You are the audit manager of a medium-sized film and have just received a package from Adam Smith. the financial controller of Accrod Ltd. a toy manufacturer. This is your firnis first year as auditor of Accrod. The following financial reports were prepared for a board meeting and Adam felt it might be useful to you in preparation of the forthcoming audit for the year ended 30 June 2012. During a brief telephone call with Adam. you made the following notes: 1. One of the conditions of the long-term loan is that the company is not to exceed a debt-to equity ratio of 2:1 at any time. The loan is reviewed each year on 30 June. 2. Provision against inventor). obsolescence is provided for at a flat rate of 5%. The amount provided in previous years was 10% and 20% respectively. Adam said that the company believes it has been overly conservative in previous years and 5% is a more realistic level, given the nature of its products. 3. The long-term loan receivable is from a company involved in the development and production of computer software. It is owned by one of the directors.
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