Reference no: EM132975324

Question - You are the audit manager in Dinga & Co and your practice has recently been appointed as auditor of Finch Co, a dealer in motor vehicles with six sites. You are currently planning the audit for the year ended 30 June 20X5. The draft financial statements show revenue of £25 million (20X4: £18.1 million), profit before tax of £2.6 million (20X4: £1.4 million) and total assets of £15.8 million (20X4: £12.6 million). New cars are purchased on a consignment basis from a single supplier. Finch Co pays the invoice price six months after delivery, or on sale of the vehicle if sooner. Currently, Finch Co records the purchase of the vehicles when they are delivered, along with the associated payable, and the items are included in inventory. New car sales represent 75% of revenue. All new cars are sold with a warranty of three years or 30,000 miles, whichever is sooner. The warranty provision in respect of new car sales is calculated based on an estimate of 3% of sales which has been estimated using the warranty costs incurred in the last year. Second hand cars are sold with a six-month warranty. Customers can purchase an extended warranty for a further three years for an additional fee. The warranty provision in respect of second-hand car sales is calculated based on an estimate of 5% of sales as older cars usually experience more issues during the extended warranty period. At 30 June 20X5 the warranty provision was £870,000. Finch Co also accepts cars in part exchange. One of the company's current promotions is that it will offer a minimum of £500 trade-in value for any car used in part exchange for the purchase of a new or second-hand car. In addition, many second-hand car customers pay cash in order to negotiate a cash discount. The value of all new cars held across the various sites at the year end, is expected to be £2.4 million. The value of used cars held at the year-end is expected to be £600,000. The finance director has informed you that the inventory count was conducted one week before the year-end. A reconciliation will be performed to calculate the quantity of inventory held at 30 June 20X5. During the year Finch Co purchased a brand of replacement parts which it will now supply on all servicing and repair jobs. As part of this purchase, £700,000 was paid for the brand name "Quick Fit." This has been capitalised as an intangible asset. No amortisation is being charged because the brand is considered to have an indefinite useful life.

Required - Evaluate the audit risks that should be considered when planning the audit of Finch Co for the year ended 30 June 20X5.