You have obtained the followinginformation:
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR TO 31DECEMBER
20X8
20X7
Note
Draft ($m)
Actual ($m)
Revenue
(1)
645.5
606.5
Other income
(2)
15.6
14.4
Changes in inventories
3.8
(16.4)
Cost of materials
(334.1)
(286.8)
Employee benefits expense
(91.0)
(83.9)
Depreciation
(3)
(29.8)
(23.6)
Other expenses
(4)
(116.3)
(100.6)
Interest income, net
(5)
12.3
(20.9)
Profit before tax
106.0
130.5
Income tax expense
(44.4)
(47.7)
Profit for the year
61.6
82.8
STATEMENT OF FINANCIAL POSITION AT 31DECEMBER
20X8
20X7
Note
Draft ($m)
Actual ($m)
Assets
Non-current assets
Intangible assets
(6)
47.8
40.5
Property, plant and equipment
(7)
124.5
102.5
172.3
143.0
Current assets
Inventories
(8)
30.3
27.9
Trade receivables
73.1
50.3
Cash and cash equivalents
111.4
86.0
Total assets
387.1
307.2
Equity and liabilities
Equity
5.8
5.8
Share capital
15.3
15.3
Share premium
112.1
80.1
Retained earnings
133.2
101.2
Non-current liabilities
Provisions
(9)
160.1
121.4
Current liabilities
Trade payables
33.5
31.8
Tax
50.4
44.3
Other liabilities
9.9
8.5
Total equity and liabilities
387.1
307.2
Notes
(1)Revenue from businessactivities:
Revenue from business activities
20X8 ($M)
20X7 ($M)
Vehicles
588.0
526.0
Parts and accessories
39.6
36.8
Other
17.9
43.7
645.5
606.5
(2)Other income includes gains on the disposals oftangible assets and income from the reversal ofprovisions.
(3)Average number of employees:
20X8 (Draft)
20X7 (Actual)
Wage earners
484
499
Salaried employees
483
477
Apprentices and trainees
36
37
1,003
1,013
(4)Other expenses include costs for warranties,administration and distribution, maintenance andinsurance.
(5)Interest income, net:
20X8 (Draft ($m)
20X7 (Actual $m)
Interest and similar income
16.8
25.1
Interest and similar expenses
(4.5)
(4.2)
12.3
20.9
(6)Intangible assets include development costs, alsofranchises and industrial rights and licenses. During the year,$12.7 million (20X7 - $6.3 million) was spent on developing a newsports model, the Fox.
(7)Property, plant and equipment:
Land and Buildings
Equipment
Assets under construction
Total
$m
$m
$m
$m
Cost
1 January 20X8
61.8
212.1
19.0
292.9
Additions
5.0
28.9
9.4
43.3
Disposals
0.0
(4.5)
0.0
(4.5)
Reclassification
3.0
8.9
(11.9)
0.0
31 December 20X8
69.8
245.4
16.5
331.7
Depreciation
Current year
1.9
18.4
0.0
20.3
Accumulated
28.7
178.5
0.0
207.2
Net book value
31 December 20X8
41.1
66.9
16.5
124.5
31 December 20X7
34.9
48.6
19.0
102.5
(8)Inventories comprise:
20X8 (Draft $m)
20X7 (Draft $m)
Raw materials, consumables and supplies
8.3
7.3
Work-in-progress
6.8
4.8
Finished goods
15.2
15.8
30.3
27.9
(9) Provisions mainly covermanufacturing warranty, product liability and litigation risks.Also, provisions have been established for deferred maintenance andIT reorganisation
The following additional information isavailable:
(i) Pavia has achieved record sales in 20X8 with the delivery of10,153 vehicles (20X7 â 7,642 vehicles).
(ii) Although some sales are direct to individual customers themajority are ordered through dealers who take new vehicles onconsignment.
(iii) Since 1 January 20X8 Pavia has offered 0% finance forthree years on new vehicle sales in its most competitivemarkets.
(iv) The launch of the Fox has been postponed from late 20X8 toearly 20X9 as internal trials have revealed that the doors are notsufficiently secure at high speeds.
(v) A car part required for the Cipeta model is bought-inexclusively from an overseas manufacturer. Deliveries of supplieshave been unpredictable in 20X7 causing disruption to the Cipetamodel assembly schedules.
Given all of the information above you are requiredto do the following:
In respect of the financial statements audit of Pavia Co for theyear ending 31 December 20X8:
(a) Identify and explain the risks of materialmisstatement to be taken into account in planning the finalaudit.
(b) Evaluate how you might use analytical procedures to provideaudit evidence and reduce the level of detailed substantiveprocedures.
(c) Briefly describe the principal audit work to be performed inrespect of the carrying amount of the following items in thestatement of financial position.
