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 publish financial information in respect of the year ended 30 June 2014.
|Nathan Gourmet Ltd
Income statement for the year ended 30 June 2014
|Food and beverages||203,368||189,610|
Total cost of sales
|Food and beverages||68,640||66,780|
|Total gross profit||152,480||147,448|
|Direct expenses – cafe||12,914||15,082|
|Direct expenses – stores||_4,858||_7,072|
|Total direct expenses||36,084||44,352|
|Fees and permits||586||578|
|Repairs and maintenance||4,960||5,304|
|Total indirect expenses||52,834||46,856|
|Operating profit before tax||63,562||56,240|
|Income tax expenses||–||–|
|Nathan Gourmet Ltd
publish statement of financial position as at 30 June 2014
|Total current assets||102,220||69,394|
|Property, plant and equipment||(b)||436,642||442,314|
|Total non-current assets||531,884||512,700|
|Accounts payable and borrowings||(d)||313,588||300,008|
|Total current liabilities||365,588||356,008|
|Total non-current liabilities||63,654||84,786|
|Share capital (100,000,000 shares @1 per share)||100,000||100,000|
Total shareholder’s equity
|Nathan Gourmet Ltd
Notes to the publish financial report
|(a)||Receivables – current|
|less Provision for doubtful debts||(2,000)||(1,820)|
|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)|
|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|
|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|
* 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.
|(d)||Accounts payable and borrowings – current|
|Bank overpublish (secured)||201,908||192,768|
|Borrowings – non-current|
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
(i) The Engagement Partner has requested you to carry out preliminary analytical procedures based on the publish 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).
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