- 30 Marks
AA – L2 – Q23 – Analytical Procedures
Explain when and how analytical procedures are applied per ISA 520. Comment on Zenith Technologies' financial performance for two years using provided data. Identify audit risks from Zenith Technologies' performance and describe audit procedures to address them.
Question
You have been presented with the following draft financial information about Fresca Solutions, a very successful company that develops and licenses specialist computer software and hardware. Its non-current assets mainly consist of property, computer hardware and investments, and there have been additions to these during the year. The company is experiencing increasing competition from rival companies, most of which specialise in hardware or software, but not both. There is pressure to advertise and cut prices.
You are the audit manager. You are planning the audit and are conducting a preliminary analytical review and associated risk analysis for this client for the year ended 31 May 20X8. You have been provided with a summarised draft statement of comprehensive income which has been produced very quickly and certain accounting ratios and percentages. You have been informed that the company accounts for research and development costs in accordance with IAS 38 Intangible Assets.
Statement of comprehensive income
| Year ended 31 May | ||
|---|---|---|
| 20X7 | 20X8 | |
| €’000 | €’000 | |
| Revenue | 15,206 | 13,524 |
| Cost of sales | 3,009 | 3,007 |
| Gross profit | 12,197 | 10,517 |
| Distribution costs | 3,006 | 1,996 |
| Administration expenses | 994 | 1,768 |
| Selling expenses | 3,002 | 274 |
| Profit from operations | 5,195 | 6,479 |
| Net interest receivable | 995 | 395 |
| Profit before tax | 6,190 | 6,874 |
| Income tax expense | 3,104 | 1,452 |
| Net profit | 3,086 | 5,422 |
| Retained profits | 1,617 | 3,983 |
| Dividends paid | €1,469,000 | €1,439,000 |
Accounting ratios and percentages
| Year ended 31 May | ||
|---|---|---|
| 20X7 | 20X8 | |
| Earnings per share | 0.43 | 1.04 |
| Performance ratios include the following: | ||
| Gross margin | 0.80 | 0.78 |
| Expenses as a percentage of revenue: | ||
| Distribution costs | 0.20 | 0.15 |
| Administrative expenses | 0.07 | 0.13 |
| Selling expenses | 0.20 | 0.02 |
| Operating profit | 0.34 | 0.48 |
Required
(a) In accordance with ISA 520 Analytical Procedures explain when analytical procedures shall or may be carried out and the nature of such procedures.
(b) Using the information above, comment briefly on the performance of the company for the two years.
(c) Use your answer for part (b) to identify the areas that are subject to increased audit risk and describe the further audit work you would perform in response to those risks.
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