Attachment # 00003417 - 17300021.docx
17300021.docx (79.8 KB)
Raw Preview of Attachment:
(refer to the detailed question and attachment below)
Faculty of Business & EnterpriseHigher Education DivisionHBC225/HBC 225NAssignmentADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITING(Week 5 – Week 11)Semester 1, 2012© Swinburne University of Technology, 2012Except as provided in the Copyright Act 1968, this document may not be reproduced in any form without the written permission of the University.ADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITINGYou need to start work on this online based continuous case study from W/B 26th March. You need to work in pairs (can choose member from other tutorials) and must participate (individually) in online discuss board (please check Blackboard discussion page).You should be able to answer each week’s requirements after you attended lecture, tutorial and read relevant chapters. Need to put together your case study answers and submit them as your final assignment (ONE pdf or word file) by due date, Monday 14th May, 2012 5pm (don’t submit on a weekly basis!).Part 1: Week 5 (Chapter 6)Adelphi Health Care Ltd listed on the Australian Securities Exchange in 2004. Prior to listing, it was a privately held company managing medical centers in New South Wales. The founders of Adelphi are John Simpson and Eddie Gallagher who are both medical practitioners by profession. At the time of going public, John held the position of Chief Executive Officer (CEO) and Eddie was the Chief Operating Officer (COO). The company raised $50 million and moved into research and development of the flu vaccine.The company’s main product Fluvacs was commercialized in 2007 and it is now sold across Australia. Since 2009, this vaccine is also being distributed in Singapore, Malaysia and the Philippines. The marketing director Anne Tanner has been instrumental in putting in place the local and overseas distribution agreements. Adelphi has agreements with one distributor in each Australian state and one distributor in each of its offshore locations.In January 2010, John Simpson resigned as CEO and took on the role of Board Chairman. He was replaced as CEO by Ray Wilson who was the CEO of a listed mining group prior to joining Adelphi. Ray has a proven track record of expanding into new projects and markets but has no experience in the health care industry. Eddie Gallagher continues in his COO role but spends more time on the golf course these days. The company has retained the same Chief Financial Officer, Jenny Maxwell. Jenny was offered a 30% increase in salary and a lucrative bonus in the current year as part of the Board’s plan to retain her. Jenny has been with Adelphi since its listing and has put into place extensive processes and controls over the past seven years. She is a perfectionist and prefers to handle important matters on her own, seldom delegating to her finance team.Since taking over Ray Wilson has decided that the company’s future lies in developing a vaccine for avian (bird) flu. He is of the view that the company is well placed to market the product in Asia with its existing distributor base. A dedicated research team has been hired to work on this vaccine. Management has indicated that initial lab results are promising and areContinuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e© 2011 McGraw-Hill AustraliaPage 1 of 15ADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITINGconfident that clinical trials can be commenced within the next 12 months. As a result, a significant proportion of research and development costs have been capitalized in the current financial year.In late 2008, the company bought a piece of land in Sydney’s inner west and constructed a purpose built building with offices and research labs. Prior to this, the company was renting premises. The land cost $6.5 million and the building cost $3.5 million. Jenny recently asked a friend who is a real estate agent for an informal valuation and was advised that the property market has lost its momentum and the company’s land and buildings were currently worth about $9 million. Jenny did not mention this to any of the company directors.You are the audit manager in charge of the audit of Adelphi Health Care Ltd. Your firm has been the auditor for the past three years. Adelphi has been provided with an unqualified opinion since your firm has been the company auditor. You are currently carrying out the audit planning for the financial year end audit.The client has provided you with the following draft financial information in respect of the year ended 30 June 2011.Adelphi Healthcare LtdDraft Statement of Comprehensive Incomefor the year ended 30 June, 201120112010$'000$'000Revenue28,71537,280Cost of sales10,88012,640Gross profit17,83524,640Operating expensesResearch & development2,93011,210Advertising1,180925Distribution1,0101,370Shipping and handling465550Salaries and wages7,9854,840Depreciation795675Interest825725Other expenses1,325180Profit before income tax1,3204,165Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e© 2011 McGraw-Hill AustraliaPage 2 of 15ADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITINGIncome tax expense3951,250Profit after income tax9252,915Draft Statement of Financial Positionas at 30 June, 2011Notes20112010$'000$'000CURRENT ASSETSCash and cash equivalents1,04011,500Receivables28,6155,880Inventories3,5601,335Other current assets440565Total current assets13,65519,280NON-CURRENT ASSETSIntangibles36,570-Property, plant and equipment410,28010,475Total non-current assets16,85010,475TOTAL ASSETS30,50529,755CURRENT LIABILITIESAccounts payable1,8452,390Provisions51,015775Total current liabilities2,8603,165NON-CURRENT LIABILITIESBorrowings610,00010,000Provisions5365235Total non-current liabilities10,36510,235TOTAL LIABILITIES13,22513,400NET ASSETS17,28016,355Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e© 2011 McGraw-Hill AustraliaPage 3 of 15ADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITINGEQUITYContributed equity50,00050,000General Reserve10,00010,000Accumulated losses(42,720)(43,645)TOTAL EQUITY17,28016,355Notes to the financial statementsNote 1 Summary of significant accounting policiesReceivablesTrade receivables are carried at original invoice value less any provision