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Please help! I know this looks like a lot but its not supposed to take longer than 20 minutes and I need to do it
Please help! I know this looks like a lot but its not supposed to take longer than 20 minutes and I need to do it tonight. Please!
Graded Audit Task #1 Consolidated Construction Inc., an issuer, is a construction company with annual revenues of $20 million. As the audit senior engaged on Consolidated Construction's Year 6 financial audit, you have been asked to calculate materiality as the engagement team plans the audit. Using the exhibits, perform a quantitative and qualitative analysis. In Part 1, determine overall materiality. In column B, calculate and enter the current ratio rounded to two decimal places. In column C, select the calculation approach the auditor should use. In column D, calculate and enter audit materiality. In Part II, perform a qualitative analysis and identify areas of qualitative concern for the Year 6 audit. There are four areas of qualitative concern. Part I: Quantitative Analysis D 1 Quantitative Analysis Current Ratio Approach Overall Materiality Overall materiality Part II: Qualitative Analysis B 1 Qualitative concern 1 2 Qualitative concern 2 3 Qualitative concern 3 4 Qualitative concern 4 Exhibit 1 Consolidatec Construction Inc. Income Statement For the Years Ending December 31, Year 6 and 5 (Numbers in thousands) Year 6 Year 5 Operating revenue Sales Total revenue 23,920 $23,920 22,800 $22,800 Cost of goods sold Gross margin $19,750 $4,170 $19,000 $3,800 Operating expenses Salaries, wages, and benefits Maintenance and repairs Depreciation and amortization Miscellaneous operating expenses Total operating expenses 915 1,100 1,200 500 $3,715 800 1,000 1,200 450 $3,450 Operating income $455 $350 5 Other expenses 5 Interest Income before income taxes 3 Provision for income taxes 130 $325 114 $236 125 100 1 Net Income 2. $200 $136 As of December 31, Years 6 and 5 (numbers in thousands) Year 6 Year 5 Assets Current assets Cash and cash equivalents Short-term investments Accounts receivable Inventory Prepaid expenses Total current assets 1,900 2,800 500 450 320 $5,970 2,500 1,700 650 410 450 $5,710 Property, plant, and equipment Less: accumulated depreciation Net property, plant, and equipment 20,750 5,000 15,750 20,000 4,400 15,600 Total Assets $21.720 $21.310 Liabilities and Stockholders' Equity Current liabilities Accounts payable Short-term loans Accrued liabilities Total current liabilities 1,400 1,100 1.700 $4,200 1,300 1,500 1.650 $4,450 $6,720 $6,260 e Long-term debt 3 Stockholders' Equity 5 Total Liabilities and Stockholders' Equit $10,800 $10,600 $21.720 $21.310 Exhibit 3: Excerpt-Auditor's Guidance Excerpts From Audit Firm's Internal Guidance-Handbook for Engagement Teams Quantitative Materiality Analysis The audit firm's standard methodology to determine overall materiality for an engagement is based on a percentage of income before taxes for the current year. If the client reports a loss or has a poor liquidity ratio (ie, a current ratio of 1.19 or lower), overall materiality should instead be based on a percentage of total assets. Standard percentages to use in determining overall materiality are: 5 percent of income before taxes 2 percent of total assets . Qualitative Analysis In planning the audit, the engagement team must consider whether any of the following factors exist with respect to the audit engagement or the client. Any such factors identified must be documented in the audit file, and the percentage for tolerable misstatement adjusted accordingly: Overall engagement risk is considered high (e.8. client operates in a high-risk industry, there are unusually high market pressures with respect to client, first-year audit engagement, engagement relates to special purpose financial statements) Fraud risk is high (e.g, internal or external pressures, ineffective governance controls, inexperienced or incompetent accounting personnel, contentious relationship with client, evasive responses to audit inquiries) History of identified misstatements in prior year audits History of material weaknesses, significant deficiencies, and/or a high number of deficiencies in internal control High risk of misstatement related to specific account balances, classes of transactions, or disclosures Increased or higher-than-usual number of accounting issues that require significant judgment and/or greater use of estimates with inherent uncertainty or subjectivity High turnover in senior management accounting, or financial reporting personnel Client operates in multiple locations (locations may consist of office/operational space or project locations) . . . . Tolerable Misstatement (Percentage) The audit firm's general baseline measure for tolerable misstatement is 60 percent of overall materiality before consideration of any qualitative factors. For each qualitative factor (as outlined under "Qualitative Analysis") that has been identified, 1.5 percent should be subtracted from the baseline measure. The final determination and documentation of tolerable misstatement must be reviewed by the engagement senior manager and approved by the audit partner. The engagement team may determine that, based on the risk of particular account balances or transactions, separate materiality percentages may be required for those balances or transactions that are lower than tolerable misstatement. In such cases, the materiality for those balances or transactions should be calculated as the lesser of: For account balances (balance sheet): 1 percent of the account balance or 20 percent of overall materiality For transactions (income statement): 0.5 percent of the transactions amount or 30 percent of overall materiality . Exhibit 4: Company and Industry Information Client: Consolidated Construction Inc. Engagement type: Audit Engagement year: Year 6 Workpaper title: Company and Industry Information Workpaper ref: 150-003 As part of its engagement assessment and planning procedures, the audit engagement team noted the following information regarding the client and the industry in which it operates: 1. 2. 3. 4. Consolidated Construction Inc. performs work as a general contractor in the state of Pennsylvania. The company is structured as a C-corporation. Consolidated Construction Inc. is publicly traded and, therefore, is required to have an annual audit performed. Consolidated construction's total revenue has exceeded $20 million for the past three years. Projections indicate that revenue will continue to increase during the current fiscal year. While demand for new construction has recently increased, the industry has experienced skilled labor shortages. Fixed-bid contracts significantly increased for Consolidated Construction during year 6, affecting total sales. There is an increased need for more accurate bid estimating in order to reduce the risk of cost overruns on projects. 5. 6. Exhibit 5: Qualitative Analysis Client: Consolidated Construction Inc. Engagement type: Audit Engagement year: Year 6 Workpaper title: Qualitative Analysis - Materiality Workpaper ref: 150-005 As part of its qualitative analysis for the purposes of determining materiality and tolerable misstatement, the audit engagement team noted the following with respect to the engagement, the client, and the industry in which the client operates: While changes have taken place in the construction industry during the past year, such changes were not considered significant enough to increase overall engagement risk. Fraud risk is considered to be low. Management is open and transparent regarding the company's operations and is generally supportive of the audit process. Per review of prior years' audit workpapers, there is no history of material identified misstatements, material weaknesses, or significant control deficiencies. As part of the company's continuous improvement efforts, management has indicated that they have made several enhancements to their internal control over financial reporting during the current year. Management asserts that these controls are performing effectively. The company's chief financial officer (CFO) resigned in July of Year 6. Shortly after, in August of Year 6, the accounting director also left the company when she was not offered the CFO position. The company currently has seven different multimillion-dollar construction projects in progress at various construction sites, all located within a 50-mile radius of the company's main office. The company's current contracts with customers-both private and government--are all currently fixed-bid contracts. This represents a significant shift from prior years, when a large portion of the company's contract portfolio was structured differently (e.g., cost-plus pricing). This change in contract pricing and terms has increased the company's reliance on projections and estimates, because revenue recognition for such contracts involves a greater use of estimation and judgment (such as for cost basis, rework and uninstalled materials adjustments, when determining delivery of performance obligations over time). Therefore, the audit engagement team has assessed a higher than normal level of risk of potential misstatement for related account balances and transactions (ie., accounts receivable and revenue) Step by Step Solution
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