AFE 3102 Auditing Written Assignment

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.

Nathan Gourmet Ltd

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

2014 2013
$’000 $’000
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





Gross profit
Food 46,770 53,270
Beverages 23,610 21,420
Other 8,730
Food and beverages 68,640 66,780
Ready-to-cook range 4,730 5,978
Total gross profit 152,480 147,448

Direct wages





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












Nathan Gourmet Ltd

publish 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








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









Nathan Gourmet Ltd

Notes to the publish 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




(d) Accounts payable and borrowings – current
Bank overpublish (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




(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

Nathan Gourmet Ltd

(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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