Section C: Answer any two questions ement and Question 2 ou are the audit senior of Wood LLP and you are planning the audit of Electronica Ltd (Electronica) onica specialises in manufacturing washing machines and la) Y ders o for the year ended 31 March 2017. Electr provides a two-yea with the finance director. statement extracts r warranty to its customers. Your audit manager has held a planning meeting He has provided you with the following notes of his meeting and financial Electronica has had a difficult year as household spending has fallen, hence revenue has dropped In order to address this, management has offered significantly extended credit terms to their custorners. However, demand has fallen such that there are still some machines 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 charge. The directors need to meet a target profit before interest and taxation of E0-5 million in order to be paid their annual bonus. In addition, to try and improve profits, Electronica changed their main material supplier to a cheaper alternative. This has resulted in more customers claiming on their warranties for repairs. To help with operating cash flow, the directors borrowed 2 million from the bank during the year. This is due for repayment at the end of 2017. Financial statement extracts for year ended 31 March DRAFT ACTUAL 2017 5m 12-5 (701 Sm 15-0 (80) Revenue Cost of sales Gross proft Operating expenses 7-0 (5-1) (50) Profit before interest and taxation 0-5 Inventory Receivables Cash Trade payables Loan 1-9 3-1 0.8 1.6 1.0 1-4 2-0 1.9 1.2 Required: Using the information above: Calculate FIVE ratios, for BOTH years, which would assist the audit senior in planning the audit; i. (10 marks) i. Using the information provided and the ratios calculated, identify and describe FIVE audit risks and explain the auditor's response to each risk in planning the audit of Electronica Ltd (10 marks) Question 2 is continued on the next page