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Extech Ltd's sales revenue budget for 2018 is $350,000

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Extech Ltd's sales revenue budget for 2018 is $350,000. Extech Ltd manufactures tables and its production costs as a percentage of sales revenue are:

Raw materials 25%

Direct Labour 25%

Overheads 10%

Raw materials, which are added at the start of production, are carried in inventory for ten days and finished goods are held in inventory before sale for twenty days.

Work in progress is held at levels where products are assumed to be 50% complete in terms of labor and overheads.

The production cycle is five days and production takes place evenly through the year.

Extech Ltd receives 60 days credit from suppliers and grants 30 days credit to its customers.

Overheads are incurred evenly throughout the year.

(a) Determine Extech Ltd’s total working capital requirement

(b) Extech Ltd are owed $10,000 by a supplier who has just been declared bankrupt. The owner of Extech wants to sue the supplier’s auditors for the $10,000 as she had reviewed their audited accounts and understood that the business would continue for the foreseeable future. Discuss, with reference to the “performance gap” and the “expectations gap” what an auditor does and does not do, and whether the owner of Extech is correct in their understanding.