for doubtful debts. Debts, which are known to be uncollectible, are written off. A provision for doubtful debts is recognized when collection of the full amount is no longer probable.InventoriesInventories are measured at the lower of cost and net realizable value. Costs incurred in bringing the product to its present location and condition, are accounted for as follows:Raw materials – purchase cost on a first in first out basis; and Finished goods and work-in-progress – cost of direct material, direct labour and a proportion of manufacturing overhead based on normal operating capacity Property, plant and equipmentCost and valuationAll property, plant and equipment are brought to account at cost.DepreciationDepreciation is calculated on a straight line basis to write off the depreciable amount of each item of property, plant and equipment (excluding land) over its expected useful life to the company.Depreciation periods are:Buildings20 yearsPlant and equipment 2.5 – 10 yearsIntangible assetsResearch and developmentContinuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e© 2011 McGraw-Hill AustraliaPage 4 of 15ADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITINGCosts incurred on research and development projects are expensed as incurred, unless future recoverability is assured beyond a reasonable doubt, to exceed those costs. Where research and development costs are capitalized, such costs are amortised over future periods on a basis related to expected benefits. Unamortised costs are reviewed at each reporting date to determine the amount (if any) that is no longer recoverable and any amount identified is written off.20112010$'000$'000Note 2ReceivablesAccounts receivable9,0156,235less Provision for doubtful debts(400)(355)8,6155,880Note 3IntangiblesResearch and development6,570-Note 4 Property, plant and equipmentFreehold Land6,5006,500Buildings3,5003,500Accumulated depreciation(700)(525)2,8002,975Plant and equipment - at cost2,6002,000Accumulated depreciation(1,620)(1,000)9801,000Total property, plant and equipment10,28010,475Note 5ProvisionsCurrentProvision for annual leave1,015775Non-currentContinuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e© 2011 McGraw-Hill AustraliaPage 5 of 15ADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITINGProvision for long service leave365235Note 6 BorrowingsSecured bank loan10,00010,000RequiredCarry out preliminary analytical procedures based on the draft financial information provided and discuss the impact of your findings on the audit plan.Part 2: Week 6 (Chapter 7)This is a continuation of question in Chapter 6, relating to Adelphi Health Care Ltd. However, it may be completed independently of that question. Refer to the background information contained there.RequiredOutline the factors that would affect your assessment of inherent risk associated with the audit of Adelphi Health Care Ltd. For each of the inherent risk factors you outlined in (a) above, indicate: whether it increases or decreases audit risk; and its effect on your audit procedures. Your audit partner has asked you to set a preliminary materiality level for the audit of Adelphi Health Care Ltd to be discussed at the planning meeting. The audit partner has asked you to consider and justify the base you think is appropriate in setting planning materiality. You should take into account your assessment of the inherent risk factors in determining planning materiality. Outline how the materiality level will influence the nature and extent of audit procedures planned. Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e© 2011 McGraw-Hill AustraliaPage 6 of 15ADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITINGPart 3: Week 7 (Chapter 8)This is a continuation of questions in Chapter 6 and Chapter 7, relating to Adelphi Health Care Ltd. However, it may be completed independently of those questions.You are currently planning the audit of Adelphi Health Care Ltd, a listed company involved in the manufacture and sale of the flu vaccine. The company has a balance date of 30 June. The following notes were drafted as part of the audit plan two years ago and describe the procedures performed by the employees of the company in relation to the purchases cycle. Control risk around purchases was assessed as low during the audit two years ago. The audit plan this year includes testing controls around purchases.Audit file note: Understanding the purchases cycle and control procedures implemented by management:The head of the manufacturing department has the authority to approve purchases up to $50,000. The computerized inventory management system generates requisition orders when inventory levels fall below re-order levels. All purchase requisitions are processed through the centralized purchasing department. The role of the purchasing department is to ensure that purchase requisitions are duly approved, approved suppliers are used and where there are no pre-approved suppliers for a particular item, competitive quotes are sought if the cost exceeds $5,000 per item. The purchasing department then prepares a purchase order which is sent to the relevant supplier.All goods are delivered to the central warehouse. The warehouse supervisor is responsible for checking that the goods received are in good order and that the quantities received and description of items matches the purchase order. The warehouse clerk then updates the inventory management system to reflect the receipt of the goods. If an order is only partially filled, a note is made on the purchase order and the purchasing department follows up with the supplier.Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e© 2011 McGraw-Hill AustraliaPage 7 of 15ADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITINGSupplier invoices are received by the accounts payable clerk who checks the invoices for mathematical accuracy and also agrees the details and quantities on the invoices to the goods received report and purchase order. Once these checks are done, the accounts payable clerk signs off on the invoice and sends it to the financial accountant for final approval. A register is maintained of all invoices received so as to avoid paying duplicate invoices. Once the accountant approves the invoices, they are batched and sent back to the accounts payable clerk for posting to the accounting system.At each month end, the accounting system generates a payment report along with a remittance advice providing a break-down of the balances owing. The financial accountant reconciles the totals to each weekly batch summary. Once the balances are reconciled, the accountant approves the payment. The system then initiates electronic transfer of funds to all suppliers and sends either an email copy or hard copy of the remittance advice.Conclusion: Control risk around purchases is assessed as LOW.RequiredList the control procedures implemented by Adelphi over the purchases cycle. Discuss the appropriateness of using the audit notes from two years ago and the associated control risk assessment. Outline further work that would be required to assess control risk in the current audit. Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e© 2011 McGraw-Hill AustraliaPage 8 of 15ADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITINGPart 3: Week 7 (Chapter 9)This is a continuation of question in Chapter 8. However, it may be completed independently of that question.You are currently involved in the audit of Adelphi Health Care Ltd, a listed company involved in the manufacture and sale of the flu vaccine. The company has a balance date of 30 June. One of the key audit risks identified in the audit plan relates to credit sales and the collectability of trade receivables. The reliance on single distributors in each local and overseas jurisdiction as well as their geographical spread heightens the risk in this area.An initial evaluation of control risk in the planning stage indicates that management has sound controls around approving the distributors, recording sales accurately and diligently following up outstanding accounts.The following are the control objectives identified in the audit plan:Ensure that Adelphi evaluates each potential distributor’s credit history prior to approving them as an authorized distributor. Ensure there is adequate segregation of duties between authorizing sales, delivering the finished product and recording sales. Ensure there are adequate controls to ensure sales are recorded in the correct financial period. Ensure there are adequate controls around the estimation of provision for doubtful debts. RequiredIdentify appropriate tests of controls for each of the above control objectives.Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e© 2011 McGraw-Hill AustraliaPage 9 of 15ADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITINGPart 4: Week 8 (Chapter 10)This is a continuation of question in Chapter 9, with additional background information from question in Chapter 6. However, it may be completed independently of those questions.You are currently involved in the audit of Adelphi Health Care Ltd, a listed company involved in the manufacture and sale of the flu vaccine. The company has a balance date of 30 June. The following information was gathered by your audit senior in discussions with management.1. Research and development expensesThe audit senior noted that research and development expenses had decreased significantly during the year. Adelphi expensed more than $11 million in research and development costs while in the current year they have only expensed close to $3 million. It was brought to the attention of the audit senior that the CFO in discussions with the Board decided to capitalize about $6.5 million in research and development costs in the current year. The CFO advised the audit senior that “while we are still in the early stages of developing the avian flu vaccine, initial testing is showing some promising results and we believe that the current research program will contribute significantly to the commercial outcomes of our new product”.2. Land and buildingsWhile reading the minutes of the Board meetings, the audit senior came across an item discussing the valuation of land and buildings. Board members were concerned with the recent slowdown in the property market and what impact that may have on the valuation of land and buildings. The CFO was asked to follow up on this matter and to arrange an independent valuation of land and buildings. There was no evidence of a follow up in the subsequent minutes.3. Accounts payableIn reviewing liabilities, the audit senior noticed that trade and other payables had decreased compared to the prior year. This did not appear reasonable given the level of spending on operating costs and research and development activities. The audit senior approached theContinuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e© 2011 McGraw-Hill AustraliaPage 10 of 15ADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITINGfinancial accountant to seek clarification. “We have made a concerted effort this year to make prompt payments to all suppliers. We have ensured that trade payables have been reconciled to all supplier invoices and to the payment summary”, reassured the financial accountant.RequiredIdentify the key financial report assertions relevant to the audit of the above account balances. For each of the assertions identified in (a) above, describe two procedures that could be used to gather sufficient and appropriate audit evidence. Part 5: Week 9 (Chapter 11)This is a continuation of question in Chapter 10. However, it may be completed independently of that question.You are reviewing your audit assistant’s work for Adelphi Health Care Ltd for the year ended 30 June 2011, and note the following issues.Your audit assistant’s work papers on the trade payables testing conclude the following: “In testing trade payables, twenty balances were randomly selected and vouched to suppliers’ invoices and receiving reports. The sample selected amounted to $832,000. Total trade payables is $1,760,000.Results of the testing revealed two invoices with a total of $24,900 had been incorrectly recorded on the trade payables ledger, as the goods were only received in July 2011.The error found relates to 3 per cent of trade payables tested. This results in a total error of $52,673 of the total trade payables balance. As total error is only 3 per cent of trade payables, it is not considered material and, therefore, no further work has been performed. I conclude that the trade payables balance of Adelphi Health Care Ltd is not materially misstated.” The audit assistant performed tests of controls on 30 purchases transactions. This testing resulted in the discovery of three errors. A tolerable error of 5 per cent had been set during the audit planning. The audit assistant concluded that the controls were reliable on the basis that none of the errors found were considered to be material. RequiredDo you consider your audit assistant’s conclusions in each of the above situations appropriate? Justify your response.Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e© 2011 McGraw-Hill AustraliaPage 11 of 15ADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITINGPart 6: Week 11 (Chapter 12)This is a continuation of question in Chapter 11, and the background information provided in question in Chapter 6. However, it may be completed independently of those questions.You are the audit senior currently involved in the audit of Adelphi Health Care Ltd, a listed company involved in the manufacture and sale of the flu vaccine. The audit is drawing to a close and the timeline below applies. The following matters come to your attention.Balance date: 30 June 2011 Directors’ declaration and audit report signed: 22 August 2011 Financial report and audit report mailed to shareholders: 29 August 2011 Annual general meeting of shareholders: 17 October 2011 The Board of Directors were growing increasingly concerned with recent media reports about falling property values in Australia and in June 2011, the Board commissioned an independent property consultant to prepare a valuation report on the land and buildings. On 18 July 2011, the property valuation report was received by the Board. The land and buildings collectively were valued at $8.5 million. In May 2011, Adelphi received correspondence from SHC Distributors Pte Ltd (SHC), its distributor in Singapore advising that it was having difficulty paying its monthly invoices. As at 30 June, 2011 SHC owed Adelphi $1.2 million. As at balance date, the financial accountant had posted a provision for doubtful debts of $300,000 against the balance owing by SHC. On 15 August, Adelphi received correspondence from company administrators advising that SHC is under voluntary liquidation. Initial estimates are that creditors are likely to receive 15 cents in the dollar once SHC is liquidated. Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e© 2011 McGraw-Hill AustraliaPage 12 of 15ADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITINGIn early August 2011, Adelphi received reports from its distributor in the Philippines that a few patients administered with the flu vaccine had complained of serious side effects. An investigation by the distributor revealed that these complaints were attributed to a batch of the flu vaccine that was shipped out in early July 2011. The distributor has recalled the affected batch and is seeking compensation from Adelphi for the cost of the recall. On 18 August 2011, Adelphi received correspondence from a legal firm representing a patient whose health has deteriorated significantly since receiving the flu vaccine. Compensation of $2 million is being sought. On 4 July 2011, there was some isolated flooding in Adelphi’s warehouse caused by a damaged water pipe. Most of the inventory stored was unaffected but after the warehouse has been cleaned up, warehouse staff determined that about $350,000 worth of inventory was damaged in the flooding and had to be destroyed as it was unfit for sale. Consider each of these independent issues to be material when determining your response to the following requirements.RequiredFor each of the events (i) to (iv) select the appropriate advise you would give your client from the actions listed below, and justify your choice: Adjust the 30 June 2011 financial report. Disclose the information in a note to the 30 June 2011 financial report. Request the client to recall the 30 June 2011 financial report for revision. No further action required. What additional audit evidence would you obtain in relation to each of the events (i) to (iv) to ensure a sound basis for forming the audit opinion? Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e© 2011 McGraw-Hill AustraliaPage 13 of 15ADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITINGPart 7: Week 11 (Chapter 13)This is a continuation of question in Chapter 12, and of the background information contained in question in Chapter 6. However, it may be completed independently of those questions.The audit of Adelphi Health Care Ltd is now complete, and as the audit manager on the engagement you have been tasked with drafting the audit report. The Board of directors has accepted the advice of the audit partner and has updated the financial report to appropriately reflect the impact of all the subsequent events identified in question 12.xx. You receive a phone call from the CEO just as you are about to finalize the audit report.“We’ve got some fantastic news! I have been discussing our new vaccine with a private equity firm and they are really excited about its prospects and have verbally assured us that they would be willing to invest up to $20 million over the next two years given how promising the preliminary results have been. This will help tremendously with our cash flow and get us back on track given the recent issues we have had. Based on this news, I think we can sign off the accounts on a going concern basis and look forward to an unqualified opinion from your firm”You assured the CEO that you would consider this information along with the audit evidence gathered thus far in arriving at the appropriate audit opinion.RequiredDo you think Adelphi Health Care Ltd is a going concern risk? Identify the relevant factors in forming and justifying your conclusion. Also identify any mitigating factors you may have considered. If you conclude that there is a going concern risk and management decide not to include a Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e© 2011 McGraw-Hill AustraliaPage 14 of 15ADELPHI HEALTH CARE LTD:CONTINUOUS CASE STUDY IN AUDITINGdisclosure note detailing the going concern issue, identify the type of audit opinion you would issue and explain the basis of your decision.Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e© 2011 McGraw-Hill AustraliaPage 15 of 15
Assignment

