Alex Blenheim operates in a low gross margin environment - Accounting Assignment

Internal Code: MAS3117

Accounting Assignment:

The business environment: Alex Blenheim operates in a low gross margin environment, which typically means that large volumes are required to cover overhead costs and generate profits. It also means that overheads need to be kept under control to ensure that net profit results from its operations. The company did not reach industry benchmarks with regard to profitability in the previous year, and budgeted to do better this in the current year. It thought that it could do so by keeping its costs down in relation to sales while allowing its gross margin to drop, evidently planning to generate a larger volume of sales. The company also planned to improve its working capital management by reducing levels of inventory and accounts receivable. It budgeted for a drop in debt levels, indicating that it expected to produce a healthy cash flow to enable it to do so. Inventory system: Alex Blenheim uses an on-line computer system. No items are manufactured in-house; rather, Alex Blenheim maintains a stock of raw materials and sub-contracts the manufacture of its items to factories in Fiji. Approximately 50 suppliers and sub-contractors are used and all have proven to be reliable. You have made the following notes about the inventory system: Separate systems, staff and warehouses are maintained for both raw materials and finished goods. Purchase orders are automatically generated by the computer when stocks of any raw material fall Questions:  Question 1  Analyse the ratios with reference to the additional information. Identify the potential impact of the audit and any particular audit steps that need to be undertaken to reduce audit risk. For example, if there was a worsening inventory turnover, one of the audit steps would include a review of obsolete inventory. Question 2 Identify the weaknesses in the internal control system described above and the potential impact on your audit. Indicate the additional audit steps that you will need to undertake to reduce audit risk. Question 3 Develop and justify three (3) Computer Assisted Audit Techniques (CAATs) that you would use to assist you in this audit.