You are the audit senior of Cari & Co and you are planning the audit of Kondo Construction Co (Kondo) for the year ended 31 March 2019.   Kondo specialises in building houses and provides a five-year building warranty to its customers. Your audit manager has held a planning meeting

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

You are the audit senior of Cari & Co and you are planning the audit of Kondo Construction Co (Kondo) for the year ended 31 March 2019.

 

Kondo 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:

 

- Kondo 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 $0•5 million

in order to be paid their annual bonus. In addition, to try and improve profits, Kondo

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 2019.

Financial statement extracts for year ended 31 March:

 

  Draft Actual

                                                                                   2019       2018

                                                                                    $m          $m

 

Revenue                                                                      13.5        16.0

Cost of sales                                                                (8.0)        (9.0)

 -------- --------

Gross profit                                                                   5.5           7.0

Operating expenses                                                     (5.0)        (5.1)

 -------- --------

Profit before interest and tax                                         0.5           1.9

 -------- --------

Inventory                                                                       1.8           1.3

Receivables                                                                   3.2           2.1

Cash                                                                              0.9           2.0

Trade payables                                                              1.5          1.1

Loan                                                                               1.0           —



Required:

Using the information above:

 

1) Calculate FIVE ratios, for both years, which would assist the audit senior in planning

the audit

Expert Solution
steps

Step by step

Solved in 2 steps with 3 images

Blurred answer
Knowledge Booster
Auditing Accounting Estimates & Using the Work of Specialists
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education