Section A (Case study- 12.1 )

1a) What is the objective of the analytical review at any stage of the audit. Give reasons which would make the auditor’s expectations to differ from the actual amounts presented by the client.
(9 marks)
b)The following information for the year to 30 April 2010 has been extracted from accounting records of Kothari Limited, a manufacturing concern, together with comparative figures for 2009.

2010
£000 £000 2009
£000 £000
Turnover
Raw material: ing stock
Purchases

Closing stock
Material used
Labour & overheads
Production cost
Work in progress: ing
Closing
Factory cost: finished goods
Finished goods: ing stock
Closing stock
Cost of sales
Gross profit
Selling expenses
Administrative expense
Depreciation not yet allocated
Net Profit

Non-current assets
Current assets
Stock of raw materials
Work in progress
Finished goods

Trade receivables
Trade payables
Net current assets
Net assets employed
Financed by
Share capital and reserves
Long term borrowings
Net capital employed
400
3,000
3,400
(800)
2,600
1,550
4,150
300
(1,000)
3,450
500
(150)
150
100
300

 
800
1,000
150
1,950
1,650
(700) 4,600

 
3,800
800
550
250

3,050

2,900
5,950

3,500
2,450
5,950
350
1,500
1,850
(400)
1,450
750
2,200
400
(300)
2,300
550
(500)
70
90
150

 
400
300
500
1,200
750
(340) 3,000

 
2,350
650
310
340

1,840

1,610
3,450

3,000
450
3,450

b) Examine the financial statements of Kothari Limited and without calculating any ratios, note matters of significance in the context of planning the final audit. Select ratios that would support or refute your observations before you seek explanations from the chief accountant. Give possible reasons that you hope can explain the observed changes.
(14 marks)

c) What are the limitations of depending too much on ratio analysis during the analytical review process for Kothari Limited.
(7marks)
d) Trade payables have increased to £ 700 from £340- generate substantive audit procedures for trade payables and explain your reason for each procedure.

Total: 40 marks