Uncle Sam's Yankee Diner Ltd is a chain of American themed fast food restaurants. It is headquartered in Sydney and has 27 restaurants throughout eastern Australia. All the restaurants are company owned. The company employs ten staff at the company headquarters and each restaurant has a full-time manager and three deputy managers. The rest of the work force consists of an average of 300 casual staff; mostly aged between sixteen and twenty years. As part of your audit planning for the year ended 10th September 2021, you have obtained the following information from the company's accounting system. 10th September 2020 10th September 2021 (unaudited) (audited) Sales $27,142,000 $24,327,000 Payroll Expense $12,872,000 $12,651,000 Interest Expense $500,000 $500,000 Other Expenses $12,616,000 $10,671,000 Profit Before Tax $1,154,000 $505,000 Profit After Tax $700,000 $300,000 Cash $45,000 $320,000 $730,000 S645,000 $5,123,000 $4,682,000 Inventory Property Plant & Equipment Accounts Payable Bank Loan $865,000 $432,000 $2,400,000 $2,700,000 Current Ratio 1.02 2.41 Net Profit Margin 2.58% 1.239 You have also gathered the following additional information. i. The company opened four new restaurants in October 2020. ii. On October 5th, 2020, the Fair Work Commission approved a 2.5% pay increase for workers covered by the Fast Food Award 2010. iii. Examination of bank statements have shown a large increase in payroll expense during the last two weeks of September 2021. The company has a 56 million twenty-year bank loan. Annual payments of $800,000, consisting of $500,000 in interest and $300,000 of principal, are due on 9th September each year. IV. 9. Based on the evidence provided, which of the following statements about Uncle Sam's Yankee Diner Ltd is true? The $300,000 fall in the bank loan when the cash balance has declined to $45,000 suggests that the bank loan is undervalued. The rise in the net profit margin from 1.23% to 2.58% is due to the opening of the three new restaurants. The fact that payroll expense has only increased by 1.7% when the casual workers were awarded a 2.5% increase by the Fair Work Commission and four new stores were opened indicates that payroll expense is understated. The fact that sales have increased by 11.6% while payroll expense has only increased by 1.7% indicates that sales are overstated. 10. Based on the evidence provided, which of the following statements about Uncle Sam's Yankee Diner Ltd is false? The company has delayed paying its casual staff at the end of the 2020 - 21 financial year so that it could make the loan repayment on 9th September 2021. The company has run down its cash balance and has delayed paying its creditors so that it could make the loan repayment on 9th September 2021. The company is having trouble paying its debts. The rise in the inventory and accounts payable balance indicates that the company is struggling to sell its inventory so it cannot generate enough cash to pay its creditors. 11. Using the above information, upon which accounts should the auditor concentrate audit work (based on which represents the highest risk)? Existence of Accounts Payable O Occurrence of Sales O Cut-Off of Payroll Expense O Accuracy, Valuation and Allocation of the Bank Loan 12. At what level would you set planning materiality of Uncle Sam's Yankee Diner Ltd Oa) $60,000 Ob) $40,000 Oc) $20,000 Od) $90,000
