Part B Report Background Sportastic is an Australian listed company producing luxury, high-tech and specialised sport shoes. The company receives its stock from production suppliers in China and distributes its products in Australia. The company has consistently maintained its profit after tax rate at around 10% annually up to the year ended June 2021, providing shareholders with a consistent dividend stream. To stay competitive in the industry, from August 2020 the company launched a new model, where the lower mould can automatically adjust itself to avoid foot injury. The company has already made a substantial investment acquiring assets for this new model. While this new model has a short three-year lifecycle, the board of directors have been convinced that the new product will help to increase revenues by 10% and maintain the profit rate. To finance the new product investment, the company borrowed an additional $4 000 000 in September 2020 for three years. In addition, a long-term loan of $5 000 000 is due in August, 2021. Production of the new model has been undertaken by the current suppliers in China. The new model was released to the Australian market in January 2021. Significant marketing costs to promote the new product, followed by an ongoing advertising campaign, have resulted in a large increase in promotional expense. Based on actual figures for the first six months ended 31 December 2020, the company released to the public a forecast of a 10% profit after tax rate for the year ended 30 June, 2021. As advised by management, turnover has not been impacted by COVID lockdowns due to strong demands from online sales. The sporting product industry has become quite competitive since 2019, particularly with new large international players from the US and France entering the Australian market, offering high-tech shoes at very affordable prices. While the new Sportastic product generated a high level of revenues since being released, there has been an increase in product returns due to technical problems and an increase in negative feedback from customers. In addition, there have been issues related to poor quality control from suppliers in China. A few shipments were returned for repair. However, it has been reported that invoices for these shipments were fully paid. Sportastic pays its suppliers in USD, and there has been a sensitive fluctuation of exchange rates between AUD and USD due to market uncertainties, particularly in light of the trade disputes between Australia and China. In the last nine months, there have been issues reported related to the process of handling customer returns and the unusual high amount of product returns recorded. For products having technical issues, customers are allowed to return the faulty item to a store within 12 months. Store staff can then write off the item returned and provide customers with a new item. Most store staff are young and employed on a casual basis, often moving on after a year or two. The company is using a perpetual inventory system, where all stock movements are captured and current balance of stock is always available. Stocktakes are conducted annually, at the end of the financial year.

Financial Information: Estimated Actual Actual Account 30-Jun 30-Jun 30-Jun 2021 2020 2019 Sales Revenue 157,309,796 143,008,906 135,425,100 Product returns -7,078,941 -2,574,160 - 2,708,502 FX Gain/Loss 805,041 -11,230 120,301 Other Revenue 4,460,400 1,001,062 712,356 Total revenue 155,496,296 141,424,578 133,549,255 COS 83,374,192 81,515,076 78,546,558 Salaries expenses 28,315,763 21,451,336 20,313,765 Administration expenses 11,011,686 10,010,623 8,125,506 Selling expenses 7,865,490 5,720,356 5,417,004 Borrowing Costs 3,845,700 3,311,423 2,945,001 Total expenses 134,412,831 122,008,815 115,347,834 Profit before income tax 21,083,466 19,415,763 18,201,421 Income Tax expense 5,270,866 5,048,098 4,550,355 Profit after income tax 15,812,599 14,367,665 13,651,066 Current assets Cash 10,650,120 12,061,680 10,575,150 Accounts Receivable 21,845,000 20,580,400 18,757,824 Inventory 16,102,457 13,254,785 12,540,125 Total current assets 48,597,577 45,896,865 41,873,099 Non-current assets Property, plant and equipment 25,140,124 19,250,123 18,600,825 Intangible assets 9,845,145 7,420,154 7,543,500 Total non-current assets 34,985,269 26,670,277 26,144,325 Total assets 83,582,846 72,567,142 68,017,424 Current Liabilities Accounts Payable 22,564,012 20,156,000 19,875,050 Interest Bearing Liabilities 7,500,000 6,500,000 8,500,000 Total current liabilities 30,064,012 26,656,000 28,375,050 Non-current liabilities Deferred tax liabilities 1,400,451 2,650,041 2,580,147 Interest-bearing liabilities 22,000,000 18,000,000 16,500,000 Total non-current liabilities 23,400,451 20,650,041 19,080,147 Total liabilities 53,464,463 47,306,041 47,455,197 Equity 30,118,383 25,261,101 20,562,227

Requirements Assume you are one of the audit team members who will conduct the financial report audit year ending 30 June 2021 for Sportastic. Using the companys information given above, prepare a report dated June 15, 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 information given above: identify and explain three (3) potential HIGH inherent risks. For each risk listed, identify the associated financial accounts and key assertions that would be affected. Please use the following table to present your answers: Potential risk description Accounts Assertions identify and explain three (3) potential HIGH internal control weaknesses (control risks). For each weakness, identify the associated financial accounts and assertions, and suggest controls that can be implemented to prevent and detect potential errors. Please use the following table to present your answers: Control weakness Accounts Assertions Transaction level internal control Please note: the risk given must be key and related to the clients characteristics/situation.

2. Planning Materiality The audit firm dictates that one planning materiality amount (and percentage if necessary) is to be used for the financial statement as a whole. The planning materiality bases are as follows: Base Threshold (%) 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 and suggest the planning materiality (amount and percentage) that you would use for the client. (You can refer to the Grant Thornton program and textbook pages 106-107 and other resources for further understanding.)

3. Analytical Procedures As part of the risk assessment phase, you must conduct analytical procedures: - Based on the financial information given above, conduct analytical procedures using simple comparison and common-size analysis. - Using the planning material set out above, 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), whether these areas are consistent with the risks identified above, and any other areas of concerns. For each potential problem area, specify the account balances and related assertions that would require attention in the audit. Please note: for each problem identified, you must use your quantitative analysis (with detailed calculations) to support your argument. 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.