Analyze and evaluate key audit risks

Analyze and evaluate key audit risks

INTRODUCTION

The assignment is based on a hypothetical audit client, Brilliant Construction Limited (BCL). Students may choose to submit the assignment individually, or in groups up to three students (maximum). For students who decided to do it in groups, they need to ensure that the group members are from the same workshop group.

The aim of the assignment is to test students’ ability to integrate skills learnt in BFA713 Auditing and Assurance to analyse a hypothetical company from the auditor’s perspective and within the framework of auditing standards. Although BCL is a hypothetical company, the successful completion of this assignment requires extensive research on BCC’s internal and external environments. It is important that students understand the company operations, strategies, external environment and the financial information provided in the case study.

Students are expected to demonstrate their ability to critically evaluate various pieces of information and apply analytical skills to critically evaluate key audit risks which would impact on the audit of BCL.

An important aspect of the assignment will be for the students to demonstrate their ability to present a written report in a professional manner.

REQUIRED

Task 1 – Assume that you are an audit manager at MFC Chartered Accountants. Your audit firm just gained a new client, Brilliant Construction Limited (BCL). You have been assigned to the audit of BCL. You are part of the team responsible for planning the BCL audit engagement for 2016. As part of the audit, you have been asked to obtain an understanding of BCL and its environment as per Auditing Standard ISA 315. The background information of BCL, including its internal environment, is provided in the case study. A comprehensive understanding about BCL’s internal and external environment is crucial in ensuring an effective and efficient audit. This is especially true given that this is the first time your firm is working on the audit of BCL.

You need to do an extensive research on BCL’s external environment, including the economy and the industry that the company is operating in. In order to do this, you need to gather relevant information from various sources such as financial news, industry reports, government statistics etc.

Based on your analysis of BCL’s internal and external environment, identify two key accounts at risk. For each of the account, explain the main assertion at risk. You need to justify why the accounts are at risk based on your analysis of the client’s internal and external environments. Appropriate references need to be provided when necessary. Students who simply provide the name of the accounts and the assertions without explaining them will not receive any mark.

Task 2 – Your audit team has performed analytical procedures. These include comparing the client’s ratios with the prior years and industry average. The unaudited income statement for the year ended 31 July 2016 are provided below together with the audited income statement for the years ended 31 July 2015, 2014. You are also provided with a number of ratios calculated based on the 2016 unaudited Income Statement and 2015 and 2014 audited Income Statements.

Your audit team have determined that the fluctuation in the gross profit ratio is considered to be unexpected and material. The results of analytical procedures indicate that BCL’s gross profit ratio and the industry average gross profit ratio are as follows:

*Gross Profit Ratio =   Revenue – Cost of Sales/Revenue

Based on your understanding of BCL and its environment, the income statements and the results of analytical procedures provided above, provide two potential explanations for the fluctuation in the gross profit ratio for the financial year ended 31 July 2016. These explanations must be supported by relevant evidence. Simply mentioning that one account increases and another account decreases is not considered as an appropriate response if no further explanation is provided.

Presentation

To get 1 mark, your assignment should be presented professionally in a format as if it were to be presented to an audit committee meeting. When appropriate, the use of tables, graphs and charts is highly encouraged. However, the assignment must be largely based on the text in paragraphs. Assignment without a proper formatting will receive no mark for presentation.

Length

Maximum 1000 words (font size 12, 1½ line spacing, Times New Roman). The 1000 words include the body of the assignment and footnotes. It excludes cover sheet, title page, executive summary (optional), appendices and list of references. Students should not use appendices to circumvent the restrictions on the length of the assignment.

Background Information about Brilliant Construction Limited (BCL)

(i) Business Management and Objectives

Jack Wilson founded Brilliant Construction Limited (BCL) in 1996 in Sydney. It is a relatively small construction company that conducts its business throughout the country. For the past two years BCL focuses its projects in a number of states, namely New South Wales, Victoria, Queensland and Western Australia. It has no overseas operations. The company’s main business objective is to bid for and win construction contracts and generate profit from the excess of the contract revenue over construction costs. A construction boom in Australia in the early to middle 2000s provided an opportunity for BCL to expand its operations. Wilson and his management team listed BCL on the Australian Stock Exchange in 2005. Wilson retained his position as the company’s CEO. BCL’s Board of Directors consists of seven members including Wilson. Wilson is a well-connected businessman. Apart from having a good network of friends in the corporate world, he also has a good relationship with the country’s top politicians, especially those from the Liberal Party.

(ii) Target Market

Two market segments targeted by BCL are:

• Construction of government projects, particularly public infrastructures and utilities such as roads, highways, bridges, schools, government office buildings and water and sewerage management services.
• Construction of private projects, mainly commercial buildings such as shopping complexes, retail outlets, warehouses and commercial office buildings.

(iii) Accounting and Control Environment

• The company uses the percentage of completion method to account for its revenue and expenses for any construction contracts.
• The previous year’s audit work papers indicated that BCL has a good internal control system whereby the strength of internal control environment was assessed as moderate. There was no change to the company’s internal control system in the current year under audit.

(iv) Debt Covenant

• BCL has a variety of debt arrangements that are used to finance its business. Many of these arrangements require the company to meet certain debt covenant ratios.
• The most binding requirement is for a minimum Interest Coverage Ratio (EBIT/Interest Expense) of 3:1 in the audited financial statements for the year ended July 31, 2016.
• In the event that BCL breaches any of the covenants, the debt provider may exercise its power to take control of BCL or appoint a Receiver to replace its board and management.

1000 words