Answer of Part 1
(i)Current Ratio = Current Asset / Current Liability = (20 + 50 + 30) / (40 + 10) = 100 / 50 = 2
Quick Ratio = (Current Asset - Inventory) / Current Liability = (100 - 30) / 50 = 70 / 50 = 14 / 10 = 1.4
(ii) Debt to equity ratio = Long term Debt / Owner's Equity = 70,000 / 1,30,000 = 7/13 = 1 / 1.8
Significance: This ratio helps assess how much a company is leveraging through debt compared to its equity. A high debt-to-equity ratio indicates that a company is heavily financed by debt, which may be riskier, especially if the company faces a downturn.
Answer of Part 2
(i)Breakeven point = Fixed Cost / (Selling Price per unit - Variable cost per unit) = 1,00,000 / (50 - 30) = 1,00,000 / 20 = 5,000 units
(ii) Required units to be sold = (Fixed Cost + Target Profit)/ (Selling Price per unit - Variable cost per unit) = (1,00,000 + 50,000) / 20 = 1,50,000 / 20 = 7,500 units
Answer of Part 3
(i)
1. Understanding
the Business
- Industry Analysis: Understand the industry in which the company
operates, including key risks, regulations, and economic conditions.
- Company Analysis: Gather information about the company's
business model, organizational structure, products or services, and
competitive landscape.
2. Assessing Risks
- Preliminary Risk Assessment: Identify areas with higher risks of material
misstatement due to error or fraud.
- Internal Control Evaluation: Assess the design and implementation of the
company's internal controls. Identify any areas where controls may be weak
or absent.
3. Establishing
Materiality
- Determine Materiality Thresholds: Set thresholds for materiality to help guide
audit procedures and identify significant misstatements.
- Quantitative and Qualitative Factors: Consider both quantitative factors (e.g.,
percentage of revenues or assets) and qualitative factors (e.g., nature of
transactions or impact on stakeholders).
4. Developing the
Audit Strategy
- Overall Audit Approach: Decide whether to take a substantive
approach (focusing on detailed testing) or a combined approach (relying on
internal controls and substantive testing).
- Resource Allocation: Determine the audit team size and expertise
required, and assign tasks accordingly.
5. Planning Audit
Procedures
- Audit Programs: Develop detailed audit programs outlining
the specific procedures to be performed for each audit area.
- Sampling Methods: Decide on sampling methods and sizes to
ensure sufficient evidence is gathered.
6. Scheduling and
Coordination
- Timeline: Establish a timeline for the audit, including key milestones and
deadlines.
- Client Communication: Coordinate with the client to schedule
meetings, walkthroughs, and access to necessary documents and personnel.
7. Compliance and
Ethical Considerations
- Regulatory Compliance: Ensure the audit plan complies with relevant
auditing standards and regulations.
- Independence and Objectivity: Confirm that the audit team maintains
independence and objectivity throughout the audit.
8. Risk Response
and Audit Plan Finalization
- Risk Response Plan: Develop responses to identified risks,
including specific audit procedures tailored to address these risks.
- Documentation: Document the audit plan, including risk
assessments, planned procedures, and rationale for key decisions.
9. Review and
Approval
- Internal Review: Have the audit plan reviewed by senior audit
team members or audit supervisors.
- Client Approval: Present the audit plan to the client’s
management or audit committee for approval and feedback.
10. Continuous
Monitoring and Adjustment
- Ongoing Assessment: Continuously monitor the progress of the
audit against the plan and adjust as necessary based on findings and
emerging risks.
- Communication: Maintain regular communication with the
client to address any issues or changes in the audit scope promptly.
