You are the audit manager currently undertaking the planning of the audit for the financial year ended
Question:
You are the audit manager currently undertaking the planning of the audit for the financial year ended 30 June 2019 of Fancy Fashion Wholesale Ltd (FFWL), a large wholesaler of women’s handbags.
You have the following additional information:
- FFWL is known for always having the latest and most fashionable products available. These products are purchased from both local and overseas suppliers.
- The company’s market comprises large chain stores, established specialist handbag retailers and, more recently, ‘up-market accessory booths located in major shopping malls.
- From the beginning of March 2019, most local purchases, at the request of FFWL’s suppliers, have been on a Cash on Delivery (COD) basis.
It is now April 2019. You have performed preliminary analytical procedures using the 31 March 2019 management reports (ratios annualized in these instances) together with the audited figures for the previous two financial years (year-end 30 June).
Results of ratio analysis
Year | Current ratio | Quick ratio | Accounts receivable turnover (days in accounts receivable) | Year-end Accounts receivable as a % of sales | Inventory turnover ratio | Sales returns as a % of sales |
2019 | 1.01 | 0.52 | 79 days | 23% | 3.3 times | 2.9% |
2018 | 1.13 | 0.61 | 61 days | 18% | 4.2 times | 2.3% |
2017 | 1.21 | 0.64 | 56 days | 14% | 4.8 times | 1.6% |
Results of simple comparisons
Year | Accounts receivable $’000 | Gross sales $’000 | Inventory $’000 |
2019 | $14,452 | $62,596 | $16,622 |
2018 | $13,342 | $74,352 | $12,480 |
2017 | $12,268 | $86,684 | $11,638 |
REQUIRED
- Based on the information given, identify two key account balances at risk of material misstatement at 30 June 2019 and for each account,
- identify the key assertion at risk for each account.
- identify 3 factors that justify your answer in a).
Ignore going concern issues in your answer.
- Identify two (2) factors presented in the above information that suggest FFWL may have a going concern problem for the year ended 30 June 2019?
Auditing and Assurance Services A Systematic Approach
ISBN: 978-0077732509
10th edition
Authors: William Messier Jr, Steven Glover, Douglas Prawitt