Hijau Sdn Bhd (30 marks)

Your firm has been appointed as the external auditor of Hijau Sdn Bhd (Hijau) for the
year ending 31 March 2021.

Hijau operates a retail chain of 30 garden centres across Malaysia, supplying

customers with trees and plants at various development stages as well as gardening
products such as lawn mowers, planting tools and other gardening essentials.
Customers pay for their respective purchases by using cash or debit/credit cards.

The business has been successful due to the increased popularity of gardening
content over social media. In August 2020, the board announced the
commencement of a programme of building works to increase the size of its garden
centres.

As a result, the directors obtained a bank loan on 31 October 2020 to ensure

sufficient cash was available for the building works, to be carried out from November
2020 to March 2021. The bank loan is repayable over three years with interest
payable quarterly in arrears. Part of the loan was also used to make a lump-sum
payment of RM1.5 million to Serenity Sdn Bhd (Serenity) for a two-year sponsorship
deal.

Serenity organises gardening shows in Malaysia on their social media page and
appointed Hijau as its lead sponsor for all their programmes for the two years ending
31 December 2022. Serenity will use Hijau’s brand when promoting its gardening
shows throughout the sponsorship period.

Employees at each garden centre include permanent gardening staff, who maintain
the trees and plants available for sale, and permanent retail and customer services
staff. In addition, a large number of temporary staff are employed between April and
September due to the increased volume of sales in this period.

Plants and trees are purchased, ready for sale, from various specialist suppliers in
Malaysia and overseas. Overseas suppliers’ invoice Hijau in their local currencies.
Hijau requires a licence to import plants and trees into Malaysia and is regularly
inspected by the licensing authority to ensure that it is complying with the terms of
the licence. Hijau plans to undertake a full inventory count at each garden centre on
31 March 2021.

The engagement partner has provided you with the following extracts from the
financial statements for the full year to 31 March:

2021 2020
(estimated) (audited)
RM'000 RM'000
Statement of profit or loss
Revenue 125,568 93,510
Cost of sales (79,635) (65,458)
 Gross profit 45,933 28,053

Finance cost (82) (80)

Statement of financial position

Current assets
Inventories 7,636 4,483

Current liabilities
Trade payables 6,747 6,513

The directors are planning to diversify the business by introducing, in September

2021, a gourmet food hall and gift shop into each garden centre to take advantage of
the increasing gardening craze on social media. In order to fund the proposed
diversification, a new loan application has been submitted to the company’s bank.
The bank wishes to examine the audited financial statements for the year ended 31
March 2021 together with the profit and cash flow forecasts in respect of the
proposed diversification for the three years ending 31 March 2024. The bank
requires an independent examination of, and a report on, the profit and cash flow
forecasts and Hijau’s directors have requested that your firm perform this
engagement.

Hijau’s finance director, Izaty Rahim, has proposed, in respect of this engagement,
that:
(1) The responsibilities of your firm include making recommendations to the
directors as to how best to prepare and present the profit and cash flow
forecasts to increase the likelihood of the bank agreeing to Hijau’s application;
and
(2) Your firm’s fee for the examination of and report on the profit and cash flow
forecasts will only be paid once the bank agrees to provide the finance to
Hijau with no fee payable should Hijau’s bank decline the new loan application

If the loan is approved by the bank, Hijau plans to use the funds to add more
refrigeration units and shelving racks in each garden centre and also make an initial
purchase of inventories of gourmet foods and gifts.

In addition, an upgrade to the computerised tills (cash register) system at each

garden centre will be performed by Pandai Sdn Bhd, Hijau’s technology provider. As
the upgrade represents an enhancement to the current tills system, the directors
propose to include the cost of the upgrade as an addition to computer equipment
within non-current assets.

Requirements
a) From the information provided, identify the areas of audit risk in respect of the
financial statements of Hijau for the year ending 31 March 2021. For each
audit risk explain the factors which have led you to identify that risk.
(20 marks)

b) Explain the professional issues for your firm raised by Izaty Rahim’s proposal
in (1) and (2).
(6 marks)
c) In respect to Hijau prepared financial statements under audit, discuss the
implications for your firm’s auditor’s report in each of the following two
potential circumstances:

(a) Hijau is not a going concern.

(b) There is a significant uncertainty about the going concern status of Hijau.

(4 marks)
Total: 30 marks