ACCT 3044: Graded Activity 3 Case Study Sem #3 2122 Case Study 1 and 2 (30%) Individual Assignment This submission will account for 30% of your overall Coursework of 100%. You are required to show ALL supporting workings where necessary and state any assumption(s) made. Grading Rubric is attached Case Study 1 Sub Sequo Ltd. is a food wholesaler operating throughout the Caribbean and its year end was 30 September 2021. The final audit is nearly complete and it is proposed that the financial statements and audit report will be signed on 13 December. Revenue for the year is $78 million and profit before taxation is $7.5 million. The following events have occurred subsequent to the year end. Receivable A customer of Sub Sequo Ltd has been experiencing cash flow problems and its year- end balance is $0.25 million. The company has just become aware that its customer is experiencing significant going concern difficulties. Sub Sequo believe that as the company has been trading for many years, they will receive some, if not full, payment from the customer; hence they have not adjusted the receivable balance. Lawsuit A key supplier of Sub Sequo is suing them for breach of contract. The lawsuit was filed prior to the year end, and the sum claimed by them is $1.2 million. This has been disclosed as a contingent liability in the notes to the financial statements; however correspondence has just arrived from the supplier indicating that they are willing to settle the case for a payment by Sub Sequo of $0.7 million. It is likely that the company will agree to this. Warehouse Sub Sequo has three warehouses; following extensive rain on 20 November significant rain and river water flooded the warehouse located in Grenada. All of the inventory was damaged and has been disposed. The insurance company has already been contacted. No amendments or disclosures have been made in the financial statements. Required: For each of the three events above: a) Discuss whether the financial statements require amendment; (10 marks) b) Describe audit procedures that should be performed in order to form a conclusion on the amendment; (10 marks) c) Explain the impact on the audit report should the issue remain unresolved. (10 marks) Case Study 2 You are the audit senior of Plannit & Co and you are planning the audit of Hoses Construction Co (Hoses) for the year ended 31 March 2021. Hoses specialises in building houses and provides a five-year building warranty to its customers. Your audit manager has held a planning meeting with the finance director. He has provided you with the following notes of his meeting and financial statement extracts: Hoses has had a difficult year; house prices have fallen and, as a result, revenue has dropped. In order to address this, management has offered significantly extended credit terms to their customers. However, demand has fallen such that there are still some completed houses in inventory where the selling price may be below cost. During the year, whilst calculating depreciation, the directors extended the useful lives of plant and machinery from three years to five years. This reduced the annual depreciation charge. The directors need to meet a target profit before interest and taxation of $0.5 million in order to be paid their annual bonus. In addition, to try and improve profits, Hoses changed their main material supplier to a cheaper alternative. This has resulted in some customers claiming on their building warranties for extensive repairs. To help with operating cash flow, the directors borrowed $1 million from the bank during the year. This is due for repayment at the end of 2021. Financial statement extracts for year ended 31 March Draft 2021 ($M) Actual 2020 ($M) Revenue Cost of sales 13.5 16.0 (8.0) (9.0) Gross profit 5.5 7.0 Operating expenses (5.0) (5.1) Profit before interest and tax 0.5 1.9 Inventory 2.2 1.6 Receivables 3.2 2.0 Cash 0.7 2.0 Trade payables 1.7 1.5 Loan 1.0 --- Required: Using the information above: a) Calculate FIVE ratios, for BOTH years, which would assist the audit senior in planning the audit; (10 marks) b) Using the information provided and the ratios calculated, identify and describe FIVE audit risks and explain the auditor's response to each risk in planning the audit of Hoses Construction Co. (20 marks)