Question One (20 Marks) You are the auditor of Speedy Electronics Ltd ("SEL"). The company is a retailer of consumer electronic goods, including smart phones, tablets, computers and peripheral items such as printers and scanners. SEL also sells televisions and home hi-fi systems and is a household name in Australia, established in the 1970's. You are currently planning your audit for the year ended 31st October 2021. Key financial information obtained from SEL's trial balance is shown below: 2021 $m (unaudited) 2020 $m (audited) Current assets Cash Trade receivables Inventories 11.0 63.9 314.5 35.9 44.0 304.6 111.1 94.4 Non-current assets Property, plant and equipment Current liabilities Trade payables 321.9 285.2 Non-current liabilities Borrowings 159.0 144.7 Total revenue Net profit after tax 1,473.1 23.8 1,583.6 45.5 In addition, you have ascertained the following information: SEL embarked on an expensive marketing campaign in July and August 2021 to attempt to increase sales to locked down consumers in Melbourne and Sydney. The campaign did not generate the sales increase anticipated by management. credit arrangements were modified in July 2021 to provide 2-year interest-free credit terms. At the same time, credit approval processes were outsourced to a credit agency. On 8th November 2021, the company signed an agreement to sell seven of their stores to a competitor for a sum of $3.4m. This is significantly below the carrying value for these properties. Net cash outflows from operations were $5.2m in 2020-2021 (inflows $73.1m in 2019-2020). SEL has significant debt finance from a lending consortium. A debt covenant requires a minimum return on assets and revenue growth. The company's return on assets is currently 4.5% (the minimum covenant requirement is 4%). In June 2021, the company terminated sponsorship arrangements with a prominent AFL football club. This has left the club facing substantial cash shortfalls and the club has lodged a claim for damages in the Supreme Court of Victoria. Lawyers acting for SEL rate the chances of an unfavourable settlement as low. The Australian dollar appreciated by 8% during the year. Required: Using the information provided above, describe five (5) significant business risks for SEL. For each risk you should also indicate the key accountote disclosure and key assertion at risk and provide a specific and practical test of detail that you would use to gather audit evidence in respect of the risk. Note, your risks must specifically relate to the information that is provided in the financial and non-financial information in the case study. There are four marks for each risk (1 for the risk, 1 for the account, 1 for the assertion and 1 for the test of detail) for a total of 20 marks Question One (20 Marks) You are the auditor of Speedy Electronics Ltd ("SEL"). The company is a retailer of consumer electronic goods, including smart phones, tablets, computers and peripheral items such as printers and scanners. SEL also sells televisions and home hi-fi systems and is a household name in Australia, established in the 1970's. You are currently planning your audit for the year ended 31st October 2021. Key financial information obtained from SEL's trial balance is shown below: 2021 $m (unaudited) 2020 $m (audited) Current assets Cash Trade receivables Inventories 11.0 63.9 314.5 35.9 44.0 304.6 111.1 94.4 Non-current assets Property, plant and equipment Current liabilities Trade payables 321.9 285.2 Non-current liabilities Borrowings 159.0 144.7 Total revenue Net profit after tax 1,473.1 23.8 1,583.6 45.5 In addition, you have ascertained the following information: SEL embarked on an expensive marketing campaign in July and August 2021 to attempt to increase sales to locked down consumers in Melbourne and Sydney. The campaign did not generate the sales increase anticipated by management. credit arrangements were modified in July 2021 to provide 2-year interest-free credit terms. At the same time, credit approval processes were outsourced to a credit agency. On 8th November 2021, the company signed an agreement to sell seven of their stores to a competitor for a sum of $3.4m. This is significantly below the carrying value for these properties. Net cash outflows from operations were $5.2m in 2020-2021 (inflows $73.1m in 2019-2020). SEL has significant debt finance from a lending consortium. A debt covenant requires a minimum return on assets and revenue growth. The company's return on assets is currently 4.5% (the minimum covenant requirement is 4%). In June 2021, the company terminated sponsorship arrangements with a prominent AFL football club. This has left the club facing substantial cash shortfalls and the club has lodged a claim for damages in the Supreme Court of Victoria. Lawyers acting for SEL rate the chances of an unfavourable settlement as low. The Australian dollar appreciated by 8% during the year. Required: Using the information provided above, describe five (5) significant business risks for SEL. For each risk you should also indicate the key accountote disclosure and key assertion at risk and provide a specific and practical test of detail that you would use to gather audit evidence in respect of the risk. Note, your risks must specifically relate to the information that is provided in the financial and non-financial information in the case study. There are four marks for each risk (1 for the risk, 1 for the account, 1 for the assertion and 1 for the test of detail) for a total of 20 marks