Literature Review
Auditing and assurance services are used to appraise the financial statements of an organization with independent view point to express an appropriate opinion on these statements to assure stakeholders about the reasonability of these statements. The auditors have the responsibility to conduct an audit in accordance with the applicable auditing standards in the country to provide an independent opinion on the financial statements of an organization as to whether these correctly reflect the true and fair financial performance and position of such organization as on a particular period and date.
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ABC Learning Centre has collapsed leaving the lenders and investors with number of unanswered questions regarding the financial statements of the organization. Was there any signal in the financial statements of the eventual collapse of the organization? Do the auditors mentioned any such sign in the audit reports? Has there been lack of emphasis on the importance of financial reports? And many more of such questions (Knechel and Salterio, 2016).
Arens et. al. (2007) has mentioned the importance of auditing and assurance services for the stakeholders of an organization. The auditing is the process of independent verification of financial statements to evaluate whether there is any material error or mistake in financial information rendering the financial statements incapable in reflecting the true and correct picture of an organization (I Ulrich, Blouch and Michenzi, 2017).
Leung, Coram and Cooper in 2017 has discussed on the use of modern day technologies to carry out an audit effectively. Modern audit requires auditors to go beyond the normal procedures of substantive and analytical techniques. Use of Computer assisted auditing techniques and tools have helped auditor to carry out an audit effectively. It is important to use innovative technology to effectively carry out an audit in the modern business environment (Shubbak and Thorne, 2016).
Knechel and Salterio in 2016 has further elaborated on the ever increasing importance of auditing and associated risks in auditing. Use of auditing and assurance standards is immensely important to conduct an audit in accordance with the relevant standards to provide an independent opinion on the financial statements which is correctly.
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The table below contains calculations essential for DuPont analysis.
|
Ratio Analytics
|
06/00
|
06/01
|
06/02
|
06/03
|
06/04
|
06/05
|
06/06
|
06/07
|
|
Dupont Analysis
|
|
|
|
|
|
|
|
|
|
Return on Equity = Net Income / Avg. Shareholder Equity
|
2.376419506
|
5.78
|
8.43
|
5.17
|
3.66
|
1.80
|
1.51
|
1.91
|
|
Return on Assets = Net Income / Avg. Total Assets
|
5.72
|
3.04
|
4.06
|
2.84
|
2.27
|
1.28
|
1.16
|
1.12
|
|
Financial Leverage = Avg. Total Assets / AVG. Shareholders’ Equity
|
0.11
|
0.47
|
0.52
|
0.46
|
0.40
|
0.35
|
0.33
|
0.43
|
|
Return on Sales = Net Income / Sales
|
11.63
|
27.45
|
30.02
|
30.31
|
27.42
|
22.69
|
13.70
|
8.78
|
|
Asset Turnover Ratios
|
|
|
|
|
|
|
|
|
|
Asset Turnover = Sales / Avg. Total Assets
|
0.39
|
0.11
|
0.14
|
0.09
|
0.08
|
0.08
|
0.08
|
0.13
|
|
Accounts Receivables Turnover = Sales / Avg. A/R
|
26.21
|
7.70
|
2.24
|
2.26
|
2.20
|
2.57
|
2.02
|
4.50
|
|
Inventory Turnover = Cost of Goods Sold / Average Inventory
|
#DIV/0!
|
#DIV/0!
|
#DIV/0!
|
#DIV/0!
|
#DIV/0!