Assignment

Question # 00057624 Posted By: solutionshere Updated on: 03/27/2015 10:51 AM Due on: 03/27/2015
Subject General Questions Topic General General Questions Tutorials:
Question
Dot Image

Faculty of Business & Enterprise

Higher Education Division

HBC225/HBC 225N

Assignment

ADELPHI HEALTH CARE LTD:

CONTINUOUS CASE STUDY IN AUDITING

(Week 5 – Week 11)

Semester 1, 2012

© Swinburne University of Technology, 2012

Except as provided in the Copyright Act 1968, this document may not be reproduced in any form without the written permission of the University.


ADELPHI HEALTH CARE LTD:

CONTINUOUS CASE STUDY IN AUDITING

You need to start work on this online based continuous case study from W/B 26th March. You need to work in pairs (can choose member from other tutorials) and must participate (individually) in online discuss board (please check Blackboard discussion page).

You should be able to answer each week’s requirements after you attended lecture, tutorial and read relevant chapters. Need to put together your case study answers and submit them as your final assignment (ONE pdf or word file) by due date, Monday 14th May, 2012 5pm (don’t submit on a weekly basis!).

Part 1: Week 5 (Chapter 6)

Adelphi Health Care Ltd listed on the Australian Securities Exchange in 2004. Prior to listing, it was a privately held company managing medical centers in New South Wales. The founders of Adelphi are John Simpson and Eddie Gallagher who are both medical practitioners by profession. At the time of going public, John held the position of Chief Executive Officer (CEO) and Eddie was the Chief Operating Officer (COO). The company raised $50 million and moved into research and development of the flu vaccine.

