Question

Cloud 9 - Continuing Case W&S Partners has just won the January 31, 2023, audit for Cloud 9. The audit team assigned to this client is: • Partner, Jo Wadley • Audit manager, Sharon Gallagher • Audit senior, Josh Thomas • IT audit manager, Mark Batten • Experienced staff, Suzie Pickering • First-year staff, lan Harper As a part of the risk assessment phase for the new audit, the audit team needs to gain an understanding of Cloud 9's structure and its business environment, determine materiality, and assess the risk of material misstatement. This will assist the team in developing an audit strategy and designing the nature, extent, and timing of audit procedures. One task during the planning phase is to consider the concept of materiality as it applies to the client. Auditors will design procedures to identify and correct errors or irregularities that would have a material effect on the financial statements and affect the decision-making of the users of the financial statements. Materiality is used in determining audit procedures and sample selections, and evaluating differences from client records to audit results. Materiality is the maximum amount of misstatement, individually or in aggregate, that can be accepted in the financial statements. In selecting the benchmark to be used to calculate materiality, the auditors should consider the key drivers of the business. They should ask, "What are the end users (that is, stockholders, banks, etc.) of the accounts going to be looking at?" For example, will stockholders be interested in profit figures that can be used to pay dividends and increase share price? W&S Partners' audit methodology dictates that one planning materiality (PM) amount is to be used for the financial statements as a whole. The benchmark selected for determining materiality is the one determined to be the key driver of the business.

please do all parts!!

Answer 1

|(Amt in Mill.) Particular Oct-22 21-0ct Difference %age Oct - 22 %age Oct - 21 Remark Cash as a % of 13.44 6.12 4.85 7.32 2.27 revenue 64.87 5.61 as a % of Account 70.48 25.41 24.08 Receivable revenue 22,56 -7,58 as a % of Account 14.98 5.40 8.37 Payable Long Term 23.661 17.119 6.54 revenue as a % of 8.53 6.35 Debt revenue Property, 103.8 6.24 37.43 97.56 36.21 as a % of plant & revenue equipment Notes 21.37 34.83 -13.46 7.71 12.93 as a % of Payable revenue Revenue 277.33 269.44 7.89 267.18 276.18 as a % of Property, plant & equipment Other 5.01 4.74 0.27 1.81 1.76 as a % of income revenue Cost of 60.50 169.35 163 6.35 61.06 as a % of Sales revenue Sell & Admin exp 78.24 as a % of 70.09 -8.15 25.27 29.04 revenue Other 0.45 0.75 as a % of -0.30 0.16 0.28 expenses revenue -0.30 Interest 1.4 1.7 0.50 0.63 as a % of revenue as a % of Income Tax 9.5 9.2 0.30 3.43 3.41 revenue Doubtful 0.64 0.06 0.24 0.7 0.25 as a % of debt revenue Profit as a % of 25.844 15.91 9.934 9.32 5.90 revenue

From the above table we can see that Profit is around 10% of sales. Hence, if there is a discrepancy in a 1% discrepancy in sales, discrepancy in profit will be 10%.

Therefore, the materiality level shall be 5% of Profit or 0.5% of Revenue.

Also, as an observation in FY2022, Long term Debt & Property increased by 6 Million. This means company raised debt to buy assets.

But the cash increased by 7.32 Million, Revenue increased by 7.83 million. However, the receivable increased 5.61 Million and payable decreased by 7.58 Million. Means outflow is (5.61+7.58 = 13 Million). There might be some risks here. Audit should pay due attention to this.