Management is in charge of preparing financial statements. they make an assessment regarding going concern when preparing the statements. For the year ending 31/12/20 RSAs management has prepared the financial statements on this basis.

1. Explain what role the auditor has regarding the going concern assumption

James, an audit partner at KFC accepted RSA as their new client. Bek is assigned at the audit manager and you are the audit assistant for RSA. RSA's functions include grading, packaging, importing and selling rice. It has a professional rice sorter to remove foreign particles and unwanted items including rice husks. RSA focuses on quality and have different types of pie imported from foreign countries. Before sorting and packing the rice, the pre processed rice is stored in silos which hold 1000 tones. The raw material inventory represents a significant portion of the total inventory.

Additional Info

- RSA has local and overseas customers. In Aus all sales are made to supermarkets and International most are also supermarkets which represent most of total sales. The sales to Aus are in AUD, and sales to U.S. are in USD. The increased sales in 2020 could be due to panic buying. The sales in final quarter of 2020 was more subdued. Revenue is recognized as soon as the sale is made for the local customers. For international, RSA owns the goods until its delivered to customer. Revenue is recognised once delivered, which can take a month.

- RSA has a large long term loan from bank which puts restrictions on further borrowing of RSA. RSA must submit audited statements to the bank by April 30 every year until loan is paid

- They also have a short term loan. RSA is negotiating with bank to re finance this loan and its board of directors has indicated that their strong preference is to raise additional funds from the shareholders.

- RSA has 5 board director members and an audit committee including the chair who is an independent director, the chief executive officer and a non-independent director.

- Some countries that RSA imports from have limits on supply due to pandemic. RSA is also dealing with limited supply locally. which has caused increase in price of unprocessed rice and some supplier require future orders to be paid in advance for security. 2021 is indicated to be a better year as more rain is expected therefore price would drop, however it is expected to remain high internationally.

. Due to the economic climate, the audit client expects the demand for rice to decline due to falling income levels in the various Pacific island nations. There is evidence that the consumers in some of these countries are switching to more traditional root crops. The demand from the Australian consumers is expected to remain stable.

