Explain how they could affect the financial statements of

Question

Your firm has been approached by a listed company, BONTO Limited, and asked if you will accept appointment as auditors for the year ending 31 December 2015(it is now late November 2015).

BONTOLtd's Finance Director provided you with the following statement of financial position and income statement information which included actual figures for years ending 31 December 2012 to 2014, with estimated figures for 2015.

BONTO Ltd produces gadgets. This was once a fairly profitable industry but both the size and profitability of the industry in Australia have declined significantly in recent years due to advanced technology and replacement products (which BONTO Ltd is unable to produce with its existing plant and equipment). Over recent years a number of its competitors and customers have closed down and existing tariffs, quotas and import duties on imported gadgetshave been scheduled to be abolished at the beginning of 2015.

BONTOLtd's factory closed in late November, pending the resolution of an industrial dispute (factory workers demanding a 15% wage rise and reduced hours). It is unlikely that work will resume prior to the Christmas shutdown and consequently the estimated figures for 2015 are not, in the opinion of the Finance Director, expected to change.

	BONTO LIMITED INCOME STATEMENT
	2012   000		2013   000		2014   000		2015   000
Revenue COGS Depreciation Amortisation Interest - Expense (net)	112,500 90,000 2,000 750 2,400		115,875 98,494 2,000 750 2,000		108,923 98,031 2,000 750 1,800		92,584 86,103 2,000 750 1,500
Other expenses	1,850		1,850		1,850		1,850
NPBT	15,500		10,781		4,492		381
Tax expense	6,045		4,204		1,752		149
NPAT	9,455		6,577		2,740		232
	BONTO LIMITED BALANCE SHEET AS AT
	2012   000		2013   000		2014   000		2015   000
Current assets Cash Receivables Inventories Other	630 21,171 19,784 517		500 24,347 22,752 517		450 27,999 26,164 517		150 33,598 31,397 517
Total Current Assets	42,102		48,116		55,130		65,662
Non-Current assets Investments Property, plant & equipment Intangibles Other	87 25,921 15,349 1,115		87 23,977 14,582 1,115		87 22,179 13,852 1,115		87 20,515 13,160 1,115
Total Non Current Assets	42,472		39,761		37,233		34,877
Total assets	84,574		87,877		92,363		100,539
Current liabilities Creditors Borrowings Provisions	9,267 5,000 11,772		10,657 0 12,361		12,256 2,500 12,978		14,707 4,000 13,627
	26,039		23,018		27,734		32,334
Non-current liabilities Creditors Borrowings Provisions	1,338 5,000 1,531		1,137 5,000 1,479		94 3,000 1,552		1,360 5,000 1,630
	7,869		7,616		4,646		7,990
Total liabilities	33,908		30,631		32,380		40,324
Net assets	50,666		57,243		59,983		60,215
Shareholders, equity Share capital Reserves Retained profits	26,202 11,187 13,277		26,202 11,187 19,854		26,202 11,187 22,594		26,202 11,187 22,826
Total shareholders, equity	50,666		57,243		59,983		60,215

Required

(a) The responsible partner for accepting new clients has requested you to prepare a preliminary analytical review on the information provided by BONTO Ltd's Finance Director. The partner suggests that as a minimum you should provide him with the following information.

(1) Horizontal analysis for 2015 and 2014. For asset's items use the net assets as base figure and for items in the income statement use the net profit before tax as the base figure. Use the findings to suggest to him the audit risk areas bearing in mind the assertions. (5 marks)

(2) Calculate 2 liquidity ratios, 2 activity ratios, 4 profitability ratios and 2 solvency ratios over the period 2011 to 2015.

Use Excel to answer both sections of part (a).  Produce a working sheet showing the formulae that you have used to calculate the ratios on Excel. (8 marks + 2 marks for presentation)

(b) List four areas of high inherent risk based on your findings in (a) above and explain how they could affect the financial statements of 2015. (5 marks)

Maximum word limit 1000 words excluding graphs and tables