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MAA 705 Auditing, T2 2014


Assessment 3: Group case anal ysis (15 marks)
Due date: Week 8, Monday 8 September 2014 before 11.59 pm. Late
submissions may be accepted only if the student has requested extension
of submission date and the unit chair approved the request.
Submission: Submit only online via CloudDeakin.
Word limit: 1.500 (including references)
Weight: This assignment is worth 15% of your final grade.
Assessment Instruction:
Group of maximum 3 students have to prepare a memorandum. Tasks are
detailed in the case study.




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Beer Brewing Ltd. (BBL)
Introduction
In March 2013, Curt Connors, an audit partner at XYZ Chartered
Accountants (XYZ), has received an offer to participate in a tender for a
potential audit client, Beer Brewing Ltd (BBL). XYZ is a medium sized
auditing firm established in 2002 by three members of the Chartered
Accountants Australia and New Zealand. XYZ has so far been dealing with
small firms as audit clients. Following the firms growth over the past few
years, the partners decided to bid for ASX-listed company audits. In making
any client acceptance or continuance decision, XYZ undertakes evaluation
of the (potential) client and assesses the XYZs independence and
competence to properly complete the audit.
BBL is an ASX listed company whose shares have been publicly traded over
the past five years. In a routine independence assessment that is conducted
as part of considering any new client, XYZ partners declared that they have
no personal or business relationships with BBL. They also declared that their
close family members neither hold BBLs shares nor have any business
relationships with the company. However, Otto Octavius, one of the audit
managers at XYZ declared that he owns BBLs shares with a current market
value of $23,000. BBL is a beer manufacturer company, but XYZ did not
conduct any audit of beer breweries earlier. However, XYZ has been
conducting audits of manufacturing firms producing other types of drinks.
BBLs background
BBL is a medium sized beer manufacturer based in regional New South
Wales. The company was established as a family business in 1989 and has
since grew in size. BBL has been operating as an ASX listed company since
J uly 2008. BBLs organizational structure shows that the company has board
of directors with eleven members. Stephen Strange chairs the board and the


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board has an audit committee with three members. BBL also has an internal
audit unit reporting to Stephen. The company operates with seven divisions,
namely, Manufacturing, Warehouse, Sales, Shipping, Purchases, and
Finance & Administration. BBL conducts sales to wholesale traders and
retailers through its sales division. The Purchases division buys raw
materials for the factory. BBL purchases most of the malted barley used in
the manufacture of beer from Barleyfarm Ltd, which is wholly-owned by
Stephens cousin. All the other materials needed for production are
purchased from other suppliers in the market.
Year 2013 audit of BBL
Curt attended a meeting with Stephen on 15 March 2013 to discuss a
possible audit engagement. Stephen explained to Curt that there was a
disagreement with the previous auditor (in the 2012 audit), but he also
assured Curt that this disagreement was not the reason for the change of
auditor. Matt & Associates (M&A) audited BBL for the previous three years.
M&A has merged with another mid-tier auditing firm and abandoned its
manufacturing clients because it planned to specialize in the real estate audit
market. Nonetheless, M&A had major disagreements with BBLs top
management and the board of directors regarding last years audit. The
disagreement arose because M&A modified the auditors report on account
of two reasons. First, M&A auditors recommended increasing the allowance
for doubtful debts, which Stephen and BBLs board of directors refused by
arguing that BBL has strengthened its collection effort and thus they were
optimistic about the recoverability of most of the receivables. Second, some
brands of beer that BBL had in stock were assessed by the auditor as having
lower value than reported on the balance sheet. While market competition
over the past few years made the sales prospect of this inventory doubtful,
the board and top management insisted that no loss be recorded in this area.
Curt requested permission to contact M&A before making a decision to
accept BBL as a client. Initially, Stephen was not happy about this request


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but was finally convinced by Curts explanation of the purpose and
importance of this communication for a proper audit of BBLs 2013 financial
statements. Subsequently, Curt held a meeting with Matt Murdock, an audit
partner at M&A, who explained to Curt why they resigned as auditors of BBL.
The information that Matt disclosed to Curt was consistent with the
information received from Stephen. Matt also explained that they dont have
any concerns regarding the integrity of BBLs top management.
Financials
Curt conducted preliminary analytical review based on BBLs financial
information presented below.



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Exhibit 1: Statement of Financial position
Beer Brewing Ltd
Statement of financi al position
At 30 June 2013

2013*
($'000)
(Unaudited)
2012
($'000)
2011
($'000)
Current Assets
Cash 5,600 5,040 6,345
Inventory 16,912 11,230 9,233
Trade Receivables 15,175 13,350 12,421
Total current assets 37,687 29,620 27,999
Non-current assets
Property, plant and equipment 19,606 18,120 13,470
Long-term receivable 3,420 4,569 5,450
Total non-current assets 23,026 22,689 18,920
Total assets 60,713 52,309 46,919
Current Li abilities
Trade Payables 5,653 4,650 5,421
Provisions 8,450 6,521 5,070
Total current liabil ities 14,103 11,171 10,491
Non-current li abilities
Long-term loan payable 6,711 5,085 4,084
Total liabilities 20,814 16,256 14,575
Net assets 39,899 36,053 32,344
Shareholder's equity
Share capital 7,657 2,300 2,300
Retained earnings 32,242 33,753 30,044
Total Shareholders' equity 39,899 36,053 32,344



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Beer Brewing Ltd
Income Statement
For the Year ended 30 June 2013*

2013
$'000
(Unaudited)
2012
$'000
2011
$'000
Sales 112,330 120,839 135,073
Cost of sales 80,321 85,919 87,930
Gross profit 32,009 34,920 47,143

