Auditing

STUDENT ASSIGNMENT COVER SHEET

Module Name and Level	AUDITING Level 3
Module Code	AC34-3
Assessment No.	Assessment One-50%
Assessment Type and weighting:	Individual Report

Auditing (AC 34-3)

Individual report

Bashayar Co is a company which designs and manufactures engine parts. Young and Ernst  are the auditors for Bashayar Co . You are the audit  team leader of Young and Ernst  and in charge of the audit of BashayarCo.The audit of the financial statements for the year ended 31 July 2018 is nearing completion and you are reviewing the working papers of the going concern section of the audit file.

The draft financial statements recognise the following

·       A net loss of OMR500,000 and

·       Total assets of OMR13.8 million.

The financial statements of 2017 recorded the following

·       A profit of OMR760,000 and

·       Total assets of OMR14.4 million. 

The audit senior has left the following note for your attention: ‘I have performed analytical review on BashayarCo’s year-end financial statements.

The current ratio is 0·8 against the 2017 ratio of 1·2. The quick ratio is 0·5 against the 2017 ratio of 1·6. The latest management accounts show that ratios have deteriorated further since the year end, and the company now has a cash balance of only OMR 25,000.

Bashayar Co has a long-term loan outstanding of OMR80,000 with a contract condition  attached, which states that if the current ratio falls below 0·75, the loan can be immediately recalled by the bank.

You are also aware that one of BashayarCo’s best-selling products, the QuickFire, has become technically obsolete during 2018 as customers now prefer more environmentally friendly engine parts. Historically, the Quick Fire has generated 45% of the company’s revenue. In response to customers’ preference, OMR 1.3 million has been spent on designing a new product, the Green Fire, due for launch in February 2019, which will be marketed as an environmentally friendly product.

A cash flow forecast has been prepared for the year to 31 July 2019, indicating that based on certain assumptions, the company’s cash balance is predicted to increase to OMR 220,000 by the end of the forecast period.

Assumptions include:

·       The successful launch of the GreenFire product.

·  The sale of plant and machinery which was used to manufacture the Quick Fire, generating cash proceeds of OMR 50,000 in January 2019.

·  A reduction in payroll costs of 15%, caused by redundancies in the Quick Fire manufacturing plant.

The receipt of a grant of OMR30,000 from a government department which encourages innovation in environmentally friendly products, scheduled to be received in February 2019.

Disclosed in notes to financial statements: is a Contingent liability for OMR 1 million. The contingent liability relates to a bank guarantee letter given to Zamzam Co.  Zamzam Co is one of the main suppliers of direct material for BashayarCo’s . The bank gaurantee had been given as a form of support for the supplier company who was  facing difficult trading  conditions.

Bashayar Co’s has recently been experiencing trading difficulties,  A major customer who owes OMR 1.5 million to Bashayar Co’s has declared insolvency.  It is unlikely that the amount will be recovered. However, the balance is included within the financial statements. The Marketing director has recently left Bashayar Co and has yet to be replaced. As a result of the weak current cash flow situation, the company has been slow in paying its suppliers and some are threatening legal action to recover the sums owing.

Given these circumstances it was decided that no dividends would be paid to shareholders. And after a  decade of healthy dividend payments, the company decided to not  pay dividends for the current financial year.

Having completed the file review, you have concluded that the use of the going concern assumption is appropriate, but that there is significant doubt over Bashayar Co’s ability to continue as a going concern.

You have advised the company’s audit committee that a note is required in the financial statements to describe the significant doubt over going concern. The audit committee is reluctant to include a detailed note to the financial statements due to fears that the note will highlight the company’s problems and cause further financial difficulties but have agreed that a brief note will be included.

Required:

Using the information above:

1.  Identify and explain the matters which cast doubt on the going concern status of Bashayar Co. 

2.    Other than the indicators covered by the case above, discuss other indicators which may indicate lack of going concern status of an organisation.

3.    Discuss the procedures that  you would carry out in respect of the cash flow forecast of Bashayar Co.

4.    Describe relevant audit procedures which you should perform in assessing whether Bashayar Co is a going concern.

5.    Discuss the implications for the audit report and outline any further actions to be taken by the auditor.

Grading Criteria:

The grading of the Written Report will be based on:

The report will be assessed according to the criteria given below:

·          Information and Research Completion of Tasks (20 %)

·          Understanding of Issues (20 %)

·          Application and Analysis (35%)

·          Presentation and structure (15%)

·          References (10%)

Additional Guidelines

·      The Assignment Submission link on MOVE will be open, a week ahead of the submission date.

·  You can submit your assignment multiple times, till the submission deadline. Note that Turnitin could take upto 24 hours to produce similarity reports for submissions.

·       The last submission, within the deadline, will be considered as your final submission.

·   Assignments should be submitted by 6pm on the day of the deadline. There is a grace period until midnight to allow for any technical difficulties, but any assignments submitted after this will be counted as late. Technical problems will not be accepted as an excuse for submitting after the day of the deadline.

·  You are required to tick to confirm the statement: “I confirm that this assignment is my own and all sources have been    acknowledged. I understand that the use of other people’s work or ideas without acknowledgement is plagiarism and could result in failing the assignment”. You will not be able to submit the assignment without ticking this box.

·      In a case of group work, it is recommended that the group should identify a leader who can be responsible for uploading theassignment on Turnitin and to share the feedback received from lecturers with the group members.

·   The similarity percentage of your final submission will be one of the factors considered, for assessing the originality of your assignment. However, the decision to report an assignment for plagiarism is taken by the Lecturers, who mark your assignment.

·      The Lecturers will consider a number of factors such as Assignment type, Part of the assignment where similarity occurs, Nature of similarity etc., along with the similarity percentage of your assignment, to assess the originality of your assignment. Therefore, similarity percentage would not be accepted as a basis for disputing academic judgments regarding plagiarism.

·       Note that the similarity percentage of your submission can change till the submission deadline, if the submissions of other students have similarity to your assignment. Therefore, the similarity percentages are not final, till the assignment submission is closed.

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