Johnny's Manufacturing is an established audit client of your firm.You were involved with the audit last year

Fantastic news! We've Found the answer you've been seeking!

Question:

Johnny's Manufacturing is an established audit client of your firm.You were involved with the audit last year as audit senior. This year, you are to act as audit supervisor. The engagement partner has asked you to plan the audit for the year ended 30 June 2020. It is an old-fashioned audit, and the partner does not anticipate that you will require the use of the new laptops that the firm has just invested in.

The company has a sales ledger of approximately 100 customers but, in terms of value, 80% of the ledger is represented by just 6. The company has just secured a new customer, Riskyways, which has only impacted on the sales ledger for one month in the current year, but is projected to represent 20% of sales in the year ending 30 June 2021. Johnny's has a large bank loan with ABC Bank. There is a covenant attached to the loan. The bank requires an interest cover of 2.5 and a current ratio of 1.5. The major development in the year is that Johnny's decided to factor its debts. In the past it had suffered a substantial irrecoverable receivables expense when a major customer went bankrupt and it is concerned that the reoccurrence of such an event would affect its interest cover ratio. It sacked its sales ledger clerk at the end of the year, so has outsourced its sales ledger function to the factor. The audit assistant attended the inventory count two days ago. They observed that there appeared to be a high level of old inventory. They were nevertheless added into the count.

The following draft figures have been provided:

STATEMENT OF FINANCIAL POSITION
$'000 $'000
2020 2019
Current assets
Inventory 460 370
Receivables 324 250
Cash 15 69
Total 799 689
Non Current assets
PPE 541 653
Total assets 1340 1342
Current Liabilities
Trade Creditors and accruals 381 367
Bank loan 10 10
Total 391 377
Non current liabilities
Bank loan 250 260
Total liabilities 641 637
Equity 699 705
STATEMENT OF PROFIT OR LOSS
Revenue 2,534 2,967
Cost of sales (1,583) (1,823)
Gross profit 951 1,144
Administrative expenses (476) (488)
Other expenses (400) (432)
Profit before interest and tax 75 224
Interest expense 14 14
Tax 30 73
Net Profit 31 137

Julie Bean, the sales ledger clerk, has threatened to sue the company for unfair dismissal and sexual discrimination. Riskyways is an audit client of the firm. You are aware that it was often in dispute with its previous supplier over its poor payment record and has changed supplier because the supplier broke off relations with it.

Required:

(a) Comment on the level at which you would set materiality.

(b) Identify and explain the audit risks in the above scenario for the audit for the year ended 30 June 2021.