Note: Please see the pictures attached as well and answer accordingly

Case Study - Rice Company of Australia Ltd FKC is a mid-tier accounting firm based in Melbourne. In 2020, a new audit client, Rice Company of Australia Ltd (RCA), expressed its interest to work with FKC. RCA is a medium size company located in Melbourne. Josh Prakash, who is an audit partner at FKC, assessed FKC's independence as well as competence to audit RCA. Finally, Josh decided to accept this new client. Rebecca Cheng was assigned as the audit manager in charge of planning and supervising the conduct of the RCA audit. You are currently employed as an audit assistant and have been assigned to work on the RCA audit. You will be assisting Rebecca.

RCA's background RCA's principal business activities include importing, grading, packing, and selling rice (i.e., rice is a common food for many households across the world). RCA focuses on the Australian market and South Pacific markets such as Fiji, Vanuatu, Solomon Islands, etc. RCA was founded in 1982 and has developed a highly efficient processing line using fully automated machinery. It has installed a state-of-the-art rice sorter in the processing line to remove any foreign particles and unwanted components such as rice husks. The reputation of focusing on quality gives RCA its competitive edge. RCA has various types of rice that cover most preferences in the market: Australian Calrose medium grain rice, Australian long grain rice, long grain rice imported from Vietnam, fragrant Jasmine rice imported from Thailand, and Basmati rice imported from India and Pakistan.

Before sorting and packaging both the imported and locally grown rice into various package sizes, the raw material (pre-processed rice) is stored in a series of side by side silos. These silos can hold up to 1000 tonnes of grain each. The raw material inventory represents a significant portion of the total inventory. The different types of rice are then put through the sorting and packaging process and stored in the company's warehouse in Melbourne before shipping to customers.

Forecast Financial Statements You have been given the unaudited financial statements for the year ending 31st December 2020, as well as the previous two years' audited results (Exhibit 1), ratio for the Industry average (Exhibit 2), and key ratios calculated by the audit team (Exhibit 3).

Additional Information

1. RCA has local and overseas customers as stated above. For the Australian market, all the sales are made in bulk to major supermarkets (like Coles and Woolworths) or to various Asian grocery stores. For international sales, they represent a significant proportion of total sales, most of the customers are the supermarket chains in the relevant island nation. The sales to the local market are in Australian dollars while the sales to the international market are in US dollars. Some of the increased sales in 2020 could be attributed to panic buying of customers in supermarkets which forced the supermarkets to increase their orders from RCA. The sales in final quarter of 2020 was more subdued. Revenue is recognized as soon as the sale is made for the local customers. For the international market, the ownership of the goods remain with RCA until the shipment is delivered to the customer. The revenue is recognized by RCA once the goods are delivered to these customers. Due to COVID-19 pandemic travel restrictions, the delivery of goods to the Pacific island customers can take more than a month. All raw material imported from overseas is paid in US dollars. The transfer of ownership from the overseas suppliers to the client varies with the contract that RCA has with the supplier.

2. RCA has taken out one significantly large long-term loan from Commonwealth Bank. The loan agreement puts certain restrictions on further borrowing possibilities of RCA. It also requires RCA to submit its audited financial statements to Commonwealth Bank by April 30 of every year until the loan is fully paid.

3. The short-term loan is due to be paid shortly. RCA is in negotiation with the bank to refinance the short-term loan and its board of directors has indicated that their strong preference is to raise additional funds from the shareholders.

4. RCA has a board of directors comprising of five members. The company also has an audit committee that consists of a chair who is an independent director, the chief executive officer and a non-independent director.

5. Some countries from which RCA imports the raw material from have imposed strict limitation on the exports to other countries due to limited supplies in their own countries because of COVID-19 pandemic. In addition, RCA is also dealing with limited supply from the local rice growers due to bush fires and drought during last summer. These factors have pushed the price of unprocessed rice. Some of the suppliers have also indicated that future orders would require RCA to make payments in advance to secure the supply. The company anticipates that 2021 will be a better year for rice growers in Australia as more rain is expected. However, the rice price from the overseas suppliers is expected to remain high in the near future.

6. Due to the current economic climate, the audit client expects the demand for rice to decline due to falling income levels in the various Pacific island nations. There is evidence that the consumers in some of these countries are switching to more traditional root crops. The demand from the Australian consumers is expected to remain stable.

Required: (to be answered)

1. ASA 315 requires auditors to understand the client for the purpose of assessing the risk of material misstatements in financial reports. Based on the provided information in this case, please write down two to three major inherent risks, and explain why you believe they are inherent risks.

