Part B - Report Background Salaz Group Limited was listed on ASX in 1999, and is headquartered in Newcastle, New South Wales, Australia. The company's business focuses on manufacturing and distributing building fixtures and fittings to residential and commercial premises in Australia, New Zealand, the United Kingdom, China, and other countries. The company offers vitreous china toilet suites, basins, plastic cisterns, taps and showers, baths, kitchen sinks, laundry tubs, smart products, and bathroom accessories, as well as domestic water control valves under various brands. To expand its market in New Zealand, the Group acquired Bath & Bed Limited for consideration of NZ$107.5M on 12 November 2020. The size of the acquisition had a pervasive impact on the financial statements. The Group engaged an independent valuation expert to advise on the identification and measurement of acquired assets and liabilities, in particular determining the allocation of purchase consideration to goodwill and separately identifiable intangible assets. On 17 June 2021, Salaz secured an additional long-term loan of $27 million with its current bank. The loan will be released in July 2021 and will be used to pay for another long-term loan that will fall due in the same month. To ensure a good availability of stock in stores and on-time delivery, Salaz must maintain a reasonable level of inventory. The inventory has a very large range of items, from very cheap (e.g. taps) to very expensive (e.g. luxury bathtubs). In the past two years, the industry has moved fast due to changes in customer preferences, new products, and fast-moving product. Many of Salaz's models have to be discontinued. Salaz generates approximately 30% of its revenue from supplying items to builders for their construction jobs at residential premises (new builds, renovations, and replacements). Builders can purchase Salaz's products on credit up to $50,000 for each construction job and pay once the job is finished. A construction job can last from a few days up to four months. For each job, the builder provides Salaz's warehouse staff with a list of items required. Items are then packed and delivered to the construction site. The delivery dockets will be given weekly to an accountant who manages inventory, invoices and payments. Each builder has a customer code number, and the same for each construction job. The New Zealand and United Kingdom markets were both impacted significantly as COVID- 19 restrictions were implemented. In response to the lockdown restrictions in the United Kingdom and New Zealand, 98 staff were retrenched during those periods. However, Salaz grew share in the United Kingdom and maintained share in New Zealand, and the management is confident of a bounce back in these markets. The fixed remuneration of the Board and Group Executive was reduced by 20 per cent for the period 1 April 2021 to 30 June 2021. In addition, there were no short-term incentive payments for all executives for FY21 as the financial gateways were not achieved due to the weaker market activity and the negative impact of the pandemic on revenue and earnings for the Group. Overall, despite the economic downturn due to COVID, the management believes that the company will remain well capitalised to manage through the current challenging conditions, continue to generate strong operating cashflow, and drive growth through new and smart products and good management. Financial Information: As at 30 June 2021 In thousands of AUD Profit or loss Estimated Account 30-Jun-21 Actual 30-Jun-20 Actual 30-Jun-19 Actual 30-Jun-18 OPERATIONS 398,704 381,730 358,622 350,437 Sales revenue Cost of sales (237,432) (219,015) (204,553) (200,381) Gross profit Other income Selling expenses 161,272 162,715 154,069 150,056 2,014 383 361 (43,021) (52,001) (44,652) (43,661) Administrative expenses (48,780) (35,325) (33,295) (31,852) Other expenses (429) (22) (263) (603) Operating profit (excluding 69,042 77,381 76,242 74,301 transaction & integration costs) Transaction & integration costs on (8,737) business combination*** Operating profit 60,305 77,381 76,242 74,301 Finance income 345 414 374 575 Finance expenses (6,462) (4,175) (5,187) (5,913) Net financing costs (6,117) (3,761) (4,813) (5,338) Profit before tax 54,188 73,620 71,429 68,963 Income tax expense (17,767) (20,723) (21,290) (19,712) 36,421 52,897 50,139 49,251 Profit from operations OTHER COMPREHENSIVE INCOME Items that may be reclassified subsequently to profit or loss: Exchange differences on translation of foreign subsidiaries, net of tax (231) (1,488) (168) 79 Cashflow hedges, net of tax (1,024) (3,086) 5,020 2,146 Other comprehensive income, net of (1,255) (4,574) 4,852 2,225 tax Total comprehensive income for 35,166 48,323 54,991 51,476 the period The fixed remuneration of the Board and Group Executive was reduced by 20 per cent for the period 1 April 2021 to 30 June 2021. In addition, there were no short-term incentive payments for all executives for FY21 as the financial gateways were not achieved due to the weaker market activity and the negative impact of the pandemic on revenue and earnings for the Group. Overall, despite the economic downturn due to COVID, the management believes that the company will remain well capitalised to manage through the current challenging conditions, continue to generate strong operating cashflow, and drive growth through new and smart products and good management. Financial Information: As at 30 June 2021 In thousands of AUD Profit or loss Estimated Account 30-Jun-21 Actual 30-Jun-20 Actual 30-Jun-19 Actual 30-Jun-18 OPERATIONS 398,704 381,730 358,622 350,437 Sales revenue Cost of sales (237,432) (219,015) (204,553) (200,381) Gross profit Other income Selling expenses 161,272 162,715 154,069 150,056 2,014 383 361 (43,021) (52,001) (44,652) (43,661) Administrative expenses (48,780) (35,325) (33,295) (31,852) Other expenses (429) (22) (263) (603) Operating profit (excluding 69,042 77,381 76,242 74,301 transaction & integration costs) Transaction & integration costs on (8,737) business combination*** Operating profit 60,305 77,381 76,242 74,301 Finance income 345 414 374 575 Finance expenses (6,462) (4,175) (5,187) (5,913) Net financing costs (6,117) (3,761) (4,813) (5,338) Profit before tax 54,188 73,620 71,429 68,963 Income tax expense (17,767) (20,723) (21,290) (19,712) 36,421 52,897 50,139 49,251 Profit from operations OTHER COMPREHENSIVE INCOME Items that may be reclassified subsequently to profit or loss: Exchange differences on translation (231) (1,488) (168) 79 of foreign subsidiaries, net of tax Cashflow hedges, net of tax (1,024) (3,086) 5,020 2,146 Other comprehensive income, net of (1,255) (4,574) 4,852 2,225 tax Total comprehensive income for 35,166 48,323 54,991 51,476 the period Requirements Assume you are one of the audit team members who will conduct the financial report audit- year ending 30 June 2021 for Salaz. Using the company's information given above, prepare a report dated June 8, 2021 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 four (4) 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: Potential risk identified - (a) state type of risk, (b) description with information from case study Accounts Assertions 2. Analytical Procedures As part of the risk assessment phase, you have to conduct analytical procedures: Based on the financial information given above, conduct analytical procedures using common-size analysis and any other information that are relevant and useful for your risk assessment. Use figures from financial year ended 30 June 2020 as the base year. - Discuss the results of the analytical procedures by outlining four (4) 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 attention in the audit. For each problem identified, you must use your quantitative analysis (with detailed calculations) to support your argument. Please use the following table to present your answers: Potential risk (a) state type of risk, (b) description with data from common-size analysis Accounts Assertions 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: Threshold (%) Base Profit before tax 5-10 Turnover 0.5-1 Gross profit 2.0-5 Total assets 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