Assignment: Financial Statement Assertions and Audit Evidence

Learning Objectives

• Explain the objectives, use and limitations of analytical procedures
• Perform analytical procedures and evaluate result

Required Readings
• EMGP: Ch 5 (LO 9-10)
• SSA 520

Pre-seminar Activity

• McGraw-Hill Connect Pre-seminar Activity

Seminar Requirements

1. Mini-group presentation (Team 5a)

Required:

(i) Explain the main purposes of analytical procedures. What factors affect the usefulness of analytical procedures as substantive procedures?

(ii) Refer to the case details in EMPG, 5-25. Perform a substantive analytical review procedure to assess the reasonableness of the ‘Reserve for returns'. Your answer should take the form of a calculation and a resulting conclusion on the reasonableness of the reserve (provision) amount.

2. You are the audit senior responsible for the audit of Toys4Kids Ltd (T4K). T4K specializes in designing, manufacturing and selling its own range of education products for children. T4K owns three factories with manufacturing and warehousing facilities in Malaysia. Besides cash sales at its retail outlets, T4K also sells its products to distributors on a consignment basis and to third-party retailers on a 30-day credit term. A large bank in Singapore provides T4K with an overdraft facility of S$1.5 million at 12% interest rate per annum, and a 10-year term loan of S$9 million, which is secured on T4K's property, plant and equipment, at 3% interest rate per annum.

T4K's research and development (R&D) centre in Singapore has, in the past three years, designed and brought to commercial production an average of fifty new education products a year. However, only a handful of these new education products are eventually patented. "As a matter of fact, most of our education products are not patented. The education products industry is very fast-moving and we would be left behind if we were to wait for patent approvals for all our products. In any case, the demand for most education products is short-lived. Thus, it is more crucial for us to have fresh ideas to create new education products that quickly hit the market every year," said Pearlie, the CEO of T4K.

Pearlie, a double-degree graduate in engineering and marketing, holds 70 percent of T4K's shares. Her vision is to develop T4K to be the leader in the educational product business in the region. Despite keen competition, especially from low-cost producers in China and India, T4K managed to achieve an impressive annual sales growth rate of 30% since its incorporation in May 2001. Francis, who recently joined T4K as its Finance Director, was an auditor with one of the Big Four international accounting firms. Both Francis and Pearlie are T4K's executive directors. Other members of T4K's board include the CEO of a local trading company, a school principal and a partner of a law firm. These three non-executive directors comprise T4K's Audit Committee.

T4K's largest factory was completely destroyed in a flood in February 2015. Pearlie is not optimistic about T4K's ability to raise additional funds to build a new factory.

T4K's financial statements are provided below:

Required:

Perform an analytical review of T4K's financial statements and identify significant audit issues. Discuss the financial statement assertions affected by the audit issues identified.