Mark Allocation - 10% You have been presented with the following draft financial information about Efren Bata Reyes Ltd, a very successful company that develops and licenses specialist computer software and hardware. Its non-current assets mainly consist of property, computer hardware and investments, and there have been additions to these during the year. The company is experiencing increasing competition from rival companies, most of which specialize in hardware or software, but not both. There is pressure to advertise and to cut prices. You are the audit manager. You are planning the audit and are conducting a preliminary analytical review and associated risk analysis for this client for the year ended 31 July 2021. You have been provided with a summarized draft income statement which has been produced very quickly and certain accounting ratios and percentages. You have been informed that the company accounts for research and development costs in accordance with IAS 38 Intangible Assets. Revenue Cost of Sales Gross Profit Distribution Costs Administrative Expenses Selling expenses Profit from Operations Net Interest Revenue Profit Before Tax Income Tax Expense Net Profit Dividends Paid Retained Profits INCOME STATEMENT Year ended 31 July, 2021 Year ended 31 July 2020 S'000 S'000 15,206 13,524 3,009 3,007 12.197 10,517 3.006 1,996 994 1,768 3,002 274 5.195 6,479 995 395 6,190 6,874 3,104 1,452 3,086 5,422 1,469 1,439 1,617 3,983 1.04 0.78 Accounting Ratios & Percentages Earnings per Share 0.43 Performance Ratios including the following: Gross Margin 0.80 Expenses as a percentage of revenue: Distribution Costs 0-20 Administrative Expenses 0.07 Selling Expenses 0.20 Operating Profit 0-34 0.15 0.13 0.02 0.48 Required: - a) Using the information given in the question identify THREE high risk areas for the audit and explain why they are high risk areas. b) For each high risk area identified, describe one audit procedure you would perform in response to those risks. Mark Allocation - 10% You have been presented with the following draft financial information about Efren Bata Reyes Ltd, a very successful company that develops and licenses specialist computer software and hardware. Its non-current assets mainly consist of property, computer hardware and investments, and there have been additions to these during the year. The company is experiencing increasing competition from rival companies, most of which specialize in hardware or software, but not both. There is pressure to advertise and to cut prices. You are the audit manager. You are planning the audit and are conducting a preliminary analytical review and associated risk analysis for this client for the year ended 31 July 2021. You have been provided with a summarized draft income statement which has been produced very quickly and certain accounting ratios and percentages. You have been informed that the company accounts for research and development costs in accordance with IAS 38 Intangible Assets. Revenue Cost of Sales Gross Profit Distribution Costs Administrative Expenses Selling expenses Profit from Operations Net Interest Revenue Profit Before Tax Income Tax Expense Net Profit Dividends Paid Retained Profits INCOME STATEMENT Year ended 31 July, 2021 Year ended 31 July 2020 S'000 S'000 15,206 13,524 3,009 3,007 12.197 10,517 3.006 1,996 994 1,768 3,002 274 5.195 6,479 995 395 6,190 6,874 3,104 1,452 3,086 5,422 1,469 1,439 1,617 3,983 1.04 0.78 Accounting Ratios & Percentages Earnings per Share 0.43 Performance Ratios including the following: Gross Margin 0.80 Expenses as a percentage of revenue: Distribution Costs 0-20 Administrative Expenses 0.07 Selling Expenses 0.20 Operating Profit 0-34 0.15 0.13 0.02 0.48 Required: - a) Using the information given in the question identify THREE high risk areas for the audit and explain why they are high risk areas. b) For each high risk area identified, describe one audit procedure you would perform in response to those risks