Depreciation Expense 8,422 6,521 4,209
Inventory obsolescence 2,484 3,531 2,166
Marketing expense 2,025 2,980 3,835
Administrative expense 13,434 13,136 17,334
Interest expense 1,565 1,919 1,716
Total expense 27,930 28,088 29,261

Profit before tax 4,079 6,832 17,882
Tax expense 1,428 2,391 6,259
Profit after tax 2,651 4,441 11,624
* The audit team obtained financial information for the year ended 30 J une 2013 in J uly
2013. Financials for the years 2012 and 2011 were obtained during the tender.
Curt calculated key financial ratios for BBL and collected corresponding industry average
ratios, presented on Exhibit 2.
Exhibit 2: Financial ratios
Key financial ratios Beer Brewing Ltd Industry Averages
2013 2012 2011 2013 2012 2011
Current ratio 2.67 2.65 2.67 2.01 2.03 2.11
Quick ratio 1.47 1.65 1.79 1.15 1.01 1.1
Debt to equity ratio 0.52 0.45 0.45 0.85 0.78 0.76
Times interest earned 3.61 4.56 11.42 4.00 5.00 6
Average Collection period (days) 49.31 40.32 33.56 45.00 35.00 32
Accounts Payable (Days) 25.69 19.75 22.50 30.00 22.00 22
Gross profit Margin (%) 28 29 35 24.00 25.00 30
Net profit Margin (%) 2 4 9 6 7.5 9.2




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Required:
Assuming that your group is the team of auditors assigned in this
engagement, write a memo to Curt Connors to:
a) Explain whether this client should be accepted;
b) Discuss risk factors present in this audit engagement and
determine major transaction cycles and/or accounts that warrant
increased audit effort;
c) Make an assessment of the RMM (risk of material misstatement);
and
d) Recommend and justify the overall audit strategy appropriate for
this engagement.
Relevant learning outcomes
This assessment task contributes to your achievement of the following unit
learning outcomes (ULOs):
ULO 2: Use professional and ethical judgement in applying relevant
legal and professional pronouncements to all stages of a given
assurance engagement.
ULO 3: Apply the concepts and processes used by audit and
assurance service providers to plan and perform assurance
engagements in a professional manner.

Marking Criteria
The following will be used in making this assignment:






Marks will be deducted if your answers contain large amounts of text copied
from textbooks or any other reference material. If you are unsure about this
please refer to the section on plagiarism in the unit guide.
Criterion* Weight (%)
DGLO 1: Discipline-specific
knowledge and capabilities
40%
DGLO 2: Communication 20%
DGLO 5: Problem solving 40%
Overall 100%
* Refer to the detailed marking rubric.


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Marking Rubric
Criteria
Unsatisfactory
Less than
satisfactory
Satisfactory Good Very good Excellent
DGLO 1: Discipline-
specific knowledge
and capabilities - This
assessment task
assists the student to
demonstrate the ability
to apply discipline-
specific knowledge to
solve real-world type
audit problems.
0 16 23 27 31 40
Did not use auditing
knowledge.
Did not adequately
use auditing
knowledge.
Used some auditing
knowledge.
Used an adequate
amount of auditing
knowledge.
Used an almost exemplary
amount auditing
knowledge.
Used an exemplary amount
of auditing knowledge.
DGLO 2:
Communication - This
assessment task helps
the student to
demonstrate the ability
to effectively
communicate in writing
and further develop
written communication
skills.
0 8 11 13 14 20
Is unable to justify
and correctly
interpret theoretical
propositions,
methodologies,
conclusions and
professional
decisions to
specialist and non-
specialist audiences.
Is very little able to
justify and correctly
interpret theoretical
propositions,
methodologies,
conclusions and
professional
decisions to
specialist and non-
specialist audiences.
Acceptably justifies and
interprets theoretical
propositions,
methodologies,
conclusions and
professional decisions to
specialist and non-
specialist audiences.
J ustifies and interprets
theoretical propositions,
methodologies,
conclusions and
professional decisions to
specialist and non-
specialist audiences.
J ustifies and interprets a
wide range of theoretical
propositions,
methodologies, conclusions
and professional decisions
to specialist and non-
specialist audiences.
J ustifies and interprets a
wide range of theoretical
propositions,
methodologies, conclusions
and professional decisions
to specialist and non-
specialist audiences.
DGLO 5: Problem
solving - A case study
to be used in this
assessment simulates
real-world auditing
issues and problems.
0 16 23 27 31 40
Proposes no or
inadequate solutions
that indicate obvious
lack of
comprehension of the
problem. Solutions
do not reflect any
intellectual
independence.
Proposes few
solutions that indicate
very little
comprehension of the
problem. Solutions
reflect very little
intellectual
independence.
Proposes one or more
acceptable creative
solutions that indicates
satisfactory
comprehension of the
problem and reflects a
proficient level of
judgement of the pros
and cons of the various
options and
independence of thought.
Solutions reflect basic
intellectual
independence.
Proposes one or more
good creative solutions
that indicates
comprehension of the
problem and reflects a
generally sound level of
judgement of the pros
and cons of the various
options and
independence of thought.
Solutions reflect
reasonable intellectual
independence.
Proposes one or more very
good creative solutions that
indicates a deep
comprehension of the
problem and reflects a
mostly high level of
judgement of the pros and
cons of various solutions
and factors impacting on
decision making within a
professional context.
Solutions reflect a high
level of intellectual
independence.
Proposes one or more
exemplary creative solutions
that indicates a deep
comprehension of the
problem and reflects a
consistently high level of
judgement of the pros and
cons of various solutions
and factors impacting on
decision making within a
professional context.
Solutions reflect a
exceedingly high level of
intellectual independence.
Total 0 40 57 67 76 100
Zero Below 50% 50 - 59% 60 - 69% 70 - 79% 80% and over