You are the audit senior of Rhino & Co. and you are planning the audit of Kaine Construction Co. for the year ended March 31, 2023. Kaine 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 on his meeting and financial statement extracts:

●		Kaine has had a difficult year; house prices have fallen and, as a result, revenue has dropped. In order to address this, management has offered significantly extended credit terms to customers. However, demand has fallen such that there are still some completed houses in inventory where the selling price may be below cost.
●		Management needs to meet a target profit before interest and taxation of $0.5 million in order to be paid their annual bonus.
●		In addition, to try to improve profits, Kaine changed its main supplier to a cheaper alternative. This has resulted in some customers claiming on their building warranties for extensive repairs.
●		To help with operating cash flow, management borrowed $1 million from the bank during the year. This is due for repayment at the end of December 2023.

Which of the following are appropriate conclusions for the auditor given the above results? (Several choices may be correct.)

Accounts receivable may be overvalued.

Inventory may be overvalued

Kaine has adequate cash on hand.

There must be a material misstatement as the warranty provision must be inadequate.

There may be going concern issues.

There is a management bias to overstate profits.

Transcribed Image Text:

Draft 2023 ($M) Actual 2022 ($M) Revenue $12,500,000 $15,000,000 Cost of sales 7,000,000 8,000,000 Gross profit 5,500,000 7,000,000 Operating expenses 5,000,000 5,100,000 Profit before interest and taxes 500,000 1,900,000 Inventory 1,900,000 1,400,000 Receivables 3,100,000 2,000,000 Cash 800,000 1,900,000 Trade payables 1,600,000 1,200,000 Operating loan 1,000,000 Draft 2023 ($M) Actual 2022 ($M) Revenue $12,500,000 $15,000,000 Cost of sales 7,000,000 8,000,000 Gross profit 5,500,000 7,000,000 Operating expenses 5,000,000 5,100,000 Profit before interest and taxes 500,000 1,900,000 Inventory 1,900,000 1,400,000 Receivables 3,100,000 2,000,000 Cash 800,000 1,900,000 Trade payables 1,600,000 1,200,000 Operating loan 1,000,000

Answer rating: 100% (QA)

Answers Accounts receivable may be overvalued Inventory may be overvalued There must be a material misstatement as the warranty provision must be inad... View the full answer