You are the audit senior of Rhino & Co. and you are planning the audit of Kaine Construction Co. for the year ended March 31, 2020. Kaine specializes in building houses and provides a five-year building warranty to its customers. Your audit manager has held a planning meeting with the finance director. He has provided you with the following notes on his meeting and financial statement extracts:

• Kaine has had a difficult year; house prices have fallen and, as a result, revenue has dropped. In order to address this, management has offered significantly extended credit terms to customers. However, demand has fallen such that there are still some completed houses in inventory where the selling price may be below cost.

• Management needs to meet a target profit before interest and taxation of $0.5 million in order to be paid their annual bonus.

• In addition, to try to improve profits, Kaine changed its main supplier to a cheaper alternative. This has resulted in some customers claiming on their building warranties for extensive repairs.

• To help with operating cash fl ow, management borrowed $1 million from the bank during the year. This is due for repayment at the end of 2020.

Required

a. Calculate five ratios that would help the auditor in planning the audit.

b. Using the information and the ratios calculated, identify five audit risks or areas that may require additional audit work.

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Actual 2019 ($M) Draft 2020 ($M) Revenue $12,500,000 $15,000,000 Cost of sales 7,000,000 8,000,000 Gross profit 5,500,000 7,000,000 Operating expenses 5,000,000 5,100,000 Profit before interest and taxes 1,900,000 500,000 1,400,000 Inventory 1,900,000 Receivables 3,100,000 2,000,000 Cash 800,000 1,900,000 Trade payables 1,600,000 1,200,000 Operating loan 1,000,000