How the quantity expansion of euro money would change

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Reference no: EM131036285

Part A:

QUESTION 1 -

Assume you are an auditor and are facing the following separate circumstances .All the following items are material .You can assume that management have refused to make any changes necessary to make the financial report "true and fair" so that the circumstances mentioned still exist.

1. The value of the write off for the Allowance for Doubtful Debts is inadequate .Management are unwilling to adjust it although the amount leads to a material misstatement of Accounts Receivable. The amount of the misstatement is limited to the Receivables and is able to be calculated.

2. A retailer provides a valuation for inventory at sales price less an allowance for sales margin.

3. The Block Company has just been advised that its main customer who purchases 45% of its stock has just gone into liquidation. Due to the specific nature of its products Block Company is unlikely to find another customer of this size. Block has been starting to have difficulties in making sufficient sales to continue operating.

4. The Croucher Company has been valuing its buildings using the fair value method. Its buildings are currently shown in the balance sheet at their current market value of 18.5 million. The buildings had originally cost 12 million.

5. The Kaycee Company values its inventory at LIFO and is unwilling to change it to FIFO as required by the Australian accounting standards. The amount of the misstatement is known and is limited to its effect on the inventory.

6. The Genome Company has prepared its financial statements but has left out details of its related party disclosures due to privacy issues. This information is required to be included under the Australian accounting standards and while the effects are material they are able to be calculated.

Required: For each of the above situations state the Audit Opinion that should be given with a brief reason/explanation related to each one.

QUESTION 2 -

The Office Two Company sells various stationery and office equipment through its stores. It sells items both at its shopfront and through its internet order service .Orders accepted over the phone are delivered in the Sydney metropolitan area within one day. All sales are made for cash. The following are the procedures for sales.

1. Customers in the store pay for their stationery giving the cash to a staff member at the desk .The staff member creates an Invoice and gives the customer a receipt on a copy of the Invoice.

2. Customers who have ordered over the phone are given a sales order number by the staff member
who prints two copies of the order. The staff member then collects the items from the store and arranges delivery of the order, giving the goods and the invoice copies of the order to the driver.

3. The driver delivers the goods to the customer collects the cash from the customer and receipts the customer's copy of the invoice.

4. The driver returns and hands over the cash and the second copy of the Invoice to a staff member in the store.

5. At the end of each day each staff member gives all cash they taken to the Store Manager who locks it in the safe overnight.

6. The next day the staff manager opens the safe and takes the cash to the bank alone.

Required: Identify the weaknesses in the above procedures.

Part B:

Question 1-

Quantity Expansion (QE) of Money in the European Union (EU)

On March 9 2015, the European Union (EU) commenced quantity expansion of money, Euro (€). The European Central Bank (ECB) has increased the quantity of money by 60 billion euro every month in the open market in an attempt to support the economy of EU countries. The large increase in the quantity of money is expected to have significant impacts on a range of economic sectors in the EU and global financial markets.

(a) Analyse how the quantity expansion of euro money is likely to affect money supply, interest rate, investment and consumption, and economic growth in the EU. Draw relevant graph(s) for your analysis.

(b) Discuss how the quantity expansion of euro money would change the value of euro, exchange rate (depreciation or appreciation) against other currencies, and exports and imports in the EU. How would this contribute to EU's current account balance and would this improve the competitiveness of the EU economy in the global market?

The United States is likely to Raise Interest Rate soon

The U.S. Federal Reserve chairman,Dr Janet Yellen, has signalled that the United States is likely to raise its interest rate as US economic indicators has improved. On the other side of the world, however, the interest rates in many other countries including the EU and Australia are on hold at their lowest level ever.

(c) Explain, in the short run, how and why an increase in US interest rate is likely to change the flow of funds between the United States and Australia.

(d) Using a graph, explain how an increase in US interest rate is likely to affect loanable funds supply and interest rate in Australia. Also, analyse how the change in loanable funds supply and home loan interest rate are likely to influence housing demand, house prices, and household debt burden in Australia.

(e) Discuss how and why an increase in US interest rate is likely to affect the value of Australian dollar and exchange rate (depreciation or appreciation) against the US dollar. Also, discuss how the change in exchange rate is expected to influence Australia's exports, imports and the current account balance (improve or worsen).

Question 2 -

Exchange Rate and Balance of Payments

In October 2012, the exchange rate was 82 Japanese yenper US dollar. As a result of Abenomicsin Japan since late 2012 and economic recovery in the US, the exchange rate rose to 114 Japanese yen per US dollar in March 2016.

(a) Draw a graph and explain what would have happened to the quantity of US dollarsupplied and the US exchange rate?What would have happened to the interest rate in the United States? Wouldpeople now plan to buy or sell US dollarin the foreign exchange market?

(b) What would have happened to the quantity of Japanese yen supplied? Would people now plan to buy or sell Japanese yen in the foreign exchange market?

In July 2015, Australian dollar is trading at US $0.75per Australian dollar and the interest rate in Australia is currently 2 per cent a year. It is forecast that the US will increase its interest rate sometime later this year.

(c) If the interest rate in the US increases to 3 per cent a year, how is it likely to affect the flow of funds between Australia and the United States and the exchange rate of US dollar against Australian dollar (depreciation or appreciation)? What is likely to happen to the current account balance of the United States?

Reference no: EM131036285

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