1 You have been presented with the following draft financial information about Hivex, a very successful company that develops and licenses specialist computer software and hardware. Its fixed assets mainly consist of property, computer hardware and investments, and there have been additions to these during the year. The company is experiencing increasing competition from rival companies, most of which specialize in hardware or software, but not both. There is pressure to advertize and to cut prices. You are the audit manager. You are planning the audit and you are conducting a preliminary analytical review and associated risk analysis for this client for the year ended 31 May 2X16. You have been provided with a summarized draft profit and loss account (Figure 10.5), which has been produced very quickly, and certain accounting ratios and percentages. You have been informed that the company accounts for research and development costs in accordance with IAS 38 Intangible Assets. FIGURE 10.5 Statement of comprehensive income year ended 31 May 2X16 2X15 000s 000s 15 206 13 524 Sales 3 009 3 007 Cost of sales 12 197 10 517 Gross profit 3 006 1 996 Distribution costs 994 1 768 Administrative expenses 3 002 274 Selling expenses Profit from operations 5 195 6 479 995 395 Net interest receivable 6 190 6 874 Profit before tax 3 104 1 452 Corporation tax Net profit Dividends paid 3 086 5 422 1 469 1 439 Retained profits 1 617 3 983 Accounting ratios and percentages Earnings per share Performance ratios include the following: 0.43 1.04 Gross margin 0.80 0.78 Expenses as a percentage of sales: Distribution costs 0.20 0.15 Administrative expenses 0.07 0.13 Selling expenses 0.20 0.02 Operating profit 0.34 0.48 Required: (a) Using the information above, comment briefly on the performance of the company for the two years. (b) Use your answer to part (a) to identify the areas that are subject to increased audit risk and describe the further audit work you would perform in response to those risks. (ACCA) 1 You have been presented with the following draft financial information about Hivex, a very successful company that develops and licenses specialist computer software and hardware. Its fixed assets mainly consist of property, computer hardware and investments, and there have been additions to these during the year. The company is experiencing increasing competition from rival companies, most of which specialize in hardware or software, but not both. There is pressure to advertize and to cut prices. You are the audit manager. You are planning the audit and you are conducting a preliminary analytical review and associated risk analysis for this client for the year ended 31 May 2X16. You have been provided with a summarized draft profit and loss account (Figure 10.5), which has been produced very quickly, and certain accounting ratios and percentages. You have been informed that the company accounts for research and development costs in accordance with IAS 38 Intangible Assets. FIGURE 10.5 Statement of comprehensive income year ended 31 May 2X16 2X15 000s 000s 15 206 13 524 Sales 3 009 3 007 Cost of sales 12 197 10 517 Gross profit 3 006 1 996 Distribution costs 994 1 768 Administrative expenses 3 002 274 Selling expenses Profit from operations 5 195 6 479 995 395 Net interest receivable 6 190 6 874 Profit before tax 3 104 1 452 Corporation tax Net profit Dividends paid 3 086 5 422 1 469 1 439 Retained profits 1 617 3 983 Accounting ratios and percentages Earnings per share Performance ratios include the following: 0.43 1.04 Gross margin 0.80 0.78 Expenses as a percentage of sales: Distribution costs 0.20 0.15 Administrative expenses 0.07 0.13 Selling expenses 0.20 0.02 Operating profit 0.34 0.48 Required: (a) Using the information above, comment briefly on the performance of the company for the two years. (b) Use your answer to part (a) to identify the areas that are subject to increased audit risk and describe the further audit work you would perform in response to those risks. (ACCA)