Your firm has been approached by a listed company, EXE Limited, and asked if you will accept appointment as auditors for the year ending 31 December 2014 (it is now late November 2014).
EXE Ltd’s Finance Director provided you with the following statement of financial position and income statement information which included actual figures for years ending 31 December 2011 to 2013, with estimated figures for 2014.
EXE Ltd produces gadgets. This was once a fairly profitable industry but both the size and profitability of the industry in Australia have declined significantly in recent years due to advanced technology and replacement products (which EXE Ltd is unable to produce with its existing plant and equipment). Over recent years a number of its competitors and customers have closed down and existing tariffs, quotas and import duties on imported gadgets have been scheduled to be abolished at the beginning of 2014.
EXE Ltd’s factory closed in late November, pending the resolution of an industrial dispute (factory workers demanding a 15% wage rise and reduced hours). It is unlikely that work will resume prior to the Christmas shutdown and consequently the estimated figures for 2014 are not, in the opinion of the Finance Director, expected to change.
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EXELIMITED INCOME STATEMENT |
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2011 $’000 |
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2012 $’000 |
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2013 $’000 |
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2014 $’000 |
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Revenue COGS Depreciation Amortisation Interest – Expense (net) |
112,500 90,000 2,000 750 2,400 |
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115,875 98,494 2,000 750 2,000 |
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108,923 98,031 2,000 750 1,800 |
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92,584 86,103 2,000 750 1,500 |
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Other expenses |
1,850 |
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1,850 |
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1,850 |
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1,850 |
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NPBT |
15,500 |
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10,781 |
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4,492 |
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381 |
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Tax expense |
6,045 |
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4,204 |
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1,752 |
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149 |
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NPAT |
9,455 |
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6,577 |
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2,740 |
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232 |
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EXE LIMITED BALANCE SHEET AS AT |
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2011 $’000 |
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2012 $’000 |
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2013 $’000 |
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2014 $’000 |
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Current assets Cash Receivables Inventories Other |
630 21,171 19,784 517 |
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500 24,347 22,752 517 |
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450 27,999 26,164 517 |
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150 33,598 31,397 517 |
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Total Current Assets |
42,102 |
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48,116 |
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55,130 |
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65,662 |
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Non-Current assets Investments Property, plant & equipment Intangibles Other |
87 25,921 15,349 1,115 |
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87 23,977 14,582 1,115 |
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87 22,179 13,852 1,115 |
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87 20,515 13,160 1,115 |
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Total Non Current Assets |
42,472 |
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39,761 |
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37,233 |
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34,877 |
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Total assets |
84,574 |
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87,877 |
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92,363 |
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100,539 |
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Current liabilities Creditors Borrowings Provisions |
9,267 5,000 11,772 |
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10,657 0 12,361 |
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12,256 2,500 12,978 |
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14,707 4,000 13,627 |
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26,039 |
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23,018 |
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27,734 |
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32,334 |
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Non-current liabilities Creditors Borrowings Provisions |
1,338 5,000 1,531 |
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1,137 5,000 1,479 |
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94 3,000 1,552 |
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1,360 5,000 1,630 |
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7,869 |
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7,616 |
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4,646 |
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7,990 |
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Total liabilities |
33,908 |
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30,631 |
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32,380 |
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40,324 |
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Net assets |
50,666 |
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57,243 |
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59,983 |
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60,215 |
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Shareholders, equity Share capital Reserves Retained profits |
26,202 11,187 13,277 |
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26,202 11,187 19,854 |
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26,202 11,187 22,594 |
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26,202 11,187 22,826 |
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Total shareholders, equity |
50,666 |
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57,243 |
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59,983 |
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60,215 |
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Required
(a) The responsible partner for accepting new clients has requested you to prepare a preliminary analytical review on the information provided by EXE Ltd’s Finance Director. The partner suggests that as a minimum you should provide him with the following information.
(1) Horizontal analysis for 2014 and 2013. Use the findings to suggest to him the audit risk areas bearing in mind the assertions. (5 marks)
(2) Calculate 2 liquidity ratios, 2 activity ratios, 4 profitability ratios and 2 solvency ratios over the period 2011 to 2014.
Use Excel to answer both sections of part (a). Produce a working sheet showing the formulae that you have used to calculate the ratios on Excel. (8 marks + 2 marks for presentation)
(b) List four areas of high inherent risk based on your findings in (a) above and explain how they could affect the financial statements of 2014. (5 marks)
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