1.

The auditor may design a sample that will be used for dual purposes, ie as a test of control
and as a substantive test.
An auditor planning to use a duo purpose sample would have made a preliminary assessment
that there is an acceptably low risk that the rate of deviations from the prescribed control in the
population exceeds the tolerable rate.
The size of a sample designed for dual purposes should be the larger of the samples that would
otherwise have been designed for the two separate purposes.

Evaluation
In evaluating the dual purpose tests, deviations from the control that was tested and monetary
misstatements should be evaluated separately using the risk levels applicable for the respective
purposes.

2. Examples of potential dual-purpose test you might perform on an audit.

Conducting a detailed examination of the reports, documents, and the company’s files to ensure
that everything in the file checks in – Here the auditor will seek to identify variations in the
reports, documents and files. In a situation the auditor finds the variations, then he/she will
request for explanation.

The tracing of the transaction from their original path up to the books of accounts - This is
majorly done through observation, inquiry, and inspection. For example, going back to the cash
receipts from sales to trace transactions that were complete through cash payment and inspect
the receipts instead of the books of account.
 Discuss 2 ethical obligations of employer governance towards its employees. 
Ensuring that the employees have been equipped with the right equipment – This is
an ethical obligation that employer governance should meet towards employees. The
reason behind this obligation is that equipment and tools that employees use may
contribute to their safety while working. Use of wrong, outdated and unsuitable tools
and equipment may put the employee at risk and therefore, the employer
governance has an ethical obligation to ensure that all their employees have been
equipped right and adequately.
Provision of protective gears to employees – Employer governance has an ethical
obligation to avail protective gears to their employees and ensure that the employees
wear them anytime they are at work. Such protective gears such as nose marks,
gloves, boots, safety belts etc, provide the employees with extra safety in the
workplace and therefore it is an obligation of the employer to provide their
employees with them and also ensure that they put them on at all times while
working.
Ensuring that the working environment is safe from any possible harm. The
employer governance has an ethical obligation to ensure that the working
environment is free from any possible harm that could compromise the safety of the
employees. For example, the employer governance has an obligation to ensure that
employees in a mining site are not working in dangerous areas that can collapse.
Ensuring that there are policies in place on safety of employees in the company.
Policies that highlight the safety measures and precautions of employees would act
as a guide to employees so that risks are avoided. The employer governance has an
ethical obligation to ensure that such policies are in place and they are being
exercised and observed.
2. Employers who do not meet needs of their employees appropriately, and who
bypass or ignore fundamental principles and/or laws, have seen to suffer
serious adverse consequences through bad publicity and the loss of
reputation. Explain why those charged with corporate governance need to be
mindful of these factors? 

Employers who bypass or ignore fundamental principles and/or laws, suffer very
adverse consequences and especially bad publicity as they are termed as negligent
of their employees’ welfare, health and safety. Again, such employers suffer from
loss of reputation. When they lose such valuable aspects, they may end up losing a
lot including loss of workforce, customer base and even suffer public criticism which
would tarnish their brand name.
Publicity and reputation are valuable assets and aspects that would influence how
the company will perform. Once the reputation is damaged, it may cause other
workforce getting discouraged from applying to work in the company and as a result,
the employer may end up facing inadequate workforce which would adversely affect
operations.
Again, once an employer loses publicity and damages reputation, it may lead to loss
of customers who are becoming sensitive of such issues like employees’ welfare, A
dented reputation may keep of customers leading to loss of revenue. The cost of
correcting this dented image and reputation are huge as the impacts are long lasting.
Correcting a dented reputation of the employer would require the company to incur
huge costs like use of public relations to corrected the damaged reputation.

3. Discuss 1 ethical failure that may have led to the problems in the first place.
Failure to put in place effective health and safety policies – This ethical failure
involves an employer failing to formulate laws and policies that are effective and
applicable to prevent such losses. Effective and workable policies need to not only
be put in place but the manager must ensure that the policies are being observed
strictly. Managers may have policies in place but fail to make a follow up to ensure
that they are followed by every employee as therefore, such policies would become
ineffective in mitigating such elements that compromise employees’ safety. This may
have led to the problems in the first place.
Some of the benefits of having a diverse workforce are: Higher creativity in decisions as a
diverse workforce has diverse views and ideas hence higher creativity, better understanding of
service customers as the diverse workforce offer higher customer satisfaction and also higher
stock prices resulting from higher performance and productivity.

