1 (18 marks) You are the auditor of Computer Store Ltd (CSL), a distributor of computer hardware products. Using the company's financial report, it's budget for the year under review and industry benchmarks, as well as your understanding of the entity, you have compiled the following information: CSL operates in a low margin environment, requiring high volumes to cover overheads and generate profit. Therefore, overheads need to be kept under control. Financial gearing also plays a role in keeping costs down and maintaining a margin for solvency during economic downturns. CSL's strategy was to keep costs down in relation to sales while allowing its gross margin to drop, and plan to generate larger sales volumes. Ratio Actual Budget Prior Year Industry Current ratio 1.5 1.4 1.4 1.6 Quick ratio 0.82 0.79 0.79 1.0 Interest coverage ratio 5.3 8.1 6.5 6.2 Debt to equity ratio 0.55 0.3 0.43 0.40 Inventory turnover 10.62 11.85 11.37 12.13 Accounts receivable turnover 6.0 7.6 7.4 8.1 Gross Margin (%) 7.7 9.0 9.6 9.0 Admin expenses/Sales (%) 1.6 1.6 1.8 2.0 Return on equity (%) 16.1 16.8 14.9 15.6 Return on assets (%) 14.8 14.3 13.4 14.7 Allowance for bad debts ('000) 1,280 1,300 1,600 1,430 The company also planned to improve its working capital management by reducing levels of inventory and accounts receivable. It budgeted for a drop in gearing levels, thus indicating that it expected to produce a healthy cash flow to enable it to do so. Required: From the above information provided in relation to CSL: 1. Identify THREE key accounts that are at high risk of misstatement. 2. For each account identified in (1) above: (a) Provide a brief explanation as to why the account is at risk; and (b) List the key assertion where audit efforts should be concentrated. (3 marks) (6 marks) (3 marks) 3. Briefly explain the position of the company (CSL) in relation to its profitability, liquidity and solvency. (6 marks)