W&S Partners commenced the planning phase of the Cloud 9 audit with procedures to gain

an

understanding of the client?s structure and its business environment. You have completed

your research on the key market forces, as they relate to Cloud 9?s operations. The topics you

researched included the general and industry

-

specific economic trends a

nd conditions; the

competitive environment; product; customer and supplier information; technological

advances and the effect of the internet; and laws and regulatory requirements. The purpose of

this research is to identify the inherent risks. The auditor

needs to indentify which financial

report assertions may be affected by these inherent risks. Identifying these risks will help

determine the nature of the audit procedures to be

performed.

Management implicitly or explicitly makes assertions regarding th

e recognition,

measurement, presentation and disclosure of the various elements of a financial report.

Auditors use assertions for account balances to form a basis for the assessment of risks of

material misstatement. That is, assertions are used to identi

fy the types of errors that could

occur in transactions that result in the account balance. Consequently, further breaking down

the account into these assertions will direct the audit effort to those areas of higher risk. The

auditors broadly classifies as

sertions as existence or occurrence; completeness; valuation or

allocation; rights and obligations; and presentation and disclosure.

An additional task during the planning phase is to consider the concept of materiality as it

applies to the client. The aud

itor will design procedures in order to identify and correct errors

or irregularities that would have a material effect on the financial report and affect the

decision making of the users of the financial report. Materiality is used in determining audit

pr

ocedures and sample selections, and evaluating differences from client records to audit

results. It is the maximum amount of misstatement, individually or an aggregate, that can be

accepted in the financial report. In selecting the base figure to be used t

o calculate

materiality, an auditor should consider the key drivers of the business. They should ask,

?what are the end users (that is, shareholders, banks etc) of the accounts going to be looking

at?? For example, will shareholders be interested in pro

fit figures that can be used to pay

dividends and increase share

price?

W&S Partners? audit methodology dictates that one planning materiality (PM) amount is to

be used for the financial report as a whole (that is, rather than separate PMs for the income

statement and the balance sheet). Further, only one basis should be selected

-

a blended

approach or average should not be used. The basis selected is the one determined to be the

key driver of the

business.

W&S Partners use the following pe

rcentages as starting points for the various bases:

BASE

THRESHOLD (%)

Profit before tax

5.0

Turnover

5.0

Total assets

0.5

Equity

1.0

These starting points can be increased or decreased by taking into account qualitative client

factors, which could

be:

?

the nature of the client?s business and industry (for example, rapidly changing, either

through growth or downsizing, or an unstable

environment)

?

if the client is a listed entity (or subsidiary of) subject to

regulations

?

the

knowledge of or high risk of

fraud.

Typically, profit before tax is used; however, it cannot be used if reporting a loss for the year

or if profitability is not consistent.

When calculating PM based on interim figures, it may be necessary to annualise th

e results.

This allows the auditor to plan the audit properly based on an approximate projected year

-

end

balance. Then at year

-

end the figure is adjusted, if necessary, to reflect the actual results.

Part 1

-

Materiality

Required

Answer the following

question based on the information presented for Cloud 9 in the

appendix to this case study.

(a) Using the 30 September 2011 trial balance (appendix to this case study) calculate

planning materiality and include the justification for the basis that you have

used for

your calculation. (10 marks).

Part 2

-

Analytical Procedures

Required

Answer the following questions based on the information presented for Cloud 9 in the

appendix to case study.

(a)

Using analytical procedures and the information provided in the ap

pendix, perform an

analysis of Cloud 9?s financial position and its business risks. Discuss the ratios

indicating a significant or an unexpected fluctuation. (10

marks).

(b)

Prepare a common

-

size statement for the balance sheet of Cloud 9, use total assets as

the basis for the balance sheet. Comment on any audit implications revealed by your

statement. (10

marks).

(c)

Which specific areas do you believe should receive special emphasis during your

audit? Consider your discussion of the analytical proce

dures results, comments on the

common

-

size statement and as well as your preliminary estimate of materiality.

Prepare a memorandum to Suzie Pickering, Audit Senior, outlining potential problems

areas (that is, where possible material misstatements in the f

inancial report exist) and

any other special concerns (for example, going concern). Specify the accounts and

related assertions that would require particular attention. (10

marks).

Notes

1.

Prepare the balance sheet as at 30 September, 2011 and compare it

with the balance

sheet as at 31 December, 2010. Use these two balance sheets to prepare the common

-

size statement and analysis for the question (b) of Part

2.

2.

