Using the information above: a) Calculate FIVE ratios, for BOTH years, which would assist the audit senior in planning the audit; b) Using the information provided and the ratios calculated, identify and describe FIVE audit risks and explain the auditor’s response to each risk in planning the audit of Hoses Construction Co
You are the audit senior of Plannit & Co and you are planning the audit of Hoses
Construction Co (Hoses) for the year ended 31 March 2021.
Hoses 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:
Hoses 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
years to five years. This reduced the annual depreciation charge.
The directors need to meet a target profit before interest and
order to be paid their annual bonus. In addition, to try and improve profits, Hoses
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 $1 million from the
bank during the year. This is due for repayment at the end of 2021.
Financial statement extracts for year ended 31 March
Draft 2021 ($M) Actual 2020 ($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 2.2 1.6
Receivables 3.2 2.0
Cash 0.7 2.0
Trade payables 1.7 1.5
Loan 1.0 ---
Required:
Using the information above:
a) Calculate FIVE ratios, for BOTH years, which would assist the audit senior in
planning the audit;
b) Using the information provided and the ratios calculated, identify and describe FIVE
audit risks and explain the auditor’s response to each risk in planning the audit of
Hoses Construction Co
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