1.

BACKGROUND KNOWLEDGE:-

Borjan Pvt. Ltd is a manufacturer of footwear. It’s a medium scale business

operating in 35 cities with 49 outlets. The company has been in business since
1995 i.e; 15 years. Mr. Zahid Hussain is the CEO and chair person of the company.
As there is no segregation of the CEO and chair person, he might be a source of
attention during the audit. Borjan has its own retail network and retail partners as
well. It also has its own Internal Audit Department but the internal auditor has a
commerce background which is not suitable for auditing. The internal control
system is good but we cannot rely on internal controls for inventory as it is a risky
area for a manufacturing concern. There is no Audit Committee and previous
auditor is also not available for meeting. Payments are being done both on cash
and credit.

Changes since the previous audit:-

There are no noticeable changes in the management structure, accounting system

and external requirements since the previous audit. However, as far as nature of
client’s business is concerned, Borjan keeps on trying to improve its product line
every year. This year, Borjan has introduced a new product line in female
footwear known as ORA Collection.

2. ANALYTICAL PROCEDURES:-
Gross Profit : Net Sales

2009 2008

308,934,717 / 838,593,143 228,580,826 / 607,268,024

= 36.8 % = 37.6%

Decrease = 0.8%

Distribution costs : Sales

2009 2008

181,453,453 / 838,593,143 152,195,142 / 607,268,024

 = 21.6 % = 25.06 %

Decrease = 3.46 %

Administrative Costs : Sales

2009 2008

79,165,140 / 838, 593,143 53,026,497 / 607,268,024

= 9.4 % = 8.7 %

Increase = 0.7 %

Net profit before tax : Sales

2009 2008

42,845,399 / 838,593,143 18,094,874 / 607,268,024

= 5.1 % = 2.9 %

Increase = 2.2 %

Net profit before tax : total net assets / liabilities

Total net assets = total assets – total liabilities

Total net assets (2009) = 240,190,915 – 122,787,587

= 117,403,328

Total net assets (2008) = 221,790,623 – 119,993,010

= 101,797,613

2009 2008

42,845,399 / 117,403,328 18,094,874 / 101,797,613

= 36.4 % = 17.7 %
 Increase = 18.7 %

Rate of inventory turnover = inventory / average Sales

Average sales = 838,593,143 + 607,268,024 / 2

= 722,930,583.5

2009 2008

91,632,745 / 722,930,583.5 98,778,562 / 722,930,583.5

= 12.6 % = 13.6 %

Decrease = 1 %

Number of weeks receivables

Average receivables = 71,068,738 + 55,108,526 / 2

= 63,088,632

2009 2008

838,593,143 / 63,088,632 607,268,024 / 63,088,632

= 13.2 % = 9.62 %

Increase = 2.6 %

Number of weeks payables = sales / average payables

Average payables = 92,562,153 + 64,619,899 / 2

= 78,591,026

2009 2008

838,593,143 / 78,591,026 607,268,024 / 78,591,026

= 10.6 % = 7.72 %

Current assets ( excluded inventory ) = current liabilities

2009 2008
79,538,353 / 110,804,515 64,612,207 / 84,559,470

= 71.1 % = 76.6 %

Decrease = 5 %

Shareholder funds : total assets

2009 2008

60,000,000 / 240,190,915 60,000,000 / 221,790,623

= 24.9 % = 27.05 %

Decrease = 2.15 %

ANALYTICAL ANALYSIS ON DIFFERNCE BASIS :-

1. SALES

838,593,143 – 607,268,024 / 607,268,024

= 38.09 % increases

2. COSST OF SALES

529,658,426 – 378,687,198 / 378,687,198

= 39.8 % increases

3. GROSS PROFIT

308,934,717 – 228,580,836 / 228,580,826

= 35.1 %

4. DISTRIBUTION COST

181,453,453 – 152,195,142 / 152,195,142

= 19.2 % increases

5. ADMINISTRATIVE EXPENSES

79,165,140 – 53,026,497 / 53,026,497

= 49 % increases
 6. OTHER INCOME

87120 / 381

= 228.6

7. NET PROFIT BEFORE TAX

42,845,399 – 18,094,874 / 18,094,874

= 136.7 % increases

8. NET PROFIT AFTER TAX

27,673,881 – 13,807,554 / 13,807,554

= 100.4 % Increases

From the analysis, it is evident that Sales have increased by 38.09% and so does
the Cost of sales has been increased by 39.8% due to which a 35% increase in
Gross profit has been reported which is a reasonable profit for the year. But here
comes a question that when all the expenses are increasing, Net profits must go
down but they are increasing then what will be the reason for it? As we can see
that there was a loss in Other income in 2008 that shows that instead of income,
expenses were incurred. But, in 2009, Other income was incurred so we can say
that Net profits have incurred due to this reason.

3. RISKS REVEALED BY THE ANALYSIS:-

o Loop hole in upper management can be seen as the posts of CEO and
chairperson are acquired by the same person.
o Low quality of work done by internal auditor due to improper qualification
that’s why we have to do extensive testing
o We have seen that assets have increased for 2009 but in the distribution
costs, depreciation has increased which must have increased according to
the situation. This highlights the area of Property, plant and equipment that
the depreciation might be calculated wrongly.
 o The increase in the net profits along with the increase in sales, costs of
sales and gross profit indicates that there may be some manipulation done
in distribution and administrative costs.
o Overall risk level as indicated by analytical procedures is moderate.
o By looking into the notes to the accounts, it is also noted that within the
expenses, there is a noticeable increase in salaries, entertainment and
stipend which does not seem justified and these areas are to be focused.

4. MATERIALITY LEVEL:-

As our risk level is moderate, materiality level wll also be moderate. In our audit,
it will be considered that an error or omisiion of less than 5% of profit before tax
is not material, while an error of more than 10% of profit before tax is material.
Materiality of amount in intermediate range depends on specific
circumstances.0.5% of total revenues or assets will be immaterial while 1.5% of
total revenues or assets will be considered material.

5. AUDIT APPROACH:-

Reliance on the internal audit report can’t be done because of the incompetancy
of internal auditor so extensive testing is to be done specially for inventory,
Property plant and equipment and distributive and administrative costs. Other
areas to be focused include purchases, wages and salaries, entertainment
expenses and stipends given to the internees.

We will carry out some additional testing on the work done in change over period
where there are greatest chances of errors occurring.

The audit will be conducted on the continuous basis.

We will also carry out a receivables circulation as at June 30, 2009.

We will also attend the annual inventory count on June 20, 2009.

6. CO-ORDINATION, DIRECTION AND REVIEW:-

Interim visit-systems work and detailed testing of transactions

Systems work completed-end of interim visit

Management letter sent

Audit confirmation sent

REVIEW

Our review ensures involvement of higher levels of management with the audit process and
provides an assurance that the work has been carried out as per the standards and guidelines.
Review of work would be carried out at each stage of audit cycle as under:

 by the audit managers on concurrent basis when the team members conclude a particular stage
in the field work;
 by the senior audit functionaries at the time of preparation of audit observations and draft audit
reports; and
 by the top management while evaluating draft audit reports and quality checks before approval of
the headI.