In order to calculate the Planning Materiality (PM), the students can use the trial

balance data

for the nine months ended on 30 September, 2011 and prepare the

projected revenue (annualised revenue) for the twelve months ending on 31

December,

2011.

ACCG305- Auditing and Assurance Services Case Study Assignment- Audit Planning- Cloud 9 Pty Ltd (total marks 40) W&S Partners commenced the planning phase of the Cloud 9 audit with procedures to gain an understanding of the client's structure and its business environment. You have completed your research on the key market forces, as they relate to Cloud 9's operations. The topics you researched included the general and industry-specific economic trends and conditions; the competitive environment; product; customer and supplier information; technological advances and the effect of the internet; and laws and regulatory requirements. The purpose of this research is to identify the inherent risks. The auditor needs to indentify which financial report assertions may be affected by these inherent risks. Identifying these risks will help determine the nature of the audit procedures to be performed. Management implicitly or explicitly makes assertions regarding the recognition, measurement, presentation and disclosure of the various elements of a financial report. Auditors use assertions for account balances to form a basis for the assessment of risks of material misstatement. That is, assertions are used to identify the types of errors that could occur in transactions that result in the account balance. Consequently, further breaking down the account into these assertions will direct the audit effort to those areas of higher risk. The auditors broadly classifies assertions as existence or occurrence; completeness; valuation or allocation; rights and obligations; and presentation and disclosure. An additional task during the planning phase is to consider the concept of materiality as it applies to the client. The auditor will design procedures in order to identify and correct errors or irregularities that would have a material effect on the financial report and affect the decision making of the users of the financial report. Materiality is used in determining audit procedures and sample selections, and evaluating differences from client records to audit results. It is the maximum amount of misstatement, individually or an aggregate, that can be accepted in the financial report. In selecting the base figure to be used to calculate materiality, an auditor should consider the key drivers of the business. They should ask, \"what are the end users (that is, shareholders, banks etc) of the accounts going to be looking at?\" For example, will shareholders be interested in profit figures that can be used to pay dividends and increase share price? W&S Partners' audit methodology dictates that one planning materiality (PM) amount is to be used for the financial report as a whole (that is, rather than separate PMs for the income statement and the balance sheet). Further, only one basis should be selected- a blended approach or average should not be used. The basis selected is the one determined to be the key driver of the business. W&S Partners use the following percentages as starting points for the various bases: BASE Profit before tax Turnover Total assets Equity THRESHOLD (%) 5.0 5.0 0.5 1.0 These starting points can be increased or decreased by taking into account qualitative client factors, which could be: the nature of the client's business and industry (for example, rapidly changing, either through growth or downsizing, or an unstable environment) if the client is a listed entity (or subsidiary of) subject to regulations the knowledge of or high risk of fraud. Typically, profit before tax is used; however, it cannot be used if reporting a loss for the year or if profitability is not consistent. When calculating PM based on interim figures, it may be necessary to annualise the results. This allows the auditor to plan the audit properly based on an approximate projected year-end balance. Then at year-end the figure is adjusted, if necessary, to reflect the actual results. Part 1- Materiality Required Answer the following question based on the information presented for Cloud 9 in the appendix to this case study. (a) Using the 30 September 2011 trial balance (appendix to this case study) calculate planning materiality and include the justification for the basis that you have used for your calculation. (10 marks). Part 2- Analytical Procedures Required Answer the following questions based on the information presented for Cloud 9 in the appendix to case study. (a) Using analytical procedures and the information provided in the appendix, perform an analysis of Cloud 9's financial position and its business risks. Discuss the ratios indicating a significant or an unexpected fluctuation. (10 marks). (b) Prepare a common-size statement for the balance sheet of Cloud 9, use total assets as the basis for the balance sheet. Comment on any audit implications revealed by your statement. (10 marks). (c) Which specific areas do you believe should receive special emphasis during your audit? Consider your discussion of the analytical procedures results, comments on the common-size statement and as well as your preliminary estimate of materiality. Prepare a memorandum to Suzie Pickering, Audit Senior, outlining potential problems areas (that is, where possible material misstatements in the financial report exist) and any other special concerns (for example, going concern). Specify the accounts and related assertions that would require particular attention. (10 marks). Notes 1. Prepare the balance sheet as at 30 September, 2011 and compare it with the balance sheet as at 31 December, 2010. Use these two balance sheets to prepare the commonsize statement and analysis for the question (b) of Part 2. 2. In order to calculate the Planning Materiality (PM), the students can use the trial balance data for the nine months ended on 30 September, 2011 and prepare the projected revenue (annualised revenue) for the twelve months ending on 31 December, 2011