Question 3 (50 marks)

Taste Sensations Pty Ltd retails quality gourmet cooking ingredients to the home kitchen and small restaurant markets, which are sourced both locally and from overseas. Recently the company has extended its product range to include ready-to-cook meals suitable for dinner parties, with customers ordering from a set menu.

The company currently has 250 store outlets of varying sizes Australia wide and has undertaken a focused marketing and promotion strategy and the acquisition of several smaller competitors over the past couple of years to expand its business. The number of cafs stocking Taste Sensations products has increased to 600. However, only 5 new cafs have been signed-up in the last year. Products are sold on consignment through these cafs. The company also owns five warehouses to service the stores and caf clients.

The companys management team is experienced, all managers having been with the company more than five years. The new finance director, who joined the company last month, is the only exception.

The company installed a new computer system in August 2015. The system was installed by a professional computer company, and the old and new systems were run parallel for three months. The new system allows each outlet to process its own stocktake results, accounts payable invoices and payments. Management has experienced no major problems with the new system to date.

Your firm, Spencer and Applebee, has acted as the auditor of Taste Sensations Pty Ltd for some years, and you are currently carrying out the planning for the 30 June 2016 audit. Taste Sensations Pty Ltd has an internal audit group that may be able to assist you with this years audit for the first time. You have also obtained the industry average ratios for 2016 and 2015.

Industry Averages
	2016	2015
Gross Profit	0.52	0.52
Net Profit	0.18	0.20
Return on Assets	0.15	0.11
Current Ratio	0.40	0.40
Days in inventory	100 days	98 days
Days in Receivable	35 days	30 days
Days in Payables	136 days	150 days
Debt to Equity Ratio	1.83	1.65
Debt to Asset Ratio	0.65	0.62

The client has provided you with their draft financial information in respect of the year ended 30 June 2016.

Taste Sensations Pty Ltd
Draft Income Statement
for the year ended 30 June 2016
		2016	2015
		$'000	$'000
Revenue
Caf
Food		75,445	76,520
Beverages		23,603	21,420
Other		9,000
		108,048	97,940
Stores
Food & beverages		203,368	189,610
Ready-to-cook range		8,560	12,932
		211,928	202,542
Total Revenue		319,976	300,482
COS		188,264	178,188
Gross profit
Caf
Food		34,770	40,270
Beverages		23,610	21,420
Other		8,730
		67,110	61,690
Stores
Food & beverages		56,312	54,528
Ready-to-cook range		4,730	5,978
		61,042	60,506
Total Gross Profit		128,152	122,196
Other revenue		6,560	3,098
		134,712	125,294
Indirect expenses
Advertising		266	370
Bad debt expense		120	110
Cleaning		2,748	2,560
Depreciation		4,210	4,196
Fees & permits		586	578
Wages		24,899	29,750
Interest		16,538	10,422
Payroll on costs		9,170	8,925
Repairs & maintenance		4,960	5,304
Security contractors		1,092	986
Total expenses		64,589	65,956
Operating profit before tax		70,123	59,338
Taste Sensations Pty Ltd
Draft Statement of Financial Position
as at 30 June 2016
		2016	2015
Notes		$'000	$'000
Current Assets
Cash		110	64
Receivables	(a)	34,858	24,690
Inventories		69,231	44,640
Total current assets		104,199	69,394
Non-current assets
Receivables	(a)	52	90
Property, Plant & Equipment	(b)	439,772	442,314
Other	(c)	93,221	70,296
Total non-current assets		533,045	512,700
Total assets		637,244	582,094
Current liabilities
Trade and other payables	(d)	310,167	300,008
Provisions		52,000	56,000
Total current liabilities		362,167	356,008
Non-current liabilities
Borrowings	(d)	44,000	44,000
Provisions		19,654	40,786
Total non-current liabilities		63,654	84,786
Total liabilities		425,821	440,794
Net Assets		211,423	141,300
Equity
Share Capital		100,000	100,000
Reserves		1200,00	120,000
Accumulated losses		(8,577)	(78,700)
Total Equity		211,423	141,300

Notes to the draft financial report
	2016	2015
	$'000	$'000
(a) Trade and other Receivables - current
Trade receivables	36,588	26,510
Provision for doubtful debts	(2,000)	(1,820)
	34,588	24,690
Trade and other receivables - non-current
Amounts owing from related parties	52	90
(a four year loan to the financial director)
(b) Property Plant and equipment
Freehold land at cost	280,082	280,082
Buildings at cost	148,380	148,380
less accumulated depreciation	(8,210)	(7,560)
Carrying amount of buildings	140,170	140,820
Plant and equipment at cost	27,280	25,612
less accumulated depreciation	(7,760)	(4,200)
Carrying amount of plant and equipment	19,520	21,412
Total property, plant and equipment	439,772	442,314
c) Other non-current
Investment project
Capital works in progress at cost	24,448
Site lease, liquor and entertainment licence	6,200
Development expenditure at cost	13,314
	43,962
Deferred tax asset	9,259	30,296
Goodwill at cost	40,000	40,000
	93,221	70,296
On the 15 January 2016, the company entered into a number of agreements for the construction and development of a restaurant and entertainment complex, and it's leasing upon completion. This is Taste Sensations Pty Ltd's first venture into the hospitality industry.
(d) Trade and other payables and borrowings - current
Bank overdraft - secured	258,487	252,768
Trade payables	51,680	47,240
	310,167	300,008
Borrowings - non-current
Secured loan	44,000	44,000
The loans and other bank accommodations are secured against the remaining property, plant and equipment. These loans are subject to a covenant agreement which specifies that the company maintain the following ratios: net tangible asset ratio which is positive a positive current ratio debt to equity ratio of 2:1
e) capital expenditure commitments
Aggregate capital expenditure contracted for 30 June 2016 for the construction and development of the restaurant and entertainment complex not provided for in the financial statements.
Payable no later than one year	57,728
Payable later than one year, not later than two years	33,432
	91,160

Required

(a) Based on the draft financial information provided, use Excel to:

a. Complete basic comparative analysis (5 marks) b. Calculate the ratios you think are necessary to undertake preliminary analytical procedures. (9 marks)

(b) Using the back ground information and your findings in (a) to complete a brief report (of approximately 750 words) for Andrew Chadwick, the audit partner of your firm, that:

a. Comments on ratio results and other comparative analysis of the 2016/2015 financials. (15 marks) b. Identifies, and justifies, three (3) account areas that are at the greater risk of misstatement, and whether those accounts are likely to be over or understated. (15 marks) c. identifies, and justifies, one (1) assertion most at risk for each of the accounts identified in b. (6 marks)