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Part 1
Before we get you started on the Redline Manufacturing audit, let’s revi
Part 1
Before we get you started on the Redline Manufacturing audit, let’s review what we know.
Client Overview
Core business: Engines (manufacturing and servicing)
Headquarters: Detroit, MI
Annual revenue: Approximately $150MM
Divisions: Three
Wellburn (35 years of operations): Diesel engines for boats, trucks, and commercial farm equipment.
Solar-Electro (recently acquired): The solar-powered engine market continues to mature, and Redline’s top management believes that the Solar-Electro division will be extremely profitable in the future as the focus on global climate change continues and anticipated regulations make solar-powered engines mandatory for certain public transportation vehicles.
Machine-Tech (2nd year of operation): Machine service and repair operations. The board of directors is considering selling the Machine-Tech division to focus on core operations—engine manufacturing, but the decision will be impacted by the evaluation of this year’s operating results. Excellent results may lead to the division being retained for the next few years. The Machine-Tech VP is committed to making the division profitable.
Audit details
EGCC CPAs has recently been engaged as the new auditor for Redline Manufacturing, effective for the audit of the financial statements for the year ended December 31, 2023. The audit team will perform preliminary analytical procedures as part of the audit planning process.
Your assignment: As this is your first experience working as a staff auditor on an actual audit, you’ve been asked to perform some preliminary analytical procedures and submit them to the audit manager for their review and comments. Your efforts will focus on the two purposes of analytical procedures:
Obtaining an understanding of the client’s business and
Indicating where there is a possibility of increased or likelihood of misstatements in the client’s financial statements.
Step 1: Download the Redline Manufacturing Financials file attached.
Step 2: Leveraging the Redline Financials Excel file, calculate the following:
In the Income Statement and Balance Sheet Excel tabs
The percentage change in each Redline Income Statement and Balance Sheet account balance
First, calculate the % change between 2021 and 2022 and then between 2022 and 2023.
Insert two columns on the Income Statement and Balance Sheet Excel file tabs, showing your calculations using Excel functions.
In the Ratios Excel file tab…
Common ratios for the years ending 12/31/23 and 12/31/22
Selected ratios for prior years have already been calculated for you.
Calculate each of the ratios for 12/31/23. Also, calculate the four missing ratios for 12/31/22, showing your calculations using Excel functions. Ignore the ratios in any cell with an asterisk (*).
You can find more information about these common ratios in Chapter 7 of your Pearson text.
Round all calculations to two decimal places!
Step 3: Summarize your observations about Redline Manufacturing’s business in a Word document.
These observations should be based exclusively on the analytical procedures performed in Step 2. Be specific and refer to your calculations. Ensure your observations include your preliminary assessment of Redline Manufacturing’s business risk(s).
Step 4: Submit your observations (Word)
Title your file: M2.5 Redline Audit: Analytical Procedures—Part 1 Observations
Step 5 Submit your updated (Excel) Redline financials file.
Part 2
As you’ll recall, EGCC CPAs was engaged as the new auditor for Redline Manufacturing, effective for the audit of the financial statements for the year ended December 31, 2023. Previously provided information about Redline is supplied in the accordion below.
Client Overview:(Known)
As part of the audit planning process, you were asked last week to complete some basic preliminary analytical procedures relative to the Redline Manufacturing business with an eye toward two universal goals:
Obtaining an understanding of the client’s business and
Indicating where there is a possibility of increased or likelihood of misstatements in the client’s financial statements
Specifically, you calculated percentage changes in each Income Statement and Balance Sheet account balance and some common ratios. Then you summarized your observations about Redline Manufacturing’s business, including the trends in the financial statement balances and ratios, and provided an assessment of Redline’s (potential) business and, therefore, audit risk. Solid work. But there’s more that needs to be done.
This part assignment
Keeping in mind our two big-picture goals, we will delve further into Redline Manufacturing’s balance sheet and income statements.
Step 1: Access the Redline Manufacturing Financials file you downloaded last week.
You can start from scratch with a “clean” Redline Financials Excel file
Step 2A: Complete the following income statement analysis.
In the Redline Income Statement tab (of the Redline Financials Excel file):
Prepare a common-size income statement for all three years of data.
See Figure 8-4 in your course textbook for an example of preparing a common-size income statement.
Use Excel functions to complete any necessary calculations. Round all calculations to two decimal places.
In Step 4, you’ll use this information to identify accounts (income statement line items) for which you believe there is a concern about potential material misstatements.
Step 2B: Complete the following income statement analyses.
In each of the three division-level income statement tabs (of the Redline Financials Excel file):
Prepare a common-size income statement for all three years of data, consistent with the step 2A approach.
Again, note any accounts that trigger concerns about potential material misstatements in preparation for step 4.
Step 3: Complete the following balance sheet analysis.
In the Redline Balance Sheet tab:
Prepare a common-size balance sheet statement for all three years of data, consistent with the step 2A approach.
Analyze the account balances for accounts receivable, inventory, and short/current long-term debt relative to potential areas of material misstatements for the current year’s audit.
Step 4: Summarize your areas of concern for the current Redline audit (including potential misstatements) in a Word doc.
Be specific about each area of potential concern, drawing on your Step 2 and Step 3 work.
Title your file: M3.5 Redline Audit: Analytical Procedures—Part 2 Concerns
Step 5: Submit your concerns (Word) document
Step 6 Submit your updated (Excel) Redline financials file- Making 2 files.
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