|
8.02
|
7.88
|
25.48
|
|
Accounts Payable Turnover = Purchases* / Average Accounts Payable
|
3.40
|
0.70
|
1.40
|
1.05
|
1.80
|
1.43
|
1.26
|
1.67
|
|
* (Purchases = Ending Inventory + COGS – Beginning Inventory)
|
|
|
|
|
|
|
|
|
|
Fixed Asset Turnover = Sales / Avg. Net PP&E
|
0.44
|
0.13
|
0.16
|
0.10
|
0.09
|
0.09
|
0.10
|
0.14
|
|
Earnings Management
|
|
|
|
|
|
|
|
|
|
YoY (Year over year) Revenue Growth:
(Revenue this quarter – Revenue same quarter last year) / Revenue same quarter last year
|
|
22.79
|
92.83
|
74.33
|
95.71
|
195.91
|
156.77
|
175.19
|
|
YoY (Year over Year) Growth in A/R:
(A/R end of this quarter – A/R end of same quarter last year) / AR end of same quarter last year
|
|
8.97
|
1072.82
|
-12.33
|
228.77
|
131.11
|
267.31
|
-42.55
|
|
Fraud Prediction
|
06/00
|
06/01
|
06/02
|
06/03
|
06/04
|
06/05
|
06/06
|
06/07
|
|
Days sales receivable index (DSRI):
Days Receivable* / Prior Days Receivables
* Days Receivable = (Receivables / Sales) *365
|
|
0.89
|
6.08
|
0.50
|
1.68
|
0.78
|
1.43
|
0.21
|
|
Days receivable
|
13.92
|
12.36
|
75.15
|
37.79
|
63.48
|
49.58
|
70.92
|
14.81
|
|
Gross margin index (GMI):
Prior Gross margin* / Gross margin
* Gross Margin = (Sales – Cost of Goods Sold) / Sales
|
|
0.78
|
1.10
|
1.00
|
1.14
|
1.46
|
1.14
|
1.34
|
|
Gross margin
|
41.67
|
53.64
|
48.94
|
49.09
|
43.07
|
29.41
|
25.76
|
19.24
|
|
Asset quality index (AQI):
Asset Quality* / Prior Asset Quality
* Asset quality = (Total Assets – (Current assets + PP&E)) / Total assets
|
|
1.15
|
1.96
|
2.81
|
2.00
|
3.71
|
1.99
|
1.75
|
|
Sales growth index (SGI):
Sales / Prior Sales
|
|
1.23
|
1.93
|
1.74
|
1.96
|
2.96
|
2.57
|
2.75
|
|
Depreciation index (DEPI):
Prior Depreciation Rate* / Depreciation Rate
* Depreciation Rate = Depreciation / (Depreciation + PP&E)
|
|
1.22
|
2.70
|
0.95
|
0.96
|
1.07
|
0.86
|
0.89
|
|
Depreciation rate
|
15.43
|
12.64
|
4.69
|
4.91
|
5.10
|
4.78
|
5.56
|
6.23
|
|
SG&A index (SGAI):
SG&A Ratio* / Prior SG&A Ratio
* SG&A Ratio = SG&A expense / Sales
|
|
0.82
|
1.07
|
1.27
|
0.92
|
1.60
|
0.83
|
1.05
|
|
SG& A ratio
|
58.33
|
48.02
|
51.59
|
65.31
|
60.13
|
96.49
|
79.97
|
83.92
|
|
M-Score
|
|
|
|
|
|
|
|
|
|
M = -6.065+ .823 DSRI + .906 GMI + .593 AQI + .717 SGI + .107 DEPI
|
-2.94
|
2.77
|
-1.73
|
-0.96
|
0.34
|
-0.74
|
-1.57
|
From the above calculation it is clear that return on equity has reduced continuously. Compared to 8.43% in 06//02 the return on equity did reduce to 1.91% in 06/07. Similarly return on assets, financial leverage and return on sales all major parameters of financial performance e and position of ABC Learning Centre has reduced each subsequent year since 2002 (Cohen and Simnett, 2014). It is clear that the financial weakness of the organization as clearly visible in the financial statements of the company. The M-score also shows how the financial position of the company has weakened each year since 2002. In 2007 the M-Score was negative (1.57) whereas in 2002 it was 2.77 (Kend and Basioudis, 2017).
