You are the audit manager of a medium-sized firm and have just received a package from Rachel Jones, the financial controller of Telechubbies Ltd, a toy manufacturer. This is your firm's first year as auditor of Telechubbies. The information contained in the statement of financial position and income statement overleaf was prepared for a board meeting and Rachel felt it might be useful to you in preparation of the forthcoming audit for the year ended 31 December 2015.

During a brief telephone call with Rachel, you made the following notes:

1. One of the conditions of the long-term loan is that the company is not to exceed a debt-toequity ratio of 2:1 at any time. The loan is reviewed each year on 31 December.

2. Provision against inventory obsolescence is provided for at a flat rate of 10%. The amount provided in previous years was 20%. Rachel said that the company believes it has been overly conservative in previous years and 5% is a more realistic level, given the nature of its products.

3. The long-term loan receivable is from a company involved in the development and production of computer software. It is owned by one of the directors.

Required

a. Suggest possible sources of information that would help you gather sufficient knowledge of the business to perform the audit of Telechubbies Ltd.

b. Perform preliminary analytical procedures using the information provided. Identify the key areas that would require special attention during the audit of the 31 December 2015 financial statements.

c. Outline ways in which the analytical procedures performed could be extended using the information collected in (a).

d. Suggest ways of using analytical procedures as a substantive test during the audit of Telechubbies Ltd.

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2015 2014 2013 Statement of financial position $'000 $'000 $'000 Current assets Cash 1 586 1743 830 Inventory Trade receivables Total current assets 16 498 11 731 7 197 12 134 10 700 9 323 30 218 24 174 17 350 Non-current assets Property, plant and equipment 14 606 12 840 9 572 Long-term loan receivable 5 200 3600 3300 Total non-current assets 19 806 16 440 12 872 Total assets 50 024 40 614 30 222 Current liabilities Trade payables 9 012 6 288 2 021 Provisions Total current liabilities 4 875 3 821 4 577 13 887 10 109 6 598 Non-current liabilities Long-term loan payable 20 000 16 000 12 000 Total liabilities 33 887 26 109 18 598 16 137 14 505 11 624 Net assets Shareholders' equity Share capital Retained earnings Total shareholders' equity 2 000 2000 2.000 14 137 12 505 9 624 16 137 14 505 11 624