The Cosy Kitchen is a regional chain of coffee shops and bistros that offers customers wholesome, good quality food and drink. It also has function rooms that are available for private events and meetings. Its year end is 30 June 2021.
You are the audit manager for Lawler and Co and this is the first year that you have been the auditors. You are currently planning the annual audit for The Cosy Kitchen.
There have been a number of significant issues that have been identified during the planning process which are all related to the Covid 19 pandemic.
The Cosy Kitchen incurred significant capital expenditure during the year on updating the chain of properties due to the Covid 19 pandemic. All of this cost has been capitalized. The finance director has proposed that this should be depreciated over 5 years using the straight-line method.
During a recent lockdown, The Cosy Kitchen were unable to fully open to customers and could only offer a limited takeaway service. They have been left with a considerable amount of perishable food goods that they could not use in their current trading operation. Some of these items have a use by date which expires in three weeks. The owner of The Cosy Kitchen has stated that they intend to sell these goods at a discount direct to customers.
The function room at one outlet was recently hit by flooding due to an incident with the gas boiler. An insurance claim has been submitted to the insurance company, but they are claiming that the incident is not covered by the terms of the insurance policy because The Cosy Kitchen did not properly maintain their gas boiler. The Cosy Kitchen have included the amount of the insurance claim as a receivable on the balance sheet
The Cosy Kitchen commenced a catering contract with a local delivery company to deliver breakfasts and lunches to customers in November in response to Covid 19. They have not been paid for any of the breakfasts or lunches provided since January and have been advised the delivery company has financial difficulties. The Cosy Kitchen does not have a provision for doubtful debts and cannot see any business need for one.
- Identify FIVE audit risks arising at the planning stage of the audit of The Cosy Kitchen and for each risk identified describe audit work that could be performed in response.
- Describe TWO audit tests that should be completed relating to the capital expenditure
- Identify the main reasons why Going Concern is reviewed by auditors during the audit process.