Higher salary rates is not a benefit of having a diverse workforce as salaries are
expenses/liabilities for a company.
Vertical analysis

This is a financial statement analysis method in which each line item is listed as a percentage of
a base figure within a statement. Line items on a balance sheet can be stated as a percentage of
total assets while Line items on an income statement can be stated as a percentage of gross
sales. Another example of vertical analysis is where in the cash flow statement, each cash
outflow or cash inflow is stated as a percentage of the total cash inflows.

Example in a balance sheet extract:

Assets $
Current assets 256,000
Long term investments 142,000
Plant and machinery 68,000
Intangible assets 15,000
Total assets 481,000

Vertical analysis for current asset will be 256,000/481,000 *100 = 53%

Horizontal Analysis

This method of financial statement analysis is the opposite of vertical analysis in that, line items
or ratios in financial statements of a firm are compared over a certain period of time. This is
done by choosing one year’s worth of entities as a baseline, and the rest of the years represent
percentage change/variation in terms of changes to the selected baseline. This analysis
therefore uses one year’s items as the bases to state the percentage of all other years. For
example, cash balances reported on the balance sheet on 31 st December 2017,2018,2019 and
2020 will be expressed as a percentage of a base year December 31 st 2017.

An example from a balance sheet extract;

Year 2020 2019 2018 2017

Using the horizontal analysis, we can calculate the percentage of cash balances using 2017 as a
base year; For 2019, 342,000/254,000 = 134.65%

Liquidity ratio

This type of financial metric measures the ability of a company or a debtor to pay off current
debt obligation without raising external capital. It measures the ability of a company to pay its
debt and the margin of safety through calculation of metrics such as quick ratio, current ratio as
well as operating cash flow ratio.

In this analysis, current liabilities are analyzed in relation to liquid assets to evaluate the
company’s ability to cover short terms of debts in case of an emergency.

Quick ratio = (Current assets – Inventory – prepaid expenses)/Current liabilities

Example, let us calculate the current ratio of a hypothetical company with current assets
$235,000 and current liabilities $152,000

Current ratio will be: $235,000/$152,000 = 1.55

The higher the ratio, the better the company’s liquidity position.

Activity Ratio

This ratio is also known as efficiency ratio. It is another financial metric that indicates how
efficient a company is leveraging the assets on its balance sheet, to generate revenues. It aids
measure how efficient a company handles inventory management.

Activity ratio broadly describe a financial metric that help investors to measure how efficient a
firm uses its assets to generate revenue. This ratio can be divided into a number of ratios such as
total assets turnover ratios, inventory turnover ratios, return on equity etc.

Asset turnover ratio = Sales/Total assets

Return on equity = Net income/Total outstanding stock shares

Example of activity ratio is Asset turnover ratio calculated by dividing a company’s sales by its
total assets. Eg. The total sales of company XYZ for year 2020 is $468,000 and the assets are
worth $647,000, asset turnover ratio will be, 468,000/647,000 = 0.72

This is a measure of a company sales value generated relative to the value of assets. The higher
asset turnover ratio, the more efficient a company is using its assets to generate revenue.

Leverage Ratio

This is any one of the several financial metrics that assess how much capital comes into the firm
in debt form. It assesses the ability of a firm to meet its financial obligations.

This ratio helps companies to assess whether they are able to settle their debts when they fall
due. Examples of such ratios includes equity multiplier, customer leverage ratio and debt-equity
ratio.

Debt-to-equity ratio = Total liabilities/ Total Shareholders’ equity

The equity multiplier = Total assets/Total Equity

Consumer leverage ratio = Total household debt/Disposable personal income

Debt-to-equity ratio is given by total liabilities divided by Total shareholders’ equity. Let’s take a
practical example, Uniq company shareholders’ equity for the year ending 2020 was $850,000
and their long term debt was $500,000. The debt-to-equity ratio would therefore be,
$500,000/$850,000 = 0.59

This is considered low meaning that the company has been financing its growth with less debt
making it more stable.