CASE STUDY: Little Diggers Ltd
Little Diggers Ltd is a large manufacturer of construction machinery based in the UK. They have recently appointed yourfirm 'Jones Cleese and Chapman' (JCC) to conduct the yearend audit for the 12 months to 30th September 2013. The engagement was accepted and as audit senior you have been asked to plan the audit.
Background Information:
Little Diggers Ltd were founded by the Bamthorpe family in 1945 as a small manufacturer of farming equipment. As they grew they diversified their product range across construction, demolition, and agriculture, and have a renowned reputation for high quality durable products. Joseph Bamthorpe, the current CEO and largest shareholder, took over the business in 2005 and has successfully expanded the businesses overseas sales. Profits made over the years have largely been re-invested in the business.
The business now design and build all products at their 'mega factory' in central England. They import their materials from around the world, and make sales across the globe but primarily to Europe and the far East. Sales are made only in Pounds (£), Dollars ($), or Euros (€), while purchases can be made in almost any currency.
Information on Previous Auditors:
The previous auditors, PwC, are the largest UK audit firm. They have not brought any issues to your attention regarding previous audits, but conversations with Little Diggers finance team suggest that Joseph Bamthorpe was not happy at the level of 'interference' from the previous auditors and wanted a smaller firm to take over.
Prior Year’s Financial Statements:
Income Statement for the year to 30th September 2012
|
|
£'000
|
|
Revenue
|
560,550
|
|
Cost of Sales
|
(475,230)
|
|
Gross Profit
|
85,320
|
|
Operating Expenses
|
(49,750)
|
|
Operating Profit
|
35,570
|
|
Finance Costs
|
(1,800)
|
|
Profit Before Tax
|
33,770
|
|
Tax
|
(6,750)
|
|
Profit After Tax
|
27,020
|
Statement of Financial Position as at 30th September 2012
|
|
£'000
|
|
Non-Current Assets
|
|
|
Fixed Assets
|
103,500
|
|
Goodwill
|
200
|
|
Intangible Assets
|
880
|
|
|
104,580
|
|
Current Assets
|
|
|
Inventories
|
15,990
|
|
Prepayments
|
150
|
|
Trade Debtors
|
12,750
|
|
Cash and Cash Equivalents
|
1,010
|
|
|
29,900
|
|
Total Assets
|
134,480
|
|
Equity and Reserves
|
|
|
Share Capital
|
50
|
|
Share Premium
|
1,000
|
|
Retained Earnings
|
90,360
|
|
Non-Current Liabilities
|
91,410
|
|
Loans
|
32,000
|
|
|
32,000
|
|
Current Liabilities
|
|
|
Short term borrowings
|
1,200
|
|
Trade Payables
|
9,870
|
|
|
11,070
|
|
Total Equity and Liabilities
|
134,480
|
REQUIRED
Write a report to the Audit Engagement Partner, in which you:
i) Summarise the key audit risks relating to the audit of Little Diggers Ltd then, based on your overall risk assessment and the information available, calculate provisional materiality levels for the year end audit.
ii) Perform non-substantive planning analytics and discuss how the materialmovements may be suggestive of additional risks on some specific financial statement line items (FSLIs).
iii) Based on your answer to part ii) make further enquiries of management regarding the debtors balance, and explain the audit procedures we will need to perform to gain comfort over the key financial statement assertions of existence and valuation.