The company’s main product Fluvacs was commercialized in 2007 and it is now sold across Australia. Since 2009, this vaccine is also being distributed in Singapore, Malaysia and the Philippines. The marketing director Anne Tanner has been instrumental in putting in place the local and overseas distribution agreements. Adelphi has agreements with one distributor in each Australian state and one distributor in each of its offshore locations.

In January 2010, John Simpson resigned as CEO and took on the role of Board Chairman. He was replaced as CEO by Ray Wilson who was the CEO of a listed mining group prior to joining Adelphi. Ray has a proven track record of expanding into new projects and markets but has no experience in the health care industry. Eddie Gallagher continues in his COO role but spends more time on the golf course these days. The company has retained the same Chief Financial Officer, Jenny Maxwell. Jenny was offered a 30% increase in salary and a lucrative bonus in the current year as part of the Board’s plan to retain her. Jenny has been with Adelphi since its listing and has put into place extensive processes and controls over the past seven years. She is a perfectionist and prefers to handle important matters on her own, seldom delegating to her finance team.

Since taking over Ray Wilson has decided that the company’s future lies in developing a vaccine for avian (bird) flu. He is of the view that the company is well placed to market the product in Asia with its existing distributor base. A dedicated research team has been hired to work on this vaccine. Management has indicated that initial lab results are promising and are

Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e


© 2011 McGraw-Hill Australia Page 1 of 15


ADELPHI HEALTH CARE LTD:

CONTINUOUS CASE STUDY IN AUDITING

confident that clinical trials can be commenced within the next 12 months. As a result, a significant proportion of research and development costs have been capitalized in the current financial year.

In late 2008, the company bought a piece of land in Sydney’s inner west and constructed a purpose built building with offices and research labs. Prior to this, the company was renting premises. The land cost $6.5 million and the building cost $3.5 million. Jenny recently asked a friend who is a real estate agent for an informal valuation and was advised that the property market has lost its momentum and the company’s land and buildings were currently worth about $9 million. Jenny did not mention this to any of the company directors.

You are the audit manager in charge of the audit of Adelphi Health Care Ltd. Your firm has been the auditor for the past three years. Adelphi has been provided with an unqualified opinion since your firm has been the company auditor. You are currently carrying out the audit planning for the financial year end audit.

The client has provided you with the following draft financial information in respect of the year ended 30 June 2011.

Adelphi Healthcare Ltd

Draft Statement of Comprehensive Income

for the year ended 30 June, 2011

2011

2010

$'000

$'000

Revenue

28,715

37,280

Cost of sales

10,880

12,640

Gross profit

17,835

24,640

Operating expenses

Research & development

2,930

11,210

Advertising

1,180

925

Distribution

1,010

1,370

Shipping and handling

465

550

Salaries and wages

7,985

4,840

Depreciation

795

675

Interest

825

725

Other expenses

1,325

180

Profit before income tax

1,320

4,165

Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e


© 2011 McGraw-Hill Australia Page 2 of 15


ADELPHI HEALTH CARE LTD:

CONTINUOUS CASE STUDY IN AUDITING

Income tax expense

395

1,250

Profit after income tax

925

2,915

Draft Statement of Financial Position

as at 30 June, 2011

Notes

2011

2010

$'000

$'000

CURRENT ASSETS

Cash and cash equivalents

1,040

11,500

Receivables

2

8,615

5,880

Inventories

3,560

1,335

Other current assets

440

565

Total current assets

13,655

19,280

NON-CURRENT ASSETS

Intangibles

3

6,570

-

Property, plant and equipment

4

10,280

10,475

Total non-current assets

16,850

10,475

TOTAL ASSETS

30,505

29,755

CURRENT LIABILITIES

Accounts payable

1,845

2,390

Provisions

5

1,015

775

Total current liabilities

2,860

3,165

NON-CURRENT LIABILITIES

Borrowings

6

10,000

10,000

Provisions

5

365

235

Total non-current liabilities

10,365

10,235

TOTAL LIABILITIES

13,225

13,400

NET ASSETS

17,280

16,355

Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e


© 2011 McGraw-Hill Australia Page 3 of 15


ADELPHI HEALTH CARE LTD:

CONTINUOUS CASE STUDY IN AUDITING

EQUITY

Contributed equity

50,000

50,000

General Reserve

10,000

10,000

Accumulated losses

(42,720)

(43,645)

TOTAL EQUITY

17,280

16,355

Notes to the financial statements

Note 1 Summary of significant accounting policies

Receivables

Trade receivables are carried at original invoice value less any provision for doubtful debts. Debts, which are known to be uncollectible, are written off. A provision for doubtful debts is recognized when collection of the full amount is no longer probable.

