You are the audit manager of a medium-sized firm and have just received a package from Rachel Jones, the financial controller of Telechubbies Ltd, a toy manufacturer. This is your firms first year as auditor of Telechubbies. The information contained in the statement of financial position and income statement overleaf was prepared for a board meeting and Rachel felt it might be useful to you in preparation of the forthcoming audit for the year ended 31 December 2020.

During a brief telephone call with Rachel, you made the following notes:

1. One of the conditions of the long-term loan is that the company is not to exceed a debt to-equity ratio of 2:1 at any time. The loan is reviewed each year on 31 December.
2. Provision against inventory obsolescence is provided for at a flat rate of 10%. The amount provided in previous years was 20%. Rachel said that the company believes it has been overly conservative in previous years and 5% is a more realistic level, given the nature of its products.
3. The long-term loan receivable is from a company involved in the development and production of computer software. It is owned by one of the directors.

Required

1. Suggest possible sources of information that would help you gather sufficient knowledge of the business to perform the audit of Telechubbies Ltd.
2. Perform preliminary analytical procedures using the information provided. Identify the key areas that would require special attention during the audit of the 31 December 2020 financial statements
3. Outline ways in which the analytical procedures performed could be extended using the information collected in (a).
4. Suggest ways of using analytical procedures as a substantive test during the audit of Telechubbies Ltd.

31/12/2020 31/12/2019 31/12/2018 Statement of financial position $'000 $'000 $'000 Current assets Cash 1,586 1.743 830 16,498 11,731 7,197 Inventory Trade receivables 12.134 10.700 9,323 Total current assets 30,218 24,174 17,350 Non-current assets Property, plant and equipment Long-term loan receivable 14,606 12.840 9,572 5.200 3.600 3,300 Total non-current assets 19.806 16,440 12,872 Total assets 50,024 40,614 30,222 Current liabilities 9.012 6,288 2,021 Trade payables Provisions 4,875 3,821 4,577 Total current liabilities 13,887 10,109 6,598 Non-current liabilities Long-term loan payable 20,000 16,000 12.000 Total liabilities 33,887 26.109 18,598 Net assets 16,137 14,505 11,624 2.000 2.000 2.000 Shareholders' equity Share capital Retained earnings Total shareholders' equity 14,137 12,505 9,624 16,137 14,505 11,624 2020 2019 2018 Income statement $'000 $'000 $'000 Sales 72,945 74,927 89.735 Cost of sales 51.840 51,765 63,066 21,105 23,162 26,669 5,595 4.332 2,796 1.650 2.346 1.439 1,345 1,980 2,548 Gross profit Depreciation Inventory obsolescence Marketing expense Administration expense Interest expense Total expenses Profit before tax 8,925 8,727 11,516 1,040 1.275 1.140 18,555 18,660 19.439 2,550 4,502 7.230 918 1,621 2.386 Tax expense Profit after tax 1.632 2.881 4.844 31/12/2020 31/12/2019 31/12/2018 Statement of financial position $'000 $'000 $'000 Current assets Cash 1,586 1.743 830 16,498 11,731 7,197 Inventory Trade receivables 12.134 10.700 9,323 Total current assets 30,218 24,174 17,350 Non-current assets Property, plant and equipment Long-term loan receivable 14,606 12.840 9,572 5.200 3.600 3,300 Total non-current assets 19.806 16,440 12,872 Total assets 50,024 40,614 30,222 Current liabilities 9.012 6,288 2,021 Trade payables Provisions 4,875 3,821 4,577 Total current liabilities 13,887 10,109 6,598 Non-current liabilities Long-term loan payable 20,000 16,000 12.000 Total liabilities 33,887 26.109 18,598 Net assets 16,137 14,505 11,624 2.000 2.000 2.000 Shareholders' equity Share capital Retained earnings Total shareholders' equity 14,137 12,505 9,624 16,137 14,505 11,624 2020 2019 2018 Income statement $'000 $'000 $'000 Sales 72,945 74,927 89.735 Cost of sales 51.840 51,765 63,066 21,105 23,162 26,669 5,595 4.332 2,796 1.650 2.346 1.439 1,345 1,980 2,548 Gross profit Depreciation Inventory obsolescence Marketing expense Administration expense Interest expense Total expenses Profit before tax 8,925 8,727 11,516 1,040 1.275 1.140 18,555 18,660 19.439 2,550 4,502 7.230 918 1,621 2.386 Tax expense Profit after tax 1.632 2.881 4.844