You are the auditor partner of accounting firm and are planning the audit of Howard

Ltd for the year ended 31 December 2019. Howard Ltd produces beds and has been

a client of your firm for two years; your audit manager has already had a planning

meeting with the finance director. He has provided you with the following notes of his

meeting and financial statement extracts.

The management of Howard Ltd were disappointed with the results in 2018, and so

in 2019 undertook a number of strategies to improve the trading results. This

included the introduction of a generous sales-related bonus scheme for their

salesmen and a high-profile advertising campaign. In addition, as market conditions

are difficult for their customers, they have extended the credit period given to them.

The finance director of Howard Ltd has reviewed the inventory valuation policy and

has included additional overheads incurred this year as he considers them to be

production related.

The finance director has calculated a few key ratios for Howard Ltd; the gross profit

margin has increased from 50.0% to 55.6% and receivables days have increased

from 51 days to 61 days. He is happy with the 2019 results and feels that they are a

good reflection of the improved trading levels. Financial statement extracts for the

year ended 31 December 2019.

Year 2019 Year 2018 $'000 $'000 Revenue 27 000 20 000 Cost of sales (12 000) (10 000) Gross profit 15 000 10 000 Operating expenses (7 500) (4 000) Profit before interest and tax 7 500 6 000 Cash 600 2 400 Inventory 2 300 1 600 Accounts receivables 4 500 2 800 Accounts payables 1 600 1 200 Bank overdraft 900 300