Reference no: EM132784827
Shades Ltd
You are planning the audit of Shades Ltd for the year ending 30 June 20X9. The principal activities of the company are the manufacture and distribution of a range of window blind systems and of the component parts for window blinds. Approximately 50% of revenue is generated from overseas customers.
During your preparation for the planning meeting with the finance director, the following matters have been highlighted as significant.
Operating results
The company has had a successful year to date with revenue, gross and operating margins up on the previous year
10 months to 30 April 20X9 10 months to 30 April 20X8 Year to 30 June 20X8
£ '000 £ '000 £ '000
Revenue 22,656 19,597 22,557
Cost of sales 13,367 12,472 14,313
Gross profit 9,289 7,125 8,244
Operating expenses 4,531 4,115 4,732
Operating profit 4,758 3,010 3,512
Gross profit margin 41% 36% 37%
Operating profit margin 21% 15% 16%
Inventories at 30 April 20X9 were £4.3 million compared with £3.6 million at 30 April 20X8 and £3.4 million at 30 June 20X8.
New computer system
During the year the company replaced its accounting software with a fully integrated standard package modified by the supplier to the company's requirements.
Incentive scheme
During the year the company introduced an incentive scheme under which the executive directors are entitled to a bonus based on pre-tax profits. The bonus will be paid thirty days after the audited accounts are available.
Requirement
Question 1: In respect of the above, identify and explain the potential audit risks and indicate the matters you would discuss with the finance director at your planning meeting:
- Operating results
- Inventories
- New computer system
- Incentive scheme
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