8.25Planning the audit

Your client is Gateshead Pty Ltd, a large family-owned company which imports and sells computer hardware products. You are planning the 30 June 2015 audit and, from your enquiries of management, have obtained the information below.

1.In January 2015, Gateshead applied for and was granted a new loan. The submission made to the bank stated:

the current ratio was 0.90

gross profit was up by 25% compared with that at the same time last year

the debt-to-equity ratio was 0.40.

2.The bank agreed to the new loan but did enter into a loan covenant with Gateshead. The covenant required that the company should not breach certain ratios, 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 Gateshead's accounting staff that the figures had been 'gently massaged' to obtain the required ratios.

Question

Discuss (referring to specific areas of the audit) the implications of this information on your planning of the audit.

8.29 Planning the audit

Alice is an audit senior for the accounting firm of Wong and Partners. In Alice's planning of the audit of Lincoln Traders Ltd for the year ended 30 June 2015, she asked to review the minutes of board of directors meetings for the year to date. From her review, she noted the following information.

Wong and Partners

Lincoln Traders Ltd

Planning

P-7

Prepared by: Alice

Date: 28/5/15

Notes from board of directors meetings for year to May 2015:

16/8/14

The board agreed to revalue land and buildings in its financial statements in accordance with a property valuation recently undertaken at the company's request. The effect would be to increase their value by 50%.

17/10/14

The company took over one of its major customers during the year. This was not expected to alter its trading relationship.

15/12/14

It was agreed that a new 'bonus scheme' would be implemented. This scheme would award directors a bonus of a percentage of the profits for this year if they could exceed last year's profit figure by 20%.

16/2/15

It was agreed that construction should begin on a new factory for processing tuna. A construction contract was approved and it was expected the work on the new factory would commence before the end of March, at least three months before the end of the financial year.

17/5/15

The board agreed to make a large loan to one of the company's subsidiaries in Fiji one month before the end of the financial year. The loan did not have any security and no interest was charged.

Question

Discuss the effect that each of the five noted items in the minutes of the board of directors meeting will have on specific aspects of the audit plan.