You have been asked to assess the inherent risk of the client and perform preliminary analytical procedures as part of the audit planning process in obtaining an understanding about the client's business and indicate where there is an increased likelihood of misstatements. Refer to the information provided and answer the following questions: (1) Assess overall inherent risk at the financial report level of Harrisons Ltd. In your answer you should discuss, based on the materials provided in the memo from the audit partner (excluding Appendix A and B) and the industry outlook report, the factors that would increase and decrease the inherent risk of material misstatements for Harrisons at the financial report level. (i.e. For this part of the question, you are to ignore the ratios provided in the appendix to the Partner's Memo). Conclude with an overall assessment of the qualitative level (high/medium/low) of inherent risk for Harrisons Ltd at the financial statement level. (Hint: This conclusion only needs to be one sentence that states your overall assessment based on the balance of factors discussed). (9 mark

use the source from below

Dean Smith (Audit Senior)

Vince Mater (Audit Partner)

6th January 2020

Harrisons Ltd Audit for 31 December 2019

I just wanted to fill you in briefly on our client, Harrisons Ltd, as you are just joining the audit team and it is your first year on the audit.I have been out to visit the client in order to get some information which will help us with planning this year's audit for their financial year ending 31 December 2019.I have conducted some initial audit procedures for the upcoming audit and have included these in the current audit file for the client.

Harrisons Ltd is a publicly traded company that is listed on the ASX.This will be the second year that we have audited the company (and I was the engagement partner last year).In last year's audit we found no material misstatements.

Harrisons Ltd is an Australian manufacturer of building materials and cement, founded in 1948 in NSW. Their operations include both manufacturing plants and wholesale distribution centers in 68 locations across Australia. They have developed a good reputation with their clients and employees and maintained strong relationships with their suppliers, who are all Australian owned and operated companies. However, there has been some recent lobbying activity by environmental groups who have expressed concerns regarding the pollution levels at their Coffs Harbour manufacturing plant.The CFO indicated to me that they do have some concerns about how this may affect their relationship with stakeholders in the community and their social licence to operate in the region. While revenues have grown year on year, and profit growth has been above 5% between 2016 and 2018, the CFO noted that inventory turnover had slowed in 2019, partly due to increased competition in the domestic market.

The company operates a results-oriented work environment that holds employees as well as managers accountable for success and utilizes systems that reward employee and group output. Notably, senior managers and sales staff were advised that they are to be rewarded with a bonus if the firm achieves profit growth of 5% in 2019.

The CEO and two Directors of Harrisons have spent some time over the last few months engaging with industry counterparts and attending conferences in the UK and have recognized the need for innovation in fire retardant building materials.Consequently, the Board of Directors has approved the establishment of a $20 million dollar Research Centre, which they envisage will become the leading edge for research in the building industry in Australia.The company took out a loan with a local bank for $12 million in August 2019 to purchase a property in Brisbane that will house the Research Centre. The debt contract requires the audit client's interest coverage ratio to be above 3, and the debt to assets ratio is required to be below 50%. The balance of the capital required to set up the Research Centre will be obtained through the issue of additional shares. The prospectus for the share issue has already been published and the applications for the share issue closes on 15 January 2020. The CEO has been anxious to ensure that the financial results will present the company in the best possible light for the share issue and has been asking staff over the last several months to focus on cost cutting.

Yesterday the client sent through a copy of their draft financial information for the year.I have calculated some ratios based on this information and included in the attached Appendix A.I also attach an extract of income statement data for the last four years in Appendix B.You might find this information useful for planning the audit.

APPENDIX A - FINANCIAL DATA

YEAR TO YEAR CHANGES % Change % Change % Change

Account Balance 2018-2019 2017-2018 2016-2017

Net sales 3.72% 2.98% 1.54%

Cost of goods sold -0.63% 3.79% 2.11%

Operating expenses 3.25% 0.94% -0.02%

Operating Income 3.43% 2.13% 1.76%

Interest Expense -2.32% -5.62% -6.41%

Net receivables 51.30% 8.61% 11.11%

Inventory 12.78% -0.93% 3.60%

Accounts Payable 22.42% 18.12% 14.46%

Current portion of long-term debt -40.51% 0.00% 11.11%

Long-term debt 24.72% -1.37% 1.35%

Common Ratios of Harrisons Ltd 2019 2018 2017

Gross margin % 33.98% 30.03% 30.57%

Net Inc. bef tax/sales 0.04 0.04 0.04

Profit growth 5.01% 5.98% 5.98%

Days Sales Outstanding 25.20 19.97 18.73

Bad Debt Expense as percentage of gross sales: 0.47% 0.62% 0.67%

Days Inventory Outstanding 88.40 86.73 88.87

Accounts payable turnover rate 12.1 15.4 15.2

Payables turnover in days 30.17 23.70 24.01

Debt to assets 0.49 0.46 0.46

Interest coverage 3.01 2.81 2.50

These are the formulae I have used in the calculations:

Gross margin % = Gross profit divided by net sales.

Net income before tax/sales = net income before tax divided by gross sales.

Profit growth = the difference between current period profit and prior period profit divided by prior period profit, i.e., (Profit t - Profit t-1) / Profit t-1.

Accounts receivable turnover = Net sales divided by average net accounts receivables

Days sales outstanding = 365 divided by accounts receivable turnover, where accounts receivable turnover = Net sales divided by average net accounts receivables

Days inventory outstanding = 365 divided by inventory turnover, where Inventory turnover = cost of goods sold for year t divided by average inventory (i.e., the average of beginning and ending inventory balances for year t).

Debt to assets ratio = Total liabilities divided by total assets.

Interest coverage ratio = Net profit divided by interest expense.

APPENDIX B

Harrisons Ltd

Extract from Income Statementfor the Year Ended December 31

(draft) 2019 2018 2017 2016

$ $ $ $

Sales 196,423,039 189,318,978 183,841,948 181,049,153

Sales Returns and Allowances 301,379 223,148 217,290 215,670

Cost of goods sold 131,480,975 132,319,374 127,485,206 124,846,646

Accounting fees 379,945 386,221 374,736 370,971

Advertising 203,140 222,511 205,098 205,406

Bad debts 927,124 1,167,575 1,240,118 1,235,095

Business publications 6,736 6,944 968 1,021

Cleaning service 102,250 104,986 95,910 97,610

Depreciation expense 4,460,910 4,927,478 4,480,887 4,986,278

Fuel 496,184 486,490 351,090 349,390

Garbage collection 49,061 48,214 47,961 47,461

Insurance 116,496 135,803 135,614 135,006

Legal service 225,020 213,175 192,298 190,298

Licensing and certification fees 224,313 216,104 200,849 197,298

Linen service 21,603 21,438 20,004 20,104

Office supplies 187,285 225,425 215,386 213,886

Postage 112,204 166,898 180,998 189,098

Property taxes 153,231 160,011 157,115 218,328

Rent 1,003,569 965,433 949,131 947,931

Repairs and maintenance 332,481 710,506 723,266 722,766

Salaries & Wages 38,363,208 35,545,259 35,687,531 35,146,601

Security 688,254 796,975 787,941 785,570

Telephone 40,503 56,466 74,834 72,334

Travel and entertainment 129,236 129,803 123,599 125,599

Utilities 327,991 333,756 344,656 342,956