DPA 50053: AUDIT 2 (GROUP 1) (APOLLO FOOD INDUSTRY)
- Statement of Financial Position
Calculate the financial ratios for 2 years (2023 and 2024) and provide an analysis of the significant ratio changes for 2 years. Please calculate the financial ratios in the table below:
PART C: FINDING AND CONCLUSIONS
Based on the significant changes observed in the financial ratios between 2023 and 2024, you are required to:
1. Verify the potential impact of these variations on the company's business risk, going concern status and any relevant issues.
a) Business Risk:
v Net Profit Decline (71.03% decrease): The steep reduction in net profit (from RM 31.6 million to RM 9.1 million) indicates increased business risk. Lower profitability can hinder the company’s ability to meet operational costs, service debt, or invest in growth.
v Gross Profit Decline (5.21%): A decrease in gross profit, even if smaller, could indicate issues in cost control (possibly increasing trade purchases) or difficulties in sustaining pricing power. This will affect future margins.
v Increase in Borrowing (77.37% rise in current liabilities): The rise in current liabilities, including a significant increase in trade payables (138.62%), indicates potential liquidity problems. Reliance on short-term borrowing could indicate cash flow shortages, increasing financial risk.
v Reduced Inventory Turnover (by 4.96%): This suggests a slowdown in sales or inefficiency in managing stock, tying up capital in unsold inventory. This can negatively impact liquidity and might lead to stock obsolescence.
b) Going Concern Status:
v Liquidity Ratios Decline: The company's liquidity position has weakened significantly with the current ratio falling from 21.86 to 12.01 and the quick ratio dropping from 18.5 to 10.3. A shrinking liquidity base could raise doubts about the company’s ability to meet short-term obligations, increasing concern about its going concern status.
v Total Asset Decline (3.75%): The reduction in assets, particularly in property, plant, and equipment, could indicate reduced investment in infrastructure, signaling a potential contraction or divestment.
v Higher Debt: The rise in total borrowing (RM 6.2 million increase) and gearing ratio indicates Apollo Food Holdings Behad's growing reliance on debt financing. This could further strain its financial stability, particularly in light of falling profits.
c) Relevant issues:
v Receivables Collection Problem: The reduction in trade receivables and the drop in receivables’ credit implies the company might be struggling to collect payments from its customers, further contributing to cash flow issues.
v Gearing Increase: A higher gearing ratio means the company’s leverage has increased, and it may struggle to meet interest payments, further elevating 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.
a) Management Assertions:
v Review Revenue Recognition Policies: Ensure that the revenue recognition policies are appropriate and applied consistently. Review the breakdown of revenue to verify if any exceptional or non-recurring items have contributed to the decline in net profit.
v Compare Forecasts with Actuals: Evaluate management’s projections from prior years and compare them with actual performance. Investigate variances to see whether management’s assumptions were realistic and if this can help predict future results.
v Discuss the Plan for Debt Repayment: Review management’s strategy to handle the growing debt and gearing issues, including their plan for repaying loans and managing payables.
b) Documentation Review:
v Obtain Borrowing Agreements: Inspect debt covenants, loan agreements, and terms related to short-term borrowings. Compare these terms with those disclosed in the financial statements.
v Trade Payables and Receivables Aging: Review the aging schedule of payables and receivables to ensure that both are fairly presented. Investigate the reasons behind delayed payments to suppliers or customers delaying their dues.
v Inventory Valuation Documentation: Inspect documentation regarding inventory valuation, ensuring there is no overvaluation or potential impairment for obsolete or slow-moving items.
c) External Confirmation:
v Bank Confirmations: Send confirmations to the company’s banks and creditors to verify the borrowing balances and interest rates disclosed in the financial statements.
v Customer Confirmations: Confirm the trade receivables directly with customers to ensure that receivables are valid and that no significant bad debts are expected.
v Industry Data: Obtain industry or market data to compare Apollo Sdn. Bhd.’s performance with competitors and assess if the decline in key ratios is company-specific or due to broader market trends.
3. Explain additional audit procedures would you recommend to understand the underlying reasons behind these variations.
a) Substantive Testing:
v Revenue Examination: Perform detailed testing of revenue transactions to ensure proper recognition and assess any irregularities.
v Expense Analysis: Analyze operating expenses in detail, identifying any unusual increases or one-time charges that may have impacted net profit.
b) Going Concern Assessment:
v Scenario Analysis: Conduct a scenario analysis to assess the potential impacts of various operational changes on the company’s ability to continue as a going concern.
v Management’s Plans: Review management’s strategies for mitigating risks and improving profitability, including any restructuring or cost-cutting initiatives.
c) Inventory Audit:
v Inventory Write-Down Testing: Investigate the reason behind the drop in inventory. Test to determine if any inventory has been written off due to obsolescence or if slow-moving stock is affecting liquidity.
v Stock Count Observation: Attend physical stock counts to verify the accuracy of recorded inventory levels.
d) Fraud Risk Assessment:
v Management Override of Controls: Given the declining financials, assess the risk of management overriding controls. Perform journal entry testing, particularly around year-end, to identify any suspicious transactions that may have been recorded to inflate earnings or improve the balance sheet.
ISA 560 Subsequent Events: This standard deals with the auditor's responsibilities for identifying and evaluating subsequent events. Subsequent events are events that occur after the balance sheet date but before the issuance of the financial statements.1 The auditor should inquire about subsequent events and review relevant documents. If a subsequent event is material, the auditor should consider the effects on the financial statements.
ISA 330: The Auditor's Responses to Assessed RisksAfter assessing risks, auditors need to design and implement appropriate responses to mitigate these risks and obtain sufficient and appropriate audit evidence.
ISA 540: Auditing Accounting Estimates and Related Disclosures. This standard provides guidance on auditing complex areas like accounting estimates (e.g., fair value, impairment) and ensuring adequate disclosure of these estimates in the financial statements.
ISA 700: Forming an Opinion and Reporting on Financial Statements. This is one of the final steps of an audit, where auditors form an opinion on whether the financial statements provide a true and fair view. It also includes guidelines on how auditors should communicate their opinion in their report.
ISA 570 Going Concern: The auditor should consider whether there is a significant uncertainty about the entity's ability to continue as a going concern. If there is, the auditor should disclose this in the auditor's report.
ISA 260 Communication with Those Charged with Governance: The auditor should communicate with those charged with governance about any significant matters that come to the auditor's attention during the audit.
REFERENCE :
https://www.wallstreetmojo.com/international-standards-on-auditing/
YOUTUBE REFERENCE :
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