Ch_3_Statistica

Balance and profit and loss statements for Statistica SA
Position	X20X7	X20X6
Assets	1000	960
Fixed assets	400	330
Current assets	600	630
Total assets	1000	960
Equity	200	160
Liability and provisions	800	800
Total liabilities	1000	960
	NA	NA
Revenue	2000	3000
Cost of sales	1990	2900
Managerial costs	200	300
Selling costs	100	50
Gross profit	-310	-250
Other operating result	500	400
Financial results	200	-20
Profit before tax	390	130
Tax	-400	0
Net profit	-10	130

Solution

a) planing materiality

Item	Range	Value	Min	Max
Net profit	5-10%	-10	-0.5	-1
Sales	0.5 -1%	2000	10	20
Net equity	3-7%	200	6	14
Total assets	0.1-1%	1000	1	10

                            (1 point for calculation)

Assumptions: A1 The X7 data will be the same as for X8. ( 1 point)

The PM relates to X7 data, thus the X7 interim should be interpolated to X7 y/e and based on such a forecast the calculation should be done, but with A1, we might consider the last year available data as the base for calculation (2 points)

Classically we base the estimation of the PM on the most stable item, as the PM should be recalculated to FM (final materiality) before issuing the opinion.

The second selection criteria is the shareholder perspective (a) for the public companies with disperse base of small investor the major gain is the dividends distribution, thus for such a company the first in rage is the net profit. In our case it is negative thus, we can not relay on it.

(b)for the concentrated shareholding with dominate position of the ultimate owner, the profit is irrelevant as it is subject to earing management schemes, but equity represent the value to concentrated shareholders, thus it take into consideration. In our case we however see a significant dump from 300 to 200 means 33% of downsizing, thus, because of the general rule we will be less willing to based the PM on equity

(c)in case of expected significant changes in shareholders structure e.g. mergers or acquisition, the major issue for squires is the market share of the require, thus the PM would be based on the sales value, but again the same applies as for (b) the parameter is unstable.

(d)in case of large entities “too big too fail” its insolvency constitute political issue, and can infect other economic actors, the magnitude of the risk is represented by the total assets, in our case the TA is the most stable parameter

Based on the above calculation the potential range of the PM vary from 1 to 20. Taking into account A1, discussion form (a) to (b) we recommend the 10 as the PM.

Beside the quantitative aspects of materiality we have a qualitative one, which means to which extend a material error might change the user decision. In practice any changes which alert the interpretation of the financial statements is material. If you look at P/L the coy reports the loss of 10, but if we find a gain of 10 and more, the company should report profit instead of losses, thus error of 10 is likely to be material.

The higher PM the more risk apatite the auditor has, thus is less sensitive to the error observed, in consequence will spent less time on engagement and realize the resources for the other clients, but at the costs of higher audit risk. The PM level set up is judgemental by

b) analytical review

It is just a check of the changes in structure and in dynamic. We calculate the differences between the years, and structure weighted to costs

Balance and profit and loss statements for Statistica SA
Position	X20X7	X20X6	Ychange	YStruc	PM_SY
Assets	1000	960	0.04	1.00	4
Fixed assets	400	330	0.21	0.40	7
Current assets	600	630	-0.05	0.60	-3
Total assets	1000	960	0.04	1.00	4
Equity	200	160	0.25	0.20	4
Liability and provisions	800	800	0.00	0.80	0
Total liabilities	1000	960	0.04	1.00	4
	NA	NA	NA	NA	NA
Revenue	2000	3000	-0.33	2.00	-100
Cost of sales	1990	2900	-0.31	1.99	-91
Managerial costs	200	300	-0.33	0.20	-10
Selling costs	100	50	1.00	0.10	5
Gross profit	-310	-250	0.24	-0.31	-6
Other operating result	500	400	0.25	0.50	10
Financial results	200	-20	-11.00	0.20	22
Profit before tax	390	130	2.00	0.39	26
Tax	-400	0	-Inf	-0.40	-40
Net profit	-10	130	-1.08	-0.01	-14

c) risk areas identification

The general idea behind the analytical review is to identify those potion, where the change of material mistake is the highest, thus the audit focus on the risk area, if they are clean, then the chance in remaining part of the financial statements is bearable at the level of audit risk. Thus, the auditor focus his/her attention on risks. Due to the mechanics of FS we focus our attention on B/S, because if all the items at the level of B/S are correct, then the errors on P+L are just of a presentation nature. (2 points)

In our case fixed assets, and liabilities are those element which bear the most risk (see change of assets is 7 times PM, while liabilities of 4 PM). (2 points)

d) audit strategy

We have a relative simple company for auditing, not consolidated financial statement, simple structure of assets, with significant adverse performance results drop from the profit to loss, which might indicate a poor internal control system, thus it is likely that auditor will choose the substantive testing strategy. However without additional information on the overall internal control effectiveness the decision could be too early.

e) ASM

Audit Strategy Memorandum

Scope

We are asked to performe y/e aduit on financial statement of the Statisitca SA. Locally based company.

Financial reporting standards

We audit the FS based on the PL gaap for individual level with y/e 31.12.X7.

Client location (or location of subsidiaries)

Statistica does not have the subsidiaries or any equity investments, all operation are kept on the main location. On Krakowskie Przedmieście, 2 Warsaw, Poladn.

Reporting objectives (dates, communication with those charge with governance)

We plan internal kik-off meetning on 3 September X7, the reporting to Statistica after interim, and final, the extended report will be presented to Statistica Audit Committee.

Materiality level (and its base for set up)

Materiality is set up at 10 see. a for detailed calculation

Preliminary identification of risk areas and material balances

We will focus our procedures on the movement of the fixed assets, and search for undrecorded liablities.

Decision of the control testing

Aflter prelimiary review we decide to apply full substantive approach

Recourses necessary to conduct the engagement (staffing, experts, consultation etc)

There is not need for external experts to be employed for the project.

Timing (budget, deliverables, communication

See appendix 1 for the budgt, delviarables, and communication set up.

Key project management task (briefings, reviews, indications)

As this is the first time client of us, we need to perform the additional opening balances procedurs.

See attached:

detailed planning calculations
analytical review

Prepraed by:

Reviewd by:

Accepted by: