GROUP 7 [ACO GROUP BERHAD]

 

Part B

Part C

1.         Verify the potential impact of these variations on the company's business risk, going concern status and any relevant issue.

Business Risk

·        Revenue

ACO Group’s revenue increased by 6.1% from RM124.9 million in 2022 to RM132.5 million in 2023. This reflects a strong demand recovery and successful backlog order fulfilment .However, inflationary pressures and increased raw material costs led to a drop in profitability. A decline in gross profit margin increases operational risk, as the company faces pressure on maintaining profitability under rising costs.

·        Competition Risk

As mentioned in the report, ACO operates in a competitive, fragmented market, with risks arising from smaller local competitors and larger distributors. The shift towards e-commerce may also increase the market risk by pressuring traditional sales channels.

·        Supply Chain Risk

Ongoing geopolitical issues like the Russia-Ukraine war have led to supply chain disruptions. ACO mitigates this through strong supplier relationships but remains vulnerable to external shocks.

Going Concern

·        Despite a slight decline in profitability, ACO’s financial position remains solid, with a gearing ratio of 0.3 times and cash and cash equivalents at RM19.7 million. This indicates a low financial leverage and a strong liquidity position.

·        The company has shown the ability to adapt, having implemented cost-cutting measures, including operational efficiency improvements. These steps help ensure the company’s sustainability in the medium to long term, supporting its going concern status.

·        However, the continued pressure on margins and the uncertainty of global markets (example inflation and supply chain risks) should be monitored closely.

 

Relevant Issues

·        Profitability Decline

A significant decline in net profit (down 18.7% from RM7.1 million to RM5.7 million) is a key concern. Rising administrative and operational costs could impact future dividends and shareholder value.

·        Long-term Investment

The company’s investments in renewable energy (example solar PV systems and EV charging infrastructure) provide opportunities for growth in the green energy sector. However, this adds investment risk if expected returns are delayed or lower than anticipated.

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.

 

Review Supporting Documentation

·        Sales and Revenue

Audit Step: Examine sales invoices, contracts, and receipts for the two years under review (2022 and 2023).

Purpose: To confirm that revenue recorded matches actual sales transactions, ensuring no overstatement or understatement of revenue.

 External Confirmation: Obtain confirmation from significant customers for large sales transactions, particularly to confirm receivables balances.

Purpose: Verify that the recorded receivables are accurate and collectible, thus validating the turnover figures.

 

·        Evaluate Key Financial Ratios Against External Benchmarks

 Audit Step: Compare the financial ratios of ACO Group to industry averages and external benchmarks (e.g., industry reports or peer companies).

 Purpose: This external validation helps to assess the reasonableness of financial trends. Significant deviations from industry trends could indicate issues such as inaccurate reporting or changes in business strategy.

 

·        Examine Purchase and Inventory Records

   Audit Step: Perform a test of purchases by matching vendor invoices to recorded trade purchases for the period. This includes checking purchase orders, goods received notes, and vendor statements.

   Purpose: To ensure that the cost of goods sold is accurately recorded, and inventory balances are consistent with physical stock counts.

   Inventory Valuation: Review inventory valuation policies and compare against external market prices for materials. Perform physical verification of inventory.

     Purpose: Validate the accuracy of inventory records and assess the risk of inventory obsolescence.

3.     Explain additional audit procedures would you recommend to understand the underlying reasons behind these variations.

 

·       Trend Analysis and Detailed Fluctuation Analysis

   Procedure: Perform a detailed comparison of income statement and balance sheet line items over multiple periods (example, monthly or quarterly). Analyze trends to detect unusual patterns.

   Purpose: Identify periods where significant changes occurred, such as spikes in revenue, purchases, or expenses, and investigate the reasons for these changes. This helps isolate events or decisions (e.g., new contracts, supply chain disruptions) that contributed to the variations.

   Examples: If there was a large increase in sales during a specific quarter, review sales contracts, promotions, or business expansions.

 

·       Substantive Testing of Revenue and Expenses

   Procedure: Select a sample of transactions from high-variance accounts (e.g., revenue, purchases, or administrative expenses) for detailed testing. This includes:

     Revenue: Examine sales contracts, invoices, and shipping documents.

     Expenses: Review supplier contracts, purchase orders, and invoices.

   Purpose: Ensure that revenue and expense recognition is accurate and aligns with accounting policies. This helps confirm that large fluctuations in profit margins are due to legitimate business reasons, not errors or manipulation.

   Examples: If gross profit decreased, check whether there were significant discounts or price changes in key products.

 

·       Examine Non-Recurring Items and One-Off Transactions

   Procedure: Identify any non-recurring items or one-off transactions, such as asset sales, impairments, or restructuring costs, that may have impacted profit or loss.

   Purpose: Non-recurring items can cause significant fluctuations that may not be indicative of normal business operations. Identifying these allows for a clearer comparison of the company's performance year over year.

   Examples: Review the sale of property or equipment and ensure it was correctly classified and recorded.