The ever decreasing return on equity, sales, return on assets was a clear indication of deterioration of financial health of ABC Learning which the investors and lenders of the organization overlooked. Asset turnover ratio, accounts receivable turnover ratio, inventory turnover ratio, accounts payable turnover ratio and fixed asset turnover ratio in 2007 were 0.13, 4.50, 25.48, 1.67 and 0.14 have all deteriorated significantly since 2002 (Simnett, Carson and Vanstraelen, 2016).
Application of DuPont analysis, common size trend analysis and Beneish M-Score:
Despite the increase in overall revenue since 2002 the inability of the organization to strengthen the financial position of the organization resulted in demise of the organization. The investors and lenders should have evaluated the financial statements properly as the indication of financial deterioration was very much evident in the financial statements (Farooq and de Villiers, 2017).
The following information from profit and loss account of the organization showed clearly that the organization was positing significant growth in the amount of revenue and operating profits each year since 2000.
|
Profit and Loss
|
06/00
|
06/01
|
06/02
|
06/03
|
|
Operating Revenue
|
9,647,000.00
|
11,846,000.00
|
22,843,000.00
|
39,823,000.00
|
|
Other Revenue
|
0.00
|
196,000.00
|
122,000.00
|
5,735,000.00
|
|
Total Revenue Excluding Interest
|
9,647,000.00
|
12,042,000.00
|
22,965,000.00
|
45,558,000.00
|
|
Operating Expenses
|
-5,627,000.00
|
-5,688,000.00
|
-11,785,000.00
|
-26,008,000.00
|
|
EBITDA
|
4,020,000.00
|
6,354,000.00
|
11,180,000.00
|
19,550,000.00
|
|
Depreciation
|
-360,000.00
|
-347,000.00
|
-318,000.00
|
-951,000.00
|
|
Amortisation
|
0.00
|
-2,000.00
|
0.00
|
-5,000.00
|
|
Depreciation and Amortisation
|
-360,000.00
|
-349,000.00
|
-318,000.00
|
-956,000.00
|
|
EBIT
|
3,660,000.00
|
6,005,000.00
|
10,862,000.00
|
18,594,000.00
|
|
Interest Revenue
|
0.00
|
226,000.00
|
160,000.00
|
453,000.00
|
|
Interest Expense
|
-1,448,000.00
|
-1,646,000.00
|
-1,222,000.00
|
-1,959,000.00
|
|
Net Interest Expense
|
-1,448,000.00
|
-1,420,000.00
|
-1,062,000.00
|
-1,506,000.00
|
|
PreTax Profit
|
2,212,000.00
|
4,585,000.00
|
9,800,000.00
|
17,088,000.00
|
|
Tax Expense
|
-789,000.00
|
-1,333,000.00
|
-2,942,000.00
|
-5,016,000.00
|
|
Net Profit after Tax Before Abnormals
|
1,423,000.00
|
3,252,000.00
|
6,858,000.00
|
12,072,000.00
|
|
Abnormals
|
-301,000.00
|
0.00
|
0.00
|
0.00
|
|
Abnormals Tax
|
0.00
|
0.00
|
0.00
|
0.00
|
|
Net Abnormals
|
-301,000.00
|
0.00
|
0.00
|
0.00
|
|
Reported NPAT After Abnormals
|
1,122,000.00
|
3,252,000.00
|
6,858,000.00
|
12,072,000.00
|
|
Outside Equity Interests
|
0.00
|
