DPA50153: AUDIT 2 (TURIYA BERHAD)
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 issue.
A)Business
Risks :
•
Turiya Berhad’s net profit decreased to RM3,296,171 from
RM4,084,468 in the previous year. The
decrease of net profit is about 19.3%. Therefore, lower profitability may
affect the company’s ability to meet its operational costs, service debt or
even the invest in growth.
• Turiya Berhad’s current
liabilities increased by 29.06%. This can be referred to as shown in the
financial statements, where there is an increase in current liabilities in 2024
amount RM7,338,891 than the previous year’s (2023) which is RM 5,686,266.
Increment in current liabilities may lead to several business risks such as
cash flow pressure, increases the financial risks and interest rate exposure.
•
Turiya
Berhad’s inventories turnover decreased by 12.74%. This also can be shown where
the 2024’s inventories turnover is 3.56, meanwhile the 2023’s inventories
turnover was slightly higher than the current year. Decrease in inventories
turnover may causes several business risks such as :
i)Obsolescence Risk: Longer inventory holding
periods increase the likelihood of products becoming obsolete or outdated,
leading to potential write-offs and losses.
ii) Cash Flow Issues: Slower inventory turnover ties up cash in unsold products, reducing available funds for operational needs and investments.
B) Going Concern Status:
•
Decrease in Liquidity Ratio : Turiya Berhad’s current liquidity ratio has
decreased from 2.21 (in 2023) to 2.13 (in 2024), a
decline in liquidity ratios can raise concerns about a company's going concern
status, which refers to its ability to continue operating for the foreseeable
future. For example :
i)
Increased Financial Risk: A declining liquidity ratio (like the current or quick ratio)
suggests that the company may struggle to meet short-term obligations,
heightening the risk of insolvency.
ii)
Going Concern Disclosure:
If liquidity ratios decline significantly, auditors may require a "going
concern" note in financial statements, which can affect perceptions and
market value.
•
Decrease in
Total Borrowings : As stated in the financial statements, total borrowings of
Turiya Berhad’s decreased from RM 33,100,282 (2023) to RM 31,420,374 (2024). A
decrease in total borrowings can generally be seen as a positive sign for a
company, but it can also raise some going concern issues, particularly if the
decrease is due to specific circumstances.
C) Relevant issues :
i) Revenue Implications : When there is decline or
significant drop in the trade purchases (as stated in the calculation above),
it will causes or indicates the declining sales or reduced production capacity.
ii) Improved Company’s Financial Stability: Lower gearing (as stated
in the calculation above), may leads to reduced financial risks as the company
(Turiya Berhad) is relying less on debt financing.
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.
Turiya
Berhad’s auditors should follow these steps:
A.
Review Documentation:
•
Analyze the audit records pertaining to the analytical process. This covers all
work
documents, notes, and calculations.
•
Verify that the process was carried out accurately and reliably.
B.
Assess Relevance and Reliability:
•
Assess the applicability of the data acquired. Does it directly connect to the
goals
of
the audit?
•
Take the source's credibility into account. In general, external data is more trustworthy
than internal data
C. External Confirmations:
External
confirmations from third-party can also be useful for better performance of
Turiya Berhad company. For example:
i)
Payable confirmations: Verify the balances owed to suppliers.
ii)Receivable
confirmations: Verify the balances owed by customers.
iii)Verify
transactions and balances using bank confirmations.
D.
External Sources:
Auditors
can use data from outside sources that are not affiliated with the entity:
i)Reports
from analysts: Examine market trends and standards.
ii)Comparable
information about rivals: Make use of benchmarking information.
3.
Explain additional audit procedures would you recommend to understand the
underlying
reasons behind these variations.
Auditors of Turiya Berhad can perform these additional
audit procedures:
A
)Substantive Analytical Procedures:
i)
Auditors may examine the current
year and the previous years’s financial statistics. For example, auditors can
examine the incomes, costs, and profitability in order to find any notable
variations.
Auditors also may compare the actual performance to
the anticipated outcomes in order to plan or estimate.
Last but not least, auditors also may check the
figures and hypotheses, in response to auditors' predictions.
B) Detailed transaction testing:
Auditors
of Turiya Berhad can perform substantive testing on a sample of transactions
related to the variances to assess their accuracy and validity. For
Example :
i)Revenue:
Review sales agreements, billing records, and guidelines for revenue
recognition.
ii)
Expenses: Examine the supporting documents and expense reports from the
financial report.
iii)Fixed
assets: Examine asset registrations and evaluate techniques for
depreciation.
C)
External Confirmations:
Auditors
of Turiya Berhad may obtain the external confirmations from the third-party,
for example :
i)
Customers : Auditors need to verify
if there is any unpaid invoices.
ii)
Providers : Alike customers,
auditors need to verify the unpaid invoices from the providers.
iii)
Banks: For banks, auditors need to
verify the loan amounts and cash balances.
D)
Do industry and market research:
Last
but not least, the additional audit procedures that auditors should follow is
to do some research on industry and market for better performance. For example
:
i)Examine
the outside variables that might influence Turiya Berhad's performance.
ii)Examine
the competitors, conditions and the industry trends.
In
conclusion, the significant changes observed in the financial ratios
between 2023 and 2024 have variaties of implications. Some can lead to better
performance, and some may causes bad influence to the financial performance of
the company. Afterall, auditors should take the better steps to prevent any
mistakes while doing the audit process.
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