5. Cat's Candies Ltd (Cat's) Cat's was founded by Catherine Crystal in partnership with her brother Dominic 10 years ago. Initially Catherine, who acts as Managing Director was the majority shareholder, owning 60% of the shares, with the remaining 40% being owned by Dominic, who is not involved in the day to day running of the business. However, during the year in a desire to raise additional funds the company created a new share issue, the shares were purchased by a long-term friend of Catherine's, Edward Emerald. As a result of this issue, Catherine now owns 55% of the total shares, Dominic 35% and Edward the remaining 10%. Cat's does not meet the threshold for a statutory audit in the UK but after a disagreement about its strategic direction Dominic has requested that an audit of the financial statements takes place and following a tendering process your firm was appointed external auditor of Cat's for the year ending 30 June 20x2. Cat's purchase sweets, drinks and other confectionary items from manufacturers and sell them on to customers. The company started with a shop in the North-East of England and whilst the shop itself is small, over that time they have built up a large online presence and the majority of their sales are now online. Cat's pride themselves in offering a large range of international and difficult to source items. A large proportion of sales are items from Japan, which have become popular in the UK thanks to social media such as TikTok, Cat's are able to capitalise on the desirability of such items and whilst the shipping costs are high, the mark up on these items is large, and they contribute significantly to Cat's overall profit. Cat's pride themselves on keeping on top of the latest trends and being one of the first companies, if not the first company in the UK, to stock whatever the latest 'must have' item is. All sales are in UK sterling (). Online sales also increased significantly during the pandemic as many people sought to treat themselves and Cat's offer a 'guaranteed delivery within 48 hours of ordering or your money back' policy to customers within the mainland UK. Cat's have also seen an increase in sales to businesses who are seeking to boost morale among employees with small gifts of appreciation. This has also increased the value of trade receivables as many businesses are taking advantage of the 30-day payment terms Cat's offer to their business customers. However, as Cat's are inexperienced in offering credit Catherine has admitted that there are a number of trade receivables that are overdue, but there are no plans to include an allowance for doubtful debt within the financial statements as I don't really understand all that. Times are difficult for a lot of businesses, I am sure they will pay in time". Due to the increase in online sales Cat's have invested in a new website which is integrated with their finance system. The system was implemented in September 20X1, it replaced the previous system which required online sales to be manually downloaded from that system and then manually uploaded into the finance system. Additionally, Cat's has acquired a new premises that will store their inventory and all online orders will be processed and dispatched from this site. The inventory for the shop will be replenished from this store on a regular basis. The new premises is not in use as it is undergoing a significant refurbishment in order to make it suitable for use by Cat's. This CONTINUED acquisition was funded by a bank loan, repayable in monthly instalments over 15 years. The shop, which is owned by the company and included in the financial statements at cost less accumulated depreciation, was revalued by an external valuer in March 20x2. Required: a) Explain why small companies such as Cat's are often exempt from statutory audit. (3 marks) b) Explain five actions the audit firm would take as part of the client screening process, excluding professional clearance, before accepting the audit of Cat's. (5 marks) c) i. ii. nswer From the information provided above: Identify and explain eight areas of audit risk in respect of the financial statements of Cat's for the year ending 30 June 20x2. (16 marks) For each area of risk identified in part (1) outline one substantive audit procedure that the auditor could undertake to address that risk. Your ansu should include one assertion the audit procedure would provide assurance over. (16 marks) You should present your answer in a two-columnar format using the headings Area of audit risk' and 'Substantive procedure to address the risk'. (Total marks available for Question 5: 40 marks)