0.00
|
0.00
|
0.00
|
|
Shares Outstanding at Period End
|
12,673,660.00
|
12,673,660.00
|
14,874,564.00
|
97,521,146.00
|
|
Weighted Average Number of Shares
|
12,673,660.00
|
10,877,848.00
|
13,942,987.00
|
86,063,605.00
|
|
EPS Adjusted (cents/share)
|
11.23
|
28.90
|
49.19
|
13.90
|
|
EPS After Abnormal (cents/share)
|
8.85
|
28.90
|
49.19
|
13.90
|
|
Profit and Loss
|
06/04
|
06/05
|
06/06
|
06/07
|
|
Operating Revenue
|
77,936,000.00
|
230,621,000.00
|
592,176,000.00
|
1,629,600,000.00
|
|
Other Revenue
|
2,495,000.00
|
59,725,000.00
|
33,952,000.00
|
51,400,000.00
|
|
Total Revenue Excluding Interest
|
80,431,000.00
|
290,346,000.00
|
626,128,000.00
|
1,681,000,000.00
|
|
Operating Expenses
|
-46,865,000.00
|
-222,522,000.00
|
-473,558,000.00
|
-1,367,500,000.00
|
|
EBITDA
|
33,566,000.00
|
67,824,000.00
|
152,570,000.00
|
313,500,000.00
|
|
Depreciation
|
-1,921,000.00
|
-5,282,000.00
|
-14,233,000.00
|
-36,500,000.00
|
|
Amortisation
|
-6,000.00
|
-4,832,000.00
|
-840,000.00
|
-2,400,000.00
|
|
Depreciation and Amortisation
|
-1,927,000.00
|
-10,114,000.00
|
-15,073,000.00
|
-38,900,000.00
|
|
EBIT
|
31,639,000.00
|
57,710,000.00
|
137,497,000.00
|
274,600,000.00
|
|
Interest Revenue
|
1,120,000.00
|
2,354,000.00
|
5,322,000.00
|
15,400,000.00
|
|
Interest Expense
|
-5,032,000.00
|
-6,478,000.00
|
-22,401,000.00
|
-92,200,000.00
|
|
Net Interest Expense
|
-3,912,000.00
|
-4,124,000.00
|
-17,079,000.00
|
-76,800,000.00
|
|
PreTax Profit
|
27,727,000.00
|
53,586,000.00
|
120,418,000.00
|
197,800,000.00
|
|
Tax Expense
|
-6,359,000.00
|
-15,790,000.00
|
-39,308,000.00
|
-54,700,000.00
|
|
Net Profit after Tax Before Abnormals
|
21,368,000.00
|
37,796,000.00
|
81,110,000.00
|
143,100,000.00
|
|
Abnormals
|
0.00
|
14,541,000.00
|
0.00
|
0.00
|
|
Abnormals Tax
|
0.00
|
0.00
|
0.00
|
0.00
|
|
Net Abnormals
|
0.00
|
14,541,000.00
|
0.00
|
0.00
|
|
Reported NPAT After Abnormals
|
21,368,000.00
|
52,337,000.00
|
81,110,000.00
|
143,100,000.00
|
|
Outside Equity Interests
|
0.00
|
0.00
|
0.00
|
0.00
|
|
Shares Outstanding at Period End
|
116,428,216.00
|
250,344,916.00
|
393,146,555.00
|
412,676,809.00
|
|
Weighted Average Number of Shares
|
111,954,777.00
|
189,436,141.00
|
292,937,000.00
|
396,900,000.00
|
|
EPS Adjusted (cents/share)
|
16.20
|
17.82
|
27.00
|
36.05
|
|
EPS After Abnormals (cents/share)
|
16.20
|
25.50
|
27.00
|
36.05
|
However, despite the improvement in financial performance of the organization in each year since 2000 the financial position of the organization kept on deteriorating in all these years. The following information form Balance sheet of the organization from 2000 to 2007 shows that clearly (Carson, Fargher and Zhang, 2016).
