Executive summary

Introduction

Understanding the client
RCG Corporation is a leading retailer of performance and lifestyle footwear with main operations in New Zealand and Australia. The Company sells different brands of
footwear through a large distribution of retail outlets across the region. The brands are categorized to suit the different needs of customers in sports and casual
wear.
Significant accounts, assertions and transactions
Account Material? Significant? Justification Assertions
Revenue ? ? The revenue account is selected as a significant account based on the inherent risks in revenue recognition and risk of fraud. There is a
strong incentive for management to overstate revenue and report impressive results in order to enhance remuneration. The evaluation of the remuneration of executive
directors and senior managers is based on the specific criteria including the company’s business performance. CEA
Cost of finished goods ? ? Due to its relationship to profitability the account is susceptible to risk of understatement in a bid to shore up profit
CEA
Employee benefits expense ? ? The employee benefits carry a risk of valuation due to estimation uncertainty AV
Provision for doubtful debts ? ? There is a risk of valuation due to estimation uncertainty CAV
Cash and cash equivalents ? ? As a financial asset in liquid form, cash is susceptible to misappropriation. CEA
Trade and other receivables ? ? The balance could be misstated if doubtful debts are incorrectly provided for. CEAP
Inventories ? ? Inventories are included as significant account due to the risk in the valuation assertion. Based on circumstances, some inventory is
likely to be obsolete especially due to the fact that the company operates in a fashion trend industry that is highly affected by obsolescence. In addition, some
inventory in transit could be included in the closing balance yet it has already been sold to clients. CEAV
Intangible assets ? ? There is a risk of impairment in the valuation of the intangible asset which carries estimation assumptions. CEAVOP
Trade and other payables ? ? There is a risk in the completeness of payables where transactions could be recorded in the inappropriate period.
EAP

Planning materiality
Client: Raincorp Group Corporation
Subject Materiality
Period Audit for the year ended 29 June 2014

Objective
To determine the basis for and materiality
$’000′ $’000′

Basis: Revenue A B C = A * B
Materiality (0.5-3)% of Total Revenue 0.02 81,190 1,624
Performance materiality 75% of Materiality 0.75 1,624 1,218
Audit misstatement posting threshold 5% of Materiality 0.05 1,624 81

Conclusion
(a) The elements of the financial statements :
The company’s elements of the financial statements includes assets, liabilities, revenue, costs and equity.
The company has been generating revenue and we do not have any evidence against continuity to generate revenue.

(b) Whether there are items on which the attention of the users of the particular entity’s financial statements tends to be focused:
The users of financial statements tend to concentrate their attention to revenue and profit of the company.
This makes revenue a good benchmark to use in setting materiality.

Based on the above factors, we have selected the revenue as the appropriate benchmark
What can go wrong
Using professional skepticism and judgment, an auditor identifies the “what could go wrongs” (i.e. likely sources of misstatements) that are related to significant
accounts. These likely sources of misstatements are mitigated by controls put in place by management to prevent, detect and correct misstatements.
Having identified our significant accounts above, we proceed to identify the “what could go wrongs”:
(i) Revenue
Master-price list change errors – the master price database could have unauthorized access that could lead to fraudulent changes of prices.
(ii) Cost of finished goods
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(iii) Employee benefits expense
Errors in valuation of employee benefit – due to reliance on the valuation assumptions of the employee benefit there is a possibility of underestimating the expense.
(iv) Provision for doubtful debts
Bad debt provision estimate errors – being dependent of estimation uncertainties, there is a likelihood of errors if the assumptions are unreliable or biased.
(v) Cash and cash equivalents
The cash balance recorded by the entity is not properly stated.
Cash payments are not booked, recorded to the incorrect vendor account, recorded for an incorrect amount, made for goods/ services not received or fraudulently
diverted.
(vi) Inventories
The inventory movement is not properly updated in the inventory system when merchandise is sold.
Key internal controls
Conclusion
Appendix
References
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