You are the audit senior of Harper & Co and you are planning the audit of two firms F & B Building Construction Co and Tech Wiz Limited for the year ended 31 December 2022.

Part A

F & B Building Construction specialises in building houses and provides a five-year building warranty to its customers. Your audit manager has held a planning meeting with the finance director. He has provided you with the following notes of his meeting and financial statement extracts.

F & B has had a difficult year; house prices have fallen and, as a result, revenue has dropped. In order to address this, management has offered significantly extended credit terms to their customers. However, demand has fallen such that there are still some completed houses in inventory where the selling price may be below cost. During the year, whilst calculating depreciation, the directors extended the useful lives of plant and machinery from three years to five years. This reduced the annual depreciation charge.

The directors need to meet a target profit before interest and taxation of $05 million in order to be paid their annual bonus. In addition, to try and improve profits, Artic changed their main material supplier to a cheaper alternative. This has resulted in some customers claiming on their building warranties for extensive repairs. To help with operating cash flow, the directors borrowed $1 million from the bank during the year. This is due for repayment at the end of 2022.

Financial statement extracts for year ended 31 December

DRAFT ACTUAL

2022 2021

$m $m

Revenue 12.5 15.0

Cost of sales (7.0) (8.0)

Gross profit 5.5 7.0

Operating expenses (5.0) (5.1)

Profit before interest and taxes 0.5 1.9

Inventory 1.9 1.4

Receivables 3.1 2.0

Cash 0.8 1.9

Trade payables 1.6 1.2

Loan 1.0 nil

Required: Using the information above:

Calculate FIVE (5) ratios, for both years, which would assist the audit senior in planning the audit. (5 marks)

Using the information provided and the ratios calculated, describe FIVE (5) audit risks and explain the auditors response to each risk in planning the audit of Artic Construction Co. (10 marks)

Explain how materiality and risk are related and integrated in the audit process. (5 marks)