|
Balance Sheet
|
06/00
|
06/01
|
06/02
|
06/03
|
|
CA – Cash
|
2,690,000.00
|
2,740,000.00
|
355,000.00
|
4,240,000.00
|
|
CA – Receivables
|
368,000.00
|
401,000.00
|
4,703,000.00
|
4,123,000.00
|
|
CA – Prepaid Expenses
|
0.00
|
103,000.00
|
333,000.00
|
1,063,000.00
|
|
CA – Inventories
|
0.00
|
0.00
|
0.00
|
0.00
|
|
CA – Investments
|
0.00
|
1,407,000.00
|
0.00
|
0.00
|
|
CA – NCA Held Sale
|
0.00
|
0.00
|
0.00
|
0.00
|
|
CA – Other
|
125,000.00
|
1,115,000.00
|
2,277,000.00
|
5,644,000.00
|
|
Total Current Assets
|
3,183,000.00
|
5,766,000.00
|
7,668,000.00
|
15,070,000.00
|
|
NCA – Receivables
|
103,000.00
|
104,000.00
|
110,000.00
|
203,000.00
|
|
NCA – Inventories
|
0.00
|
0.00
|
0.00
|
0.00
|
|
NCA – Investments
|
21,000.00
|
0.00
|
300,000.00
|
315,000.00
|
|
NCA – PP&E
|
1,973,000.00
|
2,398,000.00
|
6,463,000.00
|
18,399,000.00
|
|
NCA – Intangibles(ExGW)
|
19,590,000.00
|
20,237,000.00
|
41,223,000.00
|
122,944,000.00
|
|
NCA – Goodwill
|
0.00
|
0.00
|
0.00
|
0.00
|
|
NCA – Future Tax Benefit
|
0.00
|
16,000.00
|
39,000.00
|
93,000.00
|
|
NCA – Other
|
0.00
|
12,000.00
|
80,000.00
|
0.00
|
|
Total NCA
|
21,687,000.00
|
22,767,000.00
|
48,215,000.00
|
141,954,000.00
|
|
Total Assets
|
24,870,000.00
|
28,533,000.00
|
55,883,000.00
|
157,024,000.00
|
|
CL – Account Payable
|
1,655,000.00
|
2,274,000.00
|
1,886,000.00
|
7,744,000.00
|
|
CL – Short-Term Debt
|
242,000.00
|
1,095,000.00
|
5,460,000.00
|
2,316,000.00
|
|
CL – Provisions
|
1,079,000.00
|
2,789,000.00
|
5,136,000.00
|
2,988,000.00
|
|
CL – NCL Held Sale
|
0.00
|
0.00
|
0.00
|
0.00
|
|
CL – Other
|
0.00
|
0.00
|
0.00
|
0.00
|
|
Total Curr. Liabilities
|
2,976,000.00
|
6,158,000.00
|
12,482,000.00
|
13,048,000.00
|
|
NCL – Account Payable
|
0.00
|
0.00
|
0.00
|
0.00
|
|
NCL – Long-Term Debt
|
6,923,000.00
|
9,212,000.00
|
15,082,000.00
|
53,314,000.00
|
|
NCL – Provisions
|
1,000.00
|
1,000.00
|
818,000.00
|
1,514,000.00
|
|
NCL – Other
|
0.00
|
0.00
|
0.00
|
0.00
|
|
Total NCL
|
6,924,000.00
|
9,213,000.00
|
15,900,000.00
|
54,828,000.00
|
|
Total Liabilities
|
9,900,000.00
|
15,371,000.00
|
28,382,000.00
|
67,876,000.00
|
|
Share Capital
|
12,566,000.00
|
10,290,000.00
|
20,288,000.00
|
71,310,000.00
|
|
Reserves
|
810,000.00
|
521,000.00
|
2,206,000.00
|
3,484,000.00
|
|
Retained Earnings
|
1,594,000.00
|
2,351,000.00
|
5,007,000.00
|
14,354,000.00
|
|
Other Equity
|
0.00
|
0.00
|
0.00
|
0.00
|
|
Convertible Equity
|
0.00
|
0.00
|
0.00
|
0.00
|
|
SE Held Sale
|
0.00
|
0.00
|
0.00
|
0.00
|
|
Outside Equity
|
—
|
—
|
—
|
—
|
|
Total Equity
|
14,970,000.00
|
13,162,000.00
|
27,501,000.00
|
89,148,000.00
|
|
Balance Sheet
|
06/04
|
06/05
|
06/06
|
06/07
|
|
CA – Cash
|
4,913,000.00
