Week 11 Part 2

Question 1

what are the 6 financial ratios?

Answer 1

gross margin
operating margin
inventory holding period
receivables holding period
payables holding period
current ratio

Question 2

how to calculate gross/operating margin?

Answer 2

gross margin = (gross profit/sales) x 100

operating margin (operating profit/sales) x 100

expressed as percentages

Question 3

how to calculate inventory/payables holding period?

Answer 3

IHP = (inventory/COGS) x 365
PHP = (payables/COGS) x 365

expressed as a number of days

Question 4

how to calculate receivables holding period and current ratio?

Answer 4

RHP = (receivables/sales) x 365

current ratio = current assets/current liabilities

Question 5

inventory holding period?
receivables holding period?
payables holding period?

Answer 5

IHP = average # of days inventory is held for

RHP = average # of days it takes for receivables to be collected

PHP = average # of days it takes to settle payables balances

Question 6

current ratio?

Answer 6

ability to settle short term obligations

Question 7

examples of current assets/liabilities?

Answer 7

CA = cash, inventory, receivables
CL = payables

Question 8

examples of audit risks?

Answer 8

new client

receivables collection period has increased

inventory holding period has increased

current ratio has decreased
gross/operating profit margin has increased

Question 9

inherent risk = ?
detection risk = ?

Answer 9

inherent risk = risk that is inherent in the business’ operations

detection risk = risk that the auditor may not detect an issue

control risk = risk that the auditor’s poor controls wont prevent issues

Question 10

audit procedures for going concern?

Answer 10

1) analyse & discuss cash flow/profit/forecasts w/ management

2) review terms of loan agreements to spot any breaches

3) check board minutes for signs of financial difficulties

4) speak to lawyer about any potential litigation

5) review post y/e events to identify events impacting going concenr

6) check correspondence with customers to identify issues impacting receivables recoverability

7) check correspondence with suppliers to identify issues obtaining credit

8) check correspondence with bank to identify issues around bank loan

9) obtain written representation from management regarding future plans

Question 11

purpose of reviewing FSs?

Answer 11

• ensure compliance with standards & regulations
• ensure accounting policies are disclosed and followed
• ensure FSs adequately reflect info & conclusions made in the audit

Question 12

debenture = ?

Answer 12

long term debt instrument yielding a fixed rate of interest

Question 13

at the end of an audit, does an auditor evaluate uncorrected mistakes?

Answer 13

yes

Question 14

written representation = ?

Answer 14

a written statement by management provided to the auditor to confirm certain matters or support audit evidence

Question 15

purpose of written representation letter?

Answer 15

to provide evidence that those charged with corporate governance fulfilled the following duties:
- recorded all transactions
- provided auditor w/ all info
- prepared FSs appropriately
- confirmation of values
- confirmation of director’s judgement

Question 16

objectives of an auditor?

Answer 16

to form an audit opinion on FSs

to express the opinion clearly through a written report

Question 17

true & fair value = ?

Answer 17

• FSs adequately disclose the significant accounting policies
• estimates are reasonable
• info is relevant, reliable & understandable
• terminology used is appropriate

Question 18

modified opinion?
unqualified opinion?
qualified opinion?
disclaimer of opinion?
adverse opinion?

Answer 18

modified = arises when there’s an error

unqualified = FSs are presented fairly

qualified = FS are presented fairly to an extent

adverse = FS aren’t presented fairly

disclaimer = no opinion is expressed

Question 19

other information?

Answer 19

refers to information, other than FSs, included in the entity’s annual report that isn’t subject to audit

e.g., corporate governance statements, chariman’s report, operating & financial review

Question 20

unmodified opinion = ?

Answer 20

provides reasonable level of assurance from the auditor that FSs present a true & fair view of events

Question 21

emphasis of matter (EOM) = ?

Answer 21

a paragraph in the audit report that draws the users’ attention to a matter already disclosed in the FSs

Question 22

testing internal controls = ?

Answer 22

obtain proof that the control was executed properly

Question 23

substantive testing = ?

Answer 23

collect evidence that the journal entries are substantiated by source documents or other evidence

Question 24

substantiate = ?

Answer 24

to give substance to

to give proof of