(a) Human Help Ltd is a non-profit entity. You have discovered that it has not kept substantiating vouchers or receipts for more than 55 percent of its expenses, excluding salaries and allowances (b) JJ King Ltd is a building contractor with a varying workload. In order to compensate for the irregularity of its contracted building projects, JJ King also purchases large vacant blocks of land that it later subdivides for the construction of houses and units. JJ King then sells these on its own account. Your analysis strongly suggests that the apportionment of costs to houses and units sold has been kept low to boost profits. In your opinion, this has resulted in the overvaluation of the unsold properties. The directors of the company do not agree and hold to their view that the stock of properties is correctly valued. (c) You have completed the audit of Grand Resort Ltd (Grand Resort) for the year ended 30 June 2015. The audit partner suggested that the value of properties on the Gold Coast were overstated by $16 million, a figure which was twice the level of materiality set for the audit. As a result of discussions with the audit committee, the CEO of Grand Resort agreed to revise the valuations downward by $10 million. All other issues were resolved to the satisfaction of the audit partner, resulting in an overall misstatement of the financial report of $6 million. The audit partner is now considering the effect of the misstatement on the auditor’s report. (d) Grand Event Ltd arranges for popular overseas entertainment artists to perform in Australia. The band Eclipse was booked by Grand Event to play in major cities across the country. Grand Event’s written contract required the company to pay the band in US dollars but, in order to reduce costs, it did not hedge the amounts. Subsequent to year-end, the Australian dollar fell against the US dollar and a substantial loss relating to the band’s tour was predicted. The management of Grand The event tried unsuccessfully to renegotiate the band’s contract and has been unable to obtain finance to cover the expected shortfall. Grand Event has now canceled the tour and expects a substantial claim from Eclipse. It is clear to you, as the auditor, that Grand Event does not have the income, cash, or other assets to sustain such a loss. Required: Assuming no amendments have been made, identify, and explain the type of auditor’s opinion required for each issue outlined above.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
You are the audit partner at Parkville & Associates, a mid-tier audit firm. You are responsible for the
audits of the following four independent entities for the year ended 30 June 2018:
(a) Human Help Ltd is a non-profit entity. You have discovered that it has not kept substantiating
vouchers or receipts for more than 55 percent of its expenses, excluding salaries and allowances
(b) JJ King Ltd is a building contractor with a varying workload. In order to compensate for the
irregularity of its contracted building projects, JJ King also purchases large vacant blocks of land
that it later subdivides for the construction of houses and units. JJ King then sells these on its own
account. Your analysis strongly suggests that the apportionment of costs to houses and units sold
has been kept low to boost profits. In your opinion, this has resulted in the overvaluation of the
unsold properties. The directors of the company do not agree and hold to their view that the stock
of properties is correctly valued.
(c) You have completed the audit of Grand Resort Ltd (Grand Resort) for the year ended 30 June 2015.
The audit partner suggested that the value of properties on the Gold Coast were overstated by
$16 million, a figure which was twice the level of materiality set for the audit. As a result of
discussions with the audit committee, the CEO of Grand Resort agreed to revise the valuations
downward by $10 million. All other issues were resolved to the satisfaction of the audit partner,
resulting in an overall misstatement of the financial report of $6 million. The audit partner is now
considering the effect of the misstatement on the auditor’s report.
(d) Grand Event Ltd arranges for popular overseas entertainment artists to perform in Australia. The
band Eclipse was booked by Grand Event to play in major cities across the country. Grand Event’s
written contract required the company to pay the band in US dollars but, in order to reduce costs,
it did not hedge the amounts. Subsequent to year-end, the Australian dollar fell against the US
dollar and a substantial loss relating to the band’s tour was predicted. The management of Grand
The event tried unsuccessfully to renegotiate the band’s contract and has been unable to obtain
finance to cover the expected shortfall. Grand Event has now canceled the tour and expects a
substantial claim from Eclipse. It is clear to you, as the auditor, that Grand Event does not have
the income, cash, or other assets to sustain such a loss.
Required:
Assuming no amendments have been made, identify, and explain the type of auditor’s opinion required
for each issue outlined above.
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