|
45,560,000.00
|
132,470,000.00
|
227,800,000.00
|
|
CA – Receivables
|
13,555,000.00
|
31,327,000.00
|
115,066,000.00
|
66,100,000.00
|
|
CA – Prepaid Expenses
|
2,851,000.00
|
12,124,000.00
|
16,667,000.00
|
30,400,000.00
|
|
CA – Inventories
|
0.00
|
4,226,000.00
|
5,453,000.00
|
700,000.00
|
|
CA – Investments
|
983,000.00
|
3,649,000.00
|
0.00
|
54,900,000.00
|
|
CA – NCA Held Sale
|
0.00
|
0.00
|
9,493,000.00
|
12,000,000.00
|
|
CA – Other
|
17,121,000.00
|
6,360,000.00
|
0.00
|
0.00
|
|
Total Current Assets
|
39,423,000.00
|
103,246,000.00
|
279,149,000.00
|
391,900,000.00
|
|
NCA – Receivables
|
267,000.00
|
414,000.00
|
29,895,000.00
|
114,100,000.00
|
|
NCA – Inventories
|
0.00
|
0.00
|
0.00
|
0.00
|
|
NCA – Investments
|
1,670,000.00
|
10,119,000.00
|
49,030,000.00
|
10,400,000.00
|
|
NCA – PP&E
|
35,762,000.00
|
105,291,000.00
|
241,962,000.00
|
549,600,000.00
|
|
NCA – Intangibles(ExGW)
|
236,818,000.00
|
773,347,000.00
|
1,374,954,000.00
|
2,622,100,000.00
|
|
NCA – Goodwill
|
0.00
|
170,193,000.00
|
313,717,000.00
|
269,000,000.00
|
|
NCA – Future Tax Benefit
|
113,000.00
|
2,849,000.00
|
34,579,000.00
|
110,000,000.00
|
|
NCA – Other
|
0.00
|
0.00
|
0.00
|
0.00
|
|
Total NCA
|
274,630,000.00
|
1,062,213,000.00
|
2,044,137,000.00
|
3,675,200,000.00
|
|
Total Assets
|
314,053,000.00
|
1,165,459,000.00
|
2,323,286,000.00
|
4,067,100,000.00
|
|
CL – Account Payable
|
4,605,000.00
|
52,214,000.00
|
121,601,000.00
|
272,500,000.00
|
|
CL – Short-Term Debt
|
19,671,000.00
|
4,456,000.00
|
8,067,000.00
|
1,149,700,000.00
|
|
CL – Provisions
|
2,200,000.00
|
9,140,000.00
|
23,663,000.00
|
31,700,000.00
|
|
CL – NCL Held Sale
|
0.00
|
0.00
|
0.00
|
0.00
|
|
CL – Other
|
0.00
|
0.00
|
999,000.00
|
0.00
|
|
Total Curr. Liabilities
|
26,476,000.00
|
65,810,000.00
|
154,330,000.00
|
1,453,900,000.00
|
|
NCL – Account Payable
|
0.00
|
0.00
|
0.00
|
12,300,000.00
|
|
NCL – Long-Term Debt
|
83,353,000.00
|
195,665,000.00
|
234,888,000.00
|
610,400,000.00
|
|
NCL – Provisions
|
1,665,000.00
|
58,450,000.00
|
79,856,000.00
|
88,900,000.00
|
|
NCL – Other
|
0.00
|
0.00
|
16,480,000.00
|
0.00
|
|
Total NCL
|
85,018,000.00
|
254,115,000.00
|
331,224,000.00
|
711,600,000.00
|
|
Total Liabilities
|
111,494,000.00
|
319,925,000.00
|
485,554,000.00
|
2,165,500,000.00
|
|
Share Capital
|
123,402,000.00
|
626,328,000.00
|
1,635,028,000.00
|
1,744,500,000.00
|
|
Reserves
|
3,871,000.00
|
114,033,000.00
|
109,977,000.00
|
-15,400,000.00
|
|
Retained Earnings
|
24,679,000.00
|
54,566,000.00
|
92,727,000.00
|
172,500,000.00
|
|
Other Equity
|
50,607,000.00
|
50,607,000.00
|
0.00
|
0.00
|
|
Convertible Equity
|
0.00
|
0.00
|
0.00
|
0.00
|
|
SE Held Sale
|
0.00
