QUESTION 3 (a) You are the audit senior of Rhino and Co and you are planning the audit of Kangaroo Construction Co (Kangaroo) for the year ended 31 march 2016. Kangaroo specialises in building houses and provides a five-year building warranty to its customers. Your audit manager has held a planning meeting with the finance director. He has provided you with the following notes of his meeting and financial statement extracts: Kangaroo has had a difficult year; house prices have fallen and, as a result, revenue has dropped. In order to address this, management has offered significantly extended credit terms to their customers. However, demand has fallen such that there are still some completed houses in inventory where the selling price may be below cost. During the year, whilst calculating depreciation the directors extended the useful lives of plant and machinery from three years to five years. This reduced the annual depreciation charged. The directors need to meet a target profit before interest and taxation of M0.5 million in order to be paid their annual bonus. In addition, to try and improve profits. Kangaroo changed their main material supplier to a chapter alternative. This has resulted in some customers claiming on their building warranties for extensive repairs. To help with operating cash flow, the directors, borrowed M1 million from the bank during the year. This is due for repayment at the end of 2016. Financial statement extracts for year ended 31 March DRAFT ACTUAL 2016 2015 M'm M'm Revenue 12.5 15.0 Cost of sales (7.0) (8.0) Gross profit 5.5 7.0 Operating expenses (5.0) (5.1) Profit before interest and taxation 0.5 1.9 1.9 1.4 Inventory 3.1 2.0 Receivables 0.8 1.9 Cash 1.6 1.2 Trade payables 1.0 Loan Required: Page 7 of 8 QUESTION 3 (a) You are the audit senior of Rhino and Co and you are planning the audit of Kangaroo Construction Co (Kangaroo) for the year ended 31 march 2016. Kangaroo specialises in building houses and provides a five-year building warranty to its customers. Your audit manager has held a planning meeting with the finance director. He has provided you with the following notes of his meeting and financial statement extracts: Kangaroo has had a difficult year; house prices have fallen and, as a result, revenue has dropped. In order to address this, management has offered significantly extended credit terms to their customers. However, demand has fallen such that there are still some completed houses in inventory where the selling price may be below cost. During the year, whilst calculating depreciation the directors extended the useful lives of plant and machinery from three years to five years. This reduced the annual depreciation charged. The directors need to meet a target profit before interest and taxation of M0.5 million in order to be paid their annual bonus. In addition, to try and improve profits. Kangaroo changed their main material supplier to a chapter alternative. This has resulted in some customers claiming on their building warranties for extensive repairs. To help with operating cash flow, the directors, borrowed M1 million from the bank during the year. This is due for repayment at the end of 2016. Financial statement extracts for year ended 31 March DRAFT ACTUAL 2016 2015 M'm M'm Revenue 12.5 15.0 Cost of sales (7.0) (8.0) Gross profit 5.5 7.0 Operating expenses (5.0) (5.1) Profit before interest and taxation 0.5 1.9 1.9 1.4 Inventory 3.1 2.0 Receivables 0.8 1.9 Cash 1.6 1.2 Trade payables 1.0 Loan Required: Page 7 of 8