Question

CAN SOMEONE WITH DEEP KNOWLEDGE AND BRAINY ANSWER THE QUESTION PLEASE.

Your client is Magnificent Homeware Limited and your audit will be for the year ended 31 March 2018. Magnificent Homeware Ltd is a retailer and the main products sold are:

fridges

freezers

OLED televisions

coffee machines

blenders.

The retail shops are in Auckland (2) and Wellington (1) and the head office is in Auckland. There has been an extensive amount of capital expenditure over the past three years.

Each of the shops has a manager and they have incentive bonuses based on the net profit of the company. In discussions with each of these managers you have been alerted to the fact that there are problems with the over ordering of fridges and coffee machines. This has been as a result of the volatility of the market and competition in the market place and as a result the company had suffered cash-flow problems during the 2018 income year.

Your analysis of the industry suggests that the market for homeware products is extremely volatile and there is increasing competition and the need for heavy discounting for televisions and fridges.

The homeware industry is affected by changes in technology, especially for the televisions and therefore you have a concern for obsolete televisions as part of the inventory.

The managing director is Gwyneth Homeby and she is a gregarious person who was previously a car dealer. Accounting is definitely not her strong point. She relies completely on the accountant Helen Breeze. Gwyneth also advises you that she is concerned at the verbal reports of an isolated bullying situation by the manager to a sales staff member in one of one of the Auckland stores. You have found the following reference from the Institute of Directors which may assist you: https://www.iod.org.nz/About-us/IoD-news-and-articles/Post/19383.

In your first meeting with Gwyneth she unexpectedly offered you two free tickets to the T20 cricket match between the Black Caps and West Indies. Gwyneth explained to you that she had purchased these tickets however she has now found out that she will be going to a sales conference in Sydney at the time of this cricket match. At this stage you have not accepted the tickets and you are unsure on how to proceed.

Gwyneth also advises you that approximately 10% of the company sales is through supplying white ware and televisions to a government department in Wellington and this department is now reviewing the contract and calling for tenders for the 2018 – 2020 years.

During the 2018 income year the company borrowed an additional $1.4 million on a 15 year mortgage. The additional borrowing was used to build a new retail store which opened in Wellington in November 2017. The two Auckland shops are leased.

The bank overdraft has been agreed upon by the bank and has a maximum agreed overdraft of $400,000.

The 2018 financial statements are as follows:

Magnificent Homeware Ltd – summarised information

Income Statement

	2018			2017				2016
	$(000)			$(000)				$(000)
Sales	33,250			32,100				26,470
Less Cost of Goods Sold	26,500				27,950				22,450
Gross profit	7,250			4,150				4,020
Less interest expense	600			300				250
Other expenses			350	1,600				1,800
Net profit before tax	6,300			2,250				1,970
Less taxation	1,764			630				552
Net profit after taxation	4,536			1,620				1,418

Balance Sheet
For Magnificent Homeware Ltd
As At 31 March 2018
	2018		2017			2016
	$(000)		$(000)			$(000)
Current assets
Bank	-		-			1,804
Accounts receivable	5,200		3,250			1,620
Allowance for bad debts	(210)		(350)			(380)
Inventory	4,120		2,550			1,850
Total current assets	9,110		5,450			4,894
Non-current assets
Plant & equipment	5,480		4,900			4.300
Retail shop Wellington	2,000		-			-
Total non-current assets	7,480		4,900			4.300
Total assets	16,590		10,350			9,194
Current liabilities
Bank overdraft	380		350			-
Mortgage	200		100			100
Accounts payable	2,200		2,026			2,890
Total current liabilities	2,780		2,476			2,990
Non-current liabilities
Mortgage	3,000		1,600			1,600
Total liabilities	5,500		4,076			4,540
Net assets	10,810		6,274			4,654
Shareholders’ equity
Shares	200		200			200
Retained profits	6,074		4,454			3,036
Net profit after tax for the year	4,536		1,620			1,418
Shareholders’ equity	10,810				6,274			4,65

As the auditor for Magnificent Homeware Ltd, use the information supplied and complete the following

b. Using the financial information above, provide analytical calculations (supported by formulae and figures) for the purpose of reviewing the financial performance and the financial position of Magnificent Homeware Ltd. Your focus should be to highlight matters of significant concern and trends that appear unusual.

c. From the analysis in (b) above, what are the audit risk factors for inventory and accounts receivable?

d. How would the financial statement analysis in (b) above assist to plan your audit approach for Magnificent Homeware Ltd?

e. From the information above (excluding the financial statements) list the potential problem areas and any major concerns (where there could be risk or material misstatement) that you will need to consider as part of the plan for the 2018 audit for this company. You must provide brief reasons why each of the areas you have listed require special consideration. You should be able to comment on at least 10 areas.

Answer 1

A)	The following ratio's will helpful to analyse the company performance
	1	first of all sales. Sales of the company increased 21% in 2017 as compared to 2016. But the same was increased only
		3% in 2018 as compare to 2017. it may indicate that the company's down trend will start in future.
	2	Cost of goods sold in relation to sales
		In 2016 COGS to Sales ratio is 84%, In 2017 it is 87% and in 2018 it is 80%
		COGS to sales ration will impact on Gross profit earn m=by the company. Here even though 2017
		it is increase from 84% to 87%, but it is decreased in 2018 to 80%. Which indicates even though company's
		sales is not incrasing that much gross profit will increasing.
	3	Net Profit to sales
		2016	5.36%
		2017	5.05%
		2018	13.64%
		Net profit is increasing drastictly in 2018.
	4	Working capital
		2016	1340
		2017	2424
		2018	4700
		Working capital also increasing. But proportionatly sales of the company is not increasing that much as company to working capital
		it means you can convert some part of working capital for expansion of business
B)	The audit risk factors for Inventory and accounts recievables :
	1	Inventory tunover ratio
		2016	6.99%
		2017	7.94%
		2018	12.39%
		Here in 2018 company is maintaining inevntory inrelation to salaes is around 5% more than in 2017
		But sales doesn't increase that much as inventory increase. It indicates company is going to incurred lot of inventory carrying cost
	2	Account recievables to sales
		2016	6.12%
		2017	10.12%
		2018	18.95%
		Account receivables to sales ratio increasing. Company is selling more credit sales than cash sales.
		It will resulting to increase working capital and it may result into to increase bad debts.
C)	How would the financila statement analysis assit to plan audit approach
	1	The two ratio's in point B will help full to verify the what actions company is going to take in future to reduce it's credit sales
	2	what actions are company is going to take to recovery credit sales as early as possible.
	3	What actions company is planning to reduce inventory carrying cost.
	4	How company is maintining inventory.
	5	Which inventoyr mechanisam companby is following
D)	Potential problems areas and any major concerns
	1	Major areas is like managing inventory
	2	Manage credit sales properly
	3	proper Recovery from debtors. It may lead to increase bad debts.
	4	Maintaining same net profit percenatge and gross profit percentage.