Question 3b
You are the manager responsible for the audit of Rope Co for the year ended 30 September 2016. During a visit to the team performing the fieldwork, the audit senior shows you a cash flow forecast covering six-month periods to 30 September 2018 as prepared by management as part of their assessment of the going concern status of the company. The audit senior asks whether any of the forecast cash flows disclosed require any further investigation during the audit fieldwork.
The actual and forecast six-monthly cash flows for Rope Co for the periods ended:
| Actual | Forecast | |||||
|---|---|---|---|---|---|---|
| 31-Mar 2016 | 30-Sep 2016 | 31-Mar 2017 | 30-Sep 2017 | 31-Mar 2018 | 30-Sep 2018 | |
| $000 | $000 | $000 | $000 | $000 | $000 | |
| Operating cash flows | ||||||
| Receipts from customers | 13,935 | 14,050 | 14,300 | 14,700 | 14,950 | 15,400 |
| Payments to suppliers | (10,725) | (10,850) | (11,050) | (11,400) | (11,600) | (12,000) |
| Salaries | (1,250) | (1,300) | (1,275) | (1,326) | (1,301) | (1,353) |
| Other operating cash payments | (1,875) | (1,850) | (1,913) | (1,887) | (1,951) | (1,925) |
| Other cash flows | ||||||
| Sale of investments | – | – | – | – | – | 500 |
| Repayment of J Stewart loan | – | – | – | – | – | (500) |
| Repayment of bank loan | – | – | – | – | (1,500) | – |
| Receipt of bank loan | – | – | – | – | 1,500 | – |
| Cash flow for the period | 85 | 50 | 62 | 87 | 98 | 122 |
| Opening cash | (275) | (190) | (140) | (78) | 9 | 107 |
| Closing cash | (190) | (140) | (78) | 9 | 107 | 229 |
The following additional information has been provided in support of the forecasts:
– Receipts from customers and payments to suppliers have been estimated based on detailed sales forecasts prepared by the sales director.
– Salaries and overheads have been estimated as the prior year cost plus general inflation of 2%.
– The bank loan expires on 5 January 2018. The finance director expects to take out a matching facility with the current lender to pay off the existing debt.
– On 1 October 2015, the chief executive, Mr J Stewart, gave the company a three-year, interest free loan secured by a fixed charge over the operational assets of Rope Co. The audit team was unaware of this loan prior to obtaining the cash flow forecast.
– The directors plan to sell some investments in listed shares to fund the repayment of the chief executive’s loan. At 30 September 2016, the investments were carried in the statement of financial position at their fair value of $350,000.
Required:
(b) Comment on the matters to be considered in respect of the loan from Mr J Stewart and recommend the further audit procedures to be performed. (6 marks)