1. You also discover that your firm conducted some consultancy services for "BMC" in that they performed a review of the internal control procedures for Accounts Payable and Receivable and also used your firm's recruitment agency to employ three new Accountants. Again, you feel that there's been a conflict of interest. Therefore, as a result, would you say that there is a significant issue involving the professionalism, ethics, and independence of both firms? If so, what are they specifically and how do you think they may have affected the outcome of the audit? And which Australian Accounting Standards (ASA) and Accounting Professional Ethical Standards (APES) would specifically concern you with respect to this issue?
2. After further significant testing and sampling of the accounts for 2012/2013, your observation regarding whether "BMC" is a going concern hasn't changed but may have in fact shifted towards the company possibly now being technically insolvent. Testing and analysing the financial statements for 2012/2013 (refer to the Profit and Loss and Balance Sheet to June 2013) you ascertain and conclude the following:
a.) The loss for the year is -$100,389.
b.) You undertake some ratio analysis as follows which indicate serious cause for concern:
1. Profitability - WA (Return on Total Assets) - (Net Profit/Total Assets) x 100;
2. Profitability - NPM (Net Profit Margin) - (Net Profit/Sales) x 100;
3. Efficiency - ASPD (Average Settlement Period for Debtors) - (Trade Debtors/Credit Sales) x 365 (assume all Sales are credit sales; and
4. Liquidity - CR (Current Ratio) - Current Assets/Current Liabilities).
c.) You become aware of a letter from certain solicitors who declare that one of "BMC's" Debtors, "Smith & Jones" will not be able to pay an outstanding amount of $1,012.00. You therefore instruct the Accountant to undertake the correct journal entry to take effect of this situation in the company's books of account.
The letter from "5,p 3m& gysvmM & Wzg:' and the Receivables Reconciliation [Summary] as at 30/6/2013 are both contained in the "Case Study Working Files".
d.) You have also uncovered missing depreciation journal entries for the 2012/2013 financial year that have a significant effect on the financial performance and position of "BMC". Your findings are as follows:
1. The motor vehicles have been incorrectly accounted for as they were depreciated, straight-line at 75% per annum instead of 18.75%;
2. There is no depreciation for both the Office Equipment and the Computer Equipment from when the Assets were purchased on 1/7/2011. The Office Equipment was to be depreciated at 20% per annum straight-line and the Computer Equipment was to be depreciated at 30% per annum, reducing balance.
e.) The Accountant for "BMC" and the Bank both confirm that the Bank Loan for $11,250.00 is to commence being repaid by "BMC" from 1/7/2013 as an interest-only payment at 12% per annum.
As the Auditor, you must provide answers with reference to the above as they must be conveyed to the Audit Committee of "BMC".
1. Why do you think the current year loss of $-$100,389 is significant?
2. Complete the four ratios and comment on their significance.
3. What is the effect on the financial statements of the amount that will not be paid by "Smith & Jones"? Is it a bad or doubtful debt? What is the journal entry (debits and credits)? Should other Debtors be adjusted as a Provision? Give reasons for either Yes or No.
4. What is the effect on the financial statements of the depreciation errors? Show the correct journal entries for the three categories of Assets.
5. What will be the effect on the financial statements of the loan re-payment commencing from 1/7/2013?
After taking into account the effect on the financial statements of the above, re-calculate the "loss" for 30/6/2013 and the adjusted "Balance Sheet" as at 30/6/2013 - is it (much) worse than the current one? If so, do you think it is a "going concern" or is "BMC" now insolvent. Would you accept a Director's Declaration similar to the one for the 2011/2012 financial year and would that change the audit opinion of your firm? Please give your reasons.
And which Australian Accounting Standards (ASA) and Accounting Professional Ethical Standards (APES) would specifically concern you with respect to these issues?
3. Classification Issues
You take a closer look at the classification of the elements of both the "Profit and Loss Statement" and "Balance Sheet" for the 2012/2013 financial year. The "Profit and Loss Statement" and maybe the "Balance Sheet" don't seem to be properly classified and may require correction. Do you think that they conform to the requirements of the Australian Accounting Standards in their presentation? Please give your reasons. And which Australian Accounting Standards (ASA) would specifically concern you with respect to this issue?
Attachment:- Working papers.rar