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.

SCENARIO 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 firm's 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. 31/12/2020 31/12/2019 31/12/2018 $'000 $'000 $'000 Statement of financial position Current assets Cash Inventory Trade receivables 1,586 16,498 12,134 30,218 1,743 11,731 10,700 24,174 830 7,197 9,323 17,350 Total current assets Non-current assets Property, plant and equipment Long-term loan receivable Total non-current assets 14,606 5,200 19,806 50,024 12,840 3,600 16,440 40,614 9,572 3,300 12,872 30,222 Total assets Current liabilities Trade payables Provisions 9,012 4,875 13,887 6,288 3,821 10,109 2,021 4,577 6,598 Total current liabilities Non-current liabilities Long-term loan payable Total liabilities 20,000 33,887 16,137 16,000 26,109 14,505 12,000 18,598 11,624 Net assets Shareholders' equity Share capital Retained earnings Total shareholders' equity 2,000 14,137 16,137 2,000 12,505 14,505 2,000 9,624 11,624 Income statement Sales Cost of sales Gross profit Depreciation Inventory obsolescence Marketing expense Administration expense Interest expense Total expenses Profit before tax Tax expense Profit after tax 2020 $'000 72,945 51,840 21,105 5,595 1,650 1,345 8,925 1,040 18,555 2,550 918 1.632 2019 $'000 74,927 51,765 23,162 4,332 2,346 1,980 8,727 1,275 18,660 4,502 1,621 2,881 2018 $'000 89,735 63,066 26,669 2,796 1,439 2,548 11,516 1,140 19,439 7,230 2,386 4.844 Required (a) Suggest possible sources of information that would help you gather sufficient knowledge of the business to perform the audit of Telechubbies Ltd. (b) 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 (c) Outline ways in which the analytical procedures performed could be extended using the information collected in (a). (d) Suggest ways of using analytical procedures as a substantive test during the audit of Telechubbies Ltd. SCENARIO 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 firm's 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. 31/12/2020 31/12/2019 31/12/2018 $'000 $'000 $'000 Statement of financial position Current assets Cash Inventory Trade receivables 1,586 16,498 12,134 30,218 1,743 11,731 10,700 24,174 830 7,197 9,323 17,350 Total current assets Non-current assets Property, plant and equipment Long-term loan receivable Total non-current assets 14,606 5,200 19,806 50,024 12,840 3,600 16,440 40,614 9,572 3,300 12,872 30,222 Total assets Current liabilities Trade payables Provisions 9,012 4,875 13,887 6,288 3,821 10,109 2,021 4,577 6,598 Total current liabilities Non-current liabilities Long-term loan payable Total liabilities 20,000 33,887 16,137 16,000 26,109 14,505 12,000 18,598 11,624 Net assets Shareholders' equity Share capital Retained earnings Total shareholders' equity 2,000 14,137 16,137 2,000 12,505 14,505 2,000 9,624 11,624 Income statement Sales Cost of sales Gross profit Depreciation Inventory obsolescence Marketing expense Administration expense Interest expense Total expenses Profit before tax Tax expense Profit after tax 2020 $'000 72,945 51,840 21,105 5,595 1,650 1,345 8,925 1,040 18,555 2,550 918 1.632 2019 $'000 74,927 51,765 23,162 4,332 2,346 1,980 8,727 1,275 18,660 4,502 1,621 2,881 2018 $'000 89,735 63,066 26,669 2,796 1,439 2,548 11,516 1,140 19,439 7,230 2,386 4.844 Required (a) Suggest possible sources of information that would help you gather sufficient knowledge of the business to perform the audit of Telechubbies Ltd. (b) 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 (c) Outline ways in which the analytical procedures performed could be extended using the information collected in (a). (d) Suggest ways of using analytical procedures as a substantive test during the audit of Telechubbies Ltd