question 1

111. Planning You are the auditor of Koscki Ltd. a distributor of hiking equipment. Using the company's nancial report, its budget for the year under review and industry benchmarks, as well as your understanding of the entity, you have compiled the following information: II Koscki operates in a low gross margin environment, meaning that large volumes are required to cover overhead costs and generate profits. It also means that overheads need to be kept under control to ensure that a net profit results from its operations. Financial gearing also plays a role in keeping interest costs down and maintaining a margin for solvency during economic downturns. o The company planned to improve its working capital management by reducing levels of inventory and accounts receivable. It budgeted for a drop In gearing levels, thus indicating that it expected to produce a healthy cash flow to enable It to do so. M 52:: mm a. List the two ratios from the table above that the auditor would be most interested In when planning the audit of Koscki. Explain why you chose these ratios. b. For each ratio you listed in part {a} indicate what general ledger account is primarily affected. c. For each ratio you iisted in part {a} indicate what assertion is most at risk. Expioin why you believe this assertion is at risk. Please use the following table to structure your answer: Industry 1.90 0.73 5.35 0.43 31.20 40.00 3.90 (a) Ratio Explanation (b) Account (c) Key Explanation balance at assertion at risk risk (2 x 1 mark) (2 x 1 mark) (2 x 1 mark) (2 x 1 mark) (2 x 1 mark)