Exhibit 1. Comparative financial statement information Statement of financial position as at 30 December 2020 (Unaudited) (Audited) (Audited) 2020 2019 2018 $'000 $'000 $'000 Current Assets Cash in hand 1920 1488 1855 Payments in advance 3428 2380 1882 Trades Receivables 3804 2822 1704 Inventory 17894 13476 9876 Total current assets 27047 20166 15317 Non-current assets Property, plant and equipment net of depreciation 17407 4944 4164 Long-term receivable 4104 5483 6540 Total non-current assets 21511 10427 10704 Total assets 48558 30593 26021 Current Liabilities Trades Payables 7866 6558 5465 Short term loan 4000 3000 400 Other current liabilities 5025 4523 5000 Total current liabilities 16891 14081 10865 Non-current liabilities Long-term loan payable 18827 6102 4901 Total liabilities 35718 20183 15766 Net assets 12840 10410 10255 Shareholder's equity Share capital 3000 3000 3000 Retained earnings 9840 7410 7255 Total Shareholders' equity 12840 10410 10255 Income statement For the Year ended 30 December 2020 (Unaudited) (Audited) 2020 2019 $'000 $'000 Sales (Net) 35239 30726 Cost of sales 27985 26303 Gross profit 7254 4423 (Audited) 2018 $'000 24088 19116 4972 1825 637 96 Depreciation Inventory obsolescence Marketing expenses Administrative expenses Finance Cost Total expenses 2906 581 30 1721 678 5916 1451 199 42 1601 180 3473 1363 264 4186 Profit before tax Tax expense Profit after tax 1338 468 870 238 83 155 1499 524 974 Exhibit 2: Ratio for the Industry Average Current ratio Quick ratio Debt-to-equity ratio Trades receivable turnover(days) Trade payable turnover (days) Inventory turnover Gross profit Margin Net profit Margin 2020 2.01 1.15 2.10 29.00 30.00 2.50 24.00 6.00 2019 2.03 1.01 1.95 30.00 22.00 2.80 25.00 7.50 2018 2.11 1.10 1.96 30.00 22.00 2.60 30.00 9.20 2020 2019 * 20.59 14.39 Exhibit 3: Key ratios calculated by the audit team Ratio Formula Profitability Ratios Gross profit Gross Profit 100 Sales margin Net Profit margin Profit After Tax 100 Sales Return on Assets Net Profit After Tax 100 Average Total assets Return on Equity Net profit after tax 100 Total Equity 2.47 0.50 2.20 0.55 6.78 1.49 Liquidity Ratios Current Ratio 1.4 1.43 Quick Ratio 0.34 0.31 Current Assets Current Laibilities Cash + Trades Receivable Current Laibilities Cost of Sales Average Inventory Average trades receivable 365 1.78 2.25 35 days 27 days Sales Inventory turnover ratio Trades receivable turnover (in days) Trades payable turnover (in days) Debt to Equity ratio Average Trades payable - 365 Purchases 82 days 74 days 2.78 1.93 Total Liabilities Total Equity Exhibit 1. Comparative financial statement information Statement of financial position as at 30 December 2020 (Unaudited) (Audited) (Audited) 2020 2019 2018 $'000 $'000 $'000 Current Assets Cash in hand 1920 1488 1855 Payments in advance 3428 2380 1882 Trades Receivables 3804 2822 1704 Inventory 17894 13476 9876 Total current assets 27047 20166 15317 Non-current assets Property, plant and equipment net of depreciation 17407 4944 4164 Long-term receivable 4104 5483 6540 Total non-current assets 21511 10427 10704 Total assets 48558 30593 26021 Current Liabilities Trades Payables 7866 6558 5465 Short term loan 4000 3000 400 Other current liabilities 5025 4523 5000 Total current liabilities 16891 14081 10865 Non-current liabilities Long-term loan payable 18827 6102 4901 Total liabilities 35718 20183 15766 Net assets 12840 10410 10255 Shareholder's equity Share capital 3000 3000 3000 Retained earnings 9840 7410 7255 Total Shareholders' equity 12840 10410 10255 Income statement For the Year ended 30 December 2020 (Unaudited) (Audited) 2020 2019 $'000 $'000 Sales (Net) 35239 30726 Cost of sales 27985 26303 Gross profit 7254 4423 (Audited) 2018 $'000 24088 19116 4972 1825 637 96 Depreciation Inventory obsolescence Marketing expenses Administrative expenses Finance Cost Total expenses 2906 581 30 1721 678 5916 1451 199 42 1601 180 3473 1363 264 4186 Profit before tax Tax expense Profit after tax 1338 468 870 238 83 155 1499 524 974 Exhibit 2: Ratio for the Industry Average Current ratio Quick ratio Debt-to-equity ratio Trades receivable turnover(days) Trade payable turnover (days) Inventory turnover Gross profit Margin Net profit Margin 2020 2.01 1.15 2.10 29.00 30.00 2.50 24.00 6.00 2019 2.03 1.01 1.95 30.00 22.00 2.80 25.00 7.50 2018 2.11 1.10 1.96 30.00 22.00 2.60 30.00 9.20 2020 2019 * 20.59 14.39 Exhibit 3: Key ratios calculated by the audit team Ratio Formula Profitability Ratios Gross profit Gross Profit 100 Sales margin Net Profit margin Profit After Tax 100 Sales Return on Assets Net Profit After Tax 100 Average Total assets Return on Equity Net profit after tax 100 Total Equity 2.47 0.50 2.20 0.55 6.78 1.49 Liquidity Ratios Current Ratio 1.4 1.43 Quick Ratio 0.34 0.31 Current Assets Current Laibilities Cash + Trades Receivable Current Laibilities Cost of Sales Average Inventory Average trades receivable 365 1.78 2.25 35 days 27 days Sales Inventory turnover ratio Trades receivable turnover (in days) Trades payable turnover (in days) Debt to Equity ratio Average Trades payable - 365 Purchases 82 days 74 days 2.78 1.93 Total Liabilities Total Equity