Question
You are auditing the financial statements of Flummings Limited (FL) for the year ended 30 June 2021. FL owns and operates a number of retail
You are auditing the financial statements of Flummings Limited (FL) for the year ended 30 June 2021. FL owns and operates a number of retail hardware stores and has several product lines: timber, plumbing & electrical, and tools. Tests of controls have confirmed your original control assessment. Your audit programme now requires you to undertake substantive analytical review procedures on selected income statement items. Anything above $10,000 is regarded as material. Below is an extract from the income statement for the 2 years ended 30 June 2020 and 2021:
2021 ($000) | 2020 ($000) | |
Sales | 3,098 | 2,292 |
Cost of sales | 1,864 | 1,452 |
Gross Profit | 1,234 | 840 |
Expenses | ||
Wages | 648 | 560 |
Rent | 230 | 230 |
Depreciation | 46 | 40 |
Interest | 33 | 35 |
Other expenses | 167 | 125 |
Profit/(loss) before tax | 110 | (150) |
Your enquiries establish the following further information:
- Sales summary and analysis of sales across the three product classes:
Standard gross profit | 2021 ($000) | 2020 ($000) | |
Timber | 30% | 660 | 492 |
Plumbing & Electrical | 30% | 1,340 | 1,120 |
Tools | 40% | 1,098 | 680 |
3,098 | 2,292 |
- Since the company's inception it has employed 5 staff. However, this fell to 4 on 1 January 2021 after one staff member resigned. On 1 July 2020, all staff members were given a 10% pay rise.
- As at 1 July 2020, the company had a $300,000 long term interest-only loan with Westpac with a fixed interest rate of 10%. Being interest-only, the company could choose when to make principal repayments. A $40,000 lump-sum principal repayment was made on 31 December 2020. On 1 October 2020 the company obtained a second loan from Westpac for $50,000. This is a variable rate interest-only loan and the average interest rate over the remainder of the financial year was 13%. No repayments were made on the second loan during the year ended 30 June 2021.
REQUIRED:
Perform substantive analytical review procedures on the gross profit, wages, and interest items in the income statement for the year ending 30 June 2021 by comparing your expectation for each of these items with corresponding recorded amounts. Clearly state your conclusion about each of the three items. Where relevant, indicate what further procedures and information would be required in order to conclude that each of the items is fairly stated. Show all workings and state any assumptions you have made.
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