Inventories

Inventories are measured at the lower of cost and net realizable value. Costs incurred in bringing the product to its present location and condition, are accounted for as follows:

- Raw materials – purchase cost on a first in first out basis; and

- Finished goods and work-in-progress – cost of direct material, direct labour and a proportion of manufacturing overhead based on normal operating capacity

Property, plant and equipment

Cost and valuation

All property, plant and equipment are brought to account at cost.

Depreciation

Depreciation is calculated on a straight line basis to write off the depreciable amount of each item of property, plant and equipment (excluding land) over its expected useful life to the company.

Depreciation periods are:

Buildings 20 years

Plant and equipment 2.5 – 10 years

Intangible assets

Research and development

Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e


© 2011 McGraw-Hill Australia Page 4 of 15


ADELPHI HEALTH CARE LTD:

CONTINUOUS CASE STUDY IN AUDITING

Costs incurred on research and development projects are expensed as incurred, unless future recoverability is assured beyond a reasonable doubt, to exceed those costs. Where research and development costs are capitalized, such costs are amortised over future periods on a basis related to expected benefits. Unamortised costs are reviewed at each reporting date to determine the amount (if any) that is no longer recoverable and any amount identified is written off.

2011

2010

$'000

$'000

Note 2

Receivables

Accounts receivable

9,015

6,235

less Provision for doubtful debts

(400)

(355)

8,615

5,880

Note 3

Intangibles

Research and development

6,570

-

Note 4 Property, plant and equipment

Freehold Land

6,500

6,500

Buildings

3,500

3,500

Accumulated depreciation

(700)

(525)

2,800

2,975

Plant and equipment - at cost

2,600

2,000

Accumulated depreciation

(1,620)

(1,000)

980

1,000

Total property, plant and equipment

10,280

10,475

Note 5

Provisions

Current

Provision for annual leave

1,015

775

Non-current

Continuous case study to accompany GAY & SIMNETT, Auditing and assurance services in Australia 4e


© 2011 McGraw-Hill Australia Page 5 of 15


ADELPHI HEALTH CARE LTD:

CONTINUOUS CASE STUDY IN AUDITING

Provision for long service leave

365

235

Note 6 Borrowings

Secured bank loan

10,000

10,000

Required

Carry out preliminary analytical procedures based on the draft financial information provided and discuss the impact of your findings on the audit plan.

Part 2:Week 6 (Chapter 7)

This is a continuation of question in Chapter 6, relating to Adelphi Health Care Ltd. However, it may be completed independently of that question. Refer to the background information contained there.

Required

(a) Outline the factors that would affect your assessment of inherent risk associated with the audit of Adelphi Health Care Ltd.

(b) For each of the inherent risk factors you outlined in (a) above, indicate:

(i) whether it increases or decreases audit risk; and

(ii) its effect on your audit procedures.

(c) Your audit partner has asked you to set a preliminary materiality level for the audit of Adelphi Health Care Ltd to be discussed at the planning meeting. The audit partner has asked you to consider and justify the base you think is appropriate in setting planning materiality. You should take into account your assessment of the inherent risk factors in determining planning materiality. Outline how the materiality level will influence the nature and extent of audit procedures planned.

Dot Image
Attachments
17300021.docx (79.8 KB)
Tutorials for this Question
  1. solutionshere
    Tutorial # 00053487 Posted By: solutionshere Posted on: 03/27/2015 10:53 AM
    Puchased By: 4
    Tutorial Preview
    Health Care Limited which is involved in the business of ...
      Get the Solution
    Attachments
    1140011.docx (33.57 KB)
    11440012.docx (31.41 KB)
    1140013.xlsx (13.13 KB)
    1140014.xlsx (13.13 KB)
Whatsapp Lisa