Page 4 of 11 Exhibit 1. Comparative financial statement information Income statement For the Year ended 30 December 2020 Statement of financial position as at 30 December 2020 (Unaudited) (Audited) (Audited 2020 2019 2018 (Unaudited) (Audited) (Audited) $'000 $'000 $'000 2020 2019 2018 5'000 ,'000 $000 Sales (Net) 3523 30726 24088 19116 Current Assets Cost of sales 27985 26303 Cash in hand 1920 1488 1855 Gross profit 7254 4423 4972 Payments in advance 3428 2380 1882 Trades Receivables 3804 2822 1704 Depreciation 2906 1825 1451 Inventory 17894 13476 9876 Inventory obsolescence 581 637 199 Total current assets 27047 20166 15317 Marketing expenses 3 42 601 Non-current assets Administrative expenses 721 363 Property, plant and equipment net of depreciation 17407 4944 4164 Finance Cost 678 264 180 Long-term receivable 4104 5483 354 Total expenses 5916 4186 3473 Total non-current assets 21511 10427 10704 Total assets 18558 3059 26021 Profit before tax 1338 238 1499 Tax expense 468 83 524 t Liabilitie 6558 Profit after tax 870 155 974 Trades Payables 786 5465 Short term loan 1000 3000 400 Other current liabilities 5025 4523 5000 Total current liabilities 16891 14081 10865 Non-current liabilities Long-term loan payable 18827 6102 4901 Total liabilities 35718 20183 15766 Exhibit 2: Ratio for the Industry Average Net assets 12840 10410 10255 2020 2019 2018 Shareholder's equity Current ratio 2.01 2.03 2.11 1.01 1.10 Share capital 3000 Quick ratio 1.15 3000 3000 Debt-to-equity ratio 2.10 1.95 1.96 Retained earnings 9840 7410 7255 Trades receivable turnover(days) 29.00 30.00 30.00 Total Shareholders' equity 12840 10410 10255 Trade payable turnover (days) 30.00 22.00 22.00 Inventory turnove 2.50 2.80 2.60 Gross profit Margin 24.00 25.00 30.00 Net profit Margin 6.00 7.50 9.20 K D DDExhibit 3: Key ratios calculated by the audit team Ratio Formula Prohblllty Ratios Gross prolit margin ma mm , Sales 100 Net Profit margin Return on Assets Retum on Equity mm no. nu . so": 100 m. Mn: After W 00 momma/mm . mo Equity 10 Liquidity Ratios Current Ratio Quick Ratio Current Assets Current Laibi itles Cash + Trades Receivable Eur-rem Laibllitles Inventory turnover ratio Cost of Sales Average inventory Trades receivable turnover (in days) may. n.4,. mom\" suit-s .365 'rr-edee payable turnover (in days) AW. 17m\" pay-oi: , rumma- 365 Debt to Equity ratio Total Liabilities Total Equity Additional Information 1. RCA has local and overseas customers as stated above. For the Australian market, all the sales are made in bulk to major supermarkets (like Coles and Woolworths) or to various Asian grocery stores For international sales, they represent a significant proportion oi total sales, most of the customers are the supermarket chains in the relevant island nation. The sales to the local market are in Australian dollars while the sales to the international market are in US dollars. Some of the increased sales in 2020 could be attributed to panic buying of customers in supermarkets which forced the supermarkets to increase their orders from RCA. The sales in nal quarter of 2010 was more subdued. Revenue is recognized as soon as the sale is made for the local customers. For the international market, the ownership of the goods remain with RCA until the shipment is delivered to the customer. The revenue is recognized by RCA once the goods are delivered to these customers. Due to CDVlD-19 pandemic travel restrictions, the delivery of goods to the Pacic island customers can take more than a month. All raw material imported from overseas is paid in US dollars. The transfer of ownership from the overseas suppliers to the client varies with the contract that RCA has with the supplier. RCA has taken out one signicantly large long-term loan from Commonwealth Bank. The loan agreement puts certain restrictions on further borrowing possibilities or RCA. It also requires RCA to submit its audited nancial statements to Commonwealth Bank by April so of every year until the loan is fully paid . The shortterm loan is due to be paid shortlyt RCA is in negotiation with the bank to refinance the short-term loan and its board of directors has indicated that their strong preference is to raise additional funds from the shareholders. RCA has a board of directors comprising of five members. The company also has an audit committee that consists of a chair who is an independent director, the chief executive officer and a non-independent director. . Some countries from which RCA imports the raw material from have imposed strict limitation on the exports to other countries due to limited supplies in their own countries because of COVID-ls pandemic, In addition, RCA is also dealing with limi' ' the local rice growers due to bush fires and drought during last summe have pushed the price of unprocessed rice. Some of the suppliers have al: future orders would require Km to make payments in advance to secure