DN # 18015 DISPATCH NOTE Ship to: Nature Lovers Pty Ltd 160 James Street Richmond Vic 3121 Description Quantity The Gardening Magazine 500 copies I declare that all goods were received and no damage noted. Customer Signature: Sally Black Date: 26 April 2015 Gay_Appendix.indd 12 15/12/14 12:13 PM Appendix A12 Cash documents The following are some of the documents inspected by the auditor as part of the tests of controls for cash. Reliable Printers Ltd 35 Cannon Street Bankstown NSW 2200 INWARDS REMITTANCE REGISTER 19 FEBRUARY 2015 Receipt Number Customer CR 751 Home Press Pty Ltd Prepared by: Carly Barnes Amount $ 9306 Date: 19 February 2015 Big Bank Ltd 10 Blade Street Bankstown NSW 2200 Reliable Printers Ltd Online Banking EFT Deposits for 19 February 2015 Receipt Number Customer Amount $ EFT 324 Australia Wide Publishers Ltd 7 700 EFT 325 Glossy Magazines Ltd 6 050 EFT 326 Ace Publishing Pty Ltd 5 500 19 250 Gay_Appendix.indd 13 15/12/14 12:13 PM A13 Appendix Reliable Printers Ltd 35 Cannon Street Bankstown NSW 2200 DAILY RECONCILIATION OF ACCOUNTS RECEIVABLE POSTING TO BANKING 19 FEBRUARY 2015 Description Source Cheques Inwards remittance register EFT Online deposit report 19 250 Accounts receivable Sub-ledger 28 556 Total banking Bank statement 28 556 Prepared by: Carly Barnes Amount $ 9 306 Date: 20 February 2015 Reliable Printers Ltd 35 Cannon Street Bankstown NSW 2200 BANK RECONCILATION AS AT 28 FEBRUARY 2015 Balance as per bank statement $407 430 Less Unpresented cheques 56 107 351 323 Plus Deposits in transit 5 172 356 495 2 102 Plus Unreconciled difference* Balance as per general ledger $358 597 *Unreconciled difference is immaterial Prepared by: Terry Graham Date: 5 March 2015 Source: This case study was adapted from the Chartered Accountants Program of the Institute of Chartered Accountants in Australia2012(3) Audit & Assurance module. 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