Background Curtains Master is a large proprietary company established in North Queensland in the 1990s, selling a wide range of high-quality fabric curtains for household decoration. The company purchases products from manufactures in Vietnam, Bangladesh, and China, and then sells its products to wholesales customers in Australia, Germany, and the United States. The company also places its products on consignment in various small retail stores in Queensland. Sales mainly peak from the second half of the financial year, generating an average of 60% of revenue for the whole year. In past years the company has performed well, with its profit rate at around 12% and an average increase in annual revenues of 5%. 1 j In the last two years, the company has extended its marketing from Germany to other countries in Europe. As a result of this, in the budget for the year 2019-2020, the company while aiming to maintain its profit rate, plans to increase its revenues by 8%. The company uses USD to pay its suppliers and EUR or USD in its dealings with customers. While the business is expanding in Europe, sales in Australia and US are struggling to reach their targets. These markets are quite competitive, providing more affordable products with a large range of designs and choices. Further, in recent years, countries like Vietnam and China have become more eco-conscious, attempting to reduce their industrial impact on the environment. As such, textile manufacturing has been discouraged with strict regulations. Some of CurtainsMaster's suppliers have reduced their production capacity and have experienced an increase in production costs. Financial Information: Budget Actual Actual Account Sales Revenue Growth FX Gain/Loss (% on Total Revenue) Other Revenue (% on Total Revenue) Total revenue COS Salaries expenses Administration expenses Selling expenses Borrowing Costs Total expenses Profit before income tax (% on Total Revenue) Income Tax expense (% on Sales Revenue) Profit after income tax (% on Total Revenue) Growth Actual the first 9 months 31-Marl 2020 62,749,877 -50.5% -1,012,320 -1.4% 10,561,423 14.6% 72,298,980 36,394,929 18,145,600 9,450,120 5,019,990 3,430,468 72,441,106 -142, 126 -0.2% 2019-2020 137,000,000 8.0% - 150,000 -0.1% 600,000 0.4% 137,450,000 73,980,000 20,420,000 10,960,000 6,850,000 2,800,000 115,010,000 22,440,000 16.3% 5,610,000 4.1% 16,830,000 12.2% 6.5% 30-Jun 2019 126,885,497 5.6% -11,230 0.0% 888,198 0.7% 127,762,466 71,055,879 18,301,680 8,881,985 5,075,420 3,086,096 106,401,058 21,361,407 16.7% 5,553,966 4.4% 15,807,442 12.4% 3.8% 30-Jun 2018 120,156,721 5.9% 120,301 0.1% 712,356 0.6% 120,989,378 69,690,898 16,023,508 7,209,403 4,806,269 2,945,001 100,675,079 20,314,299 16.8% 5,078,575 4.2% 15,235,724 12.6% 0.0% -142,126 -0.2% -100.9% 5,420,140 7,000,500 11,145,100 23,565,740 8,041,120 5,145,100 4,225,001 17,411,221 7,050,100 4,689,456 4,000,450 15,740,006 Current assets Cash Accounts Receivable Inventory Total current assets Non-current assets Property, plant and equipment Intangible assets Total non-current assets Total assets 9,450,000 2,040,120 11,490,120 35,055,860 12,950,400 2,400,410 15,350,810 32,762,031 12,400,550 2,514,500 14,915,050 30,655,056 10,780,125 6,250,000 17,030,125 5,615,610 3,250,000 8,865,610 4,561,780 2,250,000 6,811,780 Current Liabilities Accounts Payable Interest Bearing Liabilities Total current liabilities Non-current liabilities Deferred tax liabilities Interest-bearing liabilities Total non-current liabilities Total liabilities Equity 405,126 3,000,000 3,405,126 20,435,251 14,620,609 650,041 6,000,000 6,650,041 15,515,651 17,246, 380 756,100 6,000,000 6,756,100 13,567,880 17,087,176 Assume you are one of the audit team members who will conduct the financial report audit - year ending 30 June 2020 - for CurtainsMaster. Using the company's information given above, prepare a report dated June 10, 2020 for the audit manager outlining the audit plan. As it is the beginning of the audit do not prepare a final audit report/opinion. The report should cover the following areas under the suggested headings: 1. Risk Assessment From the background and financial information given above: identify and explain six (6) potential HIGH risks, including BOTH inherent risk and control risk (doesn't matter how many of each). for each risk listed, identify the type of risk (inherent risk or control risk), and the associated financial accounts and key assertions that would be affected. Please use the following table to