Course Name: ACCT 3044 - Advance Auditing Question 1 You are the audit senior of Cari & Co and you are planning the audit of Kondo Construction Co (Kondo) for the year ended 31 March 2019.

Kondo 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 of his meeting and financial statement extracts:

• Kondo has had a difficult year; house prices have fallen and, as a result, revenuehas dropped. In order to address this, management has offered significantly extended credit terms to theircustomers.
• However, demand has fallen such that there are still some completed houses in inventory where the selling price may be below cost. During the year, whilst calculating depreciation, the directors extended the useful lives of plant and machinery from three years to five years. This reduced the annual depreciation charge.
• The directors need to meet a target profit before interest and taxation of $05 million in order to be paid their annual bonus. Inaddition, to try and improve profits, Kondo changed their main material supplier to a cheaperalternative.
• This has resulted in some customers claiming on their building warranties for extensive repairs. To help with operating cash flow, the directors borrowed $1 million from the bank during the year. This is due for repayment at the end of2019.

Financial statement extracts for year ended 31 March:	Draft	Actual
2019	2018
$m	$m
Revenue	13.5	16.0
Costofsales	(8.0)	(9.0)
Gross profit	5.5	7.0
Operating expenses	(5.0)	(5.1)
Profit before interestandtax	0.5	1.9
Inventory	1.8	1.3
Receivables	3.2	2.1
Cash	0.9	2.0
Trade payables	1.5	1.1
Loan	1.0	---

Required: Part A

Using the information above:

1. Calculate FIVE ratios, for bothyears, which would assist the audit senior in planning the audit. (10marks)
2. Using the information provided and the ratios calculated, identify and describeFIVE audit risks and explain the auditor's response to each risk in planning the audit of Kondo Construction Co. (20marks)

Part B

By reference to the data in Part A:

1. Explain the importance of analytical procedures as evidence in determining the fair presentation of the financial statements. (5 marks)
2. What are the purposes of preliminary analytical procedures? What types of comparisons are useful when performing preliminary analytical procedures? (5 marks)
3. Explain why auditors need an understanding of the client's industry. What sources are commonly used by auditors to learn about the client's industry? (10 marks)