Wayne is also planning the 30 June audit of Francis Ltd, a company that runs a chain of home wares retail stores in regional New South Wales and Victoria. Using the company’s financials as well as his understanding of Francis under ASA315, he has compiled the following preliminary information:

 

Ratio	2021	2020	2019	2018	2017
Current Ratio	2.44	1.97	2.18	2.11	2.18
Quick Ratio	0.84	1.17	1.58	1.53	1.43
Times interest earned	2.18	2.78	3.57	4.61	6.18
Receivables Turnover	3.65	4.79	3.57	4.70	4.87
Days in receivables	75.60	57.97	77.45	58.80	56.71
Inventory turnover	1.57	1.60	2.33	2.91	2.92
Days in inventory	176.41	172.58	121.10	95.07	94.51
Net Sales/Tangible Assets	0.52	0.56	0.64	0.60	0.58
Profit Margin	0.09	0.11	0.14	0.13	0.12
Return on Assets	0.07	0.08	0.10	0.09	0.08
Return on Equity	0.03	0.05	0.09	0.09	0.10

 

Francis import all their products, primarily from China, Europe and North America. Some items are sourced from Africa and South America. The company operates in a low gross margin environment, which typically means that large sale volumes are required to cover overhead costs and generate profits. It also means that overheads need to be kept under control to ensure that a net profit results from its operations. Francis did not reach industry benchmarks for profitability in 2020, so to do better in 2021, management planned to keep  costs down in relation to sales while allowing its gross margin to drop, evidently planning to generate a larger volume of sales. The company also planned to improve its working capital management by reducing levels of inventory and accounts receivable. It budgeted for a drop in debt levels, indicating that it expected to produce a healthy cash flow to enable it to do so.

 

Question 1 (3 marks) The business risk impact and the accounts (as well as the related assertions) most likely affected by the events outlined in relation to Knights Ltd. 

Question 2 (4 marks) Whether Wayne’s testing has obtained sufficient appropriate evidence for the relevant assertions (where appropriate) pertaining to Bowden Ltd. 

Question 3 (7 marks) Regarding Francis Ltd, based on the ratios and other information provided: The conclusions that can be drawn about the potential of Bowden to continue as a going concern. Three (3) account balances that could be at risk of material misstatement and would require special attention during the audit. You should provide Wayne with a justification as to why these three (3) accounts are at risk and a statement as to whether they are likely to be overstated or understated. For each of the three (3) account balances identified above, two (2) key assertions that are at risk and an explanation as to why they are at risk.

Question 4 (7 marks) Regarding Edwards Ltd: Three (3) internal control activities in Edwards sales and receivables, and whether these activities are intended to prevent or detected material misstatements and how this is achieved. For each control identified above, one (1) test of control that could be undertaken to verify the effectiveness of the internal control. Three (3) weaknesses in Edward’s internal controls around sales and receivables, along with an explanation as to why they are weaknesses. For each weakness outlined above, one (1) account balance at risk of material misstatement and the related assertion most at risk, along with a justification as to why this account and assertion is at risk.

Question 5 (4 marks) Regarding Murphy Ltd: Three (3) account areas that are at risk of material misstatement. For each account area identified above, one (1) key assertion that could be at risk. The audit procedures you would perform to gather sufficient appropriate evidence for each assertion.