Question 2b
(b) Pointer & Co has agreed to perform an assurance engagement for Vizsla Ltd; the engagement will be a review of prospective financial information which is needed to support the company’s overdraft facilities. Vizsla Ltd had a financial year ended 30 September 2017, and an unmodified opinion was issued on these financial statements last month. Pointer & Co’s partner responsible for ethics has agreed that any threats to objectivity will be reduced to an acceptable level through the use of a team separate from the audit team to perform the work.
The operating profit forecast for the two years to 31 March 2020 prepared by a member of the accounting team of Vizsla Ltd is shown below, along with some accompanying notes.
| Note | Six months to 30 September 2018 | Six months to 31 March 2019 | Six months to 30 September 2019 | Six months to 31 March 2020 | |
|---|---|---|---|---|---|
| £’000 | £’000 | £’000 | £’000 | ||
| Revenue | 1 | 12,800 | 16,900 | 13,700 | 18,900 |
| Gross profit % | 34% | 45% | 36% | 46% | |
| Operating costs: | |||||
| Staff costs | (2,800) | (2,900) | (2,800) | (2,900) | |
| Design costs | 2 | (1,200) | (1,200) | (1,250) | (1,250) |
| Marketing | (900) | (1,000) | (1,100) | (1,100) | |
| Interest on overdraft | 3 | (25) | (10) | - | - |
| Other expenses | 4 | (3,840) | (5,070) | (4,110) | (5,670) |
| Operating profit | ––––––– 4,035 ––––––– | ––––––– 6,720 ––––––– | ––––––– 4,440 ––––––– | ––––––– 7,980 ––––––– |
Notes:
1. Vizsla Ltd is a producer of greetings cards and giftware; the demand for which is seasonal in nature.
2. Design costs are mostly payroll costs of the staff working in the company’s design team, and the costs relate to the design and development of new product ranges.
3. Vizsla Ltd has agreed with its bank to clear its overdraft by 1 September 2019, and the management team is confident that after that point the company will not need an overdraft facility.
4. The total ‘Other expenses’ is calculated based on 30% of the projected revenue for the six-month period.
Required:
Recommend the examination procedures which should be used in the review of the profit forecast. (9 marks)