GROUP 5 (FARM FRESH)

 

Part A: The Annual Report

Part B: Analyzing Problems

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 issue.

 a) Finance performance:

 Farm Fresh’s net profit increased to RM63,281 from RM49,934 in the previous year during the fiscal year that ended on 2023.

 The substantial increase in turnover reflects a successful strategy or market demand.

 Total assets and net assets grew, showing that the company is expanding its financial base.

 

 b) ESG Risk Rating:

•   Increasing total assets (20.42% increase) can support long-term sustainability initiatives.
• Given the financial performance metrics and potential ESG practices, the preliminary ESG risk rating for Farm Fresh in 2024 could be categorized as Moderate Risk, assuming the company demonstrates positive environmental, social, and governance practices alongside its financial growth.

 

c) Business Risk:

  Inventory Management

Inventory Reduction: A decrease in inventory levels (from RM 173,675 to RM 156,299) while maintaining turnover suggests improved inventory management. This reduces carrying costs but requires ongoing attention to avoid stockouts that could impact sales.

  Turnover Growth

Increase in Turnover (28.70%): The significant growth in both cash and credit turnover indicates a robust demand for products. However, rapid growth can also lead to challenges such as inventory management, supply chain strains, and potential over-extension.

 d) Going Concern Status

   Higher net profits and gross margins can strengthen the company's financial position, supporting the going concern assumption.

  Although the current ratio remains above 2, the slight decline could indicate a need for careful cash flow management to ensure the business can meet its liabilities.

 

 e) Relevant Issues

      Operational Efficiency

· The company should focus on operational efficiencies to ensure that growth does not lead to rising costs that outpace revenue.

 Market Competition

· Increased competition in the market can affect pricing strategies and market share. Farm Fresh should be proactive in differentiating its products and enhancing customer loyalty.

 

 

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.

 

Farm Fresh’s auditors should follow these steps:

 1. Review Financial Statements

 Conduct a trend analysis for significant items such as turnover, gross profit, and net profit to ensure consistency and reasonableness.

 2. Obtain Supporting Documentation

 Collect sales invoices and purchase receipts to confirm recorded revenues and expenses, ensuring that they are accurately reflected in the financial statements.

 3. Analyze Internal Controls

Assess whether any control deficiencies could affect the reliability of the financial data.

 4. Obtain External Confirmations

Send confirmation requests to a sample of customers to verify outstanding balances and transaction details.

 5. Document Findings

Maintain thorough documentation of all corroborating evidence, including the methods used, sources consulted, and conclusions drawn.

3.Explain additional audit procedures would you recommend to understand the

underlying reasons behind these variations.

 

1. Detailed Variance Analysis

· Trend Analysis: Conduct a detailed analysis of line items that showed significant variances. This could include breaking down turnover, cost of goods sold, and operating expenses to understand fluctuations and trends.

· Segment Analysis: If applicable, analyze performance across different business segments or product lines to identify areas driving growth or decline.

2. Review Budget vs. Actual Results

· Budget Analysis: Compare actual performance against the budget or forecasts for both years. Investigate any significant discrepancies to understand management's expectations versus actual outcomes.

· Variance Explanations: Request explanations from management for variances greater than a specified threshold, focusing on key performance indicators.

3. Inquiry with Management

· Management Discussions: Conduct interviews with management to discuss the reasons behind significant changes in financial performance. This can include exploring strategic decisions, market conditions, and operational challenges.

· Risk Assessment: Ask management about risks they identified and how they mitigated these risks during the reporting period.