present your answers: Accounts Assertions Potential risk type of risk, description 2. Analytical Procedures As part of the risk assessment phase, you conducted analytical procedures and the results are as below: Budget 2019-2020 Account Total revenue COS Salaries expenses Administration expenses Selling expenses Borrowing Costs Interim 30-Jun 2020 100% 55% 28% 14% 100% 54% 15% 8% 5% 2% Actual 30-Jun 2019 100% 56% 14% 7% 4% 2% Actual 30-Jun 2018 100% 58% 13% 6% 8% 5% 4% 2% Interim Budget Actual Actual Ratios 30-Jun 30-Jun 2019-2020 30-Jun 2018 2020 2019 1.4 0.3 1.3 2.0 0.9 4.3 6.5 2.3 1.0 4.9 6.8 2.6 Liquidity ratios Current ratio Quick ratio Inventory turnover Accounts receivable Solvency ratios Debt to equity Times interest earned Profitability ratios Gross profit ratio Net profit ratio ROA Return on Sh funds 1.4 0.9 6.1 0.8 6.2 -1.0 7.0 0.46 0.12 0.362 -0.102 -0.054 -0.116 0.44 0.12 0.12 0.23 0.42 0.13 0.13 0.23 Using the above analysis and financial information given, discuss the results of the analytical procedures by outlining six (6) potential problem areas (that is, where possible material misstatements in the financial reports exist) and any other special concerns (for example, going concern). Specify the account balances and related assertions that would require particular attention in the audit. For each problem identified, you must use the above quantitative analysis to support your argument. 3. Planning Materiality The audit firm dictates that one planning materiality amount is to be used for the financial statement as a whole. The planning materiality bases are as follows: Base Profit before tax Turnover Gross profit Total assets Threshold (%) 5-10 0.5-1 2.0-5 0.5-1 Based on the information given and your risk assessment, select the base for planning materiality that you believe is most appropriate, and provide three reasons justifying the base you have chosen, calculate the planning materiality. (You can refer to Cloud 9 case and textbook pages 123-125 and other resources for further understanding.) 4. Conclusion Based on the risk assessment processes and analytical procedures undertaken in the previous sections, conclude the overall level of risk, materiality of the firm and recommend the areas of audit focus. Background Curtains Master is a large proprietary company established in North Queensland in the 1990s, selling a wide range of high-quality fabric curtains for household decoration. The company purchases products from manufactures in Vietnam, Bangladesh, and China, and then sells its products to wholesales customers in Australia, Germany, and the United States. The company also places its products on consignment in various small retail stores in Queensland. Sales mainly peak from the second half of the financial year, generating an average of 60% of revenue for the whole year. In past years the company has performed well, with its profit rate at around 12% and an average increase in annual revenues of 5%. 1 j In the last two years, the company has extended its marketing from Germany to other countries in Europe. As a result of this, in the budget for the year 2019-2020, the company while aiming to maintain its profit rate, plans to increase its revenues by 8%. The company uses USD to pay its suppliers and EUR or USD in its dealings with customers. While the business is expanding in Europe, sales in Australia and US are struggling to reach their targets. These markets are quite competitive, providing more affordable products with a large range of designs and choices. Further, in recent years, countries like Vietnam and China have become more eco-conscious, attempting to reduce their industrial impact on the environment. As such, textile manufacturing has been discouraged with strict regulations. Some of CurtainsMaster's suppliers have reduced their production capacity and have experienced an increase in production costs. Financial Information: Budget Actual Actual Account Sales Revenue Growth FX Gain/Loss (% on Total Revenue) Other Revenue (% on Total Revenue) Total revenue COS Salaries expenses Administration expenses Selling expenses Borrowing Costs Total expenses Profit before income tax (% on Total Revenue) Income Tax expense (% on Sales Revenue) Profit after income tax (% on Total Revenue) Growth Actual the first 9 months 31-Marl 2020 62,749,877 -50.5% -1,012,320 -1.4% 10,561,423 14.6% 72,298,980 36,394,929 18,145,600 9,450,120 5,019,990 3,430,468 72,441,106 -142, 126 -0.2% 2019-2020 137,000,000 8.0% - 150,000 -0.1% 