Financial Accounting

Question

Usman Ghani · Accepted Answer

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.

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Usman Ghani

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