Question 1. Barker DeYounganalytical procedures (4%)

Barker DeYoung sells high-quality, moderately priced clothing for women and girls in 9 large regional cities across Victoria (2), NSW (4), and Queensland (3). Each of the retail outlets is run by local managers but purchasing decisions for all stores are handled by Francis Spurgeon, the Chief Operating Officer (COO) who was appointed after IDE gained a controlling stake in Barker DeYoung.

The industry has always been competitive but the drought (particularly in NSW and Queensland) and COVID-19 (particularly in Victoria) has placed added pressure on the business over the past 18 months, with Barker DeYoung heavily dependent on its summer range for a disproportionate share of its sales and profits. Francis Spurgeon is constantly monitoring cash flow and negotiating with suppliers about payment terms and with banks about interest rates and extensions of credit.

A major long-term debt is due for repayment 2 months after the end of the 30 June financial year, but Francis is having trouble obtaining approval from Barker DeYoungs current bank for a renewal of the debt for a further two-year term. After their historic lows, interest rates are just beginning to increase again, adding at least 1.5% to the rate for the new debt if it is approved. The seasonality of the business means that inventory levels fluctuate considerably. On 30 June Francis placed pre-paid orders for the summer range with the goods due to start arriving in retail outlets by August.

Required

Your Audit Senior, Sally Neilson has been given the task of assessing the liquidity and solvency of Barker DeYoung. In your discussion with Sally:

1. identify the liquidity and solvency issues that Barker DeYoung faces. Explain the likely impact of each issue on the usual liquidity and solvency ratios.
2. advise her about the audit risks for Barker DeYoung and suggest how she could take these into account in the audit plan.