|
0.00
|
0.00
|
0.00
|
|
Outside Equity
|
—
|
—
|
—
|
—
|
|
Total Equity
|
202,559,000.00
|
845,534,000.00
|
1,837,732,000.00
|
1,901,600,000.00
|
The profit and loss account of ABC Learning Centre shows that in each year subsequent to 2000 the organization has managed to achieve sustainable growth in the amount of operating revenue. In addition the other revenue of the organization has also increase year after year. In 2007 the operating revenue of the organization was $1,629,600,000 in comparison to only $9,647,000 in the year 2000. However, the inability of the organization to recover its dues from the customers have led to the untimely demise of the organization as its financial health deteriorated rapidly subsequent to 2002 (Bradbury, Raftery and Scott, 2018).
The following financial ratios showed that despite the growth in earnings and revenue the organization’s financial health deteriorated at a rapid speed due to the inability of the organization to recover its dues from the customers and use its assets and inventories effectively in revenue generation operations (Prasad, 2017).
|
Ratio Analytics
|
06/00
|
06/01
|
06/02
|
06/03
|
06/04
|
06/05
|
06/06
|
06/07
|
|
Dupont Analysis
|
|
|
|
|
|
|
|
|
|
Return on Equity = Net Income / Avg. Shareholder Equity
|
2.376419506
|
5.78
|
8.43
|
5.17
|
3.66
|
1.80
|
1.51
|
1.91
|
|
Return on Assets = Net Income / Avg. Total Assets
|
5.72
|
3.04
|
4.06
|
2.84
|
2.27
|
1.28
|
1.16
|
1.12
|
|
Financial Leverage = Avg. Total Assets / AVG. Shareholders’ Equity
|
0.11
|
0.47
|
0.52
|
0.46
|
0.40
|
0.35
|
0.33
|
0.43
|
|
Return on Sales = Net Income / Sales
|
11.63
|
27.45
|
30.02
|
30.31
|
27.42
|
22.69
|
13.70
|
8.78
|
|
|
|
|
|
|
|
|
|
|
|
Asset Turnover Ratios
|
|
|
|
|
|
|
|
|
|
Asset Turnover = Sales / Avg. Total Assets
|
0.39
|
0.11
|
0.14
|
0.09
|
0.08
|
0.08
|
0.08
|
0.13
|
|
Accounts Receivables Turnover = Sales / Avg. A/R
|
26.21
|
7.70
|
2.24
|
2.26
|
2.20
|
2.57
|
2.02
|
4.50
|
|
Inventory Turnover = Cost of Goods Sold / Average Inventory
|
#DIV/0!
|
#DIV/0!
|
#DIV/0!
|
#DIV/0!
|
#DIV/0!
|
8.02
|
7.88
|
25.48
|
|
Accounts Payable Turnover = Purchases* / Average Accounts Payable
|
3.40
|
0.70
|
1.40
|
1.05
|
1.80
|
1.43
|
1.26
|
1.67
|
|
* (Purchases = Ending Inventory + COGS – Beginning Inventory)
|
|
|
|
|
|
|
|
|
|
Fixed Asset Turnover = Sales / Avg. Net PP&E
|
0.44
|
0.13
|
0.16
|
0.10
|
0.09
|
0.09
|
0.10
|
0.14
|
The auditor should have highlighted the ever deterioration of financial position of the organization by specifically highlighting the deterioration in the ability of the organization to use of inventories and assets in business operations (Hay, Stewart and Botica Redmayne, 2017).
The auditors though not responsible to provide specific warning about the financial health of an organization to its investors as per the Corporations Act 2001 but highlighting the deterioration in financial health of ABC Learning would have helped the stakeholders top take appropriate course of actions (Byrnes et. al. 2018). This could have helped the stakeholders to avert the collapse of the organization. It is important to note though, that auditors are only required to conduct independent verification of financial information with the objective of providing an independent opinion on these information. The inventors and lenders should use the financial statements not only to assess the financial performance and how much gain the stakeholders have made but such information should be evaluated properly to ascertain the financial position of the organization to take appropriate actions to avert major disaster such as collapse and liquidation of organizations (Xu et. al. 2016).
Conclusion:
ABC Learning despite positing significant growth in its profit and loss account each year since 2000 was struggling to keep its financial state positive. Each year despite increase in revenue the liquidity and solvency position of the organization was deteriorating. The ability to turnover inventory, accounts receivables and make use of fixed assets in revenue generation process deteriorated each year. This was a clear indication of organization’s inability to use its assets in business operations. Correct course of actions at such time by the management to improve collection of its revenue and use of fixed assets and current assets in business operations would have helped the organization to stay afloat in the market (Griffin and Wright, 2015).
References:
Bradbury, M.E., Raftery, A. and Scott, T., 2018. Knowledge spillover from other assurance services. Journal of Contemporary Accounting & Economics, 14(1), pp.52-64.
Byrnes, A., Banks, M., Mudge, A., Young, A. and Bauer, J., 2018. Enhanced Recovery After Surgery as an auditing framework for identifying improvements to perioperative nutrition care of older surgical patients. European journal of clinical nutrition, 72(6), p.913.
Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: a synthesis and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.
Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A Journal of Practice & Theory, 34(1), pp.59-74.
Farooq, M.B. and de Villiers, C., 2017. The market for sustainability assurance services: A comprehensive literature review and future avenues for research. Pacific Accounting Review, 29(1), pp.79-106.
Griffin, P.A. and Wright, A.M., 2015. Commentaries on Big Data’s importance for accounting and auditing. Accounting Horizons, 29(2), pp.377-379.
Hay, D., Stewart, J. and Botica Redmayne, N., 2017. The Role of Auditing in Corporate Governance in Australia and New Zealand: A Research Synthesis. Australian Accounting Review, 27(4), pp.457-479.
Kend, M. and Basioudis, I., 2017. Reforms to the Market for Audit and Assurance Services in the Period after the Global Financial Crisis: Evidence from the UK. Australian Accounting Review.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Prasad, A., 2017. ENVIRONMENTAL PERFORMANCE AUDITING in Australia, Canada and India. International Journal of Government Auditing, 44(2), p.24.
Shubbak, M.H. and Thorne, S., 2016. Development and Experimentation of a Software Tool for Identifying High Risk Spreadsheets for Auditing. Available at: arXiv preprint arXiv:1602.05231. https://arxiv.org/abs/1602.05231 [Accessed on 2 October 2018]
Simnett, R., Carson, E. and Vanstraelen, A., 2016. International archival auditing and assurance research: Trends, methodological issues, and opportunities. Auditing: A Journal of Practice & Theory, 35(3), pp.1-32.
Ulrich, T.A., Blouch, W.E. and Michenzi, A.R., 2017. EFFECTIVENESS OF AUDITING CURRICULUM: PERCEPTIONS OF PRACTICING CPAS. Journal of Business and Accounting, 10(1), pp.139-154. Available at: https://asbbs.org/files/2017/JBA_V10_Fall_2017.pdf#page=139 [Accessed on 2 October 2018]
Xu, G., Andrew, J.L., Andrew, B.H. and Cortese, C.L., 2016. Greenhouse and energy auditing-more technical or financial?-An exploration of its translation from the lobbying process and after.
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