Salaz Group Limited was listed on ASX in 1999, and is headquartered in Newcastle, New South Wales, Australia. The company's business focuses on manufacturing and distributing building fixtures and fittings to residential and commercial premises in Australia, New Zealand, the United Kingdom, China, and other countries. The company offers vitreous china toilet suites, basins, plastic cisterns, taps and showers, baths, kitchen sinks, laundry tubs, smart products, and bathroom accessories, as well as domestic water control valves under various brands. To expand its market in New Zealand, the Group acquired Bath & Bed Limited for consideration of NZ$107.5M on 12 November 2020. The size of the acquisition had a pervasive impact on the financial statements. The Group engaged an independent valuation expert to advise on the identification and measurement of acquired assets and liabilities, in particular determining the allocation of purchase consideration to goodwill and separately identifiable intangible assets. I On 17 June 2021, Salaz secured an additional long-term loan of $27 million with its current bank. The loan will be released in July 2021 and will be used to pay for another long-term loan that will fall due in the same month. To ensure a good availability of stock in stores and on-time delivery, Salaz must maintain a reasonable level of inventory. The inventory has a very large range of items, from very cheap (e.g. taps) to very expensive (e.g. luxury bathtubs). In the past two years, the industry has moved fast due to changes in customer preferences, new products, and fast-moving product. Many of Salaz's models have to be discontinued. Salaz generates approximately 30% of its revenue from supplying items to builders for their construction jobs at residential premises (new builds, renovations, and replacements). Builders can purchase Salaz's products on credit up to $50,000 for each construction job and pay once the job is finished. A construction job can last from a few days up to four months. For each job, the builder provides Salaz's warehouse staff with a list of items required. Items are then packed and delivered to the construction site. The delivery dockets will be given weekly to an accountant who manages inventory, invoices and payments. Each builder has a customer code number, and the same for each construction job. The New Zealand and United Kingdom markets were both impacted significantly as COVID- 19 restrictions were implemented. In response to the lockdown restrictions in the United Kingdom and New Zealand, 98 staff were retrenched during those periods. However, Salaz grew share in the United Kingdom and maintained share in New Zealand, and the management is confident of a bounce back in these markets. I The fixed remuneration of the Board and Group Executive was reduced by 20 per cent for the period 1 April 2021 to 30 June 2021. In addition, there were no short-term incentive payments for all executives for FY21 as the financial gateways were not achieved due to the weaker market activity and the negative impact of the pandemic on revenue and earnings for the Group. Overall, despite the economic downturn due to COVID, the management believes that the company will remain well capitalised to manage through the current challenging conditions, continue to generate strong operating cashflow, and drive growth through new and smart products and good management. Financial Information: As at 30 June 2021 In thousands of AUD Profit or loss Account OPERATIONS Sales revenue Cost of sales Gross profit Other income Selling expenses Administrative expenses Other expenses Estimated 30-Jun-21 398,704 (237,432) 161,272 (43,021) (48,780) (429) Actual 30-Jun-20 381,730 (219,015) 162,715 2,014 (52,001) (35,325) (22) Actual 30-Jun-19 358,622 (204,553) 154,069 383 (44,652) (33,295) (263) I Actual 30-Jun-18 350,437 (200,381) 150,056 361 (43,661) (31,852) (603) 34C 0 Profit or loss Account OPERATIONS Sales revenue Cost of sales Gross profit Other income Selling expenses Administrative expenses Other expenses Operating profit (excluding transaction & integration costs) Transaction & integration costs on business combination*** Operating profit Finance income Finance expenses Net financing costs Profit before tax Income tax expense Profit from operations OTHER COMPREHENSIVE INCOME Items that may be reclassified subsequently to profit or loss: Exchange differences of foreign subsidiaries, net of tax translation Cashflow hedges, net of tax Other comprehensive income not of Estimated 30-Jun-21 398,704 (237.432) 161,272 (43,021) (48,780) (429) 69,042 (8,737) 60,305 345 (6,462) (6,117) 54,188 (17,767) 36,421 (231) (1,024) (1.265) Actual 30-Jun-20 381.730 (219,015) 162,715 2,014 (52,001) (35,325) (22) 77,381 77,381 414 (4,175) (3,761) 73,620 (20.723) 52,897 (1.488) (3,086) Actual 30-Jun-19 358,622 (204,553) 154,069 383 (44,652) (33,295) (263) 76.242 76,242 374 (5,187) (4,813) 71,429 (21,290) 50,139 (168) 5,020 Actual 30-Jun-18 350,437 (200,381) 150,056 361 (43,661) (31,852) (603) 74,301 74,301 575 (5,913) (5,338) 68,963 (19,712) 49,251 79 2,146 OTHER COMPREHENSIVE INCOME Items that may be reclassified subsequently to profit or loss: Exchange differences on translation of foreign subsidiaries, net of tax Cashflow hedges, net of tax Other comprehensive income, net of tax Total comprehensive income for the period (231) 1024) (1.255) 35.166 (1488) 13.086) (4.574) 48,323 (168) 5,020 4,852 54,991 79 2,146 2,225 51,476 Statement of Financial Position CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Other Assets classified as held for sale* Total current assets NON-CURRENT ASSETS Deferred tax assets Property, plant and equipment Intangible assets Other Total non-current assets Total assets CURRENT LIABILITIES Trade and other payables Employee benefits Income tax payable Provisions Derivative financial instruments Loans and borrowings Total current liabilities NON-CURRENT LIABILITIES Trade and other payables Estimated Actual 2021 2020 32,359 71,080 80,782 3,772 187,993 15,979 92,663 421,226 0 529,868 717,861 55,456 14,928 0 12,540 0 27,000 109,924 39,637 68,057 76,846 1,656 4,178 27,860 61,476 70,029 4,777 2,413 61,912 190,374 228,467 13,224 21,951 287,699 71 322,945 513,319 43,699 5,786 947 7.839 1.448 59,719 Actual 2019 3413 10.175 14,906 286,808 297 312,186 540,653 46,044 4,371 6,532 6,348 156 12,025 75,476 718 Actual 2018 36,360 65,862 72,319 2,679 177,220 16,023 10,493 314,242 286 341,044 518,264 50,783 6,528 7346 10,594 75,251 827 H NON-CURRENT LIABILITIES Trade and other payables Loans and borrowings Employee benefits Provisions Total non-current liabilities Total liabilities Net assets EQUITY Issued capital Reserves Retained earnings Total equity 148.400 72,276 102.846 323.522 433,446 284.415 307.790 (5.758) -17.617 284.4 3413 177.759 3.884 994 186,050 245.769 267,550 718 125.000 4.427 1,631 131,776 207,252 333,401 307,790 307.790 (1,289) 4.451 -38.951 267.550 21.160 333,401 827 112,000 7,316 2267 122,410 197,661 320,603 307,838 (334) 13,099 320,603 T Requirements Assume you are one of the audit team members who will conduct the financial report audit - year ending 30 June 2021 - for Salaz. Using the company's information given above, prepare a report dated June 8, 2021 for the audit manager outlining the audit plan. As it is the beginning of the audit do not prepare a final audit report/opinion. The report should cover the following areas under the suggested headings: 1. Risk Assessment From the background and financial information given above: identify and explain four (4) potential HIGH risks, including BOTH inherent[risk and control risk (doesn't matter how many of each). for each risk listed, identify the type of risk (inherent risk or control risk), and the associated financial accounts and key assertions that would be affected. Please use the following table to present your answers: Potential risk identified - (a) state type of risk, (b) description with information from case study 2. Analytical Procedures Accounts Assertions CE FRUMU 2. Analytical Procedures As part of the risk assessment phase, you have to conduct analytical procedures: Based on the financial information given above, conduct analytical procedures using common-size analysis and any other information that are relevant and useful for your risk assessment. Use figures from financial year ended 30 June 2020 as the base year. Discuss the results of the analytical procedures by outlining four (4) potential problem areas (that is, where possible material misstatements in the financial reports exist), and any other special concerns (for example, going concern). Specify the account balances and related assertions that would require attention in the audit. For each problem identified, you must use your quantitative analysis (with detailed calculations) to support your argument. Please use the following table to present your answers: Potential risk - (a) state type of risk, (b) description with data from common-size analysis Accounts Assertions R 3. Planning Materiality The audit firm dictates that one planning materiality amount is to be used for the financial statement as a whole. The planning materiality bases are as follows: Base Profit before tax Turnover Gross profit Total assets Based on the information given and your risk assessment, select the base for planning materiality that you believe is most appropriate Tand provide three reasons justifying the base you have chosen, calculate the planning materiality. (You can refer to Cloud 9 case and textbook pages 123-125 and other resources for further understanding.) Threshold (%) 5-10 0.5-1 2.0-5 0.5-1 4. Conclusion Based on the risk assessment processes and analytical procedures undertaken in the previous sections, conclude the overall level of risk, materiality of the firm and recommend the areas of audit focus. C