Cook's Furniture Ltd. Statement of Financial Position As at 2020/6/30 Note 2020 Draft $000 2019 Audited $000 Assets Cash and Cash Equivalents Accounts Receivable Inventory Other financial assets Prepaid Expenses Total current assets 9 10 11 12 14,514 443 15,039 18,293 932 18,088 727 490 38,528 272 748 31,015 13 14 Property, Plant & Equipment Intangible Assets Total non-current assets Total Assets 37,066 951 38,017 69,032 45,944 1,189 47,133 85,661 15 16 Liabilities Borrowings Trade creditors Other creditors and accruals Deferred revenue Current tax payable Provisions Total Current Liabilities 17 5,440 4,478 2,514 10,529 145 1,362 24,468 10,181 5,789 3,040 13,199 654 1,477 34,339 18 6,650 15 17 18 Borrowings Deferred revenue Provisions Deferred tax Total Non Current Liabilities Total Liabilities Net Assets Equity Share capital Reserves Retained Earnings Total Equity 8,025 68 2,322 76 10,491 34,958 34,073 2,440 400 9,490 43,829 41,832 19 1,346 212 32,516 34,073 1,682 718 39,432 41,832 Cook's Furniture Ltd. Income Statement For the Year Ended 30 June 2020 2020 $'000 2019 $'000 Note 3 Sales Cost of Goods Sold Gross Profit 107,210 39,754 67,456 125,384 46,781 78,603 4 Depreciation and amortisation Selling Expenses Employment Expenses General and Administrative Expenses Property Expenses Financial Costs Other Expenses Total Expenses Operating Income st 4 1,701 8,556 15,251 4,296 13,573 421 672 44,470 22,986 1,890 9,504 18,128 4,682 14,968 464 514 50,148 28,455 395 375 204 Rent received Interest income Other income Net gain on disposal of plant and equipment Total other revenue Income Before Taxes 434 331 97 12 874 23,860 974 29,429 Income Taxes 7,014 8,940 Net Income 16,846 20,490 Exchange differences on translation Other comprehensive income 3 217 1 702 Retained Earnings at the End of the Year 16,632 21,191 Note 3 Revenue Recognition and measurement - Revenue and income recognition Revenue is recognised at an amount that reflects the consideration to which the consolidated entity is expected to be entitled in exchange for transferring goods or services to a customer. Revenue is recognised for major business activities as follows: Sale of goods When recognising revenue in relation to the sale of goods to customers, the key performance obligation of the consolidated entity is considered to be the point of delivery of the goods to the customer, as this is deemed to be the time that the customer obtains control of the promised goods. 2019 $'000 2020 Note 4 Expenses $'000 Profit before income tax includes the following specific expenses Included within employee benefits expenses Salaries and wages 12,150 Supernnuation expenses 1,100 Share-based payments 41 Other * 1.960 15,251 *Other employee benefits include commissions, payroll tax, workers compenstions and contract stuff 14,302 1,348 140 2.338 18,128 Included within property expenses Operating lease payments 11,290 11,988 Recognition and measurement - Expenses Leases and operating leases Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating leases are recognised as an expense in the statement of comprehensive income on a straight-line basis over the lease term of the lease. Note 9 Cash and cash equivalents Cash at bank and on hand Short-term deposits Total 2020 $'000 4,240 10.274 14,514 2019 $'000 4.259 14.034 18,293 Note 10 Receivables 2020 2019 $'000 $'000 Trade debtors 116 190 Other debtors 328 742 443 Trade receivables are initially recognised at fair value, less any allowance for expected credit losses. Trade receivables are generally due for settlement within 30 days. The consolidated entity had no expected credit losses at reporting date. 932 Other debtors includes contributions from landlords and claims due from suppliers. These are non-interest bearing and have repayment terms of up to 240 days. Note 11 Inventory Finished goods - at net realisable value Stock in transit 2020 S'000 12.807 2.232 15.039 2019 $'000 15,497 2.591 18,088 During the year ended 30 June 2020, $38.000 (2019: expense of $156.000) was recongised as a reducation in cost of good sold for inventories carried at net realisable value. Recognition and measurement - Inventories Inventories are valued at the lower of cost and net realisable value. Weighted average cost is used to value inventories. Costs incurred in bringing each product to its present location and condition includes purchase price plus freight, cartage and import duties. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. Note 12 Other financial assets 2020 $'000 272 2019 $'000 727 Derivative hedge receivable Note 13 Property plant and equipment Land and buildings - at cost Less accumulated depreciation 2020 $'000 32,598 1.784 30,814 2019 $'000 40,305 1,489 38.816 Leasehold improvements - at cost Less accumulated depreciation 7.208 3,414 3,793 7,615 3,219 4,396 Fixtures and fittings - at cost Less accumulated depreciation 381 276 105 1.385 1.121 265 Motor vehicles - at cost Less accumulated depreciation 269 129 140 408 269 139 Office equipment - at cost Less accumulated depreciation 4,798 2,585 2.213 37,066 5,310 2.981 2.329 45,944 Total Recognition and measurement Property, plant and equipment All classes of property, plant and equipment are measured at cost, less accumulated depreciation and any impairment in value. Depreciation is provided on a straight line basis on all property, plant and equipment. Major depreciation periods are: Buildings Leasehold improvements Furniture and fittings Motor vehicles Office equipment (including IT) 20 - 40 years 5- 15 years 3- 15 years 6 years 3- 12 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Leasehold improvements are depreciated at the shorter of the useful life or the term of the lease. Land is not depreciated. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the Company. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which it belongs. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. Note 14 Intangibles assets 2020 $'000 951 2019 $'000 1,189 Goodwill on acquisition of stories in Christchurch Goodwill acquired through business combinations has been allocated the Christchurch stores and related distribution centre for impairment testing. The recoverable amount of the chrsitchurch stores and related distribution centre has been determined based on a value in use calculation using cashflow projections. The key assumptions used in determining the value in use are as follows: 2020 2019 Long-term growth rate 2.0% 2.0% Weighted average cost of capital 10.3% 10.3% Recognition and measurement - Intangible assets Goodwill on acquisition is initially measured at cost being the excess of the cost of the business combination over the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. When goodwill forms part of a cash-generating unit and an operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this manner is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Note 15 Borrowings 2020 2019 $'000 $'000 Commerical bills payable - current 5,440 10,181 Commerical bills payable - non current 8,025 6,650 Recognition and measurement - Interest-bearing loans and borrowings All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Fees paid on the establishment of loan facilities that are yield related are included as part of the carrying amount of the loans and borrowings. Borrowing costs are recognised as an expense when incurred, unless they are directly attributable to the acquisition, construction or production of a qualifying asset whereby they are capitalised. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least twelve months after the reporting date. Note 16 Payables 2020 2019 $'000 $'000 Trade Creditors 4,478 5,789 Other creditors and accurals 2.514 3,040 6,992 8,829 Trade creditors are non-interest bearing financial instruments and are normally settled on 30 day terms. Other creditors are non-interest bearing financial instruments and are normally settled on 30 to 60 day terms. Recognition and measurement - Payables Trade and other payables are carried at amortised cost and due to their short-term nature they are not discounted. They represent liabilities for goods and services provided to the Company prior to the end of the financial year that are unpaid and arise when the Company becomes obliged to make future payments in respect of the purchase of these goods and services. Note 17 Deferred revenue 2020 2019 $'000 $'000 Customer deposits 10,510 13,199 Accidental damage warranties - current 19 10,529 13,199 Accidental damage warranties - non current 68 Customer deposits are amounts received from customers for orders not yet completed. A customer deposit is recognised as revenue when the customer accepts delivery of the order. The opening balance of customer deposits was all recognised as revenue in the current financial year. Accidental damage warranties are purchased by the customer in conjunction with the purchase of a piece of furniture and are recognised as revenue over the life of the warranty. Amounts classified as current will be recognised as revenue within twelve months of the reporting date. Accidental damage warranties have a life of up to five years from the date of purchase. The non-current deferred revenue relates to the portion of revenue which will be recognised more than twelve months after the reporting date. Note 18 Provisions current Employee entitlements Deffered lease incentives 2020 $'000 1,114 248 1,362 2019 $'000 1,362 115 1,477 non current Employee entitlements Deffered lease incentives Lease make good 353 1,747 222 2,322 460 1,721 260 2,440 Recognition and measurement - Provisions Employee entitlements Liabilities for annual leave and long service leave expected to be settled within twelve months of the reporting date are measured as the amounts to be paid when the liabilities are settled and are discounted to net present value. Deferred lease incentive The Company has received financial incentives from the lessor of certain properties. These are recorded as a liability and amortised over the term of the lease. Employee entitlements Liabilities for annual leave and long service leave not expected to be settled within twelve months of the reporting date are measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to the expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Lease make good A provision has been made for the present value of anticipated costs of future restoration of leased properties. The provision includes future cost estimates associated with restoring the premises to its condition at the time the Company initially leased the premises, subject to fair wear and tear. Note 19 Issued capital 2020 $'000 1,346 2019 $'000 1,682 Authorised and fully paid ordinary shares Number of shares 1000000 1000000 Assuming all potential threats can be mitigated and Kirby has accepted Cook's Furniture as an audit client. He has asked you to plan for the audit of Cook's Furniture Ltd for the 2020 financial year. You need to produce the audit planning workpaper outlining potential risks in this audit. Your audit planning workpaper must cover the following: (30 marks) a) Identify ten risk factors (conditions) that indicates that the financial statement might be misstated. b) Determine the potential impact of each risk factor on the financial statements or the audit (e.g. which account and assertions might be misstated). c) Determine the audit strategies or procedures that may address the risk of material misstatement Use the following format to present your answer. Identify the risk Potential impact on the factor (a) financial statements or the audit (6) Audit strategies or procedures to address the risk of material misstatement (c) 1 2 3 4 etc