Discussion question 1

The purposes of this discussion is an exchange of ideas or brainstorming

among the audit team members, including the auditor with final responsibility for
the audit, about how and where they believe the entitys financial statement
might be susceptible to material misstatements due to fraud, how management
could perpetrate and conceal fraudulent financial reporting, and how assets of
the entity could be misappropriated.
The discussion among the audit team members about the susceptibility of the
entitys financial statements to material misstatements due to fraud should
include a consideration of the known external and internal factors affecting the
entity might create, such as;

incentives / pressures for management and others to commit fraud or

provide the opportunity for fraud to be perpetrated and
Indicate a culture or environment that enables management to rationalise
committing fraud.

the discussion among the audit team members should emphasise the need to
maintain a questioning mind and to exercise professional scepticism in gathering
and evaluating evidence throughout the audit.
Discussion question 2
Auditors are required to adopt the use of analytical procedures at the planning
stage as well as during the course of the audit fieldwork and at the completion
stage of the audit. Preliminary analytical procedures will help to identify those
key areas of the financial statements to which the auditor should focus their
attention. For example, if gross profit margins have reduced disproportionately
from one year to the next the auditor must devise procedures to substantiate the
reasons for such a reduction and ask questions such as has stock been valued
correctly?
On the other hand, analytical procedures applied at, or near the end, of the audit
are done so in order to form an opinion as to whether the financial statements as
a whole are consistent with the auditors expectations. The intention is to allow
the auditor to consider whether their conclusions, which have been drawn as a
result of the procedures applied during the audit, corroborate those conclusions
in relation to the individual components or elements of the financial statements.

Discussion question 3
The comparisons we think in regard of the current years and prior years balance
as a percentage of sales is the most useful when we implemented the
preliminary analytical procedures. Firstly, comparisons of the current years and
prior years balances as a percentage of sales will allow us to consider the
growth or decline in business activity. For example, the Accounts Payable might
increase significantly because the growth of Inventory. In addition, comparisons
of the current years and prior years balances as a percentage of sales considers
the relationship of data to sales. By only comparing the current years and prior
years balances will ignore the relationship between different data. As a result,

we can easily come up with a conclusion that an account might have material
misstatements because of a significant change in inventory level in the current
year.
Discussion question 4
If the auditor compare inventory reported with physical inventory and
determines that the number of the reported inventory exceeds that of physical
inventory, then there is a fraud risk of overstating the revenue. The auditor also
needs to concern whether the all costs that directly related to the production of
the product have been included in the cost of goods sold such as cost of labour
used to sell the product. If the cost of goods sold is underestimated, then there is
a fraud risk of overstating the revenue. However, If the auditor compares the
number of account receivable shows on the companys bank statement with that
reported on the Balance Sheet and determined the reported account receivable
exceeds that on the bank statement, then the auditor should be concerned that
revenue may be materially overstated.
If the reported accrued interest from the note payable is less than that company
needs to pay, then the auditor should be concerned that revenue may be
materially overstated. If the reported depreciation is less than the actual one, or
the allowance for doubtful accounts is more than the actual one, then the auditor
should be also concerned that revenue may be materially overstated

Solvency
Current liabilities/Owners equity: The current liabilities increased from
$4,250,000 to $5,100,000, especially in the term of note payable. The ratio
Increased 13.64%, which means owners profit may depend more on the outside
finance. However, it is still lower than industry average.

Owners Equity/Total assets: In general, higher equity ratios are typically

favourable for companies. This is usually the case for several reasons. Higher
investment levels by shareholders shows potential shareholders that the
company is worth investing in since so many investors are willing to finance the
company. A higher ratio also shows potential creditors that the company is more
sustainable and less risky to lend future loans.
Equity financing in general is much cheaper than debt financing because of the
interest expenses related to debt financing. Companies with higher equity ratios
should have less financing and debt service costs than companies with lower
ratios

Profitability
The overall profitability of Oceanview is excellent during the year. The
performance ratios show the company increased significantly from last year.
Income before taxes/Owners equity: The return on equity ratio increases by
nearly 43% and is much higher than the industry level. This is a good signal that

shows the Company can use the money from shareholders to generate profits
and grow the company efficiently.
Income before taxes/ Total assets: The Return on asset ratio is slightly higher
than the industry and it has a growth of 50% in 2015.ROA shows how efficiently a
company can covert the money used to purchase assets into net income or
profits.
Sales/Long-term assets: The fixed-asset turnover increased around 19% during
the year. And it is way higher than the industry average rate, which shows
Oceanview has an excellent performance in effectively using the investment in
fixed assets to generate revenues.
Liquidity
Sales/Receivable: The Sales/Receivables reduced by 9.73%. It is lower than the
industry average. It means that the ability of Oceanview to collect receivable is
lower the industry average.
Number of days sales in A/R: The numbers of days sales in A/R increased by 10%
and is higher than the industry average. This reflects the companys ability to
convert its sales into cash failed to meet the industry level.