Auditing

Question 2 During analytical procedures it was observed that several of operating cycle ratios had changed materially since last year's audit as follows: 2020 2021 Current ratio 1.3:1 1.9:1 Liquid ratio 0.8:1 0.6:1 Days Debtors outstanding 52 days 69 days Inventory turnover 79 days 123 days Besides, it was found that the company had doubled their overdraft limit to provide working capital and that this limit had been exceeded twice during the year, just before the company had paid an interim dividend and just before a final dividend of 5% because the company is short of cash. The company's gearing ratio had significantly increased as a result of a t3 million long-term loan from their bankers to finance a major capital project. The project was partly financed from internal sources, but the issued capital of the company remained unchanged at two million f1 shares, fully paid. Required: a) Assess the level of audit risk associated with this situation. (16 marks) b) Recommend appropriate audit procedures aimed at ascertaining the position of the client as a "going concern". (9 marks)