600,000 0.4% 137,450,000 73,980,000 20,420,000 10,960,000 6,850,000 2,800,000 115,010,000 22,440,000 16.3% 5,610,000 4.1% 16,830,000 12.2% 6.5% 30-Jun 2019 126,885,497 5.6% -11,230 0.0% 888,198 0.7% 127,762,466 71,055,879 18,301,680 8,881,985 5,075,420 3,086,096 106,401,058 21,361,407 16.7% 5,553,966 4.4% 15,807,442 12.4% 3.8% 30-Jun 2018 120,156,721 5.9% 120,301 0.1% 712,356 0.6% 120,989,378 69,690,898 16,023,508 7,209,403 4,806,269 2,945,001 100,675,079 20,314,299 16.8% 5,078,575 4.2% 15,235,724 12.6% 0.0% -142,126 -0.2% -100.9% 5,420,140 7,000,500 11,145,100 23,565,740 8,041,120 5,145,100 4,225,001 17,411,221 7,050,100 4,689,456 4,000,450 15,740,006 Current assets Cash Accounts Receivable Inventory Total current assets Non-current assets Property, plant and equipment Intangible assets Total non-current assets Total assets 9,450,000 2,040,120 11,490,120 35,055,860 12,950,400 2,400,410 15,350,810 32,762,031 12,400,550 2,514,500 14,915,050 30,655,056 10,780,125 6,250,000 17,030,125 5,615,610 3,250,000 8,865,610 4,561,780 2,250,000 6,811,780 Current Liabilities Accounts Payable Interest Bearing Liabilities Total current liabilities Non-current liabilities Deferred tax liabilities Interest-bearing liabilities Total non-current liabilities Total liabilities Equity 405,126 3,000,000 3,405,126 20,435,251 14,620,609 650,041 6,000,000 6,650,041 15,515,651 17,246, 380 756,100 6,000,000 6,756,100 13,567,880 17,087,176 Assume you are one of the audit team members who will conduct the financial report audit - year ending 30 June 2020 - for CurtainsMaster. Using the company's information given above, prepare a report dated June 10, 2020 for the audit manager outlining the audit plan. As it is the beginning of the audit do not prepare a final audit report/opinion. The report should cover the following areas under the suggested headings: 1. Risk Assessment From the background and financial information given above: identify and explain six (6) potential HIGH risks, including BOTH inherent risk and control risk (doesn't matter how many of each). for each risk listed, identify the type of risk (inherent risk or control risk), and the associated financial accounts and key assertions that would be affected. Please use the following table to present your answers: Accounts Assertions Potential risk type of risk, description 2. Analytical Procedures As part of the risk assessment phase, you conducted analytical procedures and the results are as below: Budget 2019-2020 Account Total revenue COS Salaries expenses Administration expenses Selling expenses Borrowing Costs Interim 30-Jun 2020 100% 55% 28% 14% 100% 54% 15% 8% 5% 2% Actual 30-Jun 2019 100% 56% 14% 7% 4% 2% Actual 30-Jun 2018 100% 58% 13% 6% 8% 5% 4% 2% Interim Budget Actual Actual Ratios 30-Jun 30-Jun 2019-2020 30-Jun 2018 2020 2019 1.4 0.3 1.3 2.0 0.9 4.3 6.5 2.3 1.0 4.9 6.8 2.6 Liquidity ratios Current ratio Quick ratio Inventory turnover Accounts receivable Solvency ratios Debt to equity Times interest earned Profitability ratios Gross profit ratio Net profit ratio ROA Return on Sh funds 1.4 0.9 6.1 0.8 6.2 -1.0 7.0 0.46 0.12 0.362 -0.102 -0.054 -0.116 0.44 0.12 0.12 0.23 0.42 0.13 0.13 0.23 Using the above analysis and financial information given, discuss the results of the analytical procedures by outlining six (6) potential problem areas (that is, where possible material misstatements in the financial reports exist) and any other special concerns (for example, going concern). Specify the account balances and related assertions that would require particular attention in the audit. For each problem identified, you must use the above quantitative analysis to support your argument. 3. Planning Materiality The audit firm dictates that one planning materiality amount is to be used for the financial statement as a whole. The planning materiality bases are as follows: Base Profit before tax Turnover Gross profit Total assets Threshold (%) 5-10 0.5-1 2.0-5 0.5-1 Based on the information given and your risk assessment, select the base for planning materiality that you believe is most appropriate, and provide three reasons justifying the base you have chosen, calculate the planning materiality. (You can refer to Cloud 9 case and textbook pages 123-125 and other resources for further understanding.) 4. Conclusion Based on the risk assessment processes and analytical procedures undertaken in the previous sections, conclude the overall level of risk, materiality of the firm and recommend the areas of audit focus