Nanyang Technological University
Nanyang Business School
AC2104/AC3101 – ASSURANCE & AUDITING
Semester 1, 2016-17
Outline for Seminar 6:
Financial Statement Assertions and Audit Evidence III
Learning Objectives
Explain the objectives, use and limitations of analytical procedures
Perform analytical procedures and evaluate results
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.
End of Mini-group presentation
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$9 million, which is secured on T4K’s property,
plant and equipment, at 3% interest rate per annum.
T4K’s research and development (R&D) centre in Singapore has, in the past three years,
designed and brought to commercial production an average of fifty new education
products a year. However, only a handful of these new education products are eventually
patented. “As a matter of fact, most of our education products are not patented. The
education products industry is very fast-moving and we would be left behind if we were
to wait for patent approvals for all our products. In any case, the demand for most
education products is short-lived. Thus, it is more crucial for us to have fresh ideas to
create new education products that quickly hit the market every year,” said Pearlie, the
CEO of T4K.
Pearlie, a double-degree graduate in engineering and marketing, holds 70 percent of
T4K’s shares. Her vision is to develop T4K to be the leader in the educational product
business in the region. Despite keen competition, especially from low-cost producers in
China and India, T4K managed to achieve an impressive annual sales growth rate of 30%
since its incorporation in May 2001. Francis, who recently joined T4K as its Finance
Director, was an auditor with one of the Big Four international accounting firms. Both
Francis and Pearlie are T4K’s executive directors. Other members of T4K’s board
include the CEO of a local trading company, a school principal and a partner of a law
firm. These three non-executive directors comprise T4K’s Audit Committee.
T4K’s largest factory was completely destroyed in a flood in February 2015. Pearlie is
not optimistic about T4K’s ability to raise additional funds to build a new factory.
T4K’s financial statements are provided below:
Statement of Profit or Loss for
The year ended 31 December
Cash Sales
Credit Sales
Total Sales
Cost of sales
Gross profit
Overheads
Interest
Net profit before tax
Taxation
Profit after tax
2015
S$’000
(Unaudited)
16,250
15,175
31,425
(25,900)
5,525
(1,875)
(1,125)
2,525
(500)
2,025
2014
S$’000
(Audited)
12,700
11,125
23,825
(19,550)
4,275
(1,700)
(1,000)
1,575
(300)
1,275
2
Statement of Financial Position as at
31 December
Non-current assets
Property, plants and equipment
Intangibles – patents
Current assets
Inventories
Trade receivables
Cash
Current liabilities
Trade payables
Bank overdraft
Taxation
Other payables
Net current assets
Total assets less current liabilities
Bank loans
Shareholders Equity
Paid-up share capital
Retained earnings
2015
2014
S$’000
(Unaudited)
S$’000
(Audited)
10,700
1,700
12,400
11,350
1,400
12,750
2,450
3,225
1,300
6,975
1,750
2,625
1,875
6,250
5,075
275
450
575
6,375
600
4,175
1,063
350
437
6,025
225
13,000
12,975
5,125
7,875
5,500
7,475
2,500
5,375
7,875
2,500
4,975
7,475
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.
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