Your firm is the auditor of Happy Days, an entity which provides hospitality packages at racecourses around a single country. The managing director of Happy Days has suggested the following to your managing partner: i. All members of the audit team to be offered two free tickets to a major event at the racecourse of their choice, ii. last year’s audit senior should be seconded to the organization for a six-month period. The current year’s audit is not yet underway, iii. iii. the firm also provide internal audit services. Required Discuss which, if any of the above proposals would be acceptable to your firm and (if not state why not), and set out the main safeguards, if any, which would be required.
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.
Your firm is the auditor of Happy Days, an entity which provides hospitality packages at
racecourses around a single country. The managing director of Happy Days has suggested the
following to your managing partner:
i. All members of the audit team to be offered two free tickets to a major event at the
racecourse of their choice,
ii. last year’s audit senior should be seconded to the organization for a six-month period.
The current year’s audit is not yet underway,
iii. iii. the firm also provide internal audit services.
Required
Discuss which, if any of the above proposals would be acceptable to your firm and (if not state
why not), and set out the main safeguards, if any, which would be required.
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