(i) Inventories
(ii) Cash and cash equivalents
(iii) Receivables
You have obtained the followinginformation:
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR TO 31DECEMBER
20X8 | 20X7 | |||
Note | Draft ($m) | Actual ($m) | ||
Revenue | (1) | 645.5 | 606.5 | |
Other income | (2) | 15.6 | 14.4 | |
Changes in inventories | 3.8 | (16.4) | ||
Cost of materials | (334.1) | (286.8) | ||
Employee benefits expense | (91.0) | (83.9) | ||
Depreciation | (3) | (29.8) | (23.6) | |
Other expenses | (4) | (116.3) | (100.6) | |
Interest income, net | (5) | 12.3 | (20.9) | |
Profit before tax | 106.0 | 130.5 | ||
Income tax expense | (44.4) | (47.7) | ||
Profit for the year | 61.6 | 82.8 |
STATEMENT OF FINANCIAL POSITION AT 31DECEMBER
20X8 | 20X7 | |||
Note | Draft ($m) | Actual ($m) | ||
Assets | ||||
Non-current assets | ||||
Intangible assets | (6) | 47.8 | 40.5 | |
Property, plant and equipment | (7) | 124.5 | 102.5 | |
172.3 | 143.0 | |||
Current assets | ||||
Inventories | (8) | 30.3 | 27.9 | |
Trade receivables | 73.1 | 50.3 | ||
Cash and cash equivalents | 111.4 | 86.0 | ||
Total assets | 387.1 | 307.2 | ||
Equity and liabilities | ||||
Equity | 5.8 | 5.8 | ||
Share capital | 15.3 | 15.3 | ||
Share premium | 112.1 | 80.1 | ||
Retained earnings | 133.2 | 101.2 | ||
Non-current liabilities | ||||
Provisions | (9) | 160.1 | 121.4 | |
Current liabilities | ||||
Trade payables | 33.5 | 31.8 | ||
Tax | 50.4 | 44.3 | ||
Other liabilities | 9.9 | 8.5 | ||
Total equity and liabilities | 387.1 | 307.2 |
Notes
(1)Revenue from businessactivities:
Revenue from business activities | ||
20X8 ($M) | 20X7 ($M) | |
Vehicles | 588.0 | 526.0 |
Parts and accessories | 39.6 | 36.8 |
Other | 17.9 | 43.7 |
645.5 | 606.5 | |
(2)Other income includes gains on the disposals oftangible assets and income from the reversal ofprovisions.
(3)Average number of employees:
20X8 (Draft) | 20X7 (Actual) | |
Wage earners | 484 | 499 |
Salaried employees | 483 | 477 |
Apprentices and trainees | 36 | 37 |
1,003 | 1,013 | |
(4)Other expenses include costs for warranties,administration and distribution, maintenance andinsurance.
(5)Interest income, net:
20X8 (Draft ($m) | 20X7 (Actual $m) | |
Interest and similar income | 16.8 | 25.1 |
Interest and similar expenses | (4.5) | (4.2) |
12.3 | 20.9 |
(6)Intangible assets include development costs, alsofranchises and industrial rights and licenses. During the year,$12.7 million (20X7 - $6.3 million) was spent on developing a newsports model, the Fox.
(7)Property, plant and equipment:
Land and Buildings | Equipment | Assets under construction | Total | |
$m | $m | $m | $m | |
Cost | ||||
1 January 20X8 | 61.8 | 212.1 | 19.0 | 292.9 |
Additions | 5.0 | 28.9 | 9.4 | 43.3 |
Disposals | 0.0 | (4.5) | 0.0 | (4.5) |
Reclassification | 3.0 | 8.9 | (11.9) | 0.0 |
31 December 20X8 | 69.8 | 245.4 | 16.5 | 331.7 |
Depreciation | ||||
Current year | 1.9 | 18.4 | 0.0 | 20.3 |
Accumulated | 28.7 | 178.5 | 0.0 | 207.2 |
Net book value | ||||
31 December 20X8 | 41.1 | 66.9 | 16.5 | 124.5 |
31 December 20X7 | 34.9 | 48.6 | 19.0 | 102.5 |
(8)Inventories comprise:
20X8 (Draft $m) | 20X7 (Draft $m) | |
Raw materials, consumables and supplies | 8.3 | 7.3 |
Work-in-progress | 6.8 | 4.8 |
Finished goods | 15.2 | 15.8 |
30.3 | 27.9 | |
(9) Provisions mainly covermanufacturing warranty, product liability and litigation risks.Also, provisions have been established for deferred maintenance andIT reorganisation
The following additional information isavailable:
(i) Pavia has achieved record sales in 20X8 with the delivery of10,153 vehicles (20X7 â 7,642 vehicles).
(ii) Although some sales are direct to individual customers themajority are ordered through dealers who take new vehicles onconsignment.
(iii) Since 1 January 20X8 Pavia has offered 0% finance forthree years on new vehicle sales in its most competitivemarkets.
(iv) The launch of the Fox has been postponed from late 20X8 toearly 20X9 as internal trials have revealed that the doors are notsufficiently secure at high speeds.
(v) A car part required for the Cipeta model is bought-inexclusively from an overseas manufacturer. Deliveries of supplieshave been unpredictable in 20X7 causing disruption to the Cipetamodel assembly schedules.
Given all of the information above you are requiredto do the following:
In respect of the financial statements audit of Pavia Co for theyear ending 31 December 20X8:
(a) Identify and explain the risks of materialmisstatement to be taken into account in planning the finalaudit.
(b) Evaluate how you might use analytical procedures to provideaudit evidence and reduce the level of detailed substantiveprocedures.
(c) Briefly describe the principal audit work to be performed inrespect of the carrying amount of the following items in thestatement of financial position.
(i) Inventories
(ii) Cash and cash equivalents
(iii) Receivables
