Your client is Megabight Ltd, a large family-owned company which imports and sells a range of computer hardware products. You are currently planning the 30 June 20X11 audit and have obtained the following information from your inquiries of management:

In January 20X1, Megabight applied for and was granted a new loan. The submission made to the bank stated that:
— the current ratio was 0.90;
— gross profit was up by 25 per cent compared with the same time last year;
— the debt-to-equity ratio was 0.40.

The bank agreed to the new loan; however, it did enter into a loan covenant with Megabight. The covenant required that certain ratios should not be breached by the company and placed certain restrictions on dividends.
From audits you have conducted in previous years, you are suspicious about the validity of the ratios discussed in the submission. You hear from one of Megabight’s accounting staff that the figures had been ‘gently massaged’ to obtain the required ratios.

Required

Discuss with reference to specific areas of the audit the implications of the above information on your planning of the audit.