Question 2a ii
You are a manager in Hunt & Co, a firm which offers a range of services to audit and non-audit clients. You have been asked to consider a potential engagement to review and provide a report on the prospective financial information of Waters Co, a company which has been an audit client of Hunt & Co for six years. The audit of the financial statements for the year ended 30 April 2014 has just commenced.
Waters Co operates a chain of cinemas across the country. Currently its cinemas are out of date and use projectors which cannot show films made using new technology, which are becoming more popular. Management is planning to invest in all of its cinemas in order to attract more customers. The company has sufficient cash to fund half of the necessary capital expenditure, but has approached its bank with a loan application of $8 million for the remainder of the funds required. Most of the cash will be used to invest in equipment and fittings, such as new projectors and larger screens, enabling new technology films to be shown in all cinemas. The remaining cash will be used for refurbishment of the cinemas.
The draft forecast statements of profit or loss for the years ending 30 April 2015 and 2016 are shown below, along with the key assumptions which have been used in their preparation. The unaudited statement of profit or loss for the year ended 30 April 2014 is also shown below. The forecast has been prepared for use by the bank in making its lending decision, and will be accompanied by other prospective financial information including a forecast statement of cash flows.
| Year ended | Note relevant | Year ending | Year ending | |
|---|---|---|---|---|
| 30 April 2014 | to forecast | 30 April 2015 | 30 April 2016 | |
| Unaudited | information | Forecast | Forecast | |
| $’000 | $’000 | $’000 | ||
| Revenue | 35,000 | 1 | 43,000 | 46,000 |
| Operating expenses | (28,250) | 2 | (31,500) | (32,100) |
| Operating profit | 6,750 | 11,500 | 13,900 | |
| Finance costs | (1,700) | (2,000) | (1,900) | |
| Profit before tax | 5,050 | 9,500 | 12,000 |
Note 1:
The forecast increase in revenue is based on the following assumptions:
(ii) Ticket prices will increase from $7·50 to $10 from 1 September 2014.
Note 2:
Operating expenses include mainly staff costs, depreciation of property and equipment, and repairs and maintenance to the cinemas.
Required:
(ii) Assuming the engagement is accepted, describe the examination procedures to be used in respect of the forecast statement of profit or loss.