You are the audit senior on the audit of Resilient Furniture Manufacturers Pty Ltd (Resilient). Your firm has recently been appointed as the first auditors of the company.

You interview the managing director of the company to obtain background information on Resilient and to understand its business operations, its environment and system of internal control. You noted and documented the following?

• Resilientwas founded 30 years ago and makes 'grandfather' clocks (freestanding, weightdriven, pendulum clocks).
• The clocks are made in one factory (situated in the Alice Springs) and are distributed through boutique homeware and antique furniture stores.
• The clocks are advertised mainly in local newspapers and through pamphlet drops.
• In order to promote longer production runs and minimise finished goods stocks, Resilient's retail distributors are offered stock on a 'sale or return' basis.This means that the homeware and antique furniture stores are invoiced immediately, subject to a 90-day term of payment, but are allowed to return the stock up to 30 days before payment is due. Only the marketing manager has been given the authority to make these offers.
• All of Resilient's timber is obtained from offshore sources. Timber prices, which are denominated in USdollars, have risen substantially over the past two years and the recent drop in the value of the Australian dollar has caused them to rise even further.
• Timber purchases are secured by providing Resilient's suppliers with letters of credit which become duewhen the container shipment of timber arrives in Australia.
• Labour costs are high due to the craftsmanship and quality required for the production of the grandfather clocks. Skilled labour is not easy to obtain and wage rates have recently risen.
• Resilient has found it difficult to pass on these timber and labour price increases to customers.

An analysis of costs indicates that there have been material negative purchase price variances in purchases of timber over the course of the year. You have compiled the following information from Resilient's financials:

• the current ratio as at 30 June 2019 is 1.24
• the shareholders' funds to total assets ratio is 30%
• gross profit margins and net profit margins for the year ended 30 June 2019 have dropped to the level where losses are being incurred.

Resilient Furniture Manufacturers Pty Ltd (Resilient) Balance Sheet Current assets Debtors Sale or return debtors Inventory Non-current assets Properly, plant and machinery Total assets Current liabilities Trade and other creditors Bills payable Bank overdraft Current portion of bank loans Non-current liabilities Bank loans Equity Share capital Retained earnings Prot and Loss Account Gross sales Returns Net sales Cost of sales Materials Labour ' Diner Standard Cost Variances 'Purchase price Labour cost Operating prot Expenses Administration Sales and marketing Financing Net prot (loss) Tax Net prot atter tax {loss} 2019 2013 2017 743,331 774,439 335,939 433,020 499,357 429,333 . 300,035 305,013 253,373 1,531,737 1,579,140 1,351,953 1,937,404 1,993,053 1,337,593 ' 3,499,141 3,572,193 3,219,543 395,019 343,545 239,049 509,494 517,947 435,355 135,573 13,337 55,372 200,000 200,000 200,000 1,240,090 1,074,330 930,073 1,200,000 1,400,000 1,300,000 500,000 500,000 500,000 559,051 597,333 139,470 1,059,051 1,097,333 339,470 3,499,141 3,572,193 3,219,543 3,077,293 3,233,124 5,350,321 200,551 153,953 123,057 5,373,745 3,079,133 5,227,234 2,033,231 2,100,533 1,735,303 1,397,773 1,153,123 933,053 _ 513,570 503,130 433,723 3,930,329 3,759,320 3,137,390 (121,543) (49,335) (13,051) (132,319) (32,331) (23,133) (303,335) (112,193) (42,137) 1,592,252 2,207,149 2,017,333 791,913 754,203 300,341 ' 333,193 342,012 524,331 175,452 153,739 123,457 1,330,539 1,553,009 1,243,330 (33,317) 354,140 739,057 0 193,242 230,717 (33,317) 457,393 533,340