Salaz Group Limited was listed on ASX in 1999, and is headquartered in Newcastle, New South Wales, Australia. The company's business focuses on manufacturing and distributing building fixtures and fittings to residential and commercial premises in Australia, New Zealand, the United Kingdom, China, and other countries. The company offers vitreous china toilet suites, basins, plastic cisterns, taps and showers, baths, kitchen sinks, laundry tubs, smart products, and bathroom accessories, as well as domestic water control valves under various brands. To expand its market in New Zealand, the Group acquired Bath & Bed Limited for consideration of NZ$107.5M on 12 November 2020. The size of the acquisition had a pervasive impact on the financial statements. The Group engaged an independent valuation expert to advise on the identification and measurement of acquired assets and liabilities, in particular determining the allocation of purchase consideration to goodwill and separately identifiable intangible assets. I On 17 June 2021, Salaz secured an additional long-term loan of $27 million with its current bank. The loan will be released in July 2021 and will be used to pay for another long-term loan that will fall due in the same month. To ensure a good availability of stock in stores and on-time delivery, Salaz must maintain a reasonable level of inventory. The inventory has a very large range of items, from very cheap (e.g. taps) to very expensive (e.g. luxury bathtubs). In the past two years, the industry has moved fast due to changes in customer preferences, new products, and fast-moving product. Many of Salaz's models have to be discontinued. Salaz generates approximately 30% of its revenue from supplying items to builders for their construction jobs at residential premises (new builds, renovations, and replacements). Builders can purchase Salaz's products on credit up to $50,000 for each construction job and pay once the job is finished. A construction job can last from a few days up to four months. For each job, the builder provides Salaz's warehouse staff with a list of items required. Items are then packed and delivered to the construction site. The delivery dockets will be given weekly to an accountant who manages inventory, invoices and payments. Each builder has a customer code number, and the same for each construction job. The New Zealand and United Kingdom markets were both impacted significantly as COVID- 19 restrictions were implemented. In response to the lockdown restrictions in the United Kingdom and New Zealand, 98 staff were retrenched during those periods. However, Salaz grew share in the United Kingdom and maintained share in New Zealand, and the management is confident of a bounce back in these markets. I The fixed remuneration of the Board and Group Executive was reduced by 20 per cent for the period 1 April 2021 to 30 June 2021. In addition, there were no short-term incentive payments for all executives for FY21 as the financial gateways were not achieved due to the weaker market activity and the negative impact of the pandemic on revenue and earnings for the Group. Overall, despite the economic downturn due to COVID, the management believes that the company will remain well capitalised to manage through the current challenging conditions, continue to generate strong operating cashflow, and drive growth through new and smart products and good management. Financial Information: As at 30 June 2021 In thousands of AUD Profit or loss Account OPERATIONS Sales revenue Cost of sales Gross profit Other income Selling expenses Administrative expenses Other expenses Estimated 30-Jun-21 398,704 (237,432) 161,272 (43,021) (48,780) (429) Actual 30-Jun-20 381,730 (219,015) 162,715 2,014 (52,001) (35,325) (22) Actual 30-Jun-19 358,622 (204,553) 154,069 383 (44,652) (33,295) (263) I Actual 30-Jun-18 350,437 (200,381) 150,056 361 (43,661) (31,852) (603) 34C 0 Profit or loss Account OPERATIONS Sales revenue Cost of sales Gross profit Other income Selling expenses Administrative expenses Other expenses Operating profit (excluding transaction & integration costs) Transaction & integration costs on business combination*** Operating profit Finance income Finance expenses Net financing costs Profit before tax Income tax expense Profit from operations OTHER COMPREHENSIVE INCOME Items that may be reclassified subsequently to profit or loss: Exchange differences of foreign subsidiaries, net of tax translation Cashflow hedges, net of tax Other comprehensive income not of Estimated 30-Jun-21 398,704 (237.432) 161,272 (43,021) (48,780) (429) 69,042 (8,737) 60,305 345 (6,462) (6,117) 54,188 (17,767) 36,421 (231) (1,024) (1.265) Actual 30-Jun-20 381.730 (219,015) 162,715 2,014 (52,001) (35,325) (22) 77,381 77,381 414 (4,175) (3,761) 73,620 (20.723) 52,897 (1.488) (3,086) Actual 30-Jun-19 358,622 (204,553) 154,069 383 (44,652) (33,295) (263) 76.242 76,242 374 (5,187) (4,813) 71,429 (21,290) 50,139 (168) 5,020 Actual 30-Jun-18 350,437 (200,381) 150,056 361 (43,661) (31,852) (603) 74,301 74,301 575 (5,913) (5,338) 68,963 (19,712) 49,251 79 2,146 OTHER COMPREHENSIVE INCOME Items that may be reclassified subsequently to profit or loss: Exchange differences on translation of foreign subsidiaries, net of tax Cashflow hedges, net of tax Other comprehensive income, net of tax Total comprehensive income for the period (231) 1024) (1.255) 35.166 (1488) 13.086) (4.574) 48,323 (168) 5,020 4,852 54,991 79 2,146 2,225 51,476 Statement of Financial Position CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Other Assets classified as held for sale* Total current assets NON-CURRENT ASSETS Deferred tax assets Property, plant and equipment Intangible assets Other Total non-current assets Total assets CURRENT LIABILITIES Trade and other payables Employee benefits Income tax payable Provisions Derivative financial instruments Loans and borrowings Total current liabilities NON-CURRENT LIABILITIES Trade and other payables Estimated Actual 2021 2020 32,359 71,080 80,782 3,772 187,993 15,979 92,663 421,226 0 529,868 717,861 55,456 14,928 0 12,540 0 27,000 109,924 39,637 68,057 76,846 1,656 4,178 27,860 61,476 70,029 4,777 2,413 61,912 190,374 228,467 13,224 21,951 287,699 71 322,945 513,319 43,699 5,786 947 7.839 1.448 59,719 Actual 2019 3413 10.175 14,906 286,808 297 312,186 540,653 46,044 4,371 6,532 6,348 156 12,025 75,476 718 Actual 2018 36,360 65,862 72,319 2,679 177,220 16,023 10,493 314,242 286 341,044 518,264 50,783 6,528 7346 10,594 75,251 827 H NON-CURRENT LIABILITIES Trade and other payables Loans and borrowings Employee benefits Provisions Total non-current liabilities Total liabilities Net assets EQUITY Issued capital Reserves Retained earnings Total equity 148.400 72,276 102.846 323.522 433,446 284.415 307.790 (5.758) -17.617 284.4 3413 177.759 3.884 994 186,050 245.769 267,550 718 125.000 4.427 1,631 131,776 207,252 333,401 307,790 307.790 (1,289) 4.451 -38.951 267.550 21.160 333,401 827 112,000 7,316 2267 122,410 197,661 320,603 307,838 (334) 13,099 320,603 T Requirements Assume you are one of the audit team members who will conduct the financial report audit - year ending 30 June 2021 - for Salaz. Using the company's information given above, prepare a report dated June 8, 2021 for the audit manager outlining the audit plan. As it is the beginning of the audit do not prepare a final audit report/opinion. The report should cover the following areas under the suggested headings: 1. Risk Assessment From the background and financial information given above: identify and explain four (4) potential HIGH risks, including BOTH inherent[risk and control risk (doesn't matter how many of each). for each risk listed, identify the type of risk (inherent risk or control risk), and the associated financial accounts and key assertions that would be affected. Please use the following table to present your answers: Potential risk identified - (a) state type of risk, (b) description with information from case study 2. Analytical Procedures Accounts Assertions CE FRUMU 2. Analytical Procedures As part of the risk assessment phase, you have to conduct analytical procedures: Based on the financial information given above, conduct analytical procedures using common-size analysis and any other information that are relevant and useful for your risk assessment. Use figures from financial year ended 30 June 2020 as the base year. Discuss the results of the analytical procedures by outlining four (4) potential problem areas (that is, where possible material misstatements in the financial reports exist), and any other special concerns (for example, going concern). Specify the account balances and related assertions that would require attention in the audit. For each problem identified, you must use your quantitative analysis (with detailed calculations) to support your argument. Please use the following table to present your answers: Potential risk - (a) state type of risk, (b) description with data from common-size analysis Accounts Assertions R 3. Planning Materiality The audit firm dictates that one planning materiality amount is to be used for the financial statement as a whole. The planning materiality bases are as follows: Base Profit before tax Turnover Gross profit Total assets Based on the information given and your risk assessment, select the base for planning materiality that you believe is most appropriate Tand provide three reasons justifying the base you have chosen, calculate the planning materiality. (You can refer to Cloud 9 case and textbook pages 123-125 and other resources for further understanding.) Threshold (%) 5-10 0.5-1 2.0-5 0.5-1 4. Conclusion Based on the risk assessment processes and analytical procedures undertaken in the previous sections, conclude the overall level of risk, materiality of the firm and recommend the areas of audit focus. C