MINI PROJECT AUDIT 2 (AJINOMOTO)
COMMERCE DEPARTMENT
DPA 50153 - AUDIT 2
MINI PROJECT (CLO 2)
PROGRAMME: DAT5A & DAT5B
SESSION: 2 2023/2024
Part A: Find the Annual Report
Part C: Finding and Conclusion
1. Verify the potential impact of these variations on the company's business risk, going concern status and any relevant issues.
-Business risk
- Decrease in Turnover (A1 and A): The decrease in both credit and total turnover could indicate a decline in sales, which may increase the company's business risk
- Decrease in Gross Profit (C): The significant decrease in gross profit could be a sign of decreasing profitability, increasing the business risk.
- Increase in Overdraft Bank & Short Term Borrowing (L): The significant increase in short-term borrowing could indicate a potential liquidity issue, increasing the business risk.
- Going Concern
- Decrease in Total Current Assets (I): The decrease in total current assets could indicate a decrease in the company's liquidity, which may affect its ability to meet its short-term obligations and thus its going concern status.
- Increase in Total Current Liabilities (M): The increase in total current liabilities could also indicate a potential liquidity issue, which may affect the company's going concern status.
- Other Relevant Issues
- Decrease in Inventory Turnover (F): The decrease in inventory turnover could indicate inefficient inventory management, which may lead to higher holding costs and potential obsolescence of inventory.
- Decrease in Liquidity Ratio (I/M): The decrease in the liquidity ratio could indicate a decrease in the company's ability to meet its short-term obligations, which may affect its financial stability.
- Increase in Gearing Ratios (N/J and N/O): The increase in gearing ratios could indicate a higher leverage, which may increase the company's financial risk.
2. Prepare the steps would you take to corroborate the information obtained from this analytical procedure with other audit evidence, such as documentation supporting management's assertions and external sources of information.
-To corroborate the information obtained from the financial ratios analysis, I would take the following steps:
Step 1)Documentation supporting management's assertions:
- Review the company's internal records and financial statements to ensure that the figures used in the financial ratios analysis are accurate and complete.
- Verify the accuracy of the calculations used to derive each financial ratio.
- Compare the financial ratios with prior periods to identify any trends or anomalies.
Step 2)External sources of information:
- Obtain financial information from third-party sources such as credit rating agencies, industry analysts, or financial databases to compare the company's financial ratios with those of its peers.
- Consult regulatory bodies or industry associations to obtain any additional information about the company's financial performance or industry trends.
- Review news articles, press releases, or other public disclosures to gain insights into the company's financial position or performance.
3. Explain additional audit procedures would you recommend to understand the underlying reasons behind these variations.
-Based on the provided financial ratios and variances between 2022 and 2023, I would recommend the following additional audit procedures to understand the underlying reasons behind these variations:
- (A1) Turnover (credit): The credit turnover decreased by 10% in 2023 compared to 2022. To understand the reason behind this decrease, consider reviewing the sales journal, sales ledger, and sales daybook for the period. It would also be beneficial to analyze the aging report of receivables and compare it to the previous year to determine if there are any significant differences in outstanding balances.
- (A2) Turnover (cash): The cash turnover decreased significantly (-442%) in 2023 compared to 2022. To understand the reasons behind this decrease, consider reviewing the cash receipts journal, cash book, and bank reconciliation statements. Investigate whether there are any changes in the company's cash management policies, including any changes in banking relationships, cash on hand, or petty cash funds.
- (B) Trade purchase: The trade purchases increased by 52% in 2023 compared to 2022. To understand the reason behind this increase, consider reviewing the purchases journal, purchase ledger, and purchase orders. Investigate whether there are any changes in suppliers, pricing, or quantities purchased.
- (C) Gross profit: The gross profit decreased by 35% in 2023 compared to 2022. To understand the reason behind this decrease, consider reviewing the inventory records, production costs, and sales records. Investigate whether there are any changes in production efficiency, raw material costs, or pricing strategies.
- (D) Net profit: The net profit increased by 62% in 2023 compared to 2022. To understand the reason behind this increase, consider reviewing the income statement, expenses, and other comprehensive income items. Investigate whether there are any changes in operating expenses, financial expenses, or extraordinary items.
- (G) Trade receivables: The trade receivables increased by 34% in 2023 compared to 2022. To understand the reason behind this increase, consider reviewing the sales journal, sales ledger, and sales daybook for the period. Investigate whether there are any changes in sales policies, credit terms, or customer behavior.
- (H) Cash at bank/cash: The cash at bank decreased by 24% in 2023 compared to 2022. To understand the reason behind this decrease, consider reviewing the cash receipts journal, cash book, and bank reconciliation statements. Investigate whether there are any changes in cash management policies, including any changes in banking relationships, cash on hand, or petty cash funds.
- (I) Total current assets: The total current assets decreased by 8% in 2023 compared to 2022. To understand the reason behind this decrease, consider reviewing the individual components of current assets, including cash, accounts receivable, inventory, and other current assets. Investigate whether there are any changes in the company's asset management policies.
- (J) Total assets: The total assets increased by 1% in 2023 compared to 2022. To understand the reason behind this increase, consider reviewing the individual components of assets, including property, plant, and equipment, and investigate whether there are any changes in investment activities.
- (M) Total current liabilities: The total current liabilities decreased by 29% in 2023 compared to 2022. To understand the reason behind this decrease, consider reviewing the individual components of current liabilities, including accounts payable, accrued liabilities, and other current liabilities. Investigate whether there are any changes in the company's payment policies or financial position.
- (N) Total borrowing: The total borrowing decreased by 8% in 2023 compared to 2022. To understand the reason behind this decrease, consider reviewing the loan agreements, repayment schedules, and interest expenses. Investigate whether there are any changes in the company's debt management policies.
- Gearing 1 (N/J): The gearing decreased by 10% in 2023 compared to 2022. To understand the reason behind this decrease, consider reviewing the loan agreements, repayment schedules, and interest expenses. Investigate whether there are any changes
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