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Question 2 (9 marks) Fab & Fit Ltd (FAF) refinanced its existing loans with National Bank and also obtained additional borrowings from them during the

Question 2 (9 marks)

Fab & Fit Ltd (FAF) refinanced its existing loans with National Bank and also obtained additional borrowings from them during the year. National Bank has included covenants in the new loan agreements stipulating that FAF must make a profit before tax in every financial year and that it must maintain a net current asset position (i.e. current assets exceed current liabilities at all times). You have been provided with an extract of FAFs financial report for the year ended 30 June 2020, which shows that FAF made a profit before tax $110,000 and had a net current asset position of $40,000.

Extract from the Statement of Financial Position

30 June 2020 $000

30 June 2019 $000

Cash and cash equivalents

200

206

Trade and other receivables

1414

1234

Inventories

684

688

Total current assets

2298

2128

Trade and other payables

(604)

(560)

Deferred revenue

(420)

(602)

Loans and borrowings

(1202)

(812)

Employee benefits

(32)

(28)

Total current liabilities

(2258)

(2002)

Net current assets

40

126

Extract from the Statement of Financial Performance

30 June 2020 $000

30 June 2019 $000

Revenue

4286

4275

Required:

From the above information provided in relation to FAF:

  1. Identify TWO key accounts that are at risk of misstatement due to fraud.
  2. For each account identified in (1) above:
  1. Provide a brief explanation as to why the account is at risk:
  2. List the key assertion where audit efforts should be concentrated; and
  3. Describe substantive tests of detail you would perform to gather sufficient appropriate audit evidence in relation to the assertion identified in (b) above.

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