Shades Ltd

You are planning the audit of Shades Ltd for the year ending 30 June 20X9. The principal

activities of the company are the manufacture and distribution of a range of window blind

systems and of the component parts for window blinds. Approximately 50% of revenue is

generated from overseas customers.

During your preparation for the planning meeting with the finance director, the following

matters have been highlighted as significant.

Operating results

The company has had a successful year to date with revenue, gross and operating margins

up on the previous year

10 months to

30 April 20X9

10 months to

30 April 20X8

Year to

30 June 20X8

'000 '000 '000

Revenue 22,656 19,597 22,557

Cost of sales 13,367 12,472 14,313

Gross profit 9,289 7,125 8,244

Operating expenses 4,531 4,115 4,732

Operating profit 4,758 3,010 3,512

Gross profit margin 41% 36% 37%

Operating profit margin 21% 15% 16%

Inventories at 30 April 20X9 were 4.3 million compared with 3.6 million at 30 April 20X8

and 3.4 million at 30 June 20X8.

New computer system

During the year the company replaced its accounting software with a fully integrated

standard package modified by the supplier to the company's requirements.

Incentive scheme

During the year the company introduced an incentive scheme under which the executive

directors are entitled to a bonus based on pre-tax profits. The bonus will be paid thirty days

after the audited accounts are available.

Requirement

In respect of the above, identify and explain the potential audit risks and indicate the matters

you would discuss with the finance director at your planning meeting.

Four groups to select these areas of discussion:

Operating results

Inventories

New computer system

Incentive scheme