Auditing Scenario

ASSIGNMENT

Audit Scenario

Your firm has been approached by a listed company, ROBYN_PRAN Limited (RBL), and asked if you will accept appointment as auditors for the year ending 31 December 2016 (it is now late November 2016).

RBL’s Finance Director provided you with the following statement of financial position and income statement information which included actual figures for years ending 31 December 2013 to 2015, with estimated figures for 2016.

RBL produces gadgets. This was once a fairly profitable industry but both the size and profitability of the industry in Australia have declined significantly in recent years due to advanced technology and replacement products (which RBL is unable to produce with its existing plant and equipment). Over recent years a number of its competitors and customers have closed down and existing tariffs, quotas and import duties on imported gadgets have been scheduled to be abolished at the beginning of 2016.

RBL’s factory closed in late November, pending the resolution of an industrial dispute (factory workers demanding a 15% wage rise and reduced hours). It is unlikely that work will resume prior to the Christmas shutdown and consequently the estimated figures for 2016 are not, in the opinion of the Finance Director, expected to change.

	ROBYN_PRAN LIMITED INCOME STATEMENT
	2013 $'000		2014 $'000		2015 $'000		2016 $'000
Revenue COGS Depreciation Amortisation Interest - Expense (net)	112,500 90,000 2,000 750 2,400		115,875 98,494 2,000 750 2,000		108,923 98,031 2,000 750 1,800		92,584 86,103 2,000 750 1,500
Other expenses	1,850		1,850		1,850		1,850
NPBT	15,500		10,781		4,492		381
Tax expense	6,045		4,204		1,752		149
NPAT	9,455		6,577		2,740		232
		ROBYN_PRAN LIMITED BALANCE SHEET AS AT
		2013 $'000		2014 $'000		2015 $'000		2016 $'000
Current assets Cash Receivables Inventories Other		630 21,171 19,784 517		500 24,347 22,752 517		450 27,999 26,164 517		150 33,598 31,397 517
Total Current Assets		42,102		48,116		55,130		65,662
Non-Current assets Investments Property, plant & equipment Intangibles Other		87 25,921 15,349 1,115		87 23,977 14,582 1,115		87 22,179 13,852 1,115		87 20,515 13,160 1,115
Total Non Current Assets		42,472		39,761		37,233		34,877
Total assets		84,574		87,877		92,363		100,539

Current liabilities Creditors Borrowings Provisions		9,267 5,000 11,772		10,657 12,361		12,256 2,500 12,978		14,707 4,000 13,627
		26,039		23,018		27,734		32,334
Non-current liabilities Creditors Borrowings Provisions		1,338 5,000 1,531		1,137 5,000 1,479		94 3,000 1,552		1,360 5,000 1,630
		7,869		7,616		4,646		7,990
Total liabilities		33,908		30,634		32,380		40,324
Net assets		50,666		57,243		59,983		60,215
Shareholders, equity Share capital Reserves Retained profits		26,202 11,187 13,277		26,202 11,187 19,854		26,202 11,187 22,594		26,202 11,187 22,826
Total shareholders, equity		50,666		57,243		59,983		60,215

Required

(A) The responsible partner for accepting new clients has requested you to prepare a preliminary analytical review on the information provided by RBL’s Finance Director. The partner suggests that as a minimum you should provide him with the following information bearing in mind that any change above 10% is material.

(A: 1) Horizontal analysis for 2016 and 2015. (5 marks)

(A: 2) Calculate 2 liquidity ratios, 2 activity ratios, 4 profitability ratios and 2 solvency ratios over the period 2013 to 2016. Use the ratios to assess if the company has a going concern problem. (4 marks for ratios’ calculations + 5 marks for assessment of going concern problem + 1 mark for presentation)

(B) List four areas of high inherent risk based on your findings in (A) above and explain how they could affect the financial statements of 2016. (5 marks)