Auditing a business risk approach solutions

Auditing: A Business Risk Approach , 8th ed. In this module, you will assess inherent risk after you have done the following: 1. Analyzed Biltrite’s organizational structure and prepared an organization chart; 2. Applied preliminary analytical procedures to Biltrite’s financial data; and 3. Studied Biltrite’s business operations and the bicycle manufacturing industry generally. Auditing: A Business Risk Approach , 8th ed. In completing this assignment, you may assume that Derick has decided on the following initial risk assessments: Inherent risk: 100% Control risk: maximum Audit risk: 5% Auditing: A Business Risk Approach , 8th ed. As part of his continuing study of Biltrite’s operations, Derick has extracted the following additional data from the computerized permanent file entitled “Business and Industry.” 1. In 2009, in the face of increasing liquidity problems, payment of trade accounts payable within the specified credit terms became increasingly difficult. After much discussion with Harvey Bombenmyr, the president of Bank Two, and Bank Two’s lending officers, Lawton was able to ne- gotiate a ten-year 12% note payable for $45 million. The note is unse- cured and is payable in equal annual installments, together with interest, beginning March 1, 2009, and contains restrictive covenants. Those rel- evant to the Biltrite audit are the following: 1. A minimum balance of $10 million must be maintained in Biltrite’s demand deposit account with Bank Two; 2. Further borrowing is prohibited until the Bank Two note has been amortized below $10 million; and 3. Dividends may be declared only from retained earnings in excess of $45 million. 4. In April 2008, Lawton borrowed $3 million from the company in exchange for an unsecured note. The transaction resulted in a debit to Account 1203—Notes Receivable, Officers. According to Groth, Lawton plans to repay this note prior to December 31, 2009. 2. Legal action against the company was initiated by Rollfast, a competitor, in late 2008. The suit alleges that Biltrite infringed on a process already patented by Rollfast. The process, according to Rollfast’s attorneys, en- ables a bicycle manufacturer to produce a frame in one piece, thereby adding strength to the bicycle by eliminating welding. Biltrite has re- sponded to the action by demonstrating the unique characteristics of its patented bicycle frame. By July 2009, the suit had neither been heard by the court nor settled outside the courts by the litigants. Rollfast is suing Biltrite for $50 million. 3. Although Lawton and Groth have intensified efforts in recent years to establish and implement a sound inter nal control system, the independent auditors have not seen fit to reduce the assessed level of control risk below the maximum level. If the auditors’ 2008 recommendations have been implemented, however, Derick anticipates a reduction in the assessed level of control risk in one or more of the transaction cycles. Auditing: A Business Risk Approach , 8th ed. 4. In the past, our audit team has used the internal audit staff only when necessary to assist in various phases of the Biltrite audit. Auditing: A Business Risk Approach , 8th ed. 1. Prepare an organizational chart for Biltrite and identify the major strengths and weaknesses in Biltrite’s organizational structure. 2. Using the downloaded data and the spreadsheet program, retrieve the file titled “Analy1.” Scroll through the file and locate the following documentation:  WP A.1—Comparative income statements  WP A.2—Sales and cost of goods sold—by product line  WP A.3—Comparative schedule of manufacturing overhead and operating expenses  WP A.4—Inventories 3. In completing the preliminary analytical procedures, the audit team’s expectations are that there will be some growth over the prior year, the relationships among financial statement items will remain relatively stable, and Biltrite’s ratios will be comparable to reported industry ratios. After scrutinizing the documentation, perform the following: 1. 2. 3. 4. 5. Using the “Comparative Income Statements” data in WP A.1, calculate each income statement component as a percentage of sales for 2009. (Hint: For help with the cell equations, examine the comparable cells for 2008.) Using the “Sales and Cost of Goods Sold—By Product Line” data in WP A.2, calculate the cost per unit as a percentage of sales price for 2009 by product line.