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You are the senior auditor on the audit of Unique Furniture Manufacturers Pty Ltd (Unique). Your firm has recently been appointed as the first auditors of the company. You interview the managing director of the company to obtain background information on Unique and to understand its business operations, its environment and system of internal control. Unique was founded 30 years ago and makes grandfather clocks (freestanding, weightdriven, pendulum clocks). The clocks are made in one factory (situated in the Blue Mountains) and are distributed through boutique homeware and antique furniture stores. The clocks are advertised mainly in local newspapers and through pamphlet drops. In order to promote longer production runs and minimise finished goods stocks, Uniques retail distributors are offered stock on a sale or return basis. This means that the homeware and antique furniture stores are invoiced immediately, subject to a 90-day term of payment, but are allowed to return the stock up to 30 days before payment is due. Only the marketing manager has been given the authority to make these offers.All of Uniques timber is obtained from offshore sources. Timber prices, which are denominated in US dollars, have risen substantially over the past two years and the recent drop in the value of the Australian dollar has caused them to rise even further. Timber purchases are secured by providing Uniques suppliers with letters of credit which become due when the container shipment of timber arrives in Australia. Labour costs are high due to the craftsmanship and quality required for the production of the grandfather clocks. Skilled labour is not easy to obtain and wage rates have recently risen. Unique has found it difficult to pass on these timber and labour price increases to customers. An analysis of costs indicates that there have been material negative purchase price variances inpurchases of timber over the course of the year.

You have compiled the following information fromUniques financials: the current ratio as at 30 June 2014 is 1.24 on an annualised basis, net sales are $350,000 the shareholders funds to total assets ratio is 30% gross profit margins and net profit margins for the year ended 30 June 2014 have dropped to the level where losses are being incurred.

Uniques bank finances the companys timber purchases using bills of exchange drawn at 90 days from the date of payment of the shipment. It has also extended loan finance to Unique. The bank covenant, which is due for review shortly, requires Unique to: maintain a current ratio of 1.2 maintain a shareholders funds to total assets ratio of at least 30% maintain net sales of a minimum of $100,000 per quarter prepare a general purpose financial report for the year ended 30 June 2014 and have it audited according to Australian Auditing Standards. Note that this is a requirement of the bank covenant as Unique is not required to produce a general purpose financial report under the Corporations Act.

Required For parts (a), (b) and (c) of this question, please disregard all going concern considerations. Based on the background information above and your use of preliminary analytical procedures, answer the following questions: (a) Identify and explain two (2) asset accounts at risk of material misstatement. (b) Describe one (1) issue regarding the prior years figures. (c) Describe three (3) factors that may bring into question the going concern assumption for Unique. Disregarding the evaluation of managements assessment of the going concern assumption, briefly describe the effect of the facts on your audit planning.

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