AFE 3102 Auditing Written Assignment – Nathan Gourmet Ltd

3102AFE Auditing
Written Assignment
Nathan Gourmet
Ltd (Nathan) manufactures, supplies, and retails quality gourmet cooking
ingredients to the home kitchen and small restaurant markets. Recently Nathan has
extended its product range to include ‘ready-to-cook’ meals suitable for dinner
parties, with customers ordering from a set menu. In addition, they have opened
a number of small cafes where customers can sample the company’s product range.

Nathan
currently has 25 outlets of varying sizes, and has undertaken a focused
marketing and promotion strategy, and the acquisition of a number of smaller
competitors over the past couple of years in order to expand its business.

Nathan’s
management team is experienced, all managers having been with the company for
more than five years, with the exception of the new Chief Finance Officer (CFO),
who joined the company in May 2014.

Nathan
installed a new computer system in August 2013. The system was installed by a
professional computer company, and the old and new systems were run parallel
for three months. The new system allows each outlet to process its own stocktake
results, accounts payable invoices and payments. Management has experienced no
major problems with the new system to date.

Your firm
has acted as the external auditor of Nathan since 2010, and you are currently
carrying out the planning for the 30 June 2014. Nathan has an internal audit
group that may be able to assist you with this year’s audit for the first time.

Nathan has
provided you with the following draft financial information in respect of the
year ended 30 June 2014.

Nathan Gourmet Ltd
Income statement for the year ended 30 June 2014

2014

2013

$’000

$’000

Revenue

Cafe revenue

Food

75,445

76,520

Beverages

23,603

21,420

Other

9,000

–

Store revenue

Food and beverages

203,368

189,610

Ready-to-cook range

11,560

15,932

Other revenue

6,560

3,098

Total revenue

329,536

306,580

Total cost of sales

177,056

159,132

Gross profit

Cafe

Food

46,770

53,270

Beverages

23,610

21,420

Other

8,730

–

Store

Food and beverages

68,640

66,780

Ready-to-cook range

4,730

5,978

Total gross profit

152,480

147,448

Direct wages

18,312

22,198

Direct expenses – cafe

12,914

15,082

Direct expenses – stores

_4,858

_7,072

Total direct expenses

36,084

44,352

Indirect expenses

Advertising

266

370

Cleaning

2,748

2,560

Depreciation

4,210

4,196

Fees and permits

586

578

Indirect wages

13,424

14,610

Interest

16,538

10,422

Payroll on-costs

9,010

7,830

Repairs and maintenance

4,960

5,304

Security contractors

_1,092

­___986

Total indirect expenses

52,834

46,856

Total expenses

88,918

91,208

Operating profit before tax

63,562

56,240

Income tax expenses

–

–

Net profit

______
$63,562
======

______
$56,240
======

Nathan Gourmet Ltd
Draft statement of financial position as at 30 June 2014

2014

2013

Note

$’000

$’000

Current assets

Cash

100

64

Receivables

(a)

34,858

24,690

Inventories

_67,262

44,640

Total current assets

102,220

69,394

Non-current assets

Receivables

(a)

52

90

Property, plant and equipment

(b)

436,642

442,314

Other

(c)

95,190

70,296

Total non-current assets

531,884

512,700

Total assets

634,104

582,094

Current liabilities

Accounts payable and borrowings

(d)

313,588

300,008

Provisions

­_52,000

_56,000

Total current liabilities

365,588

356,008

Non-current liabilities

Borrowings

(d)

44,000

44,000

Provisions

19,654

40,786

Total non-current liabilities

63,654

84,786

Total liabilities

429,242

440,794

Net assets

$204,862
=======

$141,300
=======

Shareholder’s equity

Share capital (100,000,000 shares @1 per share)

100,000

100,000

Reserves

120,000

120,000

Accumulated losses

(15,138)

(78,700)

Total shareholder’s equity

$204,862

$141,300

Nathan Gourmet Ltd
Notes to the draft financial report

2014

2013

$’000

$’000

(a)

Receivables – current

Trade debtors

36,858

26,510

less Provision for doubtful debts

(2,000)

(1,820)

34,858

24,690

Receivables – non-current

Amounts owing from related parties

­____52

____90

Amounts owing from related parties represents a 4
year loan made to CFO.

(b)

Property, plant and equipment

Freehold land at cost

280,082

280,082

Buildings at cost

148,380

148,380

less Accumulated depreciation

_(11,340)

_(7,560)

Total buildings

137,040

140,820

Plant and equipment at cost

27,280

25,612

less Accumulated depreciation

(7,760)

(4,200)

Total plant and equipment

_19,520

_21,412

Total property, plant and equipment

436,642

442,314

(c)

Other –non-current

Investment project

Capital works in progress at cost*

24,448

–

Site lease, liquor and entertainment licence

6,200

–

Development expenditure at cost

13,314

–

Deferred tax asset

11,228

30,296

Goodwill at cost

40,000

40,000

95,190

70,296

*
On 15 January 2014, Nathan entered into a number of agreements for the
construction and development of a restaurant and entertainment complex, and
its leasing upon completion. This is Nathan’s
first venture into the hospitality industry.

Aggregate capital expenditure contracted for 30
June2014 for the construction and development of the restaurant and
entertainment complex not provided for in the financial information.

Payable no later than one year

57,728

Payable later than one year, not later
than two years

33,432

91,160

(d)

Accounts payable and borrowings – current

Bank overdraft (secured)

201,908

192,768

Accounts payable

111,680

107,240

313,588

300,008

Borrowings – non-current

Secured loan

_44,000

_44,000

The loans and other bank
accommodation are secured against the remaining property, plant and
equipment. These loans are subject to a covenant agreement which specified
that the company maintain the following ratios:
·
net tangible asset ratio
which is positive
·
a positive current ratio

Required:
(i) The Engagement Partner has requested you to carry out preliminary
analytical procedures based on the draft financial information provided. She
suggests that as a minimum, you address four
profitability ratios (including gross profit margin for each individual
cafe and store revenue, profit margin, return on total assets, and return on
shareholders’ equity), three liquidity
ratios [acid-test (quick) ratio, inventory turnover ratio, and days in
inventory], and two solvency ratios
(debt to total assets, and times interest earned) over the period 2013 to 2014.
Use an Excel spreadsheet to calculate these ratios. Produce a working sheet
which shows the formulae that you have used to calculate these ratios on Excel
(10 Marks); and

(ii) Produce a covering memorandum to your Engagement Partner (no more than 1000 words)
identifying FOUR (4) areas of inherent risk, and discuss the effects of your
findings on your audit plan (10 Marks).