a.
Introduction:The operational issue are the problems in a company which has to be removed for improving the operations growth of the company. Control deficiency are the actions taken by the management which controls the working of the employees.
To describe:Whether the action taken will be considered as an operational issue and not an control deficiency or it would constitute a material weakness or significant deficiency in internal control.
b.
Introduction:Financial reporting refers to the disclosing of all the financial information and financial results of the company to its managements and other users. The financial reporting describes the financial performance of a company during the year.
To describe:The change in the risk related to the objective of reliable financial reporting.
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Chapter 3 Solutions
Auditing: A Risk Based-Approach to Conducting a Quality Audit
- Alpaca Corporation had revenues of $275,000 in its first year of operations. The company has not collected on $19,400 of its sales and still owes $27,500 on $98,500 of merchandise it purchased. The company had no inventory on hand at the end of the year. The company paid $13,200 in salaries. Owners invested $16,500 in the business and $16,500 was borrowed on a five-year note. The company paid $4,200 in interest that was the amount owed for the year, and paid $8,200 for a two-year insurance policy on the first day of business. Alpaca has an effective income tax rate of 40%. (Assume taxes are paid in the same year). Compute the cash balance at the end of the first year for Alpaca Corporation.arrow_forwardAlpaca Corporation had revenues of $255,000 in its first year of operations. The company has not collected on $19,000 of its sales and still owes $27,100 on $96,500 of merchandise it purchased. The company had no inventory on hand at the end of the year. The company paid $12,800 in salaries. Owners invested $14,500 in the business and $14,500 was borrowed on a five-year note. The company paid $3,900 in interest that was the amount owed for the year, and paid $7,900 for a two-year insurance policy on the first day of business. Alpaca has an effective income tax rate of 36%. Compute the cash balance at the end of the first year for Alpaca Corporation. Can you pleae explain answerarrow_forwardLast year Kruse Corp had $355,000 of assets (which is equal to its total invested capital), $403,000 of sales, $28,250 of net income, and a debt-to-total-capital ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets and total invested capital to $252,500. The firm finances using only debt and common equity. Sales, costs, and net income would not be affected, and the firm would maintain the same capital structure (but with less total debt). By how much would the reduction in assets improve the ROE? Do not round your intermediate calculations. Group of answer choices 5.30% 4.29% 4.66% 5.35% 5.24%arrow_forward
- Last year Jullan Corp. had sales of P302,225 operating costs of P267,500 and year-end assets of P195,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2% and the firm's tax rate was 37%. The new CFO wants to see how the Return on Equity (ROE) would have been affected if the firm had used a 45% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the ROE change (increase or decrease in percentage) in response to the change in the capital structure?arrow_forwardSwindle Company is experiencing financial difficulty and is negotiating debt restructuring with its creditor to relieve its financial stress. Swindle has a $3,500,000 bank loan payable with Love Bank. The bank accepted an equity interest in Swindle Company in the form of 300,000 ordinary shares quoted at $12 per share. The par value is $10 per share. The fair value of the bank loan payable on the date of restructuring is $3,200,000. What amount should be recognized as gain from debt extinguishment as a result of the equity swap?arrow_forwardBullant Inc. has decided to go public and has sold 2 million of its shares to its underwriter for $20 per share. The underwriter then sold them to the public for $22 each. Bullant also encountered $0.5 million in administrative fees. Soon after the issue, the stock price rose to $25. Find Bullant s total cost of this issue including any underpricing.arrow_forward
- Last year, Marly Brown, Inc. reported an ROE of 25 percent. The firm’s debt-to-equity was 1.5 times, sales were $21.8 million, the capital intensity was 1.10 times, and dividends paid to common stockholders were $1,180,000. The firm has no preferred stock outstanding. This year, Marly Brown plans to decrease its debt-to-equity ratio to 1.1 times. The change will not affect sales, total assets, or dividends paid, however, it will reduce the firm’s profit margin to 10.75 percent. Calculate the internal growth rate for last year and this year and change in these numbers? (Do not round intermediate calculations and round your final answers to 2 decimal places.) Internal Growth Rate Last Year=____.__% This Year=____.__%arrow_forwardAlumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10 percentannually on its bank loan. Alumbat’s annual sales are $3,200,000, its average tax rate is 40 percent,and its net profit margin on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4times, its bank will refuse to renew its loan, and bankruptcy will result. What is Alumbat’s current TIEratio?arrow_forwardStacy Corporation had income from operations of $7,200,000. In addition, it suffered an unusual and infrequent pretax loss of $770,000 from a volcano eruption, interest revenue of $17,000, and a write-down on buildings of $53,000. The corporation’s tax rate is 30%. Prepare a partial income statement for Stacy beginning with Income from operations. The corporation had 5,000,000 shares of common stock outstanding during 2020.arrow_forward
- Past Perfect Inc. is a small firm that sells antique furnishings. In the most recent year, the firm generated $ 4 million in after-tax operating income on revenues of $ 40 million; the firm reported book value of equity of $ 8 million and book value of debt of $ 4 million at the beginning of the year. During the year, the firm invested $2 million in a new warehouse for furniture (its only cap ex) and reported depreciation of $1 million in its income statement. The firm’s only working capital item is its inventory, which increased by $ 200,000 during the course of the year. The cost of capital for the firm is expected to be 12% for the next 3 years and 10% thereafter. You have been asked to appraise the value of the company -Estimate the value of the firm at the end of year 3, assuming that the return on capital stays at the current level but the growth rate drops to 3%. -Assuming that Past Perfect Inc. has 5 million shares outstanding, estimate the value of equity per share. (You can…arrow_forwardPast Perfect Inc. is a small firm that sells antique furnishings. In the most recent year, the firm generated $ 4 million in after-tax operating income on revenues of $ 40 million; the firm reported book value of equity of $ 8 million and book value of debt of $ 4 million at the beginning of the year. During the year, the firm invested $2 million in a new warehouse for furniture (its only cap ex) and reported depreciation of $1 million in its income statement. The firm’s only working capital item is its inventory, which increased by $ 200,000 during the course of the year. The cost of capital for the firm is expected to be 12% for the next 3 years and 10% thereafter. You have been asked to appraise the value of the company Assuming that the firm maintains its existing return on capital and reinvestment rate for the next 3 years, estimate the expected free cash flow to the firm each year for the next 3 years.arrow_forwardFrench company has debt outstanding with a face value of $5 million. The value of the firm if it were entirely financed by equity would be $18 million. The company also has 390,000 shares of stock outstanding that sell at a price of $37 per share. The corporate tax rate is 35 percent. What is the decrease in the value of the company due to expected bankruptcy costs?arrow_forward
- Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning