Assign 2 WP 2-2 to 2-5b

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Brenau University *

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Apr 3, 2024

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Assignment 2 BRITTANY RHAMES BRITTANY RHAMES

Oceanview Marine Company 2-2 Preliminary Analytical Procedures — Summary of Ratio Analyses BR 3/17/2024 December 31, 2018 Liquidity: Although the liquidity ratios do not indicate there are any serious problem areas, they do reveal some possible warning signs:  The current ratio declined by over 7% during the year. However, it is still above the 2:1 level, which is a sign of good financial condition, and it is above the industry average.  It is taking longer to collect money on accounts. Up by 2.21 days this year while the national average went up by 18 days.  The company's inventory turnover has shown minimal improvement compared to the previous year, whereas the industry has experienced significant growth. Profitability : The gross profit margin did not go up by much which is evidence that accounts like general, selling, and administrative are not being mishandled. The contributed resources by stockholders and creditors went up by 50%. A higher fixed-asset turnover ratio is a sign of the business's improved ability to turn fixed- asset investments into income. The company's revenue per asset is increasing by 3.36%. In comparison to the capital used to generate those sales, the company is achieving significant sales. Solvency: The solvency ratios have deteriorated somewhat:  Long-term Assets to Owners’ Equity dropped nearly 15%.  Owners’ Equity to total assets has also gone down.  Due to declining shareholder-equity ratio, stockholders will not be earning as much. Current workpapers — audit planning

Current workpapers — audit planning

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Oceanview Marine Company 2-3 Assessment of Financial Condition BR 3/17/2024 December 31, 2018 A. Identify ratios and trends, if any, that cause concern about the client’s ability to continue as a going concern.  The long-term asset to owners' equity ratio fell by around 15%.  The ratio of shareholder equity has dropped, resulting in lower profits for shareholders.  Since stockholders' equity exceeds fixed assets, it finances both a portion of working capital as well as fixed assets. B. Identify ratios and trends, if any, which indicate a high likelihood that the client will continue successfully as a going concern. The fact that the gross profit margin did not increase much indicates that the general, selling, and administrative accounts were not handled improperly. There has been a 42.86% increase in the return on resources given by investors. Additionally, there has been a 50% increase in the return on resources given by creditors and investors. A greater fixed-asset turnover ratio indicates that the business has generated more revenue from its investment in fixed assets. The business is making 3.36% more money for each asset used. C. Assess the client’s financial condition as one of the following (check one)  High probability that the company will successfully continue in business for at least two years and be able to pay its debts as they become due.  Moderate possibility that the company will not successfully continue in business for at least two years and will be unable to pay its debts as they become due.  High probability that the company will not successfully continue in business for at least two years and will be unable to pay its debts as they become due. Current workpapers — audit planning

D. Briefly explain the reasoning behind your assessment. The profitability has kept rising. The business is making 3.36% more money for each asset used. The fact that the gross profit margin did not increase much indicates that the administrative, selling, and general accounts are not being managed improperly. Their present assets are sufficient to cover their current liabilities. Current workpapers — audit planning

Oceanview Marine Company 2-4-a Preliminary Analytical Procedures: BR 3/17/2024 Identification of Accounts with Unexpected Fluctuations December 31, 2018 Instructions: In the space provided below, identify those accounts that you believe are most likely to be materially misstated. The likelihood of misstatement may be indicated by an unexpected fluctuation or lack of fluctuation where one is expected. Materiality reflects the size of the potential misstatement of net income and other financial statement measures. Include your evaluation as to why the account balance differs from your expectations. Balance Sheet Accounts: Identify balance sheet accounts that you believe are most likely to be misstated, and evaluate why the fluctuation (or lack thereof) is significant. Account 2018 Bal . 2017 Bal. Evaluation Allowance for bad debts 116,636 CR 116,636 CR Allowance for bad debts is based on the ending A/R balance. The ending A/R balance increased by over 360,000 from the prior year, but allowance for bad debts remained constant. ACCRUED INTEREST 32,468 26,789 Accrued interest increased from the prior year, but current liabilities decreased from the prior year. Federal Income Taxes Payable 35,284 45,990 Income Taxes at the Federal Level Payable is related to the accrued payroll; this year, payroll increased, while income taxes due decreased . Income Statement Accounts: Identify income statement accounts that you believe are most likely to be misstated, and evaluate why the fluctuation (or lack thereof) is significant. Account 2018 Bal . 2017 Bal. Evaluation Legal 69,752 29,914 Legal Services went up a lot. Miscellaneous Expense 47,739 16,631 The assessment for other costs increased significantly and now doubles the sales proportion compared to the prior year. Property Taxes 3,978 27,947 Property taxes went down but no new land was purchased. Current workpapers — audit planning

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Oceanview Marine Company 2-4-b Preliminary Analytical Procedures: BR 3/17/2024 Identification of Accounts with Unexpected Fluctuations (continued) December 31, 2018 Divisional Income Statement Accounts: Identify three divisional income statement accounts that you believe are most likely to be misstated, and evaluate why the fluctuation (or lack thereof) is significant. Account & Division 2018 Bal . 2017 Bal. Evaluation Property Tax- New Boats 3,148 22,636 The amount of property tax decreased dramatically as sales increased and the land account remained constant. Legal Services- Used boats 47,372 7,214 Legal services increased dramatically while licensing and certification stayed the same. Miscellaneous Expense 39,157 9,092 This division's miscellaneous expense increased from 0.05 to 0.18, while the other divisions' percentages remained unchanged. Current workpapers — audit planning

Oceanview Marine Company 2-5-a Identification of Significant Risks of Material Misstatement BR 3/17/2024 December 31, 2018 Account: Sales Current Unadjusted Balance: $ 26,456,647 Prior Year’s Audited Balance: $ 22,889,060 Nature of potential material misstatement: Potential overstatement of sales due to: 1) Fictitious sales recorded in 2018 2) Cutoff errors (2019 sales recorded in 2018) Does the risk of material misstatement represent a significant risk due to fraud or error? Explain. Yes. An increase in revenue is significant and auditing standards require identifying revenue recognition as a fraud risk. Audit procedure to be performed to address identified risk (be specific): 1) Review sales recorded near year-end, including confirmation of accounts receivable for any special terms. 2) Increase the extent of cutoff testing to determine whether any sales that occurred in January 2019 were recorded in December 2018. Account: Sales Current Unadjusted Balance: $26,456,647 Prior Year’s Audited Balance: $ 22,889,060 Nature of potential material misstatement : Potential overstatement of sales due to: 1) Fictitious sales recorded in 2018 2) Cutoff errors (2019 sales recorded in 2018) Does the risk of material misstatement represent a significant risk due to fraud or error? Explain. Yes. Significant revenue growth necessitates the identification of revenue recognition as a fraud risk by auditing standards. Audit procedure to be performed to address identified risk (be specific): Trace receivable reports to general ledger accounts. Test invoices are listed in the receivable report. Current workpapers — audit planning

Oceanview Marine Company 2-5-b Identification of Significant Risks of Material Misstatement (continued) BR 3/17/2024 December 31, 2018 Account: Inventory Current Unadjusted Balance: $13,524,349 Prior Year’s Audited Balance: $12,356,400 Nature of potential material misstatement: The inventory count could include items for the following year. Certain inventory could be returned and not been accounted for. Does the risk of material misstatement represent a significant risk due to fraud or error? Explain. Yes. An increase in inventory accounts is significant and auditing standards require this to be fraud. Audit procedure to be performed to address identified risk (be specific):  A cutoff analysis for the inventory of the current year.  Test-high-value items in inventory.  Review freight costs. Account: Cash equivalents Current Unadjusted Balance: $1,320,096 Prior Year’s Audited Balance: $1,089,978 Nature of potential material misstatement : 1. Obligations to repay loans 2. Wanting to be out of Southeastern Enterprise control Does the risk of material misstatement represent a significant risk due to fraud or error? Explain. Yes. Significant growth in the cash account is required under auditing standards, and revenue recognition must be fraudulent. Audit procedure to be performed to address identified risk (be specific): 1. Check with the bank to make sure the amount of cash is present. 2. Review general ledger